Case study A : Ryanair

Part 1

In November of 2006, the Irish Airline company Ryanair announced a record half-year profit of 326 million euros. In order to understand how they managed to reach such profitability in the overloaded European Airline industry, we will use the business model framework.

First, Ryanair’s customers benefit from low fares and punctuality. Offering the lowest fares in every market is the company main goal. As no competitors manage to outperform Ryanair in terms of price, we can say that their value proposition is superior.

The second step of the business model framework is to emphasize the architecture of the business and how it enables the company to achieve its aims. Let’s focus on each of the six components of the company infrastructure.

✓ Ryanair aims at offering the lowest prices of the market. Low fares are the main competitive advantage of the company, so whatever the context is they try not to raise prices. Even when fuel costs soared, the company CEO, Michael O’Leary declared that they would be “no fuel surcharges not today, not tomorrow, not ever”.

✓ Ryanair’s flights are point to point only, in order to reduce costs (fuel charges, airport cost…). On those flights, there is no business class. Moreover, the company chose secondary airports as airport charges are lower than in main airports. We can Ryanair also offers ancillary services including non-flight services such as hotels or car rental service, and services on board like online gambling or in-flight mobile phone service. Ancillary services have very high margins and generate an increasing part of the company revenues. To quote M. O’Leary they are “always trying to sell you something”.

✓ In terms of distribution, e-commerce has a significant role to play: 95% of purchases are made on the Internet. Ryanair’s website is said to be the largest travel website in Europe and the fifth most recognized brand on Google. So their website is a powerful communication resource, as well as a potential source of high revenues thanks to advertising. Besides, the company CEO, Michael O’Leary, often resorts to a provocative communication strategy. For instance, when Ryanair opened a hub in Milan, he flew there aboard a plane bearing “Arrivederci Alitalia”.

✓ The efficiency of Ryanair relies mostly on its operations and processes: quick check-in and aircraft turnarounds with minimum of hold luggage. Indeed, being quick is being able to schedule more flights in a time period. Since 2006, Ryanair has used web-based check-in and priority boarding in order to save time and reduce costs (check-in staff and airport facility). Besides staying on the ground the least possible enables the company to cut airport charges. Finally, minimum luggage means quicker check-in, a saving on staff costs and less weight leading to fuel costs reduction. To urge people to travel with fewer luggage, customers are charged for check-in bags.

Dealing with operations and processes also includes the Ryanair’s fleet. The company owns the youngest fleet of any major European Airline. Their aircrafts produce less carbon emission and enables the company to lower fuel consumption. Moreover, this fleet has a larger seat capacity, to reach a higher profitability. In order to have low maintenance and staff training costs, Ryanair’s fleet is standardized (Boeing 737).

✓ In terms of management, Ryanair has a charismatic and visionary leader: its CEO, Michael O’Leary. The largest shareholder of the company (4.53% in 2007), he embodies the company and has a particular approach to stakeholder, often provocative and sometimes controversial. For instance, once he dressed up as the Pope to promote Ryanair’s offers. His abilities made him get awards, such as the European Businessman of the Year Award (2001). According his former colleague Tim Jeans, his genius lies in its capacity to “motivate and energize people”.

✓ The sixth component of the business infrastructure is Ryanair’s human resources. In 2007, the company employed 3500 people from over 25 nationalities. Most of them are flight or cabin crew. According to Ryanair, the average pay of their cabin crew is higher than other major European Airline (49 612€ ). To enhance productivity, rosters are rationalized, “tailored”. 900 hours is the maximum flying time per annum for their employees and time off for crew members are maximized, so as to prevent fatigue and increase safety. Employees receive extensive safety training. Safety impacts on the company image, but let’s not forget that a damaged aircraft also means high costs. Eventually, to reduce staff costs, Ryanair uses web check-in and automated back office software.

Studying only the internal architecture of the business is not sufficient to understand how Ryanair reached profitability: we need to integrate all components into a value chain. In the investors perspective, Ryanair is a profitable company. Shares rose by 3.6% in 2007 and, according to the company’s stockbrokers, there was an “upside potential for capital gains and a low risk of derating”. Ryanair’s partners are small and regional airports, offering lower airport fees. Ryanair’s increasing number of passengers is positive for them. Eventually, customer benefit from low prices, punctuality and safety.

The third step of the business model framework is the economic equation: what are the profits created by the integration of all components?

✓ The cost structure:

Ryanair’s mantra is “ever-decreasing costs”. In 2007, unit costs increased by 7.5%, which is minimal considering the 42% increase in fuel costs. In 2006, fuel and oil represented the high operating expense (462 466 000€), followed by airport ad handling charges (216 301 000€) and staff costs (171 412 000€).

✓ The streams of revenues:

In 2006, Ryanair made 1 433 377 000€ in revenues, of which 259 153 000€ were ancillary revenues. Those revenues increased by 36% this year, faster than passenger revenues (+27%). Besides, as we said in introduction, a record half-year profit was reached for the first half of fiscal 2007 (326m€).

Part 2

Ryanair is the first budget airline in Europe and has managed to reach success with the model of Southwest Airlines. However its model of low-fares faces some threats.

During the rise of oil’s prices, Ryanair committed itself not to raise its prices. In fact, they need to keep prices as low as possible to maintain their success. That might cause problems when their costs are rising due to external conditions. Therefore, Ryanair can be very vulnerable to markets and macroeconomic conditions (economic crisis, rise of raw materials ...).Thus, they are worried about the rise of concern about greenhouse effects which might make EU impose more taxes on fuel and would increase their costs. They also can’t afford high airport charges so they have chosen regional airport destinations. That means more trouble for passengers to join these airports which can be often badly-served by public transports and motorways. Their need to offer low-prices in any conditions makes sometimes them not abide by the law. For example, at first, they mostly ignored the new EU regulation about the obligation for companies to provide assistance and compensation to cancellations and delays but when they finally had to fund back passengers, their profits were affected. Ryanair is also affected a lot by higher security measures which make its planes stay longer in the airport and cost them a lot of money.

Moreover, Ryanair has a bad image with its staff. To reduce its costs, it keeps reducing their advantages (cut in salary, loading mobile phone forbidden, and obligation to fund back the cost of training if leaving the company …) which causes trouble with unions and make people not feel like working for Ryanair. That contributes to give Ryanair a bad image with the media and consumers and damages its recruitment politics.

Furthermore, it is affected by a bad reputation on safety issues and travel conditions: you have to buy everything with very expensive prices. For example, Channel 4 made a documentary which enhances bad security procedures and hygiene. This type of reputation can make people choose another company or another way of transport for their travel so this can damage Ryanair business model on the long view: it was voted the world’s least favorite airline in 2006.

In addition, Michael O’Leary, the Chief Executive Officer of Ryanair, has announced his desire to leave the company. He is identified as a dynamic Chief Executive and has won several prizes to reward his type of management. His leaving can be damaging for the company and for shareholders’ trust.

As a conclusion, we can say that Ryanair business model faces both internal and external threats which can affect its success in long-term view.

Part 3

To know if a merger between Ryanair and Aer Lingus would have been appropriate, we must analyse some aspects of the two companies and their situations:

✓ In terms of position, Ryan air is already viewed as a leader on the low-cost market. Thus it already has a good successful image. By diversifying, Ryanair could lose some of its power of negotiation (regarding prices, for instance), especially on the long-haul market that would be new to the company.

✓ The two companies also have been great competitors for a long time and a merger would inevitably represent a loss of pride for Aer Lingus (who sees the merger as “hostile”). This could rub off on the atmosphere of the company, especially considering that many actors were not in favor of this merger: the Irish government, some investment funds and ESOT are actors whose approval would have been necessary.

✓ Also, the two companies have different types of organization. This could lead to misunderstandings, malfunctioning or more generally difficulties to work together. So even it is an economic opportunity on a long term basis, in the short-term, a merger would imply a lot of costs, because of the reorganization. These additional costs may be considered are useless considering the fact that the company is already profitable.

✓ However, other costs could be reduced, for example by acquiring take-off and landing slots at London Stansted Airport (which is a "Golden opportunity"). More generally, the merger would enable a slight decrease of operating costs, and so an increase of efficiency.

✓ Finally, in terms of expansion, the merger would enable Ryanair to really become a giant: by getting more market shares on the European market, the two companies who together represent 80% of the flights between Ireland and other European countries would almost have a monopoly position. Merging with Aer Lingus will at last also mean a diversification process where Ryanair would not be only be specialized in short-haul, but also long-haul routes, what isn’t available now with Ryanair.

Thus, after looking at the position of the two firms and analyzing their economical and organizational situation, we can see that from Ryanair’s point of view, even if the merger would have represented a great expansion, the political context wasn’t really in favor of this “wedding” and the major actors of the ”bride” also disagreed.

As Ryanair’s situation was far from being critical at the moment and as it can grow by itself without absolutely needing to merge, we think that even if the idea was good in terms of prices and services for the customer, the moment’s wasn’t the right one to proceed to this merger.