Ryanair Holdings PLC Strategic Management

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Background

Ryanair Holdings company is an Irish Airline established in 1985 by three Ryan brothers. Their father, Tony Ryan, became the first chairman. In the same year, the company began flying scheduled routes with a single, hired, 15 seater airplane. Small business volumes meant that the business was not making enough to meet its expenses, resulting in a risk of closing down in the first months. To minimize its expenses, the company used secondary airports and by the end of their first year, they already had two airplanes and five employees, not counting the flight crew. The business was able to break even in the first year, an impressive performance considering the low profits margins in the industry at the time.

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After just three years in business, the company already had more than 600 employees and had more than 40 flights everyday. However, the business was still learning about the industry and in 1988, a strategy mistake cost the business $11 million. In 1989 the brothers invested $20 million more in the business, saving it the financial struggles. The business was then able to purchase more airplanes and fly more routes. One of the company’s strategies was low fares, resulting in tripped business volumes by the end of 1989. More challenges followed the business such as being banned by the Irish government for three years but used the time to reorganize.

1993, Michael O’Leary became the CEO of the business when it was facing major financial struggles, losing almost $7 million each year. In 2000, the company’s e-commerce site gave the business a drastic success, becoming the busiest sites in the airline industry and registering 14 million impressions per month (Done, 2009). In that year alone, the company sold tickets worth over $130 million through their site. “Today, the business is Europe’s leading low fares airline carrying more than 6 million passengers each year” (Done, 2009).

Business strategy

Ryanair is most known for low fares in the air travel industry. At one point, the airline had tickets selling for as low as $ 5 dollars for a flight between Dublin and Liverpool or Dublin and London. The strategy has worked well for the airline, giving affordable air travel to its clients. In addition to low fares, the business uses product differentiation and cost leadership to ensure its low prices don’t negatively impact the business. It has so far the lowest travel rates in 150 European cities, helping it undercut competitors.

The business targets markets with large number of people, gives them low prices and a result builds high business volumes. Large business volumes compensates for the low profit margins resulting from low fare prices. The business has no midlife, cutting its costs further. Cost cutting strategies for the company also include managing marketing costs and operating in routes which have low costs of operation. Managing staff costs and their productivity is an important business strategy for Ryanair. It is able to minimize its staff expenses and increase their output. Fleet commonality ensures that the business has latest airplane models to allow it reap the benefits of modern technology.

SWOT analysis

Strengths

Ryanair has a first growing business, allowing it good profits and a healthy financial status. It has a well established market share and continues to experience substantial growth in new markets. The company enjoys a a god reputation, which makes it easy for its customers to stay loyal. An established routes network has given the business consistency and helps its avoid business uncertainties which arise from venturing into new markets. Ryanair has been voted the cleanest and greenest fleet of aircraft in the European region. Such a good environmental reputation gives the business favor with corporate and individual clients who are environmentally sensitive. The business has been experiencing an upward trend in its operating revenues and profits, registering 8% growth in its operating revenue last year.

Weaknesses

Ryanair’s customer safety policies have been under much scrutiny in the recent past, causing the company a lot of business. Michael O’leary, the company’s CEO has been under heavy criticism after his recent comments about safety during an interview with Bloomerg Businessweek. When asked if it was necessary for their airplanes to have two pilots, the CEO is quoted as saying “there is no need for a second pilot…..let’s take out the second pilot and let the bloody computer fly it and if the pilot has a heart attack, the flight attendants, who should all learn to fly by now, should take over” (Mitchell, 2010). The company does not recognize the union of workers and its decisions, putting it in an awkward position with its employees many times. Employees’ conflicts with the business have many times destructed the company’s operations, incidents which could cost the company a lot in revenues and reputation.

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The business suffers volatile and hostile competition from competitors, a trend that is becoming a normal occurrence in the airlines industry. In a bid to have the lowest prices in the market, having the fare rates too low does cost the business a lot in revenues. The company is also viewed as being overdependent on Michael O’Leary, their CEO since 1993. An uncharacteristic management expansion is also considered a weakness which could affect the business’ future.

Opportunities

Ryanair company has a big market to venture to as a result of increased tourism activity in Europe and the rest of the world. The business can venture into new markets where customers are looking for an affordable airline. Other than reduced prices, the business can use discounts to attract more customers and reward its loyal customers. Price is considered a big deciding factor for many clients and reducing prices further through discounts could increase the company’s volumes. The European Union expansion will give the business a bigger region to operate in and expand its markets.

As a result of the global recession, clients are more sensitive to price, giving the company an advantage over its competitors. The business can also utilize its financial bargaining powers to their advantage, since it has continued to enjoy good profitability even in tough times. The internet is an affordable and good avenue to reach millions of customers at the same time, an option which the business can utilize more to its advantage.

Threats

Like many other industries, the airline industry today faces increasing competition. New entrants, alliance and mergers between competitors pose as a threat to Ryanair. It is becoming increasingly hard to retain a good market share for the company. The industry today faces high levels of criticism for its pricing, environmental concerns and ways of doing business, all which impact the companies negatively. Tougher EU regulations on safety, environment and markets operations is also a real threat to the airline.

Another important threat for Ryanair is trade unionism which has been a challenge to many employers. Trade unions continue to increase their demands over salaries and other employment terms. Alternative and more affordable modes of transport such as modern trains are creating competition, which negatively impacts the business’ sales volumes. Surging oil prices in the recent past have been a challenge, resulting in increased costs of operation and reduced profits.

Conclusion

Ryanair’s use of price as a business strategy has not been disappointing so far. The business combines fanatical cost reduction strategies and efficient basic short hauls to give it a cost reliable business model and dependable services to its customers. The business’ operating revenue has been on an upward trend since the year 2005, reporting 8% positive growth in 2009. Several challenges in the industry such as the global recession and oil prices resulted in decreased profits last year.

Scandinavian Airline Systems in 1988

Background

Scandinavian Airline System (SAS) is the largest airline in Scandinavia and is the flag carrier of Norway, Denmark and Sweden (Dess, 2007). 1980s were a good business period for the company, posting profitable results for six consecutive years from 1982 to 1987. It was a big improvement from 1981 and the years before when the business was facing big losses and rapidly loosing its market share. The company’s new CEO in 1981, Carl-Olov was able to turn business around by giving to priority to customer service and reorienting the company’s market. He completely reorganized the company by decentralizing the responsibility and invested more in customer service.

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Despite the company’s growing profitability, the business still faced considerable challenges and both the management and analysts knew the profits would not be able to last the business in the increasingly growing and competitive global market. Among the biggest challenges for SAS was an increasingly growing global market and competitive airline industry. “The company at the time only had a population base of 17 million spread over a large area which made it hard to support an international traffic system” (Dess, 2007). Another challenge for the company was its geographical location, which was proving a major disadvantage for it. Western Europe was more densely populated and offered more business compared to the company’s location, which was at the periphery of Europe.

The biggest problem for the airline was its operating costs. The company was considered as having the highest operating costs in the industry. When other major airlines’ labor costs accounted for 20% of their total costs, SAS’ labor costs accounted for over 35% of its expenses. As a result of increasing threats and unstable performance, the business was not able to invest as much as it would have wanted to in its customer care services, resulting in inconsistent customer products and services.

SWOT analysis

Strengths

SAS was experiencing increased traffic air base. As a result, the business was scheduling more flights and selling more tickets. Increased business was evident from the company’s increasing profits in its last six years. A well experienced CEO and a well able management gave the business the directions and guidelines it needed at the time. Prior to joining SAS, Carlzon had served as CEO of Linjeflyg airline, and had helped the business out of a similar situation. The CEO’s experience was much required in SAS if it was going to start making profits again, and it did.

Another important strength for the business was a healthy financial status. Healthy financial books allow a business a better hand in competition and more power in influencing the markets (Asch and Bowman, 1989). High profitability also allowed the business afford better technology and the best talent as part of its human resources. Good financial results restore customers’ confidence in a company allowing it bigger business volumes.

The company’s presence in the market for long gives it an advantage of experience which allows it adopt better preparedness and survive tough times. Its experience allows the management to know what works in the markets and what doesn’t, saving it the cost and time of trying new business models in the industry. As a result, the management is more likely to be specific and accurate in its decisions. Customers also tend to be more confident in a business which can survive the good and bad times, offering reliability.

Weaknesses

SAS had a history of inconsistency. The company’s profits were at the peak in the 1940s but lost the good results in the 1950s. 1960S and 70s were considered the company’s golden years, posting the best profits in the industry in the region (Buraas, 1989). In the 1972, the business’ profits shrank to less than half its previous results, a trend which continued until the 1980s. Such a record frightens investors and can easily destroy customer’s confidence in the business. Another major weakness was the company’s poor route network which did not meet market needs. As a result, the business was losing market share at a fast rate.

Overcapacity and safety were major concerns for the airline, causing safety concerns. Even loyal customers may leave a business if they feel their life is threatened by using their products. In an attempt to save on cost, the business was not investing much in security and safety, a decision which impacted business volumes and profits negatively. Reputation and punctuality deteriorated and increasingly inconvenienced the customers. The company’s on-time performance had dropped to 80%, a very bad percentage by airline standards.

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Opportunities

Major opportunities still presented themselves for SAS. A close relationship with other airlines such as KLM and Swissair airlines would have strengthened the company’s technical co-operation and give it an easy access to other markets. The airline industry still had many markets which were yet to be explored. Many global markets were opening up to the industry and SAS could afford to venture into them, considering its financial capability. Increased investments in new markets would have given the business improved level of service. By partnering with other airlines, the business would have been able to access other new markets and save it costs associated with marketing products in a new market.

A partnership with other airlines would also have given the business a chance to cost share maintenance and overhauling costs. The business had the opportunity of reducing its costs and increase its profits. Major areas of concern were labor and maintenance costs, which if reduced, would have given the business more money to put in other investments. SAS would have increased its market share by working on its safety and punctuality concerns. In so doing, the business would have not only increased its market share,but also increased its customers’ loyalty.

Threats

SAS faced a major threat as a result of an increasingly competitive industry. It became more hard for the business to increase or even retain its market share. Rivalry between other airlines such as KLM and Swissair meant lowered prices, a smaller market share and decreased revenues. Rivalry between Norway and Denmark after it joined the EEC also affected the business’ operations and management. There were constant rumors of the three countries disbanding SAS and running individual airlines. These rumors created anxiety over the employees and customers and affected the company’s reputation.

Fuel costs and interest rates were a major concern for SAS. Fuel prices fluctuated regularly, the industry faced shortages and bank rates kept going up. The result was increased expenses and capital was hard to access due to high bank rates. The airline industry in Scandinavia was facing a less regulated competition, making it hard for the businesses to establish stable profitability. Another challenge for the company was Copenhagen’s troublesome airports, which could not effectively compete with more attractive airports in other parts of Europe such as Amsterdam and Zurich.

Business strategies

The business needed a strategy which would allow it expand its traffic system and have daily connections to important overseas destinations. It needed a strategy which would help it compete with major European carriers that had bigger population bases. The business also needed a strategy which would help it reduce costs and regain budget consciousness. Developing a competitive distribution system was a major problem which the business needed to resolve.

The business chose a vertical strategic management which would give it more business opportunities and give it more control over inputs (Capon, 2008). This was going to be achieved in different ways and stages. The first strategy was to focus on business travelers, giving them a product which would offer significant advantages over what was already available in the market. The strategy was implemented by wooing the business travelers away from competitors.

The company dropped the first class product and introduced the “EuroClass” product. The product offered better amenities for the business traveler and was offered at the same cost of an economy class. Passengers paying the full fare would be entitled to the product and would automatically get better amenities. The product faced major resistance from the competitors but was received well by the market.

The second strategy for the business was improved schedules and punctuality. More customers meant that the company would need to change its schedules to allow more flights and give customers convenience. Implementing this strategy meant withdrawing their high-capacity Airbus aircraft with new models such as the Mcdonell-Douglas DC-10s, to allow frequent and non-stop flights. For shorter routes, old airplanes were replaced with new ones, which helped double flight frequencies.

Another strategy was an improved management and encouraged responsibility among managers. Managers’ work was subjected to auditing regularly and performance reviewed often. Employees were supposed to adhere to the company’s policy manuals while managers were supposed to be accountable for expenses in their departments. The company also started investing in educating and training its employees on things as a basic as how to smile or handle customer complaints. The intention was to create a more stable growth environment and meet competitive challenges without having to incur too many expenses.

The second wave of the company’s growth included integrating different elements in their products to give its customers more comprehensive packages. The business introduced the SAS International Hotels and established a new division to run them. The business was then able to offer traveling and accommodation packages at the same time. To keep up with increased business volumes, the business introduced a new reservation system at a cost of Skr. 250 million. Other strategic developments included the introduction of credit cards payments and the SAS Service Partner, a division which ran catering business in international flights

Feasibility and success of strategies

The first outcome for these strategies was a complete change in the company’s overall philosophy (Buraas, 1989). The business was more focused on developing better products and ensuring customer satisfaction. Improved management resulted in accountability since tasks and functions were critically examined and audited. If a product attracted more customers and benefited them, it was enhanced to give better results. If a product did not work, it was immediately abandoned. Managers had a new responsibility of monitoring expenses and identifying those which could be easily eliminated.

The results of changed aircraft and products were attractive schedules and lower fixed-costs for the business. Financial results for the strategies were dramatic. The company’s full fare paying passenger traffic went up by 8% in just a year (Buraas, 1989). Punctuality was improved to 93% on-time performance, a new record in the European market. The company’s profits rose to Skr, 1.5 billion, placing SAS third on the list of best performing major airlines in the world in 1986.

The SAS hotel division allowed clients purchase traveling and accommodation packages as one, giving them cost advantages and convenience. The product again received overwhelming support. The business made one million reservations in the first one year and the number doubled in the second year. A modernized reservation system enabled the business handle reservations more effectively.

Reference list

Asch, D. and Bowman, C., 1989. Readings in strategic management. Basingstoke: Macmillan/Open University.

Buraas, A., 1989. The making of SAS: A triumvirate in world aviation: The story of the formation of Scandinavia Airlines System. Stockholm, Sweden: Scandinavian Airlines System.

Capon, C., 2008. Understanding strategic management. Harlow: FT Prentice Hall.

Dess, G., 2007. World airline record. Chicago, R.R: Roadcap.

Done, K., 2009. Runway success-Ryanair. Financial Times, p.6a.

Mitchell, M., 2010. Ryanair Airlines CEO comments suggest safety not a priority. Bloomberg Businessweek, p.4b.

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