Ryan Air

1. Executive Summary

To identify an appropriate strategy for a given industry one must look into the external and internal factors influencing the company. The following report will discuss these factors regarding Ryanair, which is one of the leading budget European airlines.

This report identifies important issues of Ryanair's environment which have been formed since the company's development. It also goes on to analyse the future opportunities and threats which Ryanair is likely to face in currently and in the future.

Ryan air have developed a cost focus strategy, where it focuses on reducing cost to obtain a competitive advantage. The following discussion will show just how efficient the company has implemented this strategy.

2. Introduction

In 1985 Ryanair was established by the Ryan family to provide travelers an airline service from Dublin to the United Kingdom. Ryainair's strategic model was built upon the successful Southwest Airline (based in Texas) which is to provide low costs and no frills. During its history it has undergone some criticism from opposition and consumers but this has not halted Ryainair's progression in the airline industry. It has now developed from a family run business to one of Europe's leading low fare airlines with more then 133 routes across 16 destinations.

3. Porters Five Forces Strategy

Porters Five Forces strategy is used to examine the environment of competition within the industry (Tutor2u Ltd n.d). The following will examine the competition of the five forces with regard to European airline industry especially Ryanair.

3.1 Threat of New Entrants

The threat of new entrants in the airline industry is relatively high but to be successful in the market is a different matter. The deregulation of airlines in Europe has allowed airlines to be "...free to negotiate their own operating arrangements with different airports, enter and exit routes easily, and to levy airfares and supply flights according to market demand." (AvationExplorer.com n.d)

Barriers of entry for the airline industry are quite low even though the initial capital outlay is high. Banks are willing to lend money and if companies can not obtain enough they can engage in the debt and equity markets (Investopedia ULC). Due to relative ease of obtaining capital there has been a saturation of airlines in the European market.

However economies of scale in the airline industry has the potential to put off new entrants. This means that a company can produce so many units they can actually drive the average price down and in return gain more revenue. This is the case of Ryanair which owns a large number of aircraft. Given that Ryanair own a large fleet they are able to reduce the cost of servicing and pass this on to customers.

Brand equity also plays a major part in the airline industry. Many airline carriers offer rewards such as frequent flier points. The purpose of this is to keep the customer from switching to a different airlines. Hence if a company has a strong brand name and incentives for customers, they may be willing to stay with the same company.

3.2 Threat of Substitute Services

Threats of substitute services in the European Airline industry is of minor concern. Substitutes are an item or service which can replace another. Although most of Europe is accessible by train, boat or car, why would one want to travel by these means, when the cost to board a budget airline is nearly the same. Currently Ryanair is offering Ð'Ј0.01 flights excluding tax and charges until the 16th of May 2007 to certain destinations on its website, while a train ride to from Long to Paris is Ð'Ј84 (citied from Eurostar.com).

Traveling by airplane is the fastest way to travel. Bullet trains are the only closest competitor which can reach legal speeds of 320km/hr (BBC MVII 2007) but even they can not compete in terms of speed. Since Ryanair is a budget airline the service and comfort of the journey may not be as comfortable as other forms of travel. It is up to the consumer to decide how they want to travel but generally one would want to save money and get their destination the quickest.

3.3 Rivalry Among Existing Firms

Not only does Ryanair have to compete against existing budget airlines, but they also have to compete against chartered airlines and mainstream airlines such as British Airways and Luthansa. Due to the competitive nature of budget airlines, companies generally would rather return lower profits but obtain the majority of market power.

The rate of industry growth has been alarming and according to CNBC European Business, it is about to be saturated with airline companies. Due to the high amount of operators and high number of seats available, companies can only gain more of the market share at the expense of others (First Conference Ltd 2007). Hence larger airline companies have been bullying less fortunate companies and causing them to fail.

Since Ryanair is one of Europeans most predominant budget airlines, they do not take likely foreign firms investing in their "home state". An example of this is with Go's foray into Dublin. Ryanair saw this move as a personal attack and so they increased the frequency of flights around Dublin and reduced the prices to levels which Go could not match. Eventually Go stopped servicing Dublin. This gives a indication of how intense rivalry is in the European budget airline industry.

Exit barriers for airlines are typically high. Large amounts of investment are easy for airlines to acquire but once a company files for bankruptcy, the selling of the company is hard to attain (Booz Allen Hamilton Inc 2007). Due to the exit barriers being high, airlines are strongly competing against each other to coexist in the industry.

3.4 Bargaining Power of Buyers

Buyers of airplane tickets exert little bargaining power of the airlines. There are many people traveling around Europe and this is evident in figure 2 which shows a steady increase of growth everywhere. Therefore one buyer, who is not the majority of people purchasing the tickets, can not really skew the prices of airplane tickets in their favor.

Consumers are also unlikely to integrate backwards. This is due to the high setup costs that are involved and the costs to maintain the services and aircrafts. Since it is unlikely that consumers will start their own airline carrier, airlines have a significant amount