I wrote a case study for my Global Strategy business course on Ryanair. It answers a series of predetermined questions assigned by my professor on corporate strategy.
Ryanair Case Assignment
Founded in 1984, Ryanair has always followed a cost-leadership strategy. Now that more companies have entered the market and competitive rivalry is at an all-time high, their prices are no longer the selling point they used to be. No airline in the European market has majority market share and most have some version of a low-cost ticket. Due to the consumer’s new found buying and spending power as well as their desire for a better flying experience with improved customer service, Ryanair is being forced to reevaluate their strategy and potentially switch to blue ocean to keep competing successfully.
In the past, specifically before 1990, the main consumer desire within the airline industry was low prices. During this time, there were heavy government regulations on the airline industry so barriers to entry were high. Ryanair was successfully able to enter the market in 1984 at low costs that allowed them to charge much less than their small amount of competitors that were not completely focused on this strategy, taking a large percent of market share in the region. After 1990, Ryanair struggled along with the rest of the industry due to the new competitors that entered after airlines were deregulated but they were able to survive this competition and the fear of flying that came with 9/11 by sticking to their low prices. Soon after this terrorist attack came the recession of 2008, which further enforced the need for low prices. Overall, Ryanair’s history of cost leadership kept them successful, or at some points just alive, due to these legal (regulations), economic (recession), and sociocultural (reaction to 9/11) forces. Throughout these times, consumers’ first priority in choosing an airline was price, exemplifying how Ryanair was able to succeed with this strategy. Unfortunately for the company, these conditions are now changing since we are out of the recession and there are so many airlines to choose from. Since rivalry amongst existing competitors is so high in the European region, prices are being pushed down to the point of no longer being sustainable. Passengers are also now able to afford higher prices and are willing to pay these prices in exchange for better customer service. Their buying power is also ever increasing as third-party websites promise to find the lowest price for flights across all airlines. Now that governments across Europe are implementing policies to incentivize train travel instead of air travel, threat of substitutes is also higher than before. Due to these three forces, Ryanair would be unable to keep their competitive edge by simply having low prices, especially if they are no longer always the lowest. Ryanair will have to implement their intended strategy of blue ocean, providing low prices with excellent customer service. Currently, it is not their realized strategy, putting them at risk if they remain stagnant.
Ryanair does possess the unique, inimitable resource that gives them a sustainable competitive advantage over other European airlines of their relationship with their airports. Ryanair partners with small airports across Europe that often have a majority of their flights departing and arriving from Ryanair. This gives Ryanair the buyer power and flexibility to pay lower landing fees to these airports as they heavily rely on the airline. This is not only valuable due to its decrease in costs, but it also allows for 92% of Ryanair’s flights to land on time and as scheduled. This is rare since most airlines depart from larger airports, so they pay higher fees and have less control over their flights, or they are smaller than Ryanair, so they have less buyer power. This is costly to imitate since it would require another airline to copy Ryanair’s strategy that they already have developed. Finally, it is organized to capture value since Ryanair has previously reaped the benefits of these relationships in terms of lower costs and is now using it to better its customer service.
Other than this sustainable competitive advantage, their reputation as a low price airline comes close. Since this reputation originated from poor customer service at the company’s inception that helped customers equate the company with low quality and therefore low prices, it is now debatable if this attribute is still valuable. Assuming that it is possible to separate the reputation of low prices from the reputation of poor customer service, this is very valuable as consumers in a rush may quickly purchase a ticket from Ryanair without thoroughly checking other airlines as they can trust that the price will be one of the lowest. While many other airlines now focus on low prices, not many have the long history that Ryanair has in the industry. The solid reputation that has grown over time is rare amongst other companies that may have just entered the market a few years ago. Due to this, a reputation to this magnitude within the region is also costly to imitate. A company would have to either exist in the cost leadership strategic group for a long period of time to have their reputation grow over time or invest heavily in marketing which may not provide the same results. Overall, Ryanair’s low cost reputation is only a temporary competitive advantage, not sustainable, because it is not organized to capture value. Their low-cost reputation is intrinsically tied to their poor customer service reputation. As the latter is causing the airline to be ranked amongst the worst brands globally, it is clearly a clear competitive disadvantage. Unless Ryanair’s new marketing and business strategies can effectively fix this problem, their low cost reputation may not be as beneficial as it could be.
As mentioned previously, the economic recovery from the global recession has given the average flyer more spending power and the deregulation of the airline industry in 1990 allowed for many other low cost airlines to enter the market. This need is also emphasized by how consumer values are shifting towards a preference of convenience and better customer service over shorter travel times socioculturally and how third-party websites are increasing competitive rivalry technologically. Ryanair is now understanding that they must switch to a blue ocean strategy and provide excellent customer service at their already low prices since customers now value their experience with different brands highly. Politically, Britain’s exit from the European union could greatly affect Ryanair’s operating costs. Since the case was written in 2015, it is unclear what actions Ryanair has decided to take.
Global warming also relates to all of the external environment factors in the PESTEL model. As consumers experience more noticeable effects of global warming, they are more likely to become environmentally conscious. The airline industry is a large emitter of carbon dioxide, the greenhouse gas that is largely responsible for the increase in temperatures that is going to destroy many ecosystems worldwide and disrupt most people’s way of living. Due to the changes in the ecological environments that can be attributed, in part, to airlines, the industry will be greatly impacted. Ryanair does not try to lessen their carbon footprint. In fact, their purposeful purchase and use of old planes naturally make them less efficient than if they were to use newer models. Technologically, Airbus and Boeing have been working towards more fuel efficient planes which other airlines have taken advantage of. Legally, regulations are already being implemented to encourage Europeans to take alternative modes of transportation. In response, the company relies on their low prices to compete with any substitutes that may become a more pressing issue in the future. Socioculturally, these new policies, along with consumer trends, indicate that environmentally choices will become the cultural norm in the near future. Fuel and oil prices will continue to rise as the resources become even more scarce and demand increases. Economically, this will have drastic effects on the airline industry and Ryanair’s bottom line. While they currently enter forward contracts to able to predict their costs, this may not be possible in the future.
While British Airways plc attempted a blue ocean strategy to compete with Ryanair when they first entered the market, British Airways employs a differentiation strategy. This shift can be seen by how their original prices at the time of Ryanair’s entrance were more than double Ryanair’s and one of their explanations for their recent financial performance was their increases in ticket prices and fees. British Airways differentiates by focusing on over 400 destinations worldwide, including more popular airports. They have recently invested in new airplanes, the acquisition of British Midland International, and increased traffic volume. In contrast, EasyJet plc employs a cost-leadership strategy. They focus on providing over 600 point to point routes internationally at low costs, competing in the same strategic group as Ryanair. They have recently improved operational efficiency and base location effectiveness. The company that is in an especially weak position would be Lufthansa Group, which is switching from a differentiation strategy to a blue ocean strategy by creating a new low cost label called Wing, grouping their low cost subsidiary groups. While they clearly differentiate themselves by being the largest airline in Europe, with over 620 planes, 18 regional routes, and 197 routes, this new label will add the low aspect of cost-leadership that could potentially add a further competitive edge. Unfortunately, since rivalry is so high, airlines do not really have room for poor financial performance. While Lufthansa could probably recover, they have to work quickly to ensure that Wing is successful and they do not become stuck in the middle as they shift in focus. This could potentially be detrimental for the airline since they are already in a weakened state.
On the other hand, Wizz Air Group is in an especially strong position. They employ a cost-leadership strategy with the second to lowest per unit cost of airlines in Europe. By reducing fuel and labor costs, they are able to keep their expenses low and profits high and growing. Ryanair should definitely consider acquiring Wizz Air due to their high rates of growth. They are not yet at the maturity stage which could enliven to relatively old company. Since they are also prominent in Central and Eastern Europe, it would round out Ryanair’s prominence in Western Europe with little risk since they have similar strategies, already share some of the same airlines, and both are successfully financially and in terms of market share. Since Wizz Air is still independently owned, it is possible that they are trying to increase their valuation to go public and test their luck on their own. Wizz Air could easily be interesting in an acquisition though since competition in the European airline market is so intense and Ryanair has the experience in surviving various economic events.
In terms of market share, a larger airline may be correlated to greater market share, but it is definitely not a direct cause. According to Exhibit 6, Ryanair had the highest market share in four of the eight countries and in the top three in the other four while Lufthansa, the largest European airline, was only ranked first in one country. Overall, Lufthansa has the highest market share in terms of total seats, according to exhibit 8, which parallels how they have the most planes and therefore seats. Size of airline also correlates with revenue, but not with operating profit or net income. Since economies of scale are supposed to decrease costs as units increase, it is little important to the European airline industry that values relationships with airports and suppliers more than quantity produced, based from a financial standpoint.
High levels of regulations completely favor differentiation strategies over cost-leadership. Since different regulations often inflict extra costs on a company, meaning companies that are already focusing on their unique features, they have more financial freedom to follow these regulations as they are not tied down to super low prices. If a cost-leader were to be regulated, it could force them to raise prices to keep profits, risking the alienation of their consumer base if their competitors are not directly impacted by the same regulation. In terms of the new regulations that encourage train usage, focused differentiation strategies are favored as companies that choose to target the environmentally conscious consumer could stand to benefit.
Currently, Ryanair is facing the shift of consumer values from price to experience. As a cost-leader, they are being forced to adapt to keep profitable amongst the stiff competition as mentioned before. This change of strategy will most likely prove to be difficult with their current CEO who has shown little indication, other than verbal comments, of substantially improving customer service. With a CEO that has already stated that he cares little for both his employees and his customers, it will be increasingly difficult to shift to a blue ocean strategy with enough commitment to succeed. The entire culture of simple cost-cutting and demotivated workers will have to be properly changed. Due to the combination of the CEO’s comments and actions and the need to shift strategies, I would not invest in Ryanair at the time of the case. There has already been a disparity between Ryanair’s intended and realized strategy for years, so I would not trust O’Leary to lead the company in the way that is so desperately needed. Without the proper leadership to execute such a drastic change in company culture, the company could easily fail while attempting to do so.