In 2009 Ryanair bought 30% of Aer Lingus shares after a long takeover bid. It wanted to buy the whole lot of Aer Lingus, but the Commissioner for competition pointed out that the combined airline would have had a near monopoly at Dublin, with no competition on 22 out of 35 routes. “Ryanair has provided customers with more competition and more choice, but it cannot now take away that choice.”
Today Ryanair, with its Headquarters based in Dublin Airport has grown from a small airline flying the short journey from Waterford to London into Europe’s largest carrier. Ryanair carries over 130 million passengers from 200 destinations in 34 countries on a fleet of 400 Boeing 737 aircraft, with a further 260 Boeing 737’s on order. Ryanair plans to lower fares and grow traffic to over 200 million. Ryanair has a team of over 13,000 employees and an industry-leading safety record. On the 31st of March 2017, Ryanair had €6.6 billion turnovers, €1.5 billion in profits.
In the beginning, Ryanair followed a traditional business model, but it quickly began to lose money. Michael O’Leary (now the Chief Executive of Ryanair) was sent to the United States to study the Southwest Airlines business model. The business model was further developed by Ryanair to use receipts from onboard shopping, internet gaming, car rental (Hertz), phone cards, bus and train tickets (Stansted express) and hotel bookings to replace the ticket revenue from airline seats. About 16% of their profit is made from upselling. Savings were also made by negotiating discounts with airports for reduced landing fees.
Ryanair provides passengers with a low cost, no frills air travel to European destinations. The business has lower costs and those lower costs are passed on to their passengers in the form of low fares. The branded airlines such as Emirates argue that passengers are willing to pay more for a better level of service.
Ryanair has got itself a reputation of being an airline which thrives on controversy. The Chief Executive Michael O’Leary knows the value of being controversial and realizes that even if you are controversial this will give you free publicity which, in any commercial situation, has value. Some of his quotes are so controversial, he had a book written about him, called “Plane Speaking: The Wit and Wisdom of Michael O’Leary by Paul Kilduff and which was published by Aurum Press in 2010”.
In recent months Ryanair has been in the news in relation to the recognition of unions. Ryanair reversed its longstanding policy of not recognizing unions, as the airline faced the threat of widespread industrial action across Europe close to the busy Christmas period.
The Market Structure of the Budget Airline Industry
The word “Oligopoly” is derived from the Greek words for “few sellers”. Oligopoly describes a market that consists of a relatively small number of big players when viewed from a global vantage point. The products they produce are not exactly the same but similar enough that it creates competition within the marketplace. There are several examples of markets that possess the characteristics of oligopolies, these include the fast food industry where a few major players compete for market shares such as Mc Donald’s, Burger King and KFC or the music industry which is dominated by Sony, Universal, and Warner.
Within the airline industry, Ryanair’s main (budget airline) competitors include Aer Lingus, Easy Jet, WOW and Norwegian Airlines. Another defining feature of an oligopoly is that the success of the firm is often largely dependent on the actions of its’ major competitors, i.e.
Porter’s Five Forces
Porter’s work has had a greater influence on business strategy than any other theory in the last half of the 20th century. The Porter’s Five Forces framework classifies and analyses the most important forces affecting the intensity of competition in an industry and its profitability level.
Porter’s five forces are the following (i) threat of substitutes, (ii) threat of new entrants, (iii) bargaining power of buyers, (iv) bargaining power of suppliers, (v) rivalry among existing competitors.
Porter’s five forces have impacted on Ryanair’s strategy as follows: –
Threat of Substitutes
The threat of substitutes is low as within Europe there are a number of other systems such as train, buses, and cars that can be used to travel over the short-haul routes. However, the train fares are not cheap. They also take considerably longer. Ryanair tackles this by providing a comparison of their rates and the train fares over a number of routes on their website, encouraging people to use their services over non-flying means of transport (Dubovskiy, 2012). This reflects a weak threat of substitution for Ryanair.
The threat of New Entrants
Although one of the primary functions of Government is to preserve competition within the marketplace so as to ensure the economic health, they can also either directly or indirectly create barriers to entry into the industry through strict legislation, regulation, policies, and procedures. Such barriers can prove to be a deterrent to any new entrants wishing to enter the market.
This threat of new entrants is low in the aviation industry, as it is an expensive industry to enter for new entrants. The barriers to entry are high. Purchasing or even leasing jets is expensive. It is costly for new airlines to get slots at desired airports and tough especially for new airlines, inventory of spares is not economical and so on.
In order to generate awareness, huge marketing costs would need to be incurred. The staff required for an airline such as pilots, air stewards are not cheap nor is it easy to find qualified staff. Developing the low operational costs that airlines like Ryanair have developed takes experience and economies of scale (Bagdanskas, 2016). Only then can low-fare flights be profitable. Thus the threat of new entrants is not high for Ryanair.
Bargaining Power of Buyers
This is high as the low-fare airline industry lacks customer loyalty or brand loyalty. Customers are only loyal to low-fares. Any player that offers the lowest fares wins the greatest number of customers. The switching cost for the buyers is almost zero. If any player attempts to increase fares, buyers will shift to the other airlines causing the airlines to lose business. All low-fare airlines are working towards reducing their operating expenses and providing the flyers with great facilities. All of this further adds to the bargaining power of the buyers. This makes the bargaining power of the customers high.
Bargaining Power of Suppliers
This is high as there are only two manufacturers of airplanes, Boeing and Airbus. Ryanair purchases its planes from Boeing. This Duopoly has led to these manufacturers charging high prices for the aircraft. However, since Ryanair is the highest purchasing customer of Boeing in Europe, even during the 2005 post 9/11 era, Boeing holds a soft corner for Ryanair and it gives it rates less than standard market rates. The other suppliers are of jet fuel. The prices are governed by world trade, therefore Ryanair cannot attempt to bargain the prices of jet fuel from the suppliers (Field, 2017). Therefore, the bargaining power of the suppliers is high against Ryanair.
Rivalry Among Existing Competitors
This is high as there are a number of low-cost airlines operating on the routes similar to Ryanair, for example, Easy Jet, Norwegian, Vueling, etc. The competition to cover a maximum number of routes at the least cost is intense. Each player in the industry is striving to minimize their costs by reducing onboard passenger facilities and airport outlay costs. The focus is on short-haul flight routes. On may routes, Ryanair has been able to drive out competition due to its experience and large fleet size, however, on many routes, the competition is still intense. The deregulated airline industry has made the entry of other airlines easier into the European region increasing competition for the local operators such as Ryanair. All of this reflects a high competitive rivalry with Ryanair.
The profitability of an industry is largely dependent on the competitive forces that surround it, as a consequence the forces will have a major impact on strategy formulation for an organization. Taking into account the analysis of the above competitive forces, a company like Ryanair with a strong position within the global aviation industry, unthreatened by potential entrants, buyer power, and supplier power could still see low returns if it faces a superior or a lower-cost substitute product. In such a situation, coping with a substitute product becomes a strategic priority. (Harvard Business Review, 2016)