The low-cost airline Ryanair

International Business Management

The low-cost airline Ryanair

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by Stefanie Hoffmann

- Analyse the European airline industry, with implications for the budget sector, and especially Ryanair.
- Evaluate Ryanair’s strengths and weaknesses.
- Is Ryanair’s strategy sustainable?
- Would you recommend any changes to Ryanair´s approach?

Just a few years ago Ryanair was a tiny, impoverished Irish airline trying unsuccessfully to compete with Aer Lingus using a handful of elderly turboprop planes. In 2003 its share price is so high the company is worth more than British Airways, and with the unlikely business model of selling seats for as little as

99 Pence for the privilege of flying to airports perhaps fifty miles outside the cities they purport to serve, Ryanair has become the most profitable airline in Europe. It is also an airline whose phenomenal success has never been too far from controversy, whether it is its militant lack of sympathy for its passengers when their flight is delayed or cancelled, its robust approach to industrial relations, or indeed the industrial language favoured by its charismatic and buccaneering chief executive, Michael O'Leary. (Creaton, 2005)

The following questions will critically evaluate the Ryanair phenomenon and its future prospects with taking the European airline industry into consideration.

1. Analyse the European airline industry, with implications for the budget sector, and especially Ryanair.

The entrepreneurial performance of the biggest and most established European airlines has not been sufficient enough for many years to cover the cost of capital. This can only be partially traced back to the liberalisation of air transport in Europe and the thereby precipitated, still prolonged structural change. Fact is that many European airlines suffer from considerable performance problems sometimes because of a lack of adaptability and bad performance management.

In general, the tragic events of 11 September 2001, the dangerous virus SARS or the rising oil price made it difficult for airlines to stay successful on the market. Because of these unexpected incidents, the European airline industry suffered heavily which means that stocks haven fallen immediately and that the capacity of the aircrafts declined. Airlines such as Sabena, a Belgium company, disappeared from the market and also Swiss Air had liquidity problems that had to be compensated by the Swiss government.

The best and only possible reaction to this difficult situation in order to survive was the lowering of ticket prices. (http://www.researchandmarkets.com/reports/222300 accessed on 21.02.2006)

Nevertheless, since 1 April 1997, the liberalisation of air transport has lead to an increasing competition, lower prices and more connections between the member states of the European Union and it has forced airlines to restructure their operations. Today, the liberalisation allows each airline in the European Union to fly wherever it wants to fly but just within the EU.

At the beginning, the privatisation of European airlines was the main topic in order to make them competitive compared to the already privatised American airlines. Now there are several low-fare airlines such as Ryanair, EasyJet or Air Berlin who are attacking the profitable business routes and smashing the prices of established airlines which means that costs are raising and profits are decreasing. While the ticket prices for scheduled airlines still remain on a higher level, low-fare airlines are underselling each other with special air fares. (http://airlinesgate.free.fr/industry.htm accessed on 21.02.2006)

Traditional European scheduled airlines had to deal with the raising competition from low-fare airlines that have stimulated new markets and deprived air routes of established airlines, especially in the short-haul segment.

Between 1997 and 2002 airline traffic within the European Union has risen by 30%, while volumes in the low-fare segment expanded nine times. (http://www.ryanair.com/site/about/invest/docs/analyst/goodbody_may04.pdf accessed on 21.02.2006)

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Unlike in the United States where Southwest airlines dominated the low-fare segment over thirty years, in Europe came up many different low-fare carriers, some with more others with less success. One of the most significant airlines are for example Ryanair and EasyJet. These airlines were founded in the UK and in Ireland. This was no coincidence. The first point that has to be mentioned is that international travel is not easy which means that the people living on the island have to use tunnels or ferries which are high in price in order to come to other destinations in Europe. As the UK is one of the biggest air travel markets in Europe there was a huge demand for flights, especially low-budget flights. Furthermore, the use of internet and credit cards has always been very strong in the UK which means that bookings and getting information was uncomplicated. The last and most important point is the flexibility of the British workforce. Trade unions are not as strong as for example in Germany and therefore strikes of pilots are quite rarely. (Lecture, Comparative Human Resource Management, 2006, Ash, M., UWIC)

These low-fare airlines have remained cost-effective which mainly depends on the maintenance of low cost bases and of course on a well directed cost management.

The European airline industry with implications for the budget sector is characterised by a large number of suppliers. Since Ryanair succeeded with its low-cost concept more and more airlines occurred copying the concept of the airline. In general, these air carriers use the tactics of offering low fares, no frills, and point-to-point routes to smaller airports. (Johnson and Scholes, 2002) But in the meantime the market is saturated and therefore the lifespan of most low-cost airlines is very short. Michael O'Leary, chief executive officer of Ryanair thinks that faulty management, not competition, is the main reason for the collapsing of competitors on a saturated market. (Johnson and Scholes, 2002) It is expected, that in the next few years only a few of the budget airlines will survive. Ryanair will still be the market leader of those low-cost carriers. The company is about to change its strategy from serving a niche market. At the beginning Ryanair did not act like a direct competitor of the scheduled airlines because they did not offer the same product. The difference of the product between no-frill airlines and scheduled airlines is the absence of catering during a flight, less service on board and flights to remote airports. Ryanair did not try to squeeze heavy weights out of the market of the European airline industry like Lufthansa or BA. But Ryanair was the fastest growing airline in Europe during the last years and because of its growing market share Micheal O'Leary now has the objective to overturn Europe’s biggest airline Lufthansa. (Johnson and Scholes, 2002) Another important trend among European airlines is that because of the price wars airlines are forced to form alliances. Many try to increase margins by merging with other airlines in order to reduce costs and benefit from synergy effects such as the merger of LTU and DBA in February 2006. (http://ftd.de/ub/di/48739.html accessed on 23.02.2006)

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