Case Study: Ryanair Business

Strategy Analysis

Ryanair is an Irish low cost airline headquartered in Dublin founded in 1985. It

operates 181 aircrafts over 729 routes across Europe and North Africa from 31
bases. Ryanair has seen large success over the recent years due to its low-cost
business model and has become the world’s largest airline in terms of
international passenger numbers. Taking Porter’s generic business strategies into
consideration, Ryanair operates a cost-leadership strategy to drive itself into
achieving its mission of being the leading European low-cost carrier (LCC).
Throughout this essay the business strategy of Ryanair will be analysed and the
sustainability of their model evaluated.

Ryanair’s objective is to firmly establish itself as Europe’s leading low-fares

scheduled passenger airline through continued improvements and expanded
offerings of its low-fares service. Considering their objectives and mission,
Ryanair’s decision on their cost-leadership strategy was based on a few main
factors which are discussed below.

A major influence was the deregulation of the airline industry in 1978 which
removed government intervention within the European continent. Under the new
rules, routes and fare decisions were made by individual airlines which meant that
they could compete on other factors besides food, cabin crew and frequency. As
a result of deregulation, a large number of new airline start-ups emerged within
the EU and competition among airlines increased dramatically resulting in
downward price pressures. Ryanair was established to take full advantage of these
market conditions. By offering low prices, Ryanair entered a huge and virtually
unlimited market.

Having seen the major success of the low cost carrier Southwest in the United
States, Ryanair decided to follow in their footsteps by establishing a LCC for the
European continent that targeted fare conscious leisure travellers and regular low
cost business travellers. By doing this Ryanair became the first low-fare airline in
Europe. However, they took the Southwest model further by offering no drinks
and snacks at all and abolishing the frequent flyer program which Southwest up
to this day offers its customers.
The evaluation of Porters five forces influenced Ryanair’s choice of a cost-
leadership strategy, as the threat presented by new entrants and the threat of
substitutes could hinder their success. The threat of new entrants is high within
the aviation industry which meant that low fares would help drive away any
further competition. The threat of substitutes to Ryanair had to also be carefully
examined. Their primary market, Europe, had the availability of high-speed trains
and car holidays. For Ryanair to be successful, prices had to be low to attract the
public, and resist strong competition from substitutes like Eurostar.

As Europe’s largest low fare airline, Ryanair’s competitive advantage remains in

their ability to continue as cost leaders; providing the cheapest fares to its
customers. This dictates that the company must minimize its own costs to ensure
that they are able to offer customers the service at a price below their direct
competitors. This leads us to consider some key functional strategies which
directly help Ryanair towards their ultimate goal to be Europe’s leading low fares
airline.

The marketing strategy is perhaps the most obvious and significant functional
strategy of Ryanair. Low fares are designed to stimulate demand, attracting fare-
conscious travellers, those who may have used alternative forms of transportation
or even those who may have not travelled at all. Penetration pricing as it is called
helps gain market share and simply, more customers equals more revenue.
Tickets are almost solely sold on their website ‘www.ryanair.com’ which very
importantly keeps sales costs to a minimum since very few phone operators are
employed and computers are able to cheaply handle all functions of sales. With
ever increasing accessibility of the internet globally anybody with internet access
can buy airline tickets from Ryanair, so distribution practically takes care of itself
through this medium. Ryan Air relies on low cost promotions and in recent times
has concentrated on their ‘One million seats at one pound’ which is usually
advertised through their internet site, national press and bulletin boards. It is the
simplicity of this promotion which helps keep costs low since
expensive advertising agencies can be entirely avoided and advertising can be
dealt with in house.

Ryanair’s operations strategy determines how the airline will deploy its resources
and the policies it will operate by. To keep costs low they operate a ‘no frills’
service onboard aircraft. This means the fare only includes the flight. There are
however a number of other measures directly related to a no frills service. These
include ticket-less boarding, unallocated seats, one class of travel, costs for check-
in baggage, no refund policy, basic seats (to increase aircraft capacity) and
charging for any additional service. All this significantly reduces costs to Ryanair.
The Achilles heel of Ryanair is their greater aircraft utilization through super quick
turnaround times. Essentially this means the aircraft spends very little time on the
ground, they achieve this through their human resource policies and by having
none or very little cargo in the baggage hold to speed up loading and unloading
of the aircraft.

Logistics strategy deals with the flow of products into and out of Ryanair. Again
there is heavy emphasis on cost saving and reducing measures. Ryanair fly to
secondary airports which are potentially much further from the City centre but
accessible enough by other forms of ground transportation. At these airports
Ryanair are able to negotiate extremely aggressively and demand the lowest
landing and handling fees. Additionally Ryanair is usually able to gain financial
assistance with marketing and promotional campaigns at these airports.

As cost leader Ryanair strives to undercut all its rivals but this means very low
income per fare and requires maximum utilization of its resources. Fortunately
their financial policy ensures they are able to still profit handsomely from rock
bottom fares. The aim is to break-even on fares but to make their profits out of
ancillary charges and commissions from their partners. Ryanair has a number of
affiliates such as Hertz car rental, Acumus insurance and booking.com all of whom
are advertised readily on the Ryanair website. Since the website has high website
traffic its partners are able to reach out to Ryanair’s huge client base and are
prepared to pay good commissions to the firm for this privilege. Ryanair also
generate income from advertising on board the aircraft. Ancillary revenue is
generated from many of the services that traditional airlines wouldn’t charge for,
such as large baggage into the cargo hold, allocated seating, snacks and drinks.

Ryanair’s strategy when purchasing aircraft is to buy new, uniform aircraft. This is
beneficial for a number of reasons all of which directly help cost saving measures.
Firstly, by being able to order same aircraft in bulk they are able to negotiate a
better price per aircraft. Secondly, uniform aircraft mean that there are potential
savings in staff training; air stewards being more familiar with all aircraft and
maintenance will be simpler. Finally by buying new, the company has safer, more
fuel efficient planes with lower maintenance costs. Safer aircraft also means
greater consumer confidence, equating to more fare sales.

Furthermore Ryanair aggressively hedge and fix as many of their costs as possible,
such as oil and aircraft prices so they are not subject to future price fluctuations
which could adversely affect profitability.

The human resource policy is again directly related to reducing costs. Employees
are expected to pay for their own uniform and equipment. Training given is the
required minimum and staff utilization is among the highest in the airline industry.
Many staff are employed on performance contracts and those who do not meet
their expectations are readily replaced. Staff are also expected to take on a
number of roles, cabin staff will also clean the aircraft prior to the next service,
check in staff assist in boarding the aircraft etc.
Ryanair has successfully experienced years of growth both in the number of its
aircrafts and passengers since its launch. However, with the global financial
system recently suffering its greatest crisis in more than 70 years, existing
business models of many aviation firms are coming under great strain. As this
economic downturn bankrupts LCCs like XL and Zoom with more expected to
follow, the question is whether Ryanair’s cost-leadership strategy is sustainable
or not as it continues to offer lower fares in the face of high costs. Although
Ryanair has posted losses along with other aviation firms for the latest quarter, it
is expected to emerge from this downturn with fewer competitors because its
€1.8 billon balance sheet is one of the strongest in the industry. Additionally, as
the credit crunch takes its toll, traditional airlines are not in a position to cut fares
and the threat of new LCCs is virtually eliminated due to the lack of financing.
Although Ryanair faces competition from substitutes like Eurostar, it is at an
advantage because of Eurostar’s limited destinations.

Ryanair is sticking to its mantra, when the going gets tough, sell more seats for
almost nothing. By offering low fares, Ryanair expects passengers to trade down
to the low cost airlines rather than stop flying completely. This trend appears
accurate so far based on passenger numbers as recession forces millions of
passengers to focus on price. Additionally, the latest statistics from The European
Low Fares Airline Association members show a 15.7% year-on-year growth in the
number of passengers for 2008, indicating that the LCC model is robust, even in
times of crisis. Consequently, there is no doubt that Ryanair looks poised for
substantial profits and passenger growth in the coming years. However, in order
to compete with other LCCs and maintain its continued market share growth in
the future, Ryanair needs to improve its poor customer relations.

The sustainability of Ryanair’s cost leadership strategy also depends largely on

the price of oil and how effective the firm is in cutting costs in order to continue
offering low fares. According to the firm’s latest financial report, Ryanair will enjoy
significantly lower oil costs thanks to their recent hedging programme, when
most of their competitors are already hedged at much higher prices. These lower
prices will drive Ryanair’s traffic growth, maintain high load factors and capture
market share from higher cost fuel surcharging competitors. In order to cut costs,
Ryanair close all its airport check-in desks and have passengers check-in online
instead. Other cost saving methods not yet implemented include charging
customers for using toilets on airplanes. These cost cutting ideas are not very
popular among consumers and it means that Ryanair needs to improve its already
tarnished brand image in the future which it had attained through negative press
reporting and misleading advertisements.

The current strategy at Ryanair is expected to work so well that despite the
recession Ryanair’s CEO has underlined the firm’s commitment to expansion. The
firm is expected to grow at 20 percent a year because of a 180 aircraft’s on order
from Boeing. These expansion plans for the future will require the company to
increase its landing slots at airports and recruit more employees. Currently
Ryanair has limited access to landing slots in major airports and the secondary
airports are long distances away from city centers which could make it less
attractive in the future. However, a remarkable cut in flights by other European
airline carriers due to recession is creating enormous opportunities for Ryanair,
as many major airports compete to reduce charges in order to attract Ryanair’s
growth. Availability of skilled personnel shouldn’t be a problem for Ryanair due
to recent high unemployment levels. However, Ryanair needs to improve its
current low level of empathy for employees if it is to retain them in the future.

Even though Ryanair’s cost leadership strategy is robust and it looks set to serve
them well in the future, there are some key areas within the business that can be
improved on to enhance the firm’s profitability and brand image.

Ryanair has always been criticized for many aspects of its poor customer relations.
According to The Economist, Ryanair’s “cavalier treatment of passengers” had
given Ryanair “a deserved reputation for nastiness” and that the airline “has
become a byword for appalling customer service… and jeering rudeness towards
anyone or anything that gets in its way”. If Ryanair is to maintain its large
customer base, it needs to ensure that it acknowledges its customers’ concerns
and maintains a service focused attitude at all costs. Ryanair needs to invest in
servicing customers better by providing a non-premium contact number,
improving its non user friendly website, and simplifying the terms and conditions
of the flight service. Ryanair should also create a frequent flyer program to
establish a fixed customer base and encourage customer loyalty.

Ryanair is notorious for its high staff turnover which negatively affects its
reputation as an employer. Over utilization of employees, poor remuneration
package, and minimal training are a few other critical items to be considered by
Ryanair if it is to retain employees in the future. Ryanair needs to understand that
although it is currently possible to replace outgoing employees, but with time
Ryanair’s overall image will be tarnished. Resultantly, attracting new employees
could become impossible and this will hinder their expansion plans. Ryanair
should incorporate a flexible benefits package solely designed to improve
employee morale such as flexible working hours and extra holidays. To improve
its image amongst employees, training at all employee levels must include
exposure to similar techniques and methods that help promote the development
of a uniform company identity.

Following huge success in Europe, Ryanair should consider introducing low cost
transatlantic flights to support its expansion plans and attain a larger customer
base. With a high demand for certain routes like London-New York and room for
negotiation in airplane prices and airport slots mainly due to the current financial
climate, it is an ideal time to further reap the rewards of the cost leadership
strategy that has served Ryanair so well over the years.

Ryanair’s model looks set to survive the current industrial downturn through its
lower costs and substantial cash balances. No airline is better placed in Europe
than Ryanair to trade through this downturn. It will therefore continue to grow,
by lowering fares, taking market share from competitors, and expanding in
markets where competitors either withdraw capacity or go bust. By taking the
recommended improvements into consideration, it looks like Ryanair’s cost
leadership strategy seems ideal for the future.