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In terms of the case, it suggests that the environment of airline companies is not very stable, especially the increasing price of fuel which is the key driver of change. From Ryanair profit statement (Exhibit 1a) it shows the fuel and oil cost has increased by €200 million from 2005 to 2006. The increase in fuel costs is 74 percent. The impact to the airlines companies is obvious and the budget airlines may face the trouble more so than normal airlines. Moreover, airline companies also have to concentrate on some other issues. For example, according to the case, they are facing the risks from terrorist attacks which are difficult to predict.
It is not difficult to find the changeability, however it is complex to the airline environment. Some factors, such as legal action and customer demand, also have influence on them. Some of these such as the price of fuel and oil can be predicted, while some of them cannot.
Stage 2 – Audit environmental influences
The Pestel Analysis is employed to identify macro-environment influences of the airline industry.
Political: Government wants to strengthen the economy and, consequently, will support local airlines by setting rules, such as preferential rights. Every government however, will probably do so. Therefore there’s no obvious advantage between competitions. The political issues have a wide range of effect, so they are not the key points that budget airlines are facing.
Economic: This is identified as the most crucial factor to airline companies, especially to budget airlines. The influences refer to the macro-economic factors such as the national growth rates and the exchange rates. As budget airlines, they will pay more attention to the operation costs such as fuel cost. It became a big issue for budget airlines because of the increasing cost of fuel. That may reduce the advantages and the companies will be less competitive than before. On the other hand, the recession will lead more people to choose budget airlines.
Social: With the development of Asian countries in particular China, there are more and more people deciding to study or travel in Europe. In recent years, the lifestyle of local people has also changed. They tend to travel abroad to enjoy their lives. Most of these people are not wealthy such as student. The budget airlines therefore, will be their best choice to reduce the travel costs.
Technological: The innovation of technology helps the airline companies reduce costs and carry out tasks more effectively. The new type of aircraft can help to reduce the burning of fuel; and new technology can also make the security check more efficient and accurate.
Environmental: European countries pay more attention on environmental issues, especially greenhouse gases from carbon emissions. Moreover in terms of the case, airline companies have to pay the environmental taxes for the contributions they make to global warming. In particular, it is bad news for budget airlines. Costs will increase and the companies want to maintain good brand image in the consumer’s perception. Furthermore, noise pollution and energy consumption cannot be ignored under such conditions.
Legal: Some legal actions such as preferential airport rights are directed against the specific airlines. As budget airlines, which have higher competitive power, they should pay more attention to the legal forces to prevent loss. On the contrary, they can also take the initiative over illegal aid to rivals.
Stage 3 – Determine industry specific factors (this stage will be analysed in Question 2)
Stage 4 – Identify competitive position (this stage will be analysed in Question 3)
Stage 5 – Identify key opportunities and threats
There are many potential opportunities for the airline companies. For instance, the recession may lead to more people choosing the budget airline rather than the expensive ones; new technology which helps to reduce the usage of fuel; government set the tax at a lower percentage.
On the other hand, the increasing cost of fuel may be the most significant issue most budget airlines face. What’s more, the compensation to passengers, terrorism and security, and customers’ satisfactions will all have potential negative impacts on the airline. In order to achieve lower costs, budget airlines will have to reduce costs from many departments and operations. That’s why lots of customers are not satisfied with the budget airlines except for the price.
Prepare a Porter Five Forces analysis of the budget airline industry. Express Ryanair’s perspective of these forces.
The threat of entry
There are high barriers to enter the budget airline industry. i) High investment requirements. Economies of scale are important in the airline industry. It is difficult for new entrants to match others existing competitors. In addition to this, the operational experiences cannot be acquired in such short space of time. ii) Expected retaliation. Retaliation will take place when new entrants appear for budget airlines, it will probably be in the form of a price war due to costs of entry being very high for them. iii) Legislation or Government action. Government won’t let new entrants enter the market if the industry is saturated.
With regards to Ryanair in the budget airline industry, there will not be large impacts to existing budget airlines if new entrants appeared. Budget airlines always focus on the costs and price, so does Ryanair. According to the case, Ryanair was the first budget airline in Europe and now its ticket prices are much lower than the other rivals’. Therefore it will be impossible for new entrants to set a low price to win the market.
The threat of substitutes
Before discussing the threats, some comparative data is showed below.
Round Trip by Ryanair Flight:
London Stansted – Milan
Tue, 2 Dec 08
Flight FR 4184
Sun, 8 Dec 08
Flight FR 4185
One way by Rail Europe:
London (ST Pancras) – Milan
Tue, 2 Dec 08
Most of the travellers will prefer the short journey, in addition to the cheaper way to travel. From the tables it is obvious that taking a plane from Ryanair is much cheaper than taking the train in a similar situation. Although some airlines may be expensive, budget airlines such as Ryanair will usually be the best choice. The impact of substitutes, therefore, has less impact on the budget airlines.
The power of buyers
Buyers of airlines tickets can sometimes be the travel agency. In other cases, Ryanair caters to ultimate consumers. Majority of the buyers are not concentrated buyers and they come from all over the countries. Individuals can select the budget airlines according to their preference, because the switching costs are low and the differentiation of such service is weak. It is extremely expensive for people to own an aircraft. When there is a choice of budget airlines to use, with low prices. So there is a low buyer competition threat. Like Ryanair, with less concentrated buyers and buyers’ competition threat, the power of buyers is low.
The power of suppliers
The high power of suppliers may be one of the most significant threats among the budget airline industry. The increasing price of fuel, which leads to a high cost for airlines, is a basic issue they are facing. As we know, fuel industry is now concentrated in the hands of few producers. Therefore, in this situation it is difficult to cut the price for this essential material. In addition to this, it is useless to change fuel suppliers when the global price is growing. Moreover there are no practical substitutes. Ryanair is facing this problem with other budget airlines.
Furthermore Ryanair sells all the ticket directly through the website. Thus there is no intermediary.
Rivalry is influenced by these four competitive forces and each of them may have different levels of impact on the competitive rivalry.
In this market, every airline provides the same services which are poorly differentiated. Low differentiation and switching costs in this industry, therefore, cause the price competition. Ryanair, which has the first mover advantages, still holds the dominant position. Although many of the competitors were losing money or even have been taken over, Ryanair remains steady in incremental growth.
For industry growth rate, this industry is in the maturity situation of life cycle, which means the growth is low. Price war is therefore playing a crucial role throughout the competition.
Evaluate Ryanair’s particular strengths and weaknesses and explain, with reasons, what Ryanair must do to retain a sustainable competitive advantage.
As the first-mover of budget airline industry, Ryanair still holds the dominant lowest-cost position. This is also the one of the strengths it has. What’s more, Ryanair was announced being the most profitable airline in the world according to the case. The revenue is still increasing, despite the price of fuel did not stop growing in recent years. The brand image of Ryanair is also one of its strengths. Customers are attracted by the lower price. Its traffic is the highest among the competitors (see Exhibit 2) and it is still increasing due to the enlargement of the company.
On the other hand, there are still some weaknesses of this budget airline leader. In terms of the case, Ryanair win the market mostly depends on the costs. However, the costs of its major raw materials are increasing rapidly these years. This will be a serious issue. Further, minimize costs largely will cause the lack of service and training quality and so on. The Skytrax star rating (See Exhibit 2) indicates Ryanair is below the average level. Besides, competitors contribute big influence to Ryanair. For example, Easyjet which is a young upstart of the European budget airline industry grows quickly with a large number of market shares.
It is obvious Ryanair makes success base on its price advantage, and how to sustain this advantage become very crucial issue in recent situation.
Keep first mover advantages. Long history with experiences, well-known brand image and economy of scale, these are the unique resources of first mover advantages. It is difficult for competitors to get these resources at a similar level. Therefore, in order to prevent the competitors from copying the same strategy as cost reduction, Ryanair must make good use of these unique resources and try to dominate the market.
Technology. Purchase and introduce the latest technological support. Although the fixed costs will be high, they can help the airline carry out tasks more efficiently and effectively such a new security check machine. Moreover it can also help to reduce the variable costs. For example, according to the case, new type aircraft produced 50 percent less emissions, 45 percent less fuel burn and 45 percent lower noise emissions per seat. They help Ryanair reduce the fuel cost with a lower pollution to environment.
Unique cost structure. A cost structure which aims to minimize the costs must be set up. In particular to fuel cost, the fluctuations are subject to unpredictable and volatile world events according to the case. It is important for Ryanair hedge the risks before the price goes up suddenly. On the other hand, choosing the secondary and regional airport destinations is a good way of the structure. Moreover, the internet is used to reduce distribution costs.
Service quality / Customers’ satisfaction. Customers will normally associate low price with low service benefits. Ryanair was voted the world’s least favourite airline due to its bad service such as unfriendly staff and poor legroom. However it still won a great number of customer base on the price. Thus if some competitors cut down the ticket price to a low level, Ryanair will get into a big trouble due to the similar prices but lower service quality. Therefore it must not only focus on the price but also the service. In order to gain competitive power, for example, brand loyalty can be one of the aspects.
Government / legal actions. Ryanair should take care of the government and legal actions and moreover, can take the initiative over illegal aid to rivals. These may prevent the unnecessary loss.
In summary, Ryanair, as the cost leader in budget airline industry should not only focus on the costs but also lots of other issues. Although it is developing rapidly and successfully, the future is unknown. The uncertain environment is changing all the time, thus Ryanair should always follow it and make the long-term plans in order to retain a sustainable competitive advantage. Grasp the opportunities, and it will has a bright future.