Ryanair Case Study: Macro & Internal Environment Analysis

Ryanair, the Irish budget airline was established by the Ryan family with a small staff of twenty-five. After facing tremendous losses, the Ryan family invested 20 million pounds to relaunch Ryanair as a low fare airline on Southwest airlines lowcost business model (Ryanair DAC 2019). The deregulations in the air transport sector in the year 1990 played a vital role in allowing greater freedom of air traffic rights (Diaconu 2012). In the year 1992, Ryanair was the first airline to adopt the low-cost business model in Europe (Malighetti et al. 2009). The decision of considering the low fare model helped Ryanair to become the largest Irish airline on every route to/from Dublin. Low fare and high-frequency formula expedited their acceptance in every market operated between Ireland and the UK and by 1996, Ryanair overtook Aer Lingus and British Airway to become the largest passenger airline on the route of Dublin-London (Ryanair DAC 2019). Since the entry of low-cost carriers has completely revolutionized the air passenger transport industry. The core of the lowcost business model aimed at offering low fares by declining comfort services (Malighetti et al. 2009). This paper analyzes the performance of Ryanair and its strategic decisions. The analysis is broadly classified under the following points namely Macro-Environment, Internal Organizational Environment or Strategic Capabilities, Globalization & Leadership. This paper discusses Ryanair’s leadership, strategic and cultural capabilities to withstand the external forces and environmental changes that impact the overall organization performances. PESTEL framework helps to understand the macro-environment complexities. Internal organizational decisions play a vital role in strategizing the road map to achieve a long-lasting goal. Every organization seeks global exposure and globalization helps the organization to reach out to the world. Leadership plays a key role in an organization to select the right path by taking strategic decisions. Macro Environment An organization’s survival depends upon the opportunities given by its environment. The environment may also become an organization’s potential threat. It becomes vital for the stakeholders of an organization to analyze the complexity of its environment and carefully consider the influence of environmental change. PESTEL and Porter’s five forces framework can be used to anticipate the influence of environmental changes. PESTEL framework can help to predict the effect of Political, Economic, Social, Technological. Environmental and Legal environments to an organization (Johnson et al. 2011). PESTEL framework can be used to analyze Ryanair’s low-cost business model to understand Ryanair’s strategic decision to withstand the influence of the challenging changes. The impact of decisions taken by the government is political (Johnson et al. 2011). An airline industry faces political influence in the form of government stability, taxation policy, foreign trade regulations and social welfare policies (Helterlin and Ramalho 2007). In the year 1993, the European Union adopted a series of deregulations that promoted international trade. This deregulation provided a new area to explore innovation strategies and incorporate into the low-cost model. Ryanair witnessed unprecedented growth due to the deregulation decision taken by the European Union (12). Ryanair incorporated innovation strategies, for instance, Ryanair cajoled the department of transport of the Irish government to do some changes in the aviation policy. By doing so, Ryanair could survive the price war between itself and Aer Lingus and gained exclusive rights in Ireland to Stansted and Luton airport (Helterlin and Ramalho 2007). Economic influence refers to economic rates, business cycles and variation in economic growth across the world. Organization structure grows out of a set of economic characteristics that decides the strength of external uncertain environment (Johnson et al. 2011). Ryanair’s strategic planning was in consideration of economic growth. Strategies like ancillary service through the website which helped Ryanair to earn revenue manifold. The decision of not using air bridges and no provision of the frequent flyer was taken considering the economic influence. The direct sale approach eliminated commissions of travel agents (Helterlin and Ramalho 2007). Ryanair decided operating fights on small and medium routes while selecting the route the competitors were analyzed. In a few routes where competitors were present especially on London - Dublin route, the price correlations were considered. Ryanair could provide low fare considering the low- cost model and by letting go of free services. The strategic decision helped Ryanair to handle up to 4.9 million passengers per month in the year 2007. The total traffic increased from 21.1% from 2006 to 23% in the year 2007 and average revenue per passenger grew by 1.6% (Malighetti et al. 2010). Ryanair’s strategy of providing low fare socially impacted in developing tourism towards short destinations in Europe. Ryanair never gave importance to worker unions and association and they never conducted any negotiations with the unions. Thus, the company’s staff turnover is more, and it has been said that they have the worst working conditions when compared with other airline employees. The staff contract comes under Irish legislation and not under domestic labor law, thus allowing Ryanair to give its employees a higher workload and lesser holidays (Helterlin and Ramalho 2007). The organizational structure of Ryanair affects the social conditions of its employees (Nortilli and Wong 2014). Technological influences are the innovations and use of new technologies by the organization to hold its position in the external market (Johnson et al. 2011). From the beginning, Ryanair had an aggressive direct sale approach via the internet (Diaconu 2012). Ryanair introduced Europe’s first largest travel website in Jan 2000. The direct sale approach helped Ryanair to record 50,000 bookings per week within three years (Box and Byus 2007). Ticket booking through the internet not only helped the company but helped the clients significantly. Directly selling to market provided Ryanair to give detailed market information with respects to the customers. The ease of booking tickets attracted customers and they were able to compare the prices and choose the lowest one (Diaconu 2012). Environmental factor illustrates green issues such as carbon footprint, pollution, and waste generation (Johnson et al. 2011). Ryanair decided to replace its fleet of airlines in 1999. The replacement program cost seventeen billion euros and all the Boeing 737 aircraft were replaced with new Boeing 800. The replacement not only helped economically by having younger, next-generation aircraft but also helped environmentally by becoming the most fuel-efficient airlines in Europe. This shows that Ryanair does consider the service quality and gives importance to the impact its operation has on the environment. Currently, Ryanair is an environmental efficiency leader and it is constantly working towards improving its performance (Diaconu 2012). According to 2019 annual report of Ryanair, the environmental priorities are to comply to all the rules and regulations. It has prioritized to minimize fuel and energy consumption and to minimize noise pollution by 40 percent, new Boeing 737- MAX is expected to commission by fiscal year 2020. Ryanair was the airline to report the CO2 emission and continues to do on monthly basis. The legal influence is impacted by legislative changes such as changes in health and safety legislation, changes due to mergers or acquisitions (Johnson et al. 2011). To generate greater benefits, many airlines and airport operators have signed a long-term contract for competitive advantages and passenger satisfaction. Ryanair has negotiated with some airports for a share of parking revenues. When such offers are floated between airport operators and airlines, there are legal constraints that could arise. In the year 2004, the European Court found the portion of the contract between Ryanair and the airport of Charleroi was illegal due to legislation changes and ordered it to return the amount of all the facility benefits in connection with the contract. Ryanair had to repay of 4 million euros (D'alfonso and Nastasi 2014). The Internal Organizational Environment or Strategic Capabilities Every organization is different and has its strategic capabilities to achieve competitive advances and improve its performance. Two main components of strategic capabilities are competences and resources. The changing environment plays an important role in deciding an organization’s ability to create strategic capabilities and balance the internal environment. Strategic competences of an organization depend on the way the resources are utilized (Johnson et al, 2011). Though Ryanair had developed the low-cost model as per the South-west original model, it had included various new characteristics such as using unused airports. It was Ryanair’s internal strategy to adhere to the ‘Southwest model’. In a study conducted in 2004, Ryanair’s adherence to the original model was 85 percent compatible (Diaconu 2012). The illustration of Ryanair’s internal strategic capabilities can be examined by its Core activities and by its Value-added strategies (Kangis and O'Reilly 2003). The set of skills, activities, and resources of an organization that can be developed or extended; provide customer value and distinguish from its business competitors are the core competencies of an organization (Johnson et al, 2011). The Core strategies of Ryanair were to have one type of aircraft, selection of secondary airports, one class of tickets without any discrimination, no overbooking and no free-on-board services (Alderighi et al. 2016). Resources are the foundation of organizational competencies. Resources are further classified into Tangible and Intangible. Tangible resources are the assets which can be measured and quantified while Intangible resources are relatively difficult to analyze and are rooted deeply in the history of an organization and have accumulated over time (Volberda et al. 2011). Ryanair’s mission statement which was reported in 1997 was to become Europe’s most profitable lowest cost airline by rolling out ‘low-fare-no-frills’ service in all the market areas where Ryanair operates to ensure that benefit is provided to all the customers (Kangis and O'Reilly 2003). The Tangible resource of Ryanair was to finalize to operate only one type of aircraft which was Boeing 737-200s. Initially, they had fifteen aircrafts in its fleet and much of its success in achieving low costs has been attributed to its core strategy of selecting one type of aircraft in its fleet. One of the main areas of Ryanair’s concentration on cost was contracting out of services. Employee compensation cost accounts for approx. 30 percent of total operating cost, Ryanair kept the employee compensation cost low by contracting-out services. This helped Ryanair to obtain a high level of productivity from its employees (Kangis and O'Reilly 2003). Ryanair’s strategy of dropping customer inflight service items such as no free food or beverages, no seat allocation, no business class service and more seats per aircraft provided Ryanair advantages in the competitive market consisting of other European national airlines (Barrett 2004). Ryanair’s strategy of greater operational and maintenance flexibility added value to its inventory volume. Ryanair’s fleet had the same specification of single 130 seat configuration aircraft which helped to standardize, and the cockpit crew was trained on one type of aircraft thus saving time and resources. This strategy of having a similar type of fleet helped Ryanair in maintenance procedures. The training of engineers was also conducted on one type of aircraft as the maintenance procedures were standardized. A similar type of aircraft assisted Ryanair in bulk purchase of spare parts and other important equipment at economical rates (Kangis and O'Reilly 2003). Outsourcing of non-core activities to long term contracts at economical rates protected it to limit from unpredictable cost fluctuations. It had outsourced ticketing services except at home airport in Dublin, by doing so Ryanair could avoid management activities at other airports (Kangis and O'Reilly 2003). Consideration of regional airports and operating on point to point routes were the value-added strategies of Ryanair as the regional airports are less expensive compared to the main crowded airports. The seat optimization of Ryanair by just providing little space for a bar and duty-free, provided it to achieve a thirty percent increase in seating when compared with Aer Lingus. A Morgan Stanley report illustrates that Ryanair had an unprecedented effect on traffic growth between Dublin and London. Due to this, Ryanair’s network too expanded from five in 1992 to twenty-seven by 1998. Ryanair witnessed an increase in overall passenger numbers significantly in all the routes served by it. By 1998, Ryanair’s passengers exponentially increased to over four million (Lawton 2000). Ryanair could achieve a twenty-fiveminute gate turnaround and increase in productivity by fifteen percent due to crew efficiency and aircraft utilization. The internal core and value-added strategic capabilities provided Ryanair to grow exponentially and maintain its hold in the European market. As discussed above, Intangible resource is rooted deeply among the employee. Ryanair’s decision to have a flexible labour system had its pros and cons. Ryanair’s flexible labour system whereby employees could do more than one job. Ryanair had also established a performance-related pay scheme, under this scheme the employees were paid partly on a salary basis and partly on an activity basis. This helped employees to earn more and assisted Ryanair in controlling operational flexibility (Kangis and O'Reilly 2003). The scheme had its advantage of high payment, Ryanair’s reputation, especially in terms of job satisfaction, dropped considerably. The main reason consisted of overall behaviour issues of the company. The employees lacked motivation, and which led to employee turnover. Ryanair’s culture can be considered as weak as it has a culture of imposing strict rules on its employees which results in instability. As the intangible resource of an organization cannot be directly measured Ryanair needs to evaluate different models to improve organizational culture (Nortilli and Wong 2014). Globalization Globalization can simply be referred to as the process of becoming more global by considering the world as one tightly linked system (De and Meyer 2010). Globalization is extensive coordination among many nations around the world, while Internationalization is a range of options available to an organization to operate outside its country of origin (Johnson et al. 2011). Initially, Ryanair targeted customers between Ireland and Great Britain but eventually expanded its operation to other parts of Europe, the strategy was to become the leader of low-rate (Diaconu 2012). Ryanair chose to internalize to leverage the combination of ownership, geographic location, and internalization advantages. The advantages in terms of airlines are of serving foreign markets, to do so the airlines should adopt export strategies (Albers et at. 2010). The important advantages of Internalization for low fare airlines are quality control especially concerning customer uncertainties about service offerings. The process control, harmonization, and flexibility in decision making are other important factors to low fare airlines which can be catered by Internationalization (Albers et at. 2010). In 1993, the third and fourth packages of deregulations in the airport sector were rolled out, which provided access to EU airlines in other European markets. Due to the deregulations, the market share of low-cost carriers grew exponentially (Diaconu 2012). Ryanair aimed to position a strong base on the European continent before any competitor could do so. This new competition or market entry proved to be a supporting effect for Ryanair to internationalize and influence the international market. Over the period, low fare airlines were categorized under three groups namely No Internalization Only Export, Contractual Cooperation and Set up own multiple bases. Ryanair targeted to be in the third group as they chose to have their multiple international bases (Albers et at. 2010). Ryanair chose to create new branches located at a different location, this catered to increase the number of destinations. In 2007, IATA (International Air Transporters Association) declared Ryanair as the largest airline in the world as it had twenty subsidiaries spread out all over the European Union (Diaconu 2012). Ryanair aimed at internal and external strategies, the external strategy was to aim at building a strong reputation and internal strategy was to develop experience and expertise in airline management (Albers et at. 2010). The method of internationalization adopted by an airline strongly depends on the ownership structure and strategic leadership. Entrepreneur leadership and strategic drive of Michael O'Leary also seem significant while entering the international market. Ryanair also had first-mover advantage in a specific geographic region which was an important factor in the success of Ryanair among other low fare airlines (Albers et at. 2010). Leadership or Culture Leadership in an organization influences and motivates the people of the organization to achieve the desired goal. An effective leader could ensure a clear vision of the future of the organization and communicate the correct strategy so that the people of the organization are committed towards the goal (Johnson et al. 2011). Leadership values play an important role in the outcomes of an organization in the form of performance and culture. The performance of an organization can be characterized by an escalation of commitment and the growing value of leadership has influenced the strategic decisions of organizations (Carter and Greer 2013). After facing tremendous losses in 1990, Michael O’Leary was brought in as the new CEO of Ryanair and Tony Ryan suggested he visit Southwest Airlines in Dallas to understand the fundamentals of the low-cost business model in the airline's industry (Box and Byus 2007). Michael O'Leary’s significant entrepreneur leadership helped Ryanair by launching a low-cost airline business model and holding its position in the European market (Albers et at. 2010). Under his leadership, Ryanair’s profit increased while the public image drops because he made expenditure as top agenda and not the feedback of the public. According to the poll of the British Government in the year 2013, Ryanair scored a negative rating of 35 percent. The same year, Ryanair announced revenues of 4.8 billion Euros and a net profit of 569 Euros making it one of the most revenues generating airlines. The value proposition plays a crucial role in the success of Ryanair, though people are aware that Ryanair doesn’t provide excellent services, but they do get attracted to the low fare. Ryanair’s goal is not to be loved but to understand the true value of what is offering (Thomas and Thomas 2015). Michael O’Leary’s leadership quality reflects in his public statements when he reiterated the vision of Ryanair that is to simply continue to be the largest low-cost airlines in Europe. (Box and Byus 2007).