Ryanair was founded in July, 1985, by Cathal and Declan Ryan with the financial backing of their father, Tony Ryan (Thomas, 2007). Ryanair began its operations with a 15-seater aircraft from Waterford, Southeast of Ireland to London Gatwick. It was initially set up with a share capital of just ₤1 and a staff of 25. After three years of rapid growth in aircraft, routes and intense price competition with AerLingus and British Airways, Ryanair accumulates £20m in losses and goes through a substantial restructuring. The Ryan family invest a further £20m. in the company during 1990's, and copying the Southwest Airlines low fares model the airline is re-launched under new management as Europe's first low fares airline (ryanair.com, 2009). The new management team led by Michael O'Leary was appointed by the founder Tony Ryan. Ryanair now offers the lowest fares in every market, high frequency flights, moving to a single aircraft fleet type, scrapping free drinks (ryanair.com, 2009).
This report is discussing External Environment of the company. The report emphasise on two main parts which are concerned with: PESTEL Model and Porter's five forces. We are going to see how PESTEL Model is going too implemented on the organisation strategy. And Apply Porter's five forces model to critical analyses of Ryanair competitive position and evaluation of the key competitive forces.
PESTEL Model
There are many external factors in the environment that will affect the decisions of the managers of any organisation. Tax changes, new laws, trade barriers, demographic change and government policy changes are all examples of change. To help analyse these factors managers can categorise them using the PESTEL model (oup.com, 2007). PESTEL Model consists of Political, Economic, Social, Technical, Environmental, and Legal aspects. The issues faced by Ryanair, that how they mutually influence each other, and their problems and fundamental constraints can be studied in minute detail.
Political Factors
The decisions made due to government policy which affect business organisation in its functioning is called as political factors. These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system. This includes tax policy, employment laws, environmental regulations, trade restrictions and reform, tariffs and political stability. Restrictive factors are those factors that limit profits; such as constraints placed on enterprise through fair-trade laws, antitrust laws, tax laws, minimum wage legislation or pollution laws as cited in Develop Vision and Strategy (Pearce & Robinson, 1985).
Ryanair had established with only one route - flying from Waterford, Southeast of Ireland to London Gatwick. In year 1986, it established second route - flying from Dublin-Luton International Airport, this was a direct competition to the AerLingus. Hence Irish Government refused the approval to support AerLingus. Under partial EU Deregulation, airlines could begin new international intra-EU services, as long as at least one of the two governments gave approval and it got approval from British government under pro-free-market.
Ryanair made no of attempts to collaborate with AerLingus but the attempts went in wage and as Irish government supported AerLingus. Once both the company got collaboration AerLingus firmly rejected Ryanair approach and said that Ryanair had acted in a hostile, anticompetitive manner designed to eliminate a rival at a derisory price. After the collaboration Ryanair AerLingus operated approximately 80 percentages of flights between Ireland and European countries. And AerLingus chief executive didn't want to stay together with Ryanair even they raise the price of the tickets. This shows how much involvement Irish government had in Ryanair's management.
Ryanair was also defending vigorously with French government's attempts to protect Air France - KLM by forcing Ryanair to move the staff they employed form Britisher to French people on French soil. From this we can understand that how much impact government policy's has made on Ryanair's management.
Economic Factors
This type of the factors includes all what is happening within the economy, for example; economic growth/ decline, interest rates, exchange rates and inflation rate, wage rates, minimum wage, working hours, unemployment (local and national), credit availability, cost of living, etc (Charter, 2010).
Although Ryanair had built its stake to 25.2 percent in December 2006, Michael O'Leary said that 'AerLingus has no long-term future' and that if the bid did not go through, Ryanair would not increase its price, but would continue to be a minority shareholder and exercise what influence it could to encourage AerLingus to reduce costs and offer lower rates. This says that AerLingus was in direct competition with Ryanair and it can be effected by how Ryanair's management.
Cost of fuel represented by 35 percent of the operating cost in the year 2006, which was around 27 percent year before. Despite of 74% increase in fuel costs they made a 12% increase in net profit which include traffic, passenger revenue etc (Johnson, Scholes, & Whittington, 2008). Ryanair could not predict nor control these cost but Michael O'Leary said that 'we guarantee our customers no fuel surcharges not today, not tomorrow, not ever'. This means that Ryanair is not going to increase its cost of ticket even if cost of fuel rises very high. So to compensate with the price rise in fuel Ryanair started charging around €8 for entertainment like movies and games, this is because they didn't find it worthwhile investment for short term flights. Apart from doing this, they also picked up ready-made bundle of take-off food stuff rather than bargain in purchase price of food stuff and make on flight. It was also gaining around €7.70 per passenger by charging them excess on extra service like hotels, travel insurance, excess baggage charges, flight changing fees, car rent service, etc.
They have an unique capability of optimizing their production cost efficiency and co sequencing maintains the leading position among the European low cost airline and reduced the landing fees by avoiding the congested airports, choosing secondary regional destination airport and avoid the competition with big network carriers (Mayer, 2008). The shares of Ryanair rose by 3.6 percent to €9.28; the stock gained 12 percent during the year 2007. In 2006 Annual report, Ryanair claimed around that its average pay; including commissions to cabin crew for on board sales was €49,612 which is higher than any other European airline. Ryanair also claimed that they will give more than €1 per passenger off to the passengers who have to do web-based check-in form March 2006. As this will reduce the number of staff and will work faster than now. As Ryanair knew that time is money for them by arranging one more flight in the time save in check-in.
(Source): http://www.ryanair.com/doc/investor/present/quarter3_2010.pdf
Social Factors
Social factors are the factors which are related to cultural norms and expectations, health consciousness, population growth rate, age distribution, career attitudes, emphasis on safety, global warming, etc (Charter, 2010). As per Certo(1997) definition social responsibility as a managerial obligation to take actions that protects and improves both the welfare of society as whole and the interests of the organization.
After collaboration with AerLingus, Ryanair declared that it would retain its blocking stack, but it would not have a seat on the AerLingus board. This means that Ryanair will not interfere in the internal management of AerLingus and it will only charge the percentage on the profit margin, and hence it won't affects any cultural norms of AerLingus. Since Ryanair had become world's most profitable airline, it will continue to outperform all other airlines, not only in Europe but also globally. Hence there was direct challenge to all the airlines.
Ryanair was going good and in the year 2006, the employment ratio of Ryanair grew around 500% times. The employee count rose from 700 to 3500, which comprised over 25 different nations. By doing this Ryanair brought employment to around 2000 people. Hence people who were unemployed got a chance to work.
Ryanair also gave compensation to those passengers who were affected by flight cancellations by offering them either refund or rerouting and free care and assistance while waiting for their rerouted flight - specifically, meals refreshment and hotel accommodation where an overnight stay is necessary. During August 2005 there carried 156,000 people more than British Airways who carries on it entire worldwide network for the first time it happened (Anonymous, 2005). By doing this Ryanair has gain good customer relationship.
After 10 aircraft were attacked by the terrorist in August 2006, UK government authorities imposed very high security rules. Ryanair implemented body scanner and they stopped passengers to carry liquids and gels in there carry-on luggage. Form this Ryanair has ensured safety for the passengers.
Ryanair was also had a good service like on time flights and the passengers bags were also taken care of this is can be explained by the table below.
(Source):http://www.ryanair.com/doc/investor/present/quarter3_2010.pdf
Technological Factors
Technological factors include all the kinds of technology which are involved in making the organisation work better. This can be making a web link of the company or buying new gargets like computer or other electronic thing form which company gets benefits. These developments can benefits customers as well as the organisation. Technology can reduce cost, improve quality and lead to innovation.
Ryanair has two different classes of seats, and three different types of aircraft depending on the growth of the passenger volume. This means that Ryanair had option of aircraft which depends on the volume of passengers travelling, if there are less number of passengers travelling then a small aircraft will do or else big aircraft is chosen. By the end of 1989 Ryanair had six BAC-111 jets and three ATR 42 turbo (Box & Byus, 2007). As they were already running with 737-800 aircraft Ryanair also claimed in 2005, that it would order 138 new aircraft in coming six months. They also added that they will double the size of the passenger to 80 million per annum by 2012.
Also Ryanair started its own website for e-ticketing which can help passengers to book ticket online. With this the time and money both can be saved of both passengers and also Ryanair's. Whereas online booking as well as web ticketing plays an important role in helping the brand to expand its ticket sales, to the extent that 95% of sales which are now controlled solely by the web (Anonymous., 2003). And they claimed that there website was one of the top demanding website on Google. In the period of 3 months the website recorded 50,000 online bookings per week 1(Box & Byus, 2007).From this it was converting web traffic to e-commerce and advertising revenue.
Ryanair continued to introduce new technologies for example online gambling in flight mobile phone service, Internet services, etc this shows how much affects Ryanair is putting for it to section at number one position. They are also introducing 146 new routes this are going to start in 2010. This is much more than any other airlines.
(Source):http://www.ryanair.com/doc/investor/present/quarter3_2010.pdf
Environmental Factors
Environmental factors include the weather and climate change. Changes in temperature can impact on many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider (oup.com, 2007).
Ryanair replaced its old aircraft with the new ones, which are more environmental-friendly aircraft, reducing its average age of its fleet to 2.4 years (Johnson, Scholes, & Whittington, 2008). This was one of the youngest fleet of any major airlines in Europe. The new aircraft produced 50 percent less emissions, 45 percent less fuel burn and 45 percent lower noise emissions per seat. Also modified programme on the fleet was providing better performance and 2 percent reduction in fleet fuel. Hence this type of aircraft were very eco-friendly.
Aviation represents 2.6 percent of carbon emission in the EU. But University of Oxford claimed that emission of carbon world rise very high, so it would be very harmful to the environment. And hence, airline industry should pay environment tax for the contribution for global warming. This was argued by Ryanair, they say that aviation contributes very less amount of carbon emission to benefit if easily accessible cheap air lines. Ryanair are ready to deploy new aircraft which are more efficient and use less fuel and produce less pollution. But they are not ready to pay taxes for environment. This is because they know that there aircraft are more efficient and don't emit more carbon.
Legal Factors
Legal factors are the factors which are happening with changes to legislation. This may impact employment, access to materials, quotas, resources, imports/ exports, taxation etc (Charter, 2010). This includes all the kinds of laws implemented by government. And all the legal cases which are implemented on the company.
Ryanair, as sued by Sweden's prime minister and a former foreign minister over an advertising campaign that used their pictures alongside the tagline 'Time to leave the country?' which was later taken to the court. Other legal case going on Ryanair was for misleading passengers on website.
One other case which Ryanair filed with European commission was on Air France-KLM trying to block competition, after the France airline filed a case, alleging that Marseille airport was breaching the law by offering discount airline cut-price fees at its second, no-frills terminal. Other such case was also filled by France government was that on the soil of France there should be French employee rather British employee.
Critical Analysis on PESTEL model
After analyzing this case study we get to understand that Ryanair is the cheapest airline. We came to know that Ryanair was not loved by the government. As they very cheap so many people travel through these airlines and other airlines don't get much business as well as government don't get much revenue from this airline. Even after being so cheap airline it is one of the most leading profits making Airline Company. This is because it has started making money on providing extra services like extra baggage charges, entertainment charges etc. After collaboration with AerLingus, it did not interfere in the business of it. It also employed more no of people later that in year 2006. Being a airline industry it was always investing its money in new aircraft and new technology so that it could be beneficial to the passengers. It was also looking for environment by purchasing new eco-friendly aircraft. But there were many cases going on Ryanair, for misleading people, other rival company, etc.
Porter's five forces
The model of the Five Competitive Forces was developed by Michael E. Porter in book "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes (Recklies, 2001).
Porter's model is based on the corporate strategy which should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change.
(Source): www.clickok.co.uk/Porter5Forces/P5F.gif
Threat of new entrants:
Today, there are numerous low cost airlines in World. The costs for new company entering the airline industry are relatively very high. There are many barriers for the new company to enter in the industry and they are: high initial investment, distribution channels currently controlled by existing players, brand loyalty of the existing customers with their respective airlines, technical know-how, understanding of the airline industry, obtaining license and relevant approvals from the government (Porter, 1997). The strategy which Ryanair is using is, to identify new routes with low cost fare in order to be the first to introduce services on these routes. Hence the threat is low; however there is a possibility of existing company changing their strategy of moving into low-cost sector; then it causes threat to Ryanair.
Power of Suppliers:
This market is demanding few large suppliers like AirBus and Boeing for aircrafts and its parts. As a result, expansion needs to be carefully planned out as new aircrafts cannot be purchased immediately. The suppliers cannot be replaced as there are very few available in the airline industry. Other suppliers like catering, maintenance can be quickly replaced (Johnson & Scholes, 1993). A company can improve its strategic position by finding suppliers who have the least power to influence (Porter, 1997). However the power of suppliers for fuel is high due to fluctuating prices.
Outsourcing is one of the main tools used by most of the airlines by outsourcing non-core intensive labour activities. Ryan has utilized this tool at the heavy maintenance area, however could look at other area, which can be tapped into outsourcing.
Threat of substitutes:
Currently other means of transportation like the railways and roadways are considered to be more convenient for local transportation. However for overseas holiday or business travel, the airlines are still considered the best option in terms of time saved. Hence threat from substitutes is relatively low.
Power of Customers:
The customers are aware of its features such as low-cost fare, frequent departures, advance reservations, baggage handling and consistent on-time services. The launch of online booking reflected the power of customer, which made Ryanair - Europe's largest booking site. This helped Ryanair to cut cost in terms of third party agencies. So the usage of the online booking depends on the customers. Hence the Power of customers is high.
Competitive rivalry within the industry:
Due to the de-regulation of the European aviation industry, it opened up the national aviation market for 15 member states by allowing airlines free entry and competition with flight frequency and fares (Janie, 1997). This had lead to the rise of many new airline carriers. After the success of Ryanair, there are many companies in low fare or budget airlines category with similar strategy.
Conclusion
Based on the analysis, it has been noticed that the entry of Ryanair into the European airline industry has changed the airline business. Ryanair has challenged its flag carriers and is able to sustain the competition of low fares from multiple competitors.
The company has its own advantages like: it was the first carrier in the low cost, no frill category. It is also first to introduce short haul flights to operate from secondary airports and reduce cost through innovative methods. This company has seen consistent passenger growth and is expected to which increase to 67 millions in the next 12 months.
Human resource is another area which provides competitive strategy as employees are the most valuable asset in an organization than high-tech equipment. Ryanair is in a better position than other airlines with regards to employee productivity; however they should collaborate with the employees and make them fell friendly while working in an organisation. By doing this all the employees will be faithful to words Ryanair.
Ryanair has a strong position in the emerging market segment (Jackson, 2007). So Ryanair could look at the possibilities of entering the new markets through strategic acquisitions. Ryanair could also look at strategic alliances as a means to create identities in new markets, create a global network. This will provide access to untapped markets (Rajasekar & Fouts, 2009).
The company optimally utilizes its resources. Company has an ability to identify different innovative mode of cost reduction without compromising its basic idea which is commendable. Most of the credit goes to Michael O'Leary for his long standing association with Ryanair and creating a brand for low-fare, budget airline.
Recommendation
The company has great opportunities in the years ahead. However this requires continuous improvement in all the processes with constant focus on reducing costs though, it has competitive advantage over other airlines. It needs to sustain this competitive advantage.
Inspite of purchasing eco friendly aircrafts Ryanair should give environment tax to the government, as this fund will go for controlling global warming. Ryanair is improving in the technologies like providing internet, etc. But charging more for this service, rather than that they should charge little more form all the passengers and should give the service to all the passengers. Advantage of this is it will reduce the fare of the passengers who uses the service very often and other passengers can also get a chance to use the service in low cost.
