Case Study Report
low-fare airline industry has definitely become a very actual topic for
discussion in academic world in last decades. Following many ideas, this report
is aimed to answer the following question:
To what extent does Ryanair
either possess, or have the potential to, maintain a sustainable competitive
advantage in the European Airline Industry through its utilization of both its
resources and capabilities, but also given its latest/current difficulties?
do so it will provide a brief informative background on European airline
industry and Ryanair specifically, and then apply theoretical framework to discover
the potential of Ryanair’s resources and capabilities.
academic angle, this report will use such methodologies as PEST analysis,
Porter’s five forces analysis, and resource-based analysis. Based on outcomes,
it will propose some recommendations to Ryanair, and finally give answer to the
Development of European Airline Industry and Its Current
1990s, the European airline market was in
state of severe competition (e.g. legal
monopolies). During 1990s European liberalization packages approved radically
changed the conditions in which airlines operated. Legal barriers were eliminated.
New competitive environment, created by changes in regulatory framework
resulted in improvements in unit costs and productivity.
In our days, despite
the low economic growth in the EU started from 2014 (roughly around 1.5% GDP),
European airline carriers managed to significantly increase their operating
profits – 7.4$ billion in 2015 compared to 1$ billion in 2014 (European Commission,
2017). In 2016 carriers posted a record net profit ever – $35.6 billion,
slightly above 2015 and almost twice higher those of 2014 (European Commission,
2017). For the third year in a row, airlines
reached a positive ROIC. In this respect, top three airlines by profits were Lufthansa, Ryanair, and IAG.
Low jet fuel prices,
boosted passenger traffic – 6.3% increase in 2016 (European Commission, 2017),
led to lower air fares. At the same time,
due to high uncertainties caused by number of terrorist
attacks in Belgium, Turkey, Germany, France and Great Britain; a decision of
Great Britain to leave the EU (Brexit), International Monetary Fund cut the
2017 passenger traffic forecast by 0.1% (European Commission, 2017). Estimates suggests that after Brexit the number of UK air
passengers would be up to 5% lower by 2020 (IATA, 2016).
In 2015-2016 period 21 new start-ups in European
airline industry occurred (European Commission, 2017). However, 26 players
ceased their operations during the same period (European Commission, 2017). A
high-profile grounding occurred in Russia, where in October 2015 Transaero went
segment Ryanair and EasyJet performed rather well, ended third and fourth in
highest operating profits among all European carriers. By far, Ryanair and
EasyJet are the two largest carriers in European airline industry, having 50%
of total capacity, while low-cost capacity in general remained flat.
European Airline Business Models
classifications of airline business models could be found in scientific world.
Some authors divided the whole industry into
low fares and full-service airlines (Sorensen T., 2005), others provided more
complicated system approach comprises up to 7 types of business models, adding
holiday carriers, regional carriers, traditional freight carriers, integrators
and hybrid carriers to the first two types (Reichmuth J., 2008). Following the
purpose of this study it is better to describe the industry through a three-type
business model: full-service airlines, low-cost airlines and hybrid airlines.
Full-service airlines (FSA). FSA business model represents an airline that
provides a wide list of flight services. Such list includes differentiation on
service classes (usually 2 to 4), connecting flights, on-board meal allowance, allocated seats, luggage services, etc.
Most of European FSA airlines are former national carriers and thus use
hub-and-spoke transportation system with different aircraft types, serving
national, European and worldwide flights. FCA segment is often related with consolidation and mergers into groups and
alliances of airlines (Sky Team, Star Alliance, Oneworld).
Low-cost airlines (LCA). LCA business model is focused on price reduction in almost
everything possible way. LCA airlines usually exploit cheaper regional
airports, single aircraft type, avoid service class differentiation, do not
provide connecting flights and luggage services, and sometimes even undertake
radical “no-frills” measures, such as avoiding use
of corporate stationery. Consequently, such model implies a point-to-point
transportation system. There are more than 30 low-cost
airlines serving Europe nowadays.
criteria and differences between European FSA and LCA business models are represented
in Table 1.
Multiple types of aircraft
Single type of
Type of airports
regional, more cheap airports
Tickets distribution network
with emphasis on online booking
level, service classes and seat density
service classes with different service levels, low seat density
service class with low services, high seat density
Domestic, European and worldwide
Hybrid airlines. This
business model represents a combination of elements from both FCA and LCA
models. Such combination appeared to be present at contemporary aviation due to
a high level of competition. New entrants as
well as incumbents are looking for a new niche to occupy in this
market. Aer Lingus, for instance, started to offer low-class and cost services
in response to financial losses in
full-service segment, which helped to accumulate positive incomes.
Brief History of Ryanair
officially founded on 28 November 1984 as Danren
Enterprises by Christopher Ryan, Tony Ryan and Liam Lonergan in Ireland. Soon
the name of the company was changed to Ryanair Ltd. It started up with a single
route from Waterford, Ireland to Gatwick Airport, London, using the only one
Bandeirante airplane with 15 seats
available, and 25 employees. The rest of the 1980s was marked by acquisition or
lease of another nine aircrafts, fast growth in total
number of routes and harsh price war with
British Airways and Aer Lingus. Yet, Ryanair was not profitable and accumulated
losses of £20 million.
In the beginning
of 1990s the company went through
significant restructuring. Then deputy CEO Michael O’Leary was sent to the
United States to figure out the key success factors from Southwest Airlines, a first
low-cost airline in the world, that also proved to be extremely successful.
Soon, business model of Southwest was
adopted. It included multiple short-trip flights, usually using small and cheap
suburban airports, with only one type of aircraft, quick turnaround for airplanes, etc. Accompanied by deregulation
policy of European Union, Ryanair’s new business model appeared to become
successful and, at last, profitable. As a result, in the end of 1990s Ryanair
carried more than 5 million passengers, and became one of the most on-time
airlines on the routes between Ireland and UK.
millennium was framed by the introduction of use
of new technologies. In 2000 Ryanair launched its website, which became the
only source of the European lowest airfares. It entered Continental European
market, setting up its base at Charleroi Airport, Brussels, and then expanded its
presence to other countries. In 2014 Ryanair launched a new “Always Getting
Better” programme, introducing a new strategical view in low-cost airline market.
is Europe’s biggest airline in term of passenger traffic and one of the leader in profit margins. It carries more than
130 million passengers on about 1800 flights per day in 33 countries, operating
from 86 bases, exploiting a fleet of around 400 Boeing 737s, with an extra 300
PEST analysis of Ryanair
can help to understand Ryanair’s macro-environment. Some authors (Kasprzyk L.
et al., 2009) use PESTEL analysis in analyzing airline industry, but due to the
scope and limitations of this report, it will apply PEST analysis as a more
common approach (Table 2).
Government support for state
EU environmental regulations
(CO2, noise emissions, etc.)
World and EU economic
Air jet fuel prices
Airport and handling charges
Travelers lifestyle and
globalization (education, abroad workplaces)
Labour conditions, unions
Increasing growth of internet
technologies (online booking, etc.)
Use of new ways of
Renewable energy technologies
Political factors. Such
factors have a great impact on Ryanair, for the whole industry is still under government
influence. The low-cost segment itself appeared in EU as a result of
deregulation of 1990s. Liberalization
opened a door for wide privatization of many airlines, as well as created
opportunities for newcomers. Despite that, there are still number of
state-owned airline companies, which are widely supported by governments. That support
creates competitive advantage for them,
and affects private sector. Brexit uncertainties could possibly lead to
downturn in passenger traffic between UK and EU. Finally, EU environmental
regulations force Ryanair work hard on reducing CO2 and noise emissions.
Economic factors. In
short, airline industry has always been
and still is in a very tight collaboration with economic cycles within EU. In
periods of economy recession, the number of airline travelers decreases
significantly. At the same time, it opens up opportunities for low-cost
airlines such as Ryanair, since many full-service airlines’ customers often
turn to low-cost ones. Air jet fuel prices have a significant impact on airlines’
cost. Fuel prices comprise more than 30% in
airlines’ expenses in the industry, and more than 40% in Ryanair’s expenses specifically (as of 2016 fiscal year). Airline industry is also seriously affected by
airports and handling charges (16% of all expenses for Ryanair in 2016). Interest
rates also have impact on airlines.
Social factors. Airline
industry provides travelling services directly to the people. Therefore, its
business is in direct dependence of
people’s perception of airlines as a way of travelling. Affordability, convenience,
time-efficiency, and reputation of the carrier are key factors defining traveler’s choice. Not the least important factor
is people’s lifestyle. Business trips and
tourism across Europe have become a popular trend in past decades. Growing
population and open borders made it regular to study or work abroad. Next, increasing
demand for flights raised safety issues. Fear of terrorist attacks with regards
to recent incidents across Europe and US, spread of epidemic illnesses (Dengue,
Ebola viruses) may affect trust in travels by air. If travelers do not feel
safe with airlines they will switch to substitutes (trains, cars). Finally, companies
such as Ryanair are forced to negotiate on labour conditions of its pilots and
other employees with trade unions, providing additional training, career and
Technological factors. The
development of new technologies play significant role in airline industry, and
low-cost sector particularly. Firstly, increasing growth of use of Internet,
provided opportunities for airlines to popularize air travels. At the same
time, availability of information for customers intensified competition, for
they can compare offers from different companies, and choose the cheaper and
more convenient one. As a result, airlines need to reduce prices by increasing
cost efficiency. Secondly, use of videoconferencing
reduced travels by air as unnecessary attribute.
Also, new and more efficient models of aircrafts allowed low-cost airlines such
as Ryanair create extra capacity by load factor, thus reduce ticket prices, as
well as CO2 and noise emissions per passenger. Finally, emergence of renewable
energy technologies, e.g. graphene batteries, could reshape aircraft industry
and thus affect airlines.
Porter’s Five Forces Analysis of Ryanair
framework allows to understand industry competition and choose positioning
direction for the company. This report will apply 3 levels scale of strength
for each force – high, medium, and low.
Threat of substitutes. In Europe,
there is number of substitutes to airplanes.
Cars and buses are good for short distance trips. For onshore trips, trains are
real threat due to well-developed railroads across Europe. For offshore
travels, ships and ferries can be chosen as an alternative to airline. At the same time, for long-distance
trips, taking into consideration cost and time consumption, and also Ryanair’s routes
network, threat of substitutes is medium.
Bargaining power of suppliers. Main suppliers for Ryanair are aircraft manufacturers, airports,
and air jet fuel providers. In regard to aircraft production, there are only
two main manufacturers – Boeing and Airbus. Therefore, their fares are very
high. Given the fact that Ryanair utilizes only Boeing 737, no other company
can offer alternative. Airports could not be replaced, for low-cost model
requires use of secondary airports. Also,
Ryanair is in high dependence of jet fuel prices. Consequently, suppliers carry
out most of the profits, therefore their bargaining power is high.
Bargaining power of buyers. Apart from Ryanair, there are other low-cost airlines (EasyJet, Aer
Lingus, Wizz Air), and number of full-service airlines operating in Europe.
Thus, customers can easily switch from Ryanair to another airline. Moreover,
customers have as an alternative option substitute carriers (trains, cars).
Given that, customers are very price sensitive and force down ticket prices,
what suggests their bargaining power is high.
Threat of entrants. As was mentioned above, in
2015-2016 period there were 21 new airline entrants in Europe, which could indicate
on high threat of entrants. On the other hand, during the same period 26
airlines ceased their operations. Furthermore, Ryanair use economy of scale,
having more than 300 aircrafts and covering route network of 1800 flights each
day in 33 countries, having established relationships with airports, Boeing,
and other suppliers. Combined, all these suggest that there are high entry
barriers in low-cost segment, with regards to Ryanair specifically. As a result,
threat of entrants is medium.
Industry rivalry. Due to a
large number of players within European airline industry, the intensity of rivalry
is high. EU deregulation made it easier to newcomers to enter this market.
Price wars, continuous desire of Ryanair to put all of its efforts on lowering
ticket prices, confirm this assumption. Despite the economy of scale used by Ryanair, rivals always keep up
the pace. Hence, it becomes obvious that the industry rivalry is high.
Resource-based analysis of Ryanair
its business in one of the least profitable industry. To achieve and maintain sustainable competitive advantage, apart from
good strategy, it shall possess a strong set of resources and capabilities.
Fleet. The main resource
for Ryanair is its aircraft fleet. As of 2017, Ryanair possessed over 400 Boeing
737-800 aircrafts. All of them having a high seat density of 189 seats. It
expects to get a fleet comprising around 585 Boeing 737s by 2024. New aircrafts
will have 197 seats, a move from Ryanair, that will allow them to increase load
factor to additional 8 seats. Ryanair use bulk purchases, which lower aircraft
cost in comparison to standard order.
Routes network. Ryanair
has one of the largest routes network in Europe, connecting 210 airports. This
enables Ryanair to operate around 1800 flights per day. Through heavy utilization
of its massive fleet and fast turnaround time, Ryanair succeeded in on time
Human resources. According
to 2017 Financial Report, more than 13 000 skilled aviation staff members contributed
for Ryanair’s success. By constantly
investing in recruitment and training of its people, Ryanair creates a unique opportunity
to hire or nurture highly qualified and talented professionals, who can deliver
their best for the company.
CEO. The Ryanair itself,
its business model and strategy were articulated by its CEO Michael O’Leary. In
2014 Michael O’Leary signed a 5-year contract with Ryanair, replaced previous
1-year format, under which he had worked before. That gave the company more
certainty over his leadership in the foreseen future.
Facilities. With its new head
office in Dublin, Ireland, Ryanair operates through 86 bases across Europe. It
also has three sophisticated simulator training centers
(in UK, Italy and Ireland) and Boeing maintenance training aircraft.
Website and other digital resources. Since introduction of its website, Ryanair has been using on-line
booking as primary source of ticket sales. Use of number of other digital technologies, such as electronic flight
bags, enables Ryanair not only to reduce costs but lower impact on the environment.
Low costs and no-frills.
The main capability of Ryanair is its power to keep costs at a very low level. For
Ryanair, this became the soul of the whole company from unit costs to
stationery. Ryanair succeeded its best in implementing so-called “no-frills”
strategy, meaning elimination of everything excessive from company’s expense
list. In this regards Ryanair is only comparable with Southwest Airlines.
Flights punctuality. Second central element of Ryanair is its on time
flights. Despite short fall of 2% in
2017, Ryanair keeps an industry leading with 88% of all flights arriving on
Negotiation with suppliers. It is crucial to get beneficial agreements with suppliers to
achieve low costs. Ryanair ability to enter into arrangements providing for
significant defense against fluctuations in air jet fuel prices by signing
contracts for periods of up to 18 months, constant negotiations with Boeing, and
bulk purchases yielded significant benefits.
Strategical flexibility. For
long, Ryanair had been known for its lack of services quality. In respond, a
new strategical programme called “Always Getting Better” (AGB) was launched in
2014. This programme provides unusual for low-cost airline moves, such as range
of customer services, family products, and delivering connecting flights. All
this resulted in forward bookings and
load factor rise. Hence, the ability of the company to adjust its strategy is another
key element in achievement sustainable
Difficulties and challenges
fact, that Ryanair has more than 30-years safety record, there were some
accidents with aircrafts in its history. The most significant accident happened
in November 2008, when after a multiple bird strike an aircraft suffered
substantial damage, which resulted in taking to hospital two cabin crew members
and eight passengers.
has a reputation of souring relationship with its pilots and unions. Traditionally,
Ryanair did not recognize unions, which was subject to legal proceedings. The
latest examples are Dublin pilots voted for industrial action in December 2017,
following the same action taken by pilots in Portugal. In Dublin case, up to
117 pilots expected to take action (Topham G., 2017), which would likely affect
flights between Dublin, Shannon and Cork.
negative reputation of poor service airline has always had an impact on the
company’s potential customers.
challenges, one of the most important one is the Brexit Referendum uncertainties.
If a revised or new agreement on European flights is not signed before the
deadline in March 2019, new wave of cancellations may occur, which could
adversely affect Ryanair’s operations.
pressure in a highly competitive industry with falling ticket prices is another
challenge. Accompanied by falling fuel costs, this threatens Ryanair’s position
in marketplace, taking into consideration governmental aid to state-owned flag
in European airline industry could make upcoming years very problematic. A rise
of new technologies opens up new opportunities. Some experts advised airlines
to articulate new resilient strategies with emphasis on the use of digital
technologies and the development of sharper competitive positioning (Bohlman
J., Kletzel J., Terry B., 2017).
report recommends Ryanair to not only invest in digital technologies, but also
consider investments in development of renewable energy technologies (electric air
jet engines, new generation of batteries, etc.). Since electric engines took
their first steps in automotive industry, e.g. Tesla, this direction could conquer
other industries in provisional future as well. Aircrafts powered with electric
engines that work on graphene batteries, being able to get charged in less than
half an hour, and then to cover distance of intercontinental flight with zero
CO2 emissions, are not a fantasy anymore. Hence, those who get use of such
technologies first, will benefit from competitive advantage in the industry.
recommendation to Ryanair is to attract more customers by increasing quality of
services and customer experience. How would this fit low-cost model – a
question to be answered. Nevertheless, three years of implementing AGB
programme by Ryanair proved this could be done.
This report has examined position of Ryanair in the European airline
industry. At first, brief description of European airline business models and
its current performance were covered. Then, using academic frameworks, Ryanair’s
strategy was studied.
underwent analysis, it could be concluded that Ryanair has a unique combination
of resources and capabilities. Given its massive fleet of Boeing 737s, strong
leadership of CEO Michael O’Leary, human resources, facilities, digital technologies
and route network, accompanied by capabilities of no-frills strategy, on-time
flights, agreements with suppliers and strategical flexibility, Ryanair is able
to reduce the strength of Porter’s five forces.
only Ryanair does possess a sustainable competitive advantage in low-cost
segment of European airline industry, but it also has the potential to
reinforce its position in a highly competitive market. Ryanair’s plans to lower
ticket prices and increase annual passenger traffic to 200 million people by
the end of 2024 financial year confirm such statement. At the same time, taking
into consideration Ryanair’s difficulties and challenges, to achieve such plans
it may consider recommendations given in this report.