Introduction
For many years, the airline industry in Europe has been stable because of government regulations but due to globalization, the industry has been deregulated altering some important areas of community legislation and airliners acquired more freedom (Rajagopal, 2007). The deregulated environment created an environment that led to the emergence of low-cost carriers, like Ryanair which is the biggest low-cost carrier in Europe and the third-largest worldwide in terms of the number of international passengers. Low-cost carriers have actively engaged in stiff competition with incumbent airlines and this paper will use Porter’s five forces to analyze the competitive forces that have an impact on the European low-cost airline industry and from this analysis, the paper will point out the three main forces that have an impact on the competitive positioning within the airline industry in Europe. The objective of this study, therefore, is to identify the forces that shape the strategies of low-cost airlines in Europe and the strategic options that these airlines have. The second part of the paper will apply a properly supported value chain analysis to Ryanair with a view of identifying areas where this airline is adding or losing value through its activities and linkages and from this analysis, recommendations will be made on the areas that the airline should improve.
Competitive forces
The airline industry exists in a very competitive market and recently, there has been a shake-up that has created far-reaching ramifications in the airline industry’s strategic direction of expansion in both domestic and international services (Duncan, 2000). This is widely evident in Europe where most airlines are privately held. Several factors affect the competitiveness of an airline, especially in Europe. Some of these factors include airport capacity, routing, leasing costs, and elements of technology (Baker, 2001). Larger issues include weather which is variable and unpredictable, fluctuating fuel costs bearing in mind that fuel is the second largest expense incurred by airlines and labor which is the most expensive cost that any airline incurs.
Airlines earn revenue from the transportation of cargo, flier miles, and in-flight services that they sell but the largest revenue is earned from passengers meaning that consumer confidence is one of the biggest factors affecting the growth of airlines. Business passengers are the most important because of the frequency of their travels and they also purchase upscale services in the airline. Leisure travelers are price sensitive and their travels are dictated by the nature of the economy meaning that they are not a consistent revenue earner. Another thing that should be considered while studying the competitiveness of the airline industry is the geographic areas they target. Airlines that have diversified compete better than those airlines that target a particular market (Fahey, 1986). For example, The Caribbean routes are normally patronized by leisure travelers meaning that an airline that deals with these routes only will find it hard competing with airlines that have diversified because the outlook of leisure travelers is consistent with economic times and profits are likely to plunge in case of an economic crisis. Finally, the airline industry is extremely sensitive to fuel and labor costs and a rising trend in fuel costs should be included in an analysis of any company
: Porter five forces analysis of the competitive forces
The following is a Porter five forces analysis of the competitive forces that have an impact on the European low-cost airline industry and from this analysis, three main forces that have an impact on the competitive positioning within the airline industry in Europe will be pointed out (Haines, 2004). The first force is the threat of new entrants. Many people think that the airline industry is tough to break into but the prevailing cheap interest rates encourage more borrowing meaning that the likelihood of more entrants into the industry is higher. More new airlines are entering the industry every year and the market has almost been saturated (Lears, 2008). In such a saturated market, brand name recognition and the use of incentives can attract and retain customers. The other force is the power of suppliers and the airline supply market is currently dominated by Boeing meaning that there is no stiff competition between the suppliers (Kaye, 2008).
There is also a low likelihood of vertical integration of suppliers which implies that suppliers cannot start offering airline flight services. The third force is the power of the buyers and the bargaining power of the buyers in the air industry is at its minimum because the cost of switching between airlines is very costly for the consumers. Secondly, the services offered by most airlines are almost similar and unless someone is looking for more luxury, all the airlines are similar in service but differ in price (Suzanne, 1993). The other force analyzed by Porter is the availability of substitutes. For regional airlines, substitutes such as rail transport may pose a significant threat but for international carriers, the threat of substitutes is nonexistent because the most convenient and timely means of international transport is air (Miles, 2003). The last force is a competitive rivalry that has been affecting the profit margins of most airlines, especially in tough economic times. The analysis of Michael porter’s five forces will help in understanding possible future developments in the European airline industry and this analysis has shown that regulated environments are the most important force that is shaping the strategies of bigger airlines while cost reduction and predatory price-fixing are the main competitive forces that shape the strategies of the low-cost airlines.
Value chain analysis to Ryanair
Ryan air was founded in 1985 as a family business and started to compete within the confines of the existing industry by attracting its rival’s customers. One of the rivals that were affected by this strategy was state-owned Lings and Ryanair used a follow-me strategy where they tried to be all things to all people (Kotler, 1996). The company tried to restructure but lack of differentiation did not create a cost advantage which means it was not profitable. The company started creating a competitive advantage by aligning three business systems which include the creation of superior values for the customers, giving superior and value-added activities effectively and efficiently, and creating a resource base needed to perform these activities that add value (Estelle, 2000).
According to Porter corporate strategy is more important than a summation of all the business parts because it is concerned with the strategic direction of the company, the scope, and the purpose and it helps to meet the expectations of stakeholders better by adding value. Below is an outline of the value creation dimension used by this airline and three theories have been considered in this outline. The outline will also analyze linkages in the value chain of Ryan air and the resource base of the company. This will lead to the discussion of the future challenges of the company by analyzing the strengths and the weaknesses of the value chain plus their internal values such as assets and skills (Lorenzen, 2006).
This airline occupies the low-cost segment and it has found a source of leveraging a competitive advantage by exploiting the opportunities that are related to the low-cost strategy and this approach was applied in the European market where the airline has become a no-frills airline that focuses on short destinations and making sure that their planes are in the air as frequently as possible (Kurtz, 2010). The company, therefore, helped in expanding the boundaries for the uncontested markets space and its low fares created a lot of demand from fare-conscious leisure and business passengers and also encouraged more people who would not have been able to fly, to use air transport. This created less competition and allowed the company to keep performing in the saturated industry and even now the airline still reaps the benefits of its early profitability and rapid growth and this has helped to use a low-cost business model that creates value for the customers without overcharging them (Kurtz, 2010).
Then company further created value for its consumers through its international expansion strategies by taking its operations to more and more countries and the airline has managed to grow at the rate of 20 percent annually and has been ordering more planes from Boeing more frequently than any other airliner in Europe (Laermer, 2007). The airline can compete on price because it has a resource base that matches its price positioning and this has helped it during the tough economic times because it does not get stuck in the middle like the incumbent airlines whose cost-cutting strategies affect their areas of differentiation (Levitt, 1990).
Ryan Air acquires Air Lingus-strategic change
Various strategic change actions would be necessary for Ryan air to undertake if it acquired Air Lingus for it to take advantage.of such a merger. These actions can be explained by the concepts of complexity theory which are used to describe organizational change and development (Levitt, 1990). According to the complexity theory, organizations are adaptive and non-equilibrium systems and it is very hard for organizations to move from one stable state to another without implementing strategic actions that are meant to safeguard and maintain the stability of the company. In event of a merger between Air Lingus and Ryan air, a nonlinear, complex adaptive system will be created and this system will be very sensitive to initial conditions that will prevail after the merger. This means that future order for the company can only emerge if the activities, events, routines, and processes form conditions that support the strategic directions of the company (Tracy,2000). There are several strategic moves that Ryan air ought to make for it to enjoy the advantages of the merger between it and Air Lingus.
The first action is to align the human resource activities at the company with its strategic visions and missions meaning that the human resource department becomes strategic. During the acquisition, the human resource departments of the two airlines will merge and this will create a complex situation as outlined by the complexity theory. The complex situation will arise due to the difference in the human resources processes and this situation can only be remedied by making the new enlarged department strategic. This means that the human resource personnel will become part of the strategic direction of the bigger company and this will help the company to achieve its strategic goals and enjoy the full benefits of the merger. Secondly, the firm ought to adopt a cost leadership strategy that will help it to adopt a hybrid position. A hybrid position will enable the firm to continue operating at a low-cost position while at the same time providing extra value for its customers.
The merge may be complicated by the different cost leadership strategies adopted by the company before the merger and different value chain networks that the firms had but the adoption of a hybrid position will enable the firm to fully enjoy the fruits of the merger because it will be able to attract and retain consumers through value addition, while at the same time operating at a lower cost. Lastly, the company can take advantage of the merger by using the differentiation strategy. Both companies had their market segments before the merger and the merger widens their target market. The companies can take advantage of the newly found financial and operational muscle to differentiate its services meaning that it can come up with premium cost services available at a higher price for the higher-end customers and this will help to create a competitive advantage for the bigger Ryan air.
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