Analysis of Ryanair's Strategy

1. Introduction

1.1. Industry background

Low fare airline firstly emerged in the US with Pacific Southwest Airlines, pioneering the concept in 1949. [1] In 1991, Ryanair re-established the airline as the first European company following the low fare strategy implemented by Southwest Airlines. Nowadays the growth of low fare airline (LFA) is currently focused on the European market, where LFA s stood for 19.5% in 2007 of the total air transport supply according to seats. [2] According to the European Low Fares Airline Association (ELFAA)'s expectation, the total share of low fares traffic in Europe is expected to reach over 40% by 2010. [3] Ryanair and EasyJet are the largest rivals in European LFAs standing for 28.67% and 22.1% passenger numbers respectively. [4]

1.2. Ryanair overview

Ryanair, the first low fare airline company in Europe, has been the World's favorite airline. It was till March, 2010 that Ryanair officially announces 247 Boeing 737-800 aircrafts operating in its fleet and about 6000 employees. [5] Ryanair turns to be progressively famous for its extremely low price tickets and highly rapid growth. Comments like 'the most profitable aviation company in the world' from Economics and 'one of the most popular airline stocks' from Wall Street Journal, have demonstrated itself a great model as a low fare airline organization so far.

1.3. Research questions

This essay reviews the situation of European low fare industry and Ryanair's development in the recent years, aiming to study on two centre areas: analyzing the strategic position of Ryanair between 2006 and today; and on the basis of this analysis, describing and evaluating the strategies Ryanair used during that time period.

2. Strategic position analysis

2.1. Environment analysis

When analyzing the strategic environment of a corporation, a business environment scanning is always necessary given its vital advantages (Thomas, 2007). Generally an environmental analysis helps organization position itself properly (Palmer, 2008). In this part, different analysis tools, such as PESTEL analysis, Porter's Five Forces analysis will be used in different business environment levels respectively.

2.1.1. Macro-environment analysis

Particularly, the macro-environment is the top-rated level given its vast impact and influence on a company. In order to achieve a comprehensive learning and awareness of the environment, wide consideration is crucial. Thus, PESTEL framework which widely incorporates political, economic, social, technological, environmental and legal aspects is recommended for a business environment analysis (McGahan, 2000).

2.1.1.1. Political and legal

Deregulation and liberalization

The most influential political decision to European LFA industry was the deregulation of the European flight market in 1997. Before that, the market of flight was largely controlled by the governments of European countries through which to secure their respective national carriers market share. The liberalization and relatively free competitions forced the carriers to examine and re-establish their operation and encouraged new rivals' entry. Meanwhile, airline from other regions in the world comes in EU market because of the liberalization.

State aid

EU has laid down strict control on state aid to discourage governments from supporting national flag carriers with state subsidies, also compared to legislation in other countries in general. [6] Even after 911, EU still insisted not to subsidize any airline apart from allowing compensation for lost revenues directly caused by the terrorist attach and as a result the Belgium national flag carrier Sabena went bankrupt in November 2001 as the ailing airline. Additionally, government support such as investment in terminals especially second terminals can encourage low fare airline companies to set more future airline plans (Johnson, 2002).

Travel tax

Government taxes on travel could damage LFAs' development and could have a material adverse impact on LFAs' operations. Some countries increased the taxes on travel in the resent years, which have a negative influence on passenger volume and other financial index. For instance, the U.K. government levies an Air Passenger Duty (APD) of £11 per passenger. The tax was previously set at £5 per passenger, but it was increased to £10 per passenger in 2007 and £11 in 2009. [9]

2.1.1.2. Economic

Global recession

As the global recession has still been ongoing, a general downturn trend needs to be bear in mind. This downturn situation is like a double-blade sword to LFAs; on one hand, obviously economic recession brought general shock to airline industry through financial market; on the other hand, it made customers' purchase power weaker, and more customers would like to take low fare airline considering the much cheaper ticket price, safety and swiftness rather than full service and luxury environment.

Fuel price

The most important cost to low fare airline companies is definitely identified as fuel cost as the fuel costs constitute 10-14% of an airline's operating costs.[2] Fuel price has almost boosted sharply in recent years and it has already forced some companies to quit the competition from market (Johnson, 2002). Traditionally airline companies would choose to off-set the costs of rising fuel prices on to the customers, either through increasing general fares or to add a "fuel surcharge" into the ticket prices as most full service airlines. However most LFAs refrains from using this strategy, instead that they are trying to increase market share off-set the higher fuel prices by serving more passengers and increasing the load factor.

Labor costs

Labor cost is another main contributor to airline companies' operational costs. In such a downturn situation, reducing the labor costs through lowering wages or workforce is reasonable to airline companies. However, in countries with inflexible labor markets and strong labor unions, it is difficult to reduce the wages; therefore many companies went bankrupt during the recession because of unaffordable high wages. Many