Free «Strategic Management and Accounting» Essay Sample
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Ryanair Holdings Plc began as an Irish Low Cost Airline Incorporated in 1985 as a family business operating short flights. In 1997, the deregulation of the aviation industry led to the company’s rapid expansion as the company went public. According to FundingUniverse.com, the airline is the largest budget airline in Europe and “has gone a long way towards making air travel a commodity in the United Kingdom”. According to the article ‘History of Ryanair’, the airline boasts of being “the world’s favourite airline and operates more than 1400 flights per day from 44 bases and 1100 low fare routes across 27countries, connecting 160 destinations”.
The airline employs staff of 8500 people and the organisation comprises a board of directors at the top, the chief executive officer Michael O’Leary, department heads and the rest of the line staff. Eight department heads are reporting to the CEO, i.e. chief pilot, deputy chief executive officer and chief financial officer, deputy chief executive officer and chief operations officer, director legal and regulatory affairs and company secretary, director of ground operations and flight operations, director of engineering and chief engineer, director of human resources and in-flight, and finally, head of customer service. As The Independent noted, “the management structure is flat, so eight people run the business, meaning there are just two layers of hierarchy between the pilots and Mr. O'Leary” (Shah, 2006).
In 1990, O’Leary emulated the American Southwest Airlines model of low cost “no frills” flights, which, according to ‘History of Ryanair’, comprised “ the lowest fares in every market, high frequency flights, moving to a single aircraft fleet type, scrapping free drinks and expensive meals on board, but reducing the lowest fares from £99 to just £59 return”. This model is basically about cost cutting, i.e. offering air travel to the mass market by cutting out all additional services that traditionally accompany a flight and cause high costs of air tickets. According to Dunne (2009), this low cost model was achieved through the use of secondary airports rather than major airports at low fees, rapid turnaround of aircrafts of 25minutes, point-to-point routing avoiding passenger and baggage transfer costs, single aircraft family, the Boeing 737, which simplified the maintenance process, no passenger service and non-union staff. This resulted in lower salaries and high frequency flights.
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In 2000, Ryanair launched its website with online booking facilities. This enabled the airline to sell a great number of tickets directly to customers at very low overheads, since agent commissions were no longer a part of the price. Fundinguniverse.com (2012) claims that “Ryanair sold $130 million worth of tickets online in the first year”.
Airscoop.com identifies 3 pillars of the Ryanair Business Model, namely legalism, finance and communication. Legalism “allows the company to defend a very personal interpretation of the EU and local laws as well as putting into place offensive strategies” (Ryanair’s Business Model, 2011). According to Ryanair’s Business Model 2011 (2011), as an example of ‘offensive strategies’ is “when the company goes to court, Ryanair strategy is pretty offensive towards its opponent but also towards the legal system”.
According to Ryanair’s Business Model 2011 (2011), “Ryanair has a widespread reputation of coming up with elaborate tricks to cut costs and maximize profits”. This claim was also made by the Belfast Telegraph in 2008 stating that “Ryanair has been identified as the worst offender for adding on extra charges to airline tickets in Britain.” Apparently, Ryanair was noted to have made up to 20% of its profit along with ancillary revenues, i.e. additional, non-compulsory, ticket-related services. In Ryanair’s Business Model 2011 (2011) communication is further identified as the third pillar of the Ryanair business model claiming that whereas “conventional airlines ... highly invest in advertising and public relations expenses, the Ryanair’s model is based on cheapness, provocation and buzz.” Moreover, Ryanair communication is cheap and relies on bloggers and journalists, rather than advanced well-planned communication campaigns.
The airline generates revenue from ticket sales and ancillary revenues, including advertising on its highly popular website. The 2011 financial report posted on the website shows that the revenue was € 3.629 billion. It was only in 1998, when the airline used funds from capital markets to finance its expansion. It stated on its website that it “placed an order for 45 Boeing 737-800 with a value of over $2bn in March and in July, issued new shares to raise over £110m to help pay for these aircraft”. Previously, the website stated that “in 1990 the airline had accumulated £20m losses necessitating the “Ryan family to invest further £20m” (‘History of Ryanair’, 2012).
Products are bought more than sold. This is because the model offers very low fares, thus, passengers that would normally use trains and buses can afford tickets. Moreover, flying is faster and more prestigious, and low income brackets would consider a chance to fly worth it despite the ‘no frills’ approach. Their objective is to get from point A to point B, and Ryanair offers just that at a price that they can afford. However, during special times, the airline runs promotional campaigns to drive sales even further.
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Product Life Cycle
This refers to 4 stages of development that a product goes through from innovation and growth, maturity and finally to its decline or death. Ryanair’s success initially was based on its innovative and low air travel fare that has made it one of the biggest airlines in Europe. As Perner (2008) states, “the product life cycle is tied to the phenomenon of the diffusion of innovation. When a new product comes out, it is likely to be adopted by consumers, who are more innovative than others”. While the product is now at the maturity stage in Europe, i.e. customers are well-aware of the product, advertising costs are minimal, and profits are high. The firm expands to new territories, thus it also grows.
This business model has been adopted by other airlines in Europe and competition is stiff for Ryanair. It is reported that there were 60 new low cost airlines formed in 2004. Using Porter’s competitive forces to analyze Ryanair competitive advantage, one notes that the threat of new entrants is high, the threat of substitute products is medium, buyers’ bargaining power is low, while suppliers’ bargaining power is low and rivalry among existing firms is high. However, Ryanair’s strategy is to aggressively weed out competition by such tactics as undercutting competition on particular routes.
Whereas competitors are not doing anything particularly different from Ryanair, the airline has a generally poor public image. This is a result of poor customer service, poor employee relations, and allegations of misleading advertising and controversial advertising campaigns. The high intensity of rivalry among firms in the industry forces each to differentiate itself from the pack. As more and more firms attempt to outdo each other on aspects other than price, Ryanair will begin to steadily lose small pockets of the market share to the advantage of smaller firms. The cumulative loss will affect Ryanair’s bottom line.
To respond to this challenge and to maintain its leading position in the market, Ryanair requires to re-think its public image. The best time to strike is while the airline is still ahead, making an effort to completely turn its image around by asking existing customers what service they would like to get. The firm already has the infrastructure in place, since it can use the website to solicit for customer views.
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Moreover, the airline can look at new emerging markets, such as African, and introduce its business model. In emerging markets, air travel is considered a privilege of the rich, yet there is a growing middle class. This middle class comprises mostly regional leisure and business travellers. The largest airlines are national carriers that rely on strategic alliances with bigger international carriers in order to provide more routes for their customers. Before attempting to introduce the model, Ryanair should commission a comprehensive research on potential benefits of such a move. This is because the entire world looks at Asia Africa and Middle East as new frontiers for expansion, thus, competition is bound to be stiff. Moreover, local airlines try to copy the Ryanair model to fly regional routes. This has led to an increase in the number of passengers and profits of airlines operating in emerging markets. The strategy, which can be adopted by Ryanair is to come in, to rake in profits for a period and to divest when competition begins to affect the bottom-line.
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Current Strategy Impact on Organisation Structure
The current structure is ideal for the Ryanair strategy. Since the structure is flat, there is faster decision-making because of low bureaucracy, a better flow of information between the management and the staff, faster turnaround and lower costs in salaries. The low fares model made the management “more hands-on”. The use of online booking in 2000 was a major technological change that gave Ryanair additional boost and contributed much to its success.
A proposed change consists on involving the staff and customers in service development in order to give customers what they want and to ensure loyalty. This would guarantee that Ryanair keeps its market share, so that when there is a sudden unanticipated change in the environment, profits will not decline, since loyal customers will continue supporting the company. Moreover, there is a need to give more authority to the customer service department in order to prioritize issues to do with customers. Today’s number of customers cannot guarantee firm’s profitability in the future. The only way to be assured of continued profitability is to retain and maintain existing customers, attempting to grow market share.
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Technological Changes that Could Disrupt Model
Currently, there are no technological changes that have disrupted the business model. According to Ryanair’s Business Model 2011 (2011) “Ryanair, has repeatedly raised the possibility that it could launch a transatlantic venture, connecting Europe to the United States with an extremely cheap economy class and a standard business class”. However, Ryanair did not replace its aircraft, since discussions with Boeing for new aircraft failed on the basis of the mark up, which Boeing wanted. This possibility denies the airline an opportunity to take advantage of newer technology that will enable them to provide transatlantic flights using the same low cost model. Moreover, it was stated in Ryanair’s Business Model 2011 that Ryanair’s plans are in question since “structural complexities of transoceanic operations would force Ryanair to review a major part of its employment policy” (Ryanair’s Business Model 2011, 2011), and, therefore, the business model and organisation structure would change. This is because it will be difficult for the company to maintain efficiency across such distances and customer disappointments will be too many.
Avenues to Improve Quality
As Ryanair contemplates growth, there are several avenues that it can use to improve the quality of its services and maintain its high market share in a stiff competitive market.
One of the most important considerations is an improvement in employee and customer relations. The airline relies on outsourcing staff, but there is a need to improve working conditions and terms in order to attract the most qualified people. People that are in direct contact with customers are very critical in resolving customer issues and improving the image of the company. These people need to earn well, to be appreciated and trained on customer relations regularly. Moreover, Ryanair needs to reconsider its approach towards resolving customer issues. Charlton posted “Ten things Ryanair could do better online” in 2009. Most of these are yet to be done. The airline fails to recognize that its current profit model that is based on numbers alone is not sustainable because of growing stiff competition (Charlton, 2009).
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Secondly, the airline should improve relations with other organisations, since it cannot survive on its own. According to Ryanair’s Business Model 2011 (2011), the stance to ‘fight everyone’ might have contributed to the poor image, which the airline has in business circles. Moreover, the failure to come to consensus with Boeing or Airbus may have devastating impacts on the firm, since it would have to buy aircrafts from Russia or China. This will effectively cause the airline to go back “to a dual aircraft fleet, depriving Ryanair of much appreciated economies of scale”.
Thirdly, fuel costs are dependent on changes in the volatile oil market. Ryanair criticized other low costs airlines for surcharging passengers on fuel costs and used the issue as a platform to fight competitors, positioning itself as an airline that does not pass on rising fuel costs to its customers. However, the airline is also vulnerable to changing oil prices as fuel costs directly impact the bottom-line. A newer more fuel efficient fleet is necessary to reduce the impact of fuel costs. As it is noted in Ryanair’s Business Model 2011 (2011), “the unstoppable rise of fuel prices caused by rising demand and dwindling reserves” will affect the entire industry, therefore, Ryanair would do well to reconsider its fleet.
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