Ryanair, the low fares airline


Seminar Paper, 2003

12 Pages, Grade: 2,0


Excerpt

The European airline industry has historically been dominated by national carriers like British Airways, Lufthansa and Air France, whose aggregate share of intra European routes was about 70 percent by the end of 1998. But from 1990 a rising share of the market started to migrate to the budget carriers because of the deregulation policy of the EU. This essay contains an analysis of the European airline industry as a part of the transportation industry at the beginning of 1999 with a special emphasis on the budget sector. In that sector, one of the most famous and successful budget carriers, Ryanair, will be contemplated with regard to its strategy and its strengths and weaknesses. Finally, a short summary will be done about what happened in the European airline industry between 1999 and 2003.

Considering the high level of population density and the continuous enlargement of the EU, the market of the airline industry is quite large and with a high potential to grow. In 1999, the growth rate in the European market is one and a half times that in the American market and there are still several intra-European international routes with potential for new operators. The predominant airlines in the market are the big national carriers, like Air France, British Airways and Lufthansa, but there are already many new budget airlines with Ryanair and easyJet as the famous ones, but also Virgin Express, Debonair, KLMuk, Go and Air One. However the competitive rivalry between those two groups stays moderate, while it is quite high within each group, which will be explained more detailed later applying Porter’s Five Forces model.

Furthermore there are differences between the customers of the two groups, the mature airlines and the budget airlines, which also explains the rather low rivalry between them. The low fares airlines concentrate predominantly on budget conscious leisure and business travellers who are not customers of the more expensive airlines because they have otherwise used alternative forms of transportation or might not have travelled at all. In contrast national carriers’ customers are rather interested in “frills” which are not offered by the budget airlines like in-flight meals, advance seat assignment, cargo services and other amenities.

In the airline industry, flights are considered as products which seem to be quite differentiated between mature and budget airlines, but within the budget sector of the “no frills” airlines, the products are more homogeneous concerning the services the passenger buys, and only differ in prices.

That development in the European airline industry was only possible because of the deregulation and the liberalisation policy of the EU started in 1997. But in 1999, the regulatory influences of the EU can still be seen in many sectors of the industry. Getting and keeping the air operator licence is not easy and requires complying with all EU regulations concerning especially the maintenance of the used aircrafts, hushkitting, and continuous air traffic controls. Furthermore, EU regulatory authority interdicts ground handling monopolies at European airports and forbids the airports to offer differential deals to different airline operators. And finally the abolition of duty free shopping within the European Union from July 1999 will cause heavy losses for all airlines, losses of revenue and of incentive to flight attendance, but also losses due to increased landing charges announced by the airports.

Additional to the restrictions of the EU, the European airline industry suffers from specific problems like the relatively shorter distances on intra-European routes, comparing to the USA, which causes higher expenses on a per “Available Seat Mile” basis. Moreover the airports and skies of Europe are more congested than in the USA, which forces new entrants into smaller airports far away from large metropolitan cities.

But in spite of all these problems, the European airline industry seems to be very profitable with regard on the positive, relatively high profits earned by the mature airlines, like British Airways, as well as by budget airlines, like Ryanair.[1]

In order to escape the competition and to improve their profitability, national carriers tend to form alliances among themselves or with smaller airlines, even with budget airlines. According to the case study, by 2010, the airline industry could consist of a maximum of four groupings of national airlines. This would change, of course, the competitive situation, which looks as follows in 1999, applying Porter’s Five Forces Framework.

As it has already been mentioned above, the rivalry between existing mature airlines and budget airlines is low because of quite different flight offers and different customers, but also because established airlines concentrate on primary congested airports while budget airlines operate on secondary airports. However the competition within the budget sector is very high because of quite similar “no frills” flights only sometimes different in price.

The threat of substitutes is high as well, because aircrafts are means of transportation, so they compete with cars, trains, busses and boats. Especially the high-speed long-distance rail network and the construction of major tunnels or bridges to cross water have caused dramatically declining passenger numbers.

Due to very high barriers to enter the airline industry, the threat of new entrants is quite low. First of all, air operator licences from government are required for entering the airspace. New entrants have to face very high capital investments as aircrafts, technical support and catering services have to be bought or leased. Furthermore, this business is very fuel and labour intensive, and there are high tax and excise charges on fuel. It is also difficult to get access to distribution channels, which means to achieve access to take-off and landing spots and to be able to pay all the landing fees, passenger loading fees, aircraft parking fees and noise surcharges. Moreover there is the necessity of entering a new route on a large enough scale in order to achieve acceptable cost levels because of the huge fixed costs. And the existing airlines’ retaliatory behaviour like cuts in fares should also be taken into account.

The bargaining power of suppliers of the airlines is high as well. Even if the bargaining power of the technical supporters and the catering services can be neglected, this of the aircraft manufacturers (Boeing, Airbus, Fokker) and the providers of fuel (British Petroleum, Chevron Texaco, Shell) is very high because of their small number, and because aircrafts and fuel cannot be substituted at all by other products in the airline industry.

Since customers who buy plane tickets are neither concentrated nor they are buying large volumes, they cannot exercise a high bargaining power on the airlines. But they have some bargaining power because of their possibility to switch easily the airline or decide on travelling by another means of transport like train or car.

To complete the industry analysis, it is important to identify some key success factors of the European Airline Industry through modelling the profitability. Profitability can be measured by operating income per available seat-mile (ASM)[2]:

illustration not visible in this excerpt

With the operating income per ASM as a key success factor, it is important to take into account by which determinants it is influenced. The airfares as the main sources of revenue are one of the most important determinants. Low fares attract customers and provide a large competitive advantage over the rivals. Punctuality and frequency are the other “intangible” factors to attract passengers and to build up their loyalty, which also raises the load factors and increases the revenue. Revenue can also be enhanced by saving costs like wages and administrative costs, or fuel expenses by making the aircrafts more fuel efficient. With regard to these essentially important factors for gaining profitability, Ryanair has elaborated a quite successful strategy to cope with the challenges of its fast changing external environment.

[...]


[1] Eleanor O’Higgins, Ryanair: The Low Fares Airline, ECCH Collection, University College Dublin, Exhibit 7

[2] Robert M. Grant, Contemporary strategy analysis, fourth edition, Balckwell Publishing, p.99

Excerpt out of 12 pages

Details

Title
Ryanair, the low fares airline
College
Lund University
Grade
2,0
Author
Year
2003
Pages
12
Catalog Number
V54645
ISBN (eBook)
9783638497978
File size
413 KB
Language
English
Tags
Ryanair
Quote paper
Paulina Gugenheimer (Author), 2003, Ryanair, the low fares airline, Munich, GRIN Verlag, https://www.grin.com/document/54645

Comments

  • No comments yet.
Read the ebook
Title: Ryanair, the low fares airline



Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free