Executive Summary:
The report portrays a fundamental analysis of European Airline Industry with particular focus on Ryanair. Initially the report highlights the overview of European industry and demonstrates the key importance and highlights of the industry. After discussing industry overview, the report touches upon the introduction of Ryanair and carries out following analysis to strategically analyze the profitability and position of Ryanair.
The report used analytical tools like PESTLE, VRIO and Porter Five Forces analysis to recommend few useful strategies for Ryanair for the long term and sustainable profitability.
Introduction:
The main task of this report is to study the European Airline Industry and Ryanair to apply strategic and management concepts about Strategic Choice and Strategic Position. To assess the attractiveness of the European Airline industry, we would be using tools like Porter Five Forces Analysis to evaluate the competitive forces of the industry. We would also incorporate PESTEL analysis to do scenario analysis by which we would be able to judge the key opportunities and threats related to Ryanair. Moreover, VRIO analysis would also be used further to determine the capabilities and resources of the chosen airline.
The main target of this report would be to do the strategic analysis of the current position of Ryanair and suggest appropriate strategic choices for Ryanair.
Overview – Aviation Industry:
The aviation industry has never been as vital as it is in the current era; rapidly increasing interconnectedness among countries and growing levels of globalization have provided this industry a definitive boast. Global traffic of air travel passengers has increased by an average annual growth rate of 6.58% from 2010 to 2019, whereas the revenue of commercial airlines worldwide grew at a CAGR of 4.5% during the same tenure. Moreover, as per IATA, consumers are expected to spend around a total of $908 billion, amounting to approximately 1% of the total global GDP, on air travel in 2020. All of these statistics help us in understanding the current and future potential associated with the aviation industry.(IATA, 2019)
The aviation sector’s performance heavily relies on macroeconomic factors like GDP growth, level of personal income, and unemployment rate; any sluggishness in such factors can negatively impact the revenues of the sector. Furthermore, the dynamics of the aviation sector tend to vary from region to region. The European market is way different than that of the United States of America, where one key distinguishing factor between the two markets is “fragmentation.” Four airline groups control an 80% share of the total aviation market. In contrast, the European market is far more segregated, which results in fierce competition and a high level of rivalry among competing peers. Airliners in Europe are now taking robust and innovative measures like cost-cutting and utilization of technologies to remain competitive and sustainable in the current environment.(CAPA, 2019)
Moreover, in recent days, COVID 19 has severely damaged the revenue of the aviation industry; most of the Global, including several European airlines, is grounded as due to the ban on traveling. Amid such circumstances, Flybe has collapsed, and Norwegian Air stock has lost about 70% of its value in March 2020, with no end to the crisis in sight. Other key issues that are or will hinder the growth of the European aviation sector are geopolitical issues, slowing down of local economies, rise in the cost of maintenance, and increased rate of the cost of borrowing. (IATA, 2019)
As per the executive board of Lufthansa Group, the largest airline of Europe, the group has reduced its unit costs of operations for the fourth year in succession;
“2019 was another demanding year for the European airline industry. Slower economic growth worldwide, trade disputes, uncertainty surrounding Brexit, overcapacities the resulting price erosion also affected the performance of the Lufthansa Group.”
Overview – Ryanair:
Ryanair is one of the largest airline groups of Europe, which started in 1996 with just 12 aircraft; currently, the airline has more than 450 aircraft with around 19,000 aviation professionals. Ryanair also owns other small airlines like Lauda, Malta Air, Buzz, and Ryanair DAC.(Ryanair, 2019)
Ryanair claims to carry approximately 154 million passengers every yearfrom 82 different bases on more than 2,400 flights daily. The airline group travels over 200 destinations in 40 different countries. (Ryanair, 2019)
Competitive Forces Analysis (Porter Five Forces):
The intensity of Industry Rivalry:
Generally, the aviation industry is considered as one of the most competitive industries where the rivalry among the peers are very rigid. As it is challenging to differentiate the services from other competing peers, the airliners have to be very keen and determined to offer the best services at the most optimal prices. As mentioned in the overview paragraph, Lufthansa Group has successfully cut its operating cost per unit for the 4th consecutive year; such an attitude has to be a must if airliners want to survive and thrive in this throat, reducing competitive environment. Other aspects that make the aviation industry very high in the rivalry is negligible consumer switching cost, overcapacity, and high concentration. (Laurence Frost, 2020)
As a general rule, the more competitors, the more intense the rivalry; the European aviation industry is very highly fragmented with several large and small carriers. The population of the European Union is roughly 50% more than that of the United States of America, amounting to 500 million approximately. But in the USA there are just ten airlines which carry millions of passengers in a year. In contrast, the European aviation industry is quite splintered, having 20 airlines that are comparably equal in size.(Natasha Frost, 2019)
Due to a large number of aviation players, overcapacity is another factor that comes into play when considering industry rivalry. However, European airlines have understood this issue and are gradually slowing their pace of the growing number of seats. In 2019, the number of available seats increased by a mere 3.1%, the slowest since 2013, and lower than the ten-year CAGR (2009 to 2019) of 4.5%. (CAPA, 2019)
The threat of Potential Entrants:
The risk of potential new entrants is generally considered low in the aviation sector amid its requirement of significant capital, regulatory issues, need of highly technical staff, and the cost advantage to large players due to economies of scale.
Establishing an airline from scratch and entering into a market that is already highly fragmented with players that have deep pockets is a tough task. However, airliners these days have opted lease and rental model instead of purchasing aircraft, still, the initial amount of capital required is staggering. Amid high risks attached to the aviation sector, the cost of raising money is also higher than the average lending rates. As per the financial statements of the Lufthansa group, the weighted average cost of capital in 2019 was 4.2%; even though Lufthansa is one of the biggest names of the aviation sector, its cost of capital is higher than the standard lending rates.
Other hindrances in entering the aviation sector are acquiring the licenses and fulfilling other regulatory requirements, which can be time and capital consuming. Recruiting and retaining technical aviation professionals in a highly competitive industry is another key hurdle. Finally, airline groups gain from economies of scale, and so players who have bigger fleets are advantageous over players who are small in comparison.
All of the above-discussed factors make entering into the aviation industry difficult, which means high barriers to entry.
Bargaining Power of Buyers:
Considering the aspects that the aviation industry is highly splintered, service is homogeneous, several substitutes are available (number of airlines), the negligible switching cost for consumers and a large number of frequent air travelers are very price sensitive; this makes us conclude that the bargaining power of buyers is substantially high.
Bargaining Power of Suppliers:
Suppliers of the aviation industry can be segregated in few categories like; suppliers of aircraft and providers of maintenance services (giants like Airbus and Boeing), fuel suppliers, catering suppliers, and hoteliers who rent out their rooms to the transit passengers and aircraft operators.
Bargaining power of suppliers that supply aircraft, their parts, and maintenance services to the aviation industry is robustly secure as the number of such suppliers is quite concentrated. Amid such circumstances, several large airliners are investing heavily in research and development and trying to move towards backward integrations.
The bargaining powers of other suppliers, like fuel, catering, and hotel rooms, are not that strong.
The Threat of Substitutes:
The aviation industry on an industry level doesn’t face any risk of substitutes; however, the substantial threat of substitutes exist when talking at a level of the company. As mentioned previously, the homogeneous nature of service, no cost of switching from one company to another for consumers, a large number of players, and intense competitive rivalry enlarge the threat of substitute of the airline groups.
It matters a great deal these days that how an airliner can differentiate itself from the other competing players, and if we analyze carefully, we can see notable attributes on which a plane can differentiate itself from other players.
PESTLE Analysis
Political:
Being an international airline, it is of crucial importance that airline keeps its harmony with the political forces of the region where it travels. Political factors play a very fundamental role in the profitability of any airline; moreover, who successful an airline is in making its revenue sustainable heavily relies on its political linkages. Several political threats can hinder the growth of Ryanair and damage profitability.(Ryanair, 2019)(Laurence Frost, 2020)
Increase in taxes: If the government decides to increase the taxes on air travel, it will negatively impact the profitability of Ryanair. People will lessen their air travel and would prefer to use other means of local travel like buses and trains. What Ryanair can do is to anticipate any such hike in the tax rate beforehand and make strategies to deal with such an increase in taxes.(Ryanair, 2019)(Natasha Frost, 2019)
BREXIT: Another key challenge faced by all European airlines, including Ryanair, is of BREXIT. Ryanair is a persistent traveler in Europe, and flying to and from England is a prevalent and profitable route. However, till now, no objection or ruling putting restrictions or ban on crossing the air space of England has been coming out, but still, it remains a threat. Ryanair should envisage new destinations and shouldn’t be dependent on just a single goal. (Ryanair, 2019)
Fuel Cost: One of the main operating expenses for all airline groups is off fuel, which highly depends on the geopolitical environment of the world. Any heat up among key oil players like Saudi Arab, Russian, Iran, or USA can shoot up the prices of crude oil. However, it is so challenging to hedge such risk, Ryanair should strategize the usages of derivatives to minimize the risk and should also focus on increasing the fuel storage.
Economical:
A macroeconomic indicator such as interest, inflation rates, GDP growth rate can have a straightforward impact on the performance of the airline sector. During the financial crisis of 2009, several airlines went into severe losses. Slow growth in the economy of the region can severely harm the business of the airline. Sluggish growth of GDP can give rise to unemployment and lower the income level, which can result in lower revenue as people will give up business and leisure traveling.(Sean D.Barrett, 2014)
Another critical impact of the economy on the financial health of Ryanair could be of the weakening of Euro in which the company maintains its books. (Natasha Frost, 2019)
Social:
The current era has been dominated by millennials who are obsessed with traveling. Such demographic changes can have a positive impact on the revenues of Ryanair. However, to take complete advantage of such demographic and social changes, Ryanair should focus on what these millennials want. The management should focus on their likes and dislikes and should introduce customized services for the younger generation.(CAPA, 2019)
Technological:
Technology has been rapidly changing the travel and logistics industry. If we analyze the taxi industry, now it is being ruled by tech giants like Uber and Lyft. Tech gurus are predicting that such massive innovations can also disrupt the airline industry. To be relevant and sustainable in this era, Ryanair should embrace technological advances. It should allow secure booking systems through an app or mobile phone with quick and secure payments. (Laurence Frost, 2020)
Legal:
One of the critical challenges faced by European Airlines currently is off dealing with two regulatory bodies, the European Union and England. This will surely present a tough time for Ryanair. (Natasha Frost, 2019)
Environmental:
The world has started to worry about the carbon emissions and other pollutants been released by industries and automotive sectors. Airlines are also facing the heat as planes emit a little amount of carbon while traveling. To deal with these issues effectively, Ryanair should invest in research and development and improve its fuel efficiency, which will help in reducing carbon emissions. (CAPA, 2019)
Scenario Analysis
Case Scenario 1: Rising of regulatory issues after BREXIT
Brexit has happened now the decision remains pending that what changes would European airlines face in terms of regulations regarding air boundaries. Would there be new clauses or restrictions for the airlines entering the boundary of England or not. This issue can rise troubles for Ryanair and can hurt its profitability a England is one of the key destinations for Ryanair.
Case Scenario 2: Hike in the crude oil prices
As discussed in the PESTLE analysis, crude oil prices are highly dependent on geopolitical environment, any upheaval in the tension between key oil states like KSA, USA or Russia can push the oil prices up. If there is a hike in oil prices it can severely hurt the profit margins of Ryanair.
Case Scenario 3: Slow-down in the regional economy
As mentioned above, revenue of airline industry highly correlates with the performance of global and regional economies. Any sign of slow down or sluggishness can impact negatively on the profitability of Ryanair.
Case 4: More restrictions on Carbon Emission:
As the world has started to worry over the grave issue of global warming due to high emissions of carbon particles, it has raised new issues for global airline industry as one of the main sources of carbon emission is the burning of jet fuel. If such movement against the carbon emissions take pace, it can create problems for Ryanair which can result in low revenue.
VRIO Analysis:
| Resources / Capabilities | Value | Rareness | Inimitable | Organization | Competitive Advantage |
| Low operating costs | Yes | No | No | Yes | Sustained/Above Normal |
| Global and Local Presence | Yes | Yes | Yes | Yes | Sustained/Above Normal |
| Large Fleet | Yes | No | No | Yes | Sustained/Normal |
| Strong Brand Portfolio | Yes | No | Yes | Yes | Sustained/Above Normal |
For VRIO analysis, five most essential and critical resources/capabilities have been picked, which are its ability to operate at low cost, widespread global and local presence, its large fleet, and robust portfolio of brands.
Low Operating Costs:
The fundamental reason behind the success of Ryanair is its ability to function at a little cost. This ability indeed provides value, but when it comes to rareness, it might not be the only airline to do so. There are several low cost operating airlines like Southwest or Airjet. However, it is not effortlessly perfect and the organization itself is very well organized to take advantage of this capability; hence it is a sustained competitive advantage. (Ryanair, 2019)(Paolo Malighettia Stefano Palearia Renato Redondib, 2009)(Thomas M. Box,, 2005)(Friedrich Gröteke and Wolfgang Kerber, 2016)
Global and Local Presence:
Ryanair enjoys a ubiquitous presence, both locally and globally. Such resources provide great value in terms of economies of scale, are also rare, and very hard to imitate. Moreover, the organization is very well poised to take full advantage of this resource. Hence it is a sustained competitive advantage. (Ryanair, 2019)
Large Fleet:
Another reason for how Ryanair has been so successful in providing low fare flights. A resource which indeed offers excellent value but isn’t rare as there are several airlines which have even larger fleets. Whereas the organization in itself is very well established to enjoy the benefits.(Alberta Giorgi e Luca Raffini, 2015)
Strong Brand Portfolio:
Ryanair is a parent group of few other aviation giants which provides an ultimate edge to its consumer preferences and competitive advantage. A strong brand portfolio, however, is not rare, but indeed it is hard to imitate, hence being a sustained competitive advantage of Ryanair.(John F.O’Connell, 2005)
Strategic Choices Ryanair should adopt to improve its chances of being persistently profitable:
After a thorough analysis of strategic position of Ryanair, we can recommend few strategies to the management to improve its chances of being persistently profitable:
- As it has been observed by our analysis that its key strength is that it is a very low cost operator, the airline should continue the trend and should invest more in research and development by which it can introduce other different ways to cut cost further ahead.
- Technology is taking over almost all industries; in order to remain profitable and sustainable the Ryanair should focus on new technological advances and embrace new innovation by which it can make it further easier for the travelers to travel and book flight tickets.
- Try to be more environment friendly by investing in new planes which have better fuel efficiencies.
- Build good relationships with regulators and institutions.
Bibliography
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Friedrich Gröteke and Wolfgang Kerber, 2016. The Case of Ryanair – EU State Aid Policy on the Wrong Runway. ORDO.
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John F.O’Connell, 2005. Passengers’ perceptions of low cost airlines and full service carriers: A case study involving Ryanair, Aer Lingus, Air Asia and Malaysia Airlines. Journal of Air Transport Management.
Laurence Frost, 2020. Coronavirus to drive European airline industry shakeout. Reuters, 19 March.
Natasha Frost, 2019. European airlines are confronting the same grim reality their US counterparts faced decades ago. Quartz, 6 November.
Paolo Malighettia Stefano Palearia Renato Redondib, 2009. Pricing strategies of low-cost airlines: The Ryanair case study. Journal of Air Transport Management.
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Sean D.Barrett, 2014. The sustainability of the Ryanair model. International Journal of Transport Management.
Thomas M. Box,, 2005. RYANAIR (2005): SUCCESSFUL LOW COST LEADERSHIP. JOURNAL OF THE INTERNATIONAL ACADEMY FOR CASE STUDIES.
