Ryan Air: Ups and Downs
Ryan Air was founded in 1985 by the Ryan family to provide scheduled passenger airline services between Ireland and the UK, as an alternative to the then state monopoly carrier, Aer Lingus. According to Doganis (2001) Ryan Air was the first low-cost, nor frills airline that had an impact on the European airline industry. When launched in 1985 ikt targeted the Irish ethnic market between Ireland and the United Kingdom by offering a more or less traditional type of service with a two-class cabin but at significantly lower fares. It stimulated a rapid growth of passenger traffic across the Irish Sea, much of it diverted from the sea ferries. On the London-Dublin route, where traffic had been stagnant for three years, passenger numbers more or less doubled in the next three years in response to the low fares introduced by Ryanair and to the lower fares forced on Aer Lingus and British Airways. But Ryanair was not profitable. Its unit costs, though lower than those of Aer Lingus, were not low enough to sustain its low fares strategy. By 1991 its accumulated losses amounted to close on (Sterling) £18 million and the airline was facing serious cash flow problems. It had also gone through five chief executives.
After a visit to Southwest Airlines in Texas in 1991 yet another new management decided to reinforce the low-fare strategy but to abandon all frills in order to reduce costs. It also moved its London base from Luton to Stansted airport, which was new and offered high-speed access to Central London. The new strategy slowly turned the company round and it recorded a small pre-tax profit in 1992. Subsequently traffic and profits grew steadily and in summer 1997 Ryanair was successfully floated on the Dublin and New York stock exchanges. In the financial year 1997-98 alone its profits rose by 51 per cent to US million. Ryanair’s sparkling financial performance was an encouragement to other European entrepreneurs to assess the low-cost, no-frills model as a way of entering European aviation markets.
Ryan Air’s Strategic Intent
Strategic intent concerns the direction in which a business id headed in the long term (Proctor 2000). The strategic intent of the firm is to maintain its leadership position in the low-cost airline sector.
Leadership in the Low-Cost Arena
Ryan Air is considered as the largest low-cost airline in Europe. The company carries more or less 35 million passengers on 325 low fair destinations across twenty-one countries in Europe. The airline has 12 European bases, a large fleet that has more or less 250 aircrafts and more that 2700 employees. In order to maintain its leadership position in the low-cost sector, Ryan Air renders point-to-point services, cutting airport charges. Part of the strategic intent of the company is to maintain its leadership position by acquiring other companies. According to Michael Porter (1980; 1985), in order for a firm to maintain a sustainable competitive advantage, it must follow one of the three generic strategies. These strategies are:
1. Low-Cost – involves the sacrifice of some quality, fashion and even product innovation in order to keep costs low – the lowest in the industry (cited in Proctor 2000, p. 175).
2. Differentiation – focuses on the factors ignored by the low-cost strategy such as product variety, quality and service (cited in Proctor 2000, p. 176).
3. Focus – requires a firm to concentrate on a particular market segment rather than the overall market (Reid et al 1993).
The firm exemplifies most of the characteristics of a cost focus strategy. In order to keep the costs down, the airline maintains a no frills strategy. No frills is a direct approach to low cost which removes all frills and extras from a product or service. The goal is to generate a cost advantage that is sustainable for one of two reasons. First, competitors cannot easily stop offering services that their customers expect. Second, competitors’ operations and facilities have been designed for such services and cannot easily be changed (Proctor 2000).
Stakeholders and Their Importance
Stakeholders are the people who are affected by or can affect the activities of the firm. There are two types of stakeholders – primary and secondary. Primary stakeholders are those who have formal, official, or contractual relationship with the organization. The secondary stakeholders are other societal groups who are affected by the activities of the firm. This section identifies the major stakeholders of Ryan Air and how they are important to the firm. The stakeholders of Ryan Air are:
- Shareholders – the shareholders participate in distribution of profits, additional stock offerings, assets on liquidation, inspection of company books, election of board of directors and other rights established in the contract with the firm.
- Employees – Employees are believed to be a source of competitive advantage. The knowledge, skills and abilities of the employees contribute to the success of the organization. In return, the employees expect economic, social and psychological satisfaction in the place of employment. The employees also expect freedom from arbitrary and capricious behavior on the part of company officials. The employees expect to share in fringe benefits, freedom to join union and participate in collective bargaining, individual freedom in offering up their services through an employment contract.
- Customers – the customers are the source of the firm’s earnings. The customers purchase the firm’s products and services in exchange with satisfaction of needs, wants and requirements.
- Suppliers – the suppliers are part of the firm’s value chain. In exchange with the suppliers products, services or expertise the firm is expected to be a source of business and facilitate a professional relationship in contracting for, purchasing, and receiving goods and services.
- Competitors – competitors are also important stakeholders. They expect the company to observe the norms of competitive conduct established by society and industry.
- Governments – the national government and other governmental departments are important stakeholders that have direct impact on the firm’s strategies. The government expect the firm to pay taxes, to adhere to the letter and intent of public policy dealing with the requirements of fair and free competition; discharge of legal obligations.
- Local Communities – the local communities are also important stakeholders. The firm needs to participate in community affairs and to provide regular employment and support to the local government.
Main Resources and Capabilities
Resourced-Based of the Firm
The resource-based view presents a perspective of competition that portrays the value of a resource or capability as derived from the dynamic interplay of market forces. While the market and environment establish external constraints and pressures, a firm’s response through resource allocation and capability development become a source of competitive advantage (Boone and Ganeshan pp. 283-284). The resource-based perspective views a firm as an organization that has a bundle of protective resources and capabilities. Resources are tangible and intangible assets a firm uses to choose and implement its strategies. Capabilities are the skills a firm uses to bring its resources to bear. The capabilities of the firm are:
- Lowest airfare rates
- Simple processes (no frills)
- Large brand awareness
- Clear offer (focuses on particular market segment)
- Innovative strategies on cost cutting
- Quick turnaround time
The resources of Ryan Air are:
1. Physical Resources – consists of the resources that are needed to operate such as aircraft fleet, headquarter, secondary airports.
2. Human Resources – the company has 2,700 employees.
3. Financial Resources – The financial resources of the company comes from the Ryan Family, shareholders, investors and creditors.
4. Intellectual Capital – these are the knowledge, skills, abilities and talents that every in Ryan Air possesses.
Sustainable Competitive Advantage
Ryan Air continues to be the lowest cost airline in Europe. The firm manages to maintain its cost leadership despite the presence of other low cost airlines in Europe. The source of competitive advantage of the company is its ability to drive down costs to sustain low fares while at the same time remain profitable. This is done through:
1. Fleet Commonality
The airline’s fleet is made up of Boeing 737, the most common aircraft being flown in the present. Because of fleet commonality the firm is able to cut on costs in obtaining spares and maintenance services.
2. Contracting Out of Services
Other than Dublin Airport where the firm maintains its staff and services, Ryan Air contracts out aircraft handling, ticketing, baggage handling and other functions to third parties. The firm is able to obtain competitive rates and multi-year contracts at fixed prices, limiting exposure to cost increases. Third [arty service outsourcing also limits Ryan Air’s Direct exposure to employee relations responsibilities and potential disputes.
3. Airport Charges and Route Policy
Airport charges include landing fees, passenger loading fees, aircraft parking fees and noise surcharges. In order to reduce these fees, the firm avoids congested main airports and chooses secondary and regional airport destinations which are very interested in increasing passenger throughput.
4. Staff Costs and Productivity
In order to control employee compensation costs, the firm implements a performance related pay structure. Although the company provides lower labor costs, the employees can earn additional pay or remuneration base on their performance.
5. Marketing Costs
In order to reduce marketing costs, the firm cut its rate commission to travel agents. The firm’s main advertisement tools are newspapers, radio, television and its company website.
Future Strategy and Recommendations
Mergers and Acquisitions
Mergers and acquisitions have become one of the most important corporate-level strategies in the new millennium. Merger and acquisition strategies are important to firm growth and success in the 21st century (Hitt et al 2001). As Ryan Air continues to grow it is expected that the company will acquire other companies such as Buzz, in order to improve its capabilities and acquire more competitive advantage.
Strategic Human Resource Management
Ryan Air, in its commitment to low-cost airfare have sacrificed its processes and services. The human resources of the company are not seen as a potential source of competitive advantage. The company do not seem to value its people. There is a growing belief that a company’s human resources is the most important source of competitive advantage. Human resources or the company’s people are one source of sustainable competitive advantage. In a fast-changing environment where technological innovations and other strategies can be copied, it is the human resources that bring a sustainable competitive advantage.
References
Boone, T and Ganeshan, R (eds.) 2002, New Directions in Supply-Chain Management: Technology, Strategy, and Implementation, AMACOM, New York.
Doganis, R 2001, The Airline Business in the Twenty-First Century, Routledge, London.
Proctor, T 2000, Strategic Marketing: An Introduction, Routledge, London.
Porter, M 1980, Competitive Strategy, The Free Press, New York:
Porter, M E 1985, Competitive Advantage, The Free Press, New York.
Reid, G C, Jacobsen, L R and Anderson, M E 1993, Profiles in Small Business: A Competitive Strategy Approach, Routledge, New York.
Credit:ivythesis.typepad.com
0 comments:
Post a Comment