Ryanair's Development of an Airline Business Essay

Introduction

Ryanair is an airline founded in 1985 and started providing scheduled flights between Ireland and UK. It was initially a full-service and traditional airline with the economy and business classes of seating. However, it had accumulated significant losses by the end of 1990 despite growth in passenger volumes. This prompted the airline to restructure in the early 1990s to become the first low-fares and no-frills carrier in Europe. The model has successfully steered Ryanair to one of the largest European airlines by capacity. It is the second largest airline in the UK market with 18% of the market share (as of 2016), behind EasyJet. In 2016, it was the market leader in Spain and Italy, controlling 18% and 26% of the market shares respectively (Ryanair, 2016). This report evaluates Ryanair's strategies including its value and supply chains. It also analyses the opportunities and risks associated with the company's strategies.

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Strategic Evaluation of Ryanair

The success of any business boils down to the effectiveness of its strategies. Well-though and executed strategies form a basis for creating, monitoring and measuring success (David, 2013). According to Hitt, Ireland & Hoskisson (2010), it is essential to monitor strategic implementation to ensure that the strategies meet the intended objectives. Ryanair reviewed its strategies in the early 1990s after accumulating losses in the first five years of operations.

Ryanair's Generic Strategies

Ryanair's primary generic strategy is cost leadership. Cost leadership strategy involves offering products or services with acceptable quality and features to a broad set of customers at a low price (Haberberg & Rieple, 2008). The objective is to charge the lowest fare in the industry. Cost leadership is based on the premise that lower prices attract more customers and boost the company's revenues (Hill and Jones, 2013). Ryanair is a low-fare airline targeting travelers who are price-sensitive. This has enabled the airline to raise passenger volumes and increase its profitability. In 2016, the company made a net profit of PS1.1 billion despite reducing its fares by 13% (The Guardian, 2017). Although this strategy results in lower margins, it increases net profit through high volumes of sales.

The airline also uses focus differentiation without premium pricing. Focus differentiation involves providing unique services that serve a narrow market (Mintzberg et al., 2003). Its planes have no frills and no in-flight free foods. Thus, it targets price-sensitive passengers who do not value luxury as well as regular travelers who do not carry heavy luggage.

Value and Supply Chain Analysis

The supply chain includes a series of activities involved in the sourcing, procurement, and conversion of materials into goods and services (Haberberg & Rieple, 2008). On the other hand, value chain refers to all activities involved in creating or adding value to goods and services to enhance customer value (Haberberg & Rieple, 2008). Supply and value chains are interrelated and critical to the successful implementation of any of the generic strategies. Porter classified a supply chain into primary and secondary activities (Bartlett & Beamish, 2011). Primary activities consist of inbound logistics, operations, outbound logistics, marketing and sales, and services, while secondary activities include infrastructure as well as support functions such as human resource, procurement, accounting, among other functions (Thompson & Martin, 2010). Effective value and supply chains have contributed significantly to the success of Ryanair. Ryanair has configured its supply chain to support its cost leadership strategy (Mintzberg, Ahlstrand & Lampel, 2009).

The airline uses several strategies to reduce the cost of inbound logistics while maintaining the quality of inputs. It sources supplies, including aircraft, low-cost suppliers to reduce acquisition and operating costs. For instance, it purchases all its aircraft from Boeing due to the significant discounts it secured from the manufacturer. It uses its high bargaining power to buy modern aircraft at lower costs. The company also enters into agreements with various airports to reduce airport charges. This is important because airport charges are the second largest airline's expense. According to Kendall (2017), Ryanair's airport charge per passenger is lower than that of EasyJet, Vueling and Wizz Air. It also offers high quality training to all its employees to improve service quality. These strategies positively contribute to customer value by enabling the airline to charge lower fares and provide top quality services (McGee, 2014).

Ryanair's has streamlined its operations to reduce costs. It operates with a limited crew to reduce labor costs. Nearly half of its crew are contractors, who it pays when their services are needed. Its flights also do not have frills and do not offer passengers free in-flight food. Instead, it earns ancillary revenue from food sales during flights (Smith, 2017). The airline also reduces operating costs by providing point-to-point flights along short-haul routes. It has also improved its website to enhance direct ticket sales. It does not sell tickets through agents thus cutting ticketing expenses and enhancing passenger convenience. Besides, Ryanair reduces fuel costs through forward contracts. Forward contracts protect the company from fluctuations in fuel price by fixing the purchase price (Gerrard, 2017). It has forward contracts for about 90% of its fuel requirements. Efficient operations are essential for a successful low-cost strategy (Lynch, 2012). The airline cannot sustain low-fares if it does not minimize its operating costs (Wells, 2013). Despite charging low fares, Ryanair has maintained its profitability since its operations are efficient.

Ryanair is a service firm hence almost all operations are outbound logistics. It has invested in integrated management and control systems to improve the quality of customer service. It also uses low-cost marketing and sales strategies such as the internet among other strategies.

Ryanair uses a hybrid of low-price and differentiation although its principal strategy is low-price. No frills are examples of low-price with low value added. However, most of Ryanair's customers perceive its services to be of high quality. The segment where Ryanair falls is associated with low-profit margins but high volumes of sales.

Factors Influencing Ryanair's Strategic Choices

Ryanair's low-price strategy has been influenced by the stiff competition (high competitive rivalry) in the industry. It faces competition from other airlines such as EasyJet, Norwegian, Wizz, and Vueling, among other airlines. The low-fare strategy is suitable for market penetration purposes and increasing market share (Johnson et al., 2014). This strategy has enabled Ryanair to grow its market share and become Europe's largest airline by passenger numbers. Besides, the cost-reduction strategies are motivated by the desire to sustain low fares. Ryanair can maintain its low fare so long as it lowers the costs of operation.

Besides, its global expansion is motivated by the need to diversify risks and revenue sources. It started with flights between UK and Ireland and now provides short-haul flights to several areas around Europe and beyond. Global expansion is critical as it enables the airline to access new markets and improve its profitability (Hill, 2011). The airline is trying to expand its operations, while maintaining its low-fare strategy. In 2017, it started negotiations with Norwegian Air about offering trans-Atlantic flights between the UK and the US (McGuire, 2017). The flights will be two-legged with passengers will fly with Ryanair around the UK and other European airports that the Norwegian Air uses (McGuire, 2017). They would then be transferred into Norwegian Air to fly them to major airports in the US.

Ryanair's industry is also associated with the low bargaining power of suppliers while airlines have high bargaining powers. This is because aircraft purchases and maintenance contracts involve significant amounts. Ryanair has used its high bargaining powers to negotiate contracts and secure substantial discounts from Boeing.

Competitors' Reaction and Strategies

Ryanair entered the market and restructured to a low-cost airline in the early 1990s. It became the first low-cost airline in Europe (Mennen, 2010). Existing airlines like the British Airways, Air France, and Lufthansa reacted by increasing their short-haul flights and lowering prices to retain their market shares. The success of Ryanair also saw the entry of more airlines such as EasyJet, Wizz Air, and Vueling, among others, in the low-cost airline sector. Increased competition from low-cost airlines saw a decline in the market share of traditional airlines (Powley, 2016). British Airways, Air France, and Lufthansa have lost more than 40% of their share in the short-haul market to low-cost carriers like Ryanair and EasyJet (Powley, 2016).

Ryanair continued to implement its low-fare pricing to wade off stiff competition. It implemented initiatives to reduce operating costs such as fuel hedging, airport agreements, identifying low-cost suppliers, among other strategies (Ryans, 2008). Increased cost-cutting has enabled Ryanair to sustain its low-fare pricing. In 2016, the company further reduced its prices by 13% to increase its market share (The Guardian, 2017). This has helped it maintain its profitability despite the rising competition. Besides, Ryanair has increased its global expansion to diversify revenue sources. It has entered into partnerships with other conventional airlines to offer long-haul flights to its customers across the globe. Finally, Ryanair has diversified its revenue sources by selling in-flight food and drinks.

Comparison of Business Models

Ryanair is a low-cost carrier focusing on point-to-point and short-haul flights. It chooses secondary airports and regional destinations to reduce airport charges. It provides the minimum customer service standards with no frills and free in-flight foods. It earns ancillary revenue by selling in-flight foods. It operates a homogeneous fleet of aircraft (Boeing 737-800). This reduces training and maintenance costs and enables it to charge low fares. The models result in lower margins but higher sales volumes. EasyJet is also a low-cost airline, but it focuses on intra-European routes, unlike Ryanair that focuses on niche markets. EasyJet operates from large hubs such as Madrid, Amsterdam, Munich, and Paris while Ryanair uses secondary airports where charges are low. Wizz Air has a similar model as Ryanair only that it concentrates on the Central European market while Ryanair is expanding its operations globally. Norwegian Air is a low-cost airline but offers long-haul flights.

Ryanair's Competitive Advantage

Ryanair's supply and value chains have helped it create and sustain competitive advantage. Firstly, it purchases all its aircraft from Boeing that offered it substantial discounts. This also lowers its maintenance and training costs. Its efficient operations such as hedging fuel costs and using limited crew, also help it reduce operating costs. The cost reduction initiatives give it an edge over its competitors. It is the efficient supply and value chains that al...