Ryanair is a Dublin-based carrier that dominates the European airline industry in terms of passengers flown. It is famous for its rapid expansion following the European deregulation of the aviation industry (Ryanair Group, n. d.). Although it has a prominent low-cost business strategy copied by many followers, the company is strongly criticised for poor customer service and employee working conditions. Many customers are also not happy with extra charges for services that earlier were inclusive and other hidden costs. Nevertheless, the company is top-rated due to its punctuality, advanced aircraft and low fares. The paper aims to identify whether Ryanair’s strategy is suitable for facing current challenges and remaining Europe’s largest airline in the post-Covid world.
Airline Industry: Current Challenges
One of the common challenges every airline company faces is the fuel factor. Changes to GDP and oil prices seriously affect its bottom line and total costs. High costs in their turn drive a surge in airfares for customers due to imposed fuel surcharges. Contrary, low oil prices benefit airlines and the whole aviation industry due to massive cost reduction. It often leads to advanced airline fleet planning in line with older fleet extension and carriers’ windfall profits (Schofield, n.d.).Thus, one of management’s main tasks is to purchase high-quality jet fuel at the market’s lowest price to reduce costs significantly.
The airline industry has undergone some structural shifts during its history. The last major shift occurred due to the expansion of low-cost carriers such as easyJet and Ryanair revealing that customers prefer lower fares over high-quality services and related frills. According to the law of demand, discounted airfares contribute to increased demand for tickets among air travellers. As a result, the low-cost providers expanded the number of available seats on the boards. Although such a move increased business efficiency and improved aircraft use, the flying experience quality has significantly dropped (Wolla & Backus, 2018). Generally, healthy competition is essential for further development of the industry.
The airline industry is characterised by high fixed costs (purchase and maintaining of aircraft) and relatively low variable costs represented by fuel prices and labour. Thus, airline carriers seek to spread their fixed costs across as many output units as possible (tickets and flights) to achieve so-called economies of scale. Under this approach, the company benefits from many customers due to a decline in overhead cost per passenger (Mankiw, 2020). As a result, some big companies enjoy the dominance in the market.
Deregulation triggered very low fares that saw a surge in mergers between 2005 and 2015 as many companies turned to be not profitable in the long-run. For instance, in 2015, the US airline industry was an oligopoly where few firms dominated the market due to mergers. Nevertheless, low-cost carries revived competition in 2016 by expanding their operations (Wolla & Backus, 2018). It became a monopolistic competition, where service providers fight for customers by offering similar but differentiated options.
Other common issues that affect airline industry performance include overcapacity and labour unrest. The economic environment continuously and rapidly changes, seeing giant players failing to adapt and lose revenue. Companies which do not manage their capacity throughout the year suffer from high costs. Pilot walkouts usually demand better working conditions, a higher salary that ultimately drives the variable costs. For instance, Ryanair is still in fractious relations with its pilots despite the relatively recent recognition of pilot unions. For instance, in 2019, Balpa members (Ryanair’s pilots) turned out for the ballot demanding better working conditions and social benefits (Davies & Brignall, 2019). Pilots’ strikes usually drastically hit the earnings, whereas unresolved problems contribute to lower employee retention.
The most recent challenges are related to worldwide efforts to stop Covid-19 pandemic. According to the OECD (2020), the dramatic drop in demand for flights in 2020 was caused by travel restrictions, economic activity contraction and economic crises. Airline companies’ liquidity buffers are currently under pressure due to higher operating costs (additional health and safety measures) and change in consumers’ transport behaviour. Majority of airline companies started to downsize, opting to use a smaller fleet, network and operation in response to anticipated low demand (Reed, 2020). Many of them need policy assistance from the local governments to survive.
Evaluation of Ryanair’s Strategy
Under the resource-based view (RBV), the company can be successful only if it possesses and develop VRIN (valuable, rare, inimitable, non-substitutable) resources (Adeel, 2017). Superior firm performance is possible when an organisation finds internal resources that bring competitive advantage. It is better to have both heterogeneous and immobile assets as it hinders possible replication and strategy imitation. In terms of airlines, most of the resources various industry players manage are quite similar, including Boeing/Airbus fleet, staff, fuel, technology and related services. Nevertheless, Ryanair’s strategy and focus on variable costs contraction was unique enough to capture the European market.
Ryanair entered the market using a cost leadership strategy and aggressive costs-cutting policy. Its “low-cost and no-frill” business model was designed to offer the lowest ticket prices possible for business and leisure travellers (O’Higgins, 2016). It considers six critical elements: productivity and cost of advertising, flight policies and airport charges, sub-contracting some operations, the staff training and aircraft involved.
From the very beginning, the Ireland-based operator opted to pursue direct sales via the Internet to reduce related operating costs. In terms of route policy, the company offers short-haul flights on a one-way basis to eliminate free extra in-flight services, increase jet use efficiency and avoid transfers. The firm’s aircraft fleet is young and streamlined consisting only of Boeing 737-800 series. Ryanair continues to purchase new 737-MAX-200 aircraft to have approximately 600 planes in total by 2024 (Johnson & Humphries, 2020). This renewal strategy will contribute to higher safety and reduced costs related to staff training, aircraft maintenance, and ensure up-to-date fuel efficiency.
To increase passenger throughput and decrease airport charges, Ryanair avoids popular airports, choosing regional and secondary destinations instead. Although AGB programme embraced additional primary airports, the company still prefers smaller ones and attacks air passenger duties imposed by most governments (O’Higgins, 2016). Relations between the staff and the company became less controversial since its first-ever recognition of trade unions in 2018. Ryanair used to contract cabin crew and pilots on an individual basis or under platform-style conditions, but now it ready to negotiate collective labour agreements with local unions. Nevertheless, the European giant continues to use Irish labour contracts with its personnel and hire third-party contractors instead of full-time employees.
The airline provider applies web-based check-in (high airport check-in fee) and priority boarding to cut passenger service costs. Although AGB initiative made all related measures milder, Ryanair continues to motivate passengers to travel with less luggage imposing high charges. Another critical strategy element is ancillary services both available on the website and in aircraft for an extra fee. For instance, the company charges for in-flight beverages and meals and for booking specific seats online. Moreover, its website offers car hire, hotel reservations, rail and bus tickets bundled with air travel.
Table 1. Ryanair’s SWOT.
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Ryanair boasts a suitable business model, rich experience and tool base to manage available resources wisely. The cost-cutting approach helps the Irish carrier not only survive but also remain profitable in times of crisis. The company made a 649 million euros of net profit in 2019/2020 fiscal year despite a drastic 29% drop compared to 2018/2019 (Statista, 2020). Ryanair has a strong balance sheet, stable returns to stakeholders and superior stock market performance.
In general, the Dublin based provider seems to be a best-prepared airline to face the economic aftershocks of the Covid-19 upheaval due to relatively stable growth. The main weakness identified is a lousy brand image regarding customer dissatisfaction with refunds, high charges for extra services and hidden costs, despite the AGB programme’s efforts. The pandemic’s uncertainty and inconsistency resemble both opportunities to expand and threats to lose more money for the carrier.
Competitive Position of Ryanair
Ryanair pioneered the low-cost model in Europe, and many other airlines emerged to follow suit after the European deregulation. The idea behind this model is to provide cheap and short flights to customers without any traditional and inclusive frills. All the extra services, including changes, cancellations, meals and reserved seats, require additional payment. Thus, low-cost carriers compete much on price, while ancillary revenues remain their primary focus. According to Hayward (2020), low-cost airlines reached 33% of European market share in 2019. The giant legacy providers (Lufthansa Group, Air France-KLM and IAG) still account for 70% market share dominating the market. Such companies mainly provide long-haul flights and have enough resources to offer experimental unbundled fares to compete with Ryanair.
Nevertheless, legacy carriers do not operate in expanded point-to-point networks as low-costs do. Hence, the main competitors of Irish company are easyJet, Wizz Air, Norwegian and Pegasus. The closest rival in terms of passengers is easyJet that serves 97 million people compared to 152 million of Ryanair (Hayward, 2020). Porter five forces framework analysis would be further conducted to find out the extent of competition in Europe.
Porter Five Forces Analysis
The Threat of New Entrants
To become a competitor, a new airline approaches severe entry barriers that include high capital investments, large economies of scale and competition for airport slots. While the financial problem can be resolved with banks, investors and aircraft manufacturers, it is more challenging to win the physical areas at airports (gate access, check-in and security area). New entrants are expected to pay the whopping sum of money to access one in a popular destination. For instance, it happened to Oman Air, who paid 75 million dollars for the slot at Heathrow Airport (Maslen, 2016). Bonus programs offered by major low-cost carriers providing customers with a year membership and related benefits is another delicate issue for new firms.
Threat of Substitution
Before the pandemic trains were the main opponents to airlines in Europe. The new technologies reduced the time needed to travel between two destinations by train. For instance, such trains as Siemens Velaro and TGB can reach the 350 km/h speed, whereas the EU possesses advanced railway system between the member states. Nevertheless, in Covid-19 aftermath, airports and jets will be still more popular due to a more robust overall safety image.
Supplier’s Bargaining Power
In general, aircraft and spare parts manufacturers, fuel suppliers, and maintenance providers’ bargaining power are jointly high. There are a limited number of suppliers with two major plane manufacturers Boeing and Airbus. However, the two firms compete with each other, and Ryanair is one of Boeing’s primary customers. The manufacturer tends to offer significant discounts for purchasing its products to the company that entirely consists of Boeings. This already historical cooperation and co-dependency reduce the bargaining power of the latter.
During the pandemic, both manufacturers have been severely hit with Airbus reporting a loss for the first half of the year because of the steep decline in orders (Jolly, 2020). For that reason, they may reduce the cost of spare parts and new aircraft models soon. Trade unions’ bargaining power seems to reach a medium-high level since they managed to make Ryanair follow their suggestions regarding job security and working conditions in 2019 after the pilot’s strikes.
Customer’s Bargaining Power
Ryanair’s business model and cost-cutting strategy allow the firm to sell tickets often under lower prices than their competitors do. Although leisure travellers are more price sensitive, Irish carriers’ customers do not have significant bargaining power over ticket fares. Moreover, Ryanair’s high load factor and its closest rivals also reduce aircraft travellers’ power. Hence, even if some customers are not happy with the adjusted price, more of them are willing to pay the price still lower than other airlines offer. For a long time, the limited seats available and high demand have reduced customers’ bargaining power. However, during the pandemic (due to lower demand and number), customers gained more power shifting their influence from medium to medium-high.
Table 2. Porter Five Forces Summary.
|Force||Competition amongst low-cost carriers||The threat of new entrants||Threat of substitutes||Bargaining power of customers||Bargaining power of suppliers|
|Factors|| ||Barriers: || || || |
To summarise this part, the airline industry is saturated with powerful companies that currently fight for customers by driving prices down. The low-cost carriers continue to cut the costs and put effort to launch new routes and additional services. In this harsh environment, Ryanair should operate carefully and make timely adjustments to its strategy. From one side, the coronavirus pandemic weakened majority of smaller rivals, putting them aside from the competition. From the other side, the lower demand and consequently, a limited number of customers leads the fight for passengers to the new level.
Large capital and airport spot requirements significantly limit the entry possibilities for new carriers in times of crisis. Nevertheless, the bargaining power of customers is higher than before, as there are more seats available. Although aircraft is still the most convenient option, high-speed trains remain the primary threat substitute for Ryanair in Europe. Restrictions and health measures make airlines a better choice in travellers’ eyes at the moment due to perceived safety and reliability. However, in a few years, it could evolve into a problem for the Irish carrier. Fuel prices are generally low, while aircraft manufacturers lack the bargaining power they had before the crisis. The only voice Ryanair should listen to is of pilot unions that push variable costs up demanding higher salaries and benefits for cabin crews and flight attendants.
Recovery and Growth Plan
Majority of airlines pulled a survival strategy that shrinks schedules, cancels orders for new aircraft and leave airport spots to downsize. During the pandemic, Ryanair followed suit and cut salaries together with workforce numbers (Tully, 2020). Nevertheless, additional measures taken by the firm seem to be ambitious and forward-looking. O’Leary, the Ryanair’s CEO, stated in November that Irish carrier waits for a right moment to launch an aggressive post-pandemic strategy (Flight Global, 2020). Not wasting time, the company has been working to restructure its cost base.
When others abandon renewing their fleet, Ryanair is waiting for the arrival of 30 brand new Boeings 737 MAX in 2021. It will reduce the cost of maintenance and fuel bills that are already not high. On the contrary, top management decided to preserve as many routes and airport spots as possible to ensure rapid restoration of pre-Covid presence and operation intensity. When the health situation allows, Ryanair plans to capitalise on its decreased cost base and new aircraft offering the lowest fares, expanding its operations and providing new services.
As a result, such an aggressive approach would see the Dublin-based provider dominating the market, making profits and absorbing smaller players. Wizz Air, one of the latter’s main rivals, reported the lowest cost in the market sticking to a similar cost-cutting strategy. Nevertheless, O’Leary criticised Wizz Air for using a relatively outdated fleet (Airbus A320) that can become a problem shortly (Tully, 2020). The market would return to some normality in 2021, and it seems that the low-cost carrier is ready to prosper from its competitors’ retrenchment.
To conclude, Ryanair’s cost-cutting and pricing strategies are sustainable enough to face challenges brought by coronavirus pandemic. The firm has enough resources, including new aircraft, airport sports, a comprehensive destination network and one of the lowest cost bases. With the aggressive post-Covid expansion strategy, the latter will help the Irish carrier recover quickly and expand its operations worldwide. Following the Porter five forces analysis, it could be stated that Ryanair still has the leading position in the UK and European market enjoying bargaining power over aircraft manufacturers and other suppliers. Adverse influence on variable costs may be expected from trade unions and governmental decisions. Although Ryanair’s strategy is ready for further competition, the AGD programme should be revised to remedy customer dissatisfaction as soon as possible.
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