26 Jan 2018
The economics of business vary, both depending upon the industry where they operate and the style and strategy adopted by the management. Within this paper it is intended to assess those economic factors as they relate to the “low-cost” airlines. To assist with this assessment Ryanair, one of the leading “low-cost” airline operators in Europe, will be used as an example.
Existing Corporate Strategy
Following the liberalisation of the airline industry, the consumer demand for air travel began to increase. However, when operators such as Ryanair, an Irish based company, was one of the “first-movers” (Faulkner and Campbell 2006). in adopting a “low-cost” strategy for Europe, similar to the model successfully introduced by Southwest Airlines (2007) in the US, the levels of demand increased dramatically. As can be seen from the numbers of passengers using UK airports (see table 1).
Table 1 Airline passengers
The demand for airline seats is also forecast to more than treble by 2030 to around five hundred million UK passengers.
Ryanair is an Irish airline operator that commenced business in the mid 1980’s with one 15-seater aircraft, has grown to a business that now has a fleet of over 150 aircraft and carrying over two million passengers (About Us 2007). Since the beginning of the century, the company’s growth rate has improved substantially, to a position where it is now supplying air travel to around forty million passengers (see figure 1), with an expectation of this rising to seventy million within the next few years (Ryanair 2007).
The company has achieved this growth by supplying consumers with consistently low prices. It maintained these low fares by creating a “no frills” price advantage (Pettigrew et al 2002), which differentiated its service from the established airline competitors (Porter 2004, p.207 and Kotler et al 2004, p.407). In other words Ryanair offered cheap fares with lower levels of service. For example, free in-flight meals were eliminated. At one stage the no-frills policy included not providing ice for in-flight drinks (Creaton 2004, p.169), although this was reintroduced following complaints.
However, to sustain this position, as Lynch (2006) and Faulkner and Campbell (2005), who submitted that to achieve and maintain low price in the market place, the business itself had to be structured in a way that provided a limited cost base. Ryanair has achieved this situation by taking a number of measures, which include: -
All of these measure have given Ryanair the flexibility to be able to maintain a flexibility of price, from 99p owards, and service and helped it to react effectively to industry changes.
In terms of profit and the financial contribution that Ryanair’s strategy has achieved, as can be seen from the following financial data taken from the relevant company’s website, shows how successful Ryanairs appraach was in 2003, when compared with its main competitors (See table 2 below).
Table 2Net profit percentages
There are significant future challenges facing the low-cost airline industry in general, and Ryanair in particular, which will need to be addressed. Amongst these are the following: -
It increased regional and global harmonisation and development of air travel; Ryanair is bound to face increasing competition within the next five years. This could materialise from developing nations within Europe, where there is significant scope for new entrants (see figure 2)
It could also result from the recently signed “open skies” agreement between the EU and US (Milmo and Gow 2007). Both of these actions could result in loss of market share to new entrants, which would impact adversely upon Ryanair’s current level of success and financial results. Similarly, Ryanair’s own growth predictions could reduce its profitability levels. Whilst growth brings economies of scale, it can increase management costs, which is counter-productive to efficiency (Creaton 2004, p.250).
At present the airline industry is heavily subsidised. As identified with the Bized (2004) report, this benefits the industry players by around £6 billion annually. These benefits include zero VAT, capped landing charges and fuel tax exemption. It is anticipated the removal of these benefits, by introducing the relevant takes could reduce passenger levels by over 22% as a result of the increase in prices. Whilst it is not expected that all these subsidies will be eliminated at once, there is little doubt that for political, treasury and environmental reasons some adjustments will be seen in these areas will be seen within the next five years.
The major challenge facing Ryanair relates to its impact on climate change. Following recent IPCC, the EU are becoming increasingly concerned with the airline industries contribution to this global issue. As a result, these organisations have developed industry targets that are expected to be met within the next 5 years and beyond (see table 3).
Unless Ryanair adapts its corporate strategy to take into account these targets, the result addition costs, or reduction in service will impact severely upon its ability to remain cost efficient and to maintain its present levels of profitability.
As has been advised by a number of researchers (Lynch (2006) and Faulkner and Campbell (2006)) every business needs to review its corporate strategy to address future challenges. There are two ways that Ryanair can address the challenges that have been outlined in the previous section of this paper
In terms of reducing the impact of competition, and making it more difficult for new entrants, the business needs to continue to seek ways to sustain its cost reduction programme. This not only means that it has to ensure that the internal management structure efficiency of the business needs to be as efficient as it has been in the past, but also that the business needs to seek new measures of cost reductions. For example, expanding its automatic check-in processes through all its locations would greatly reduce the business human resource cost. It can also sustain its lower price policy by transferring the cost of flying from ticket cost to other aspects of the travel, for example luggage. This specific action could also offset any potential airport cost increases.
However, the most effective strategy to adopt in order to address all of the challenges is to develop a plan that increases the supply to meet anticipated demand, whilst at the same time reducing the cost of that supply and the effects of increased taxations and meeting its environmental commitment. The most effective plan for this achievement is the conversion of the current fleet to higher passenger capacity aircraft. For example, the introduction of a significant number of Airbus models would double capacity on those flights. From an economic viewpoint it would also reduce costs. For example the maintenance and servicing costs would remain the same because aircraft numbers have not been increased, but will reduce as a percentage of the ticket cost. Similarly, airport costs and other taxes, such as fuel tax would also be reduced per passenger capita. Finally, because of the increased load, and higher efficiency of these aircraft, the emissions level per passenger km would also see a reduction, thus helping the business to meet its environmental targets.
As has been seen from this research, over the past two decades the business economic strategies that Ryanair has employed have been successful in helping it maintain competitive advantage, achieve passenger growth and fulfil its objective of increasing business value.
However, with the future challenges facing the business from increased competition, rising taxation and environmental concerns, the business will need to adopt a that is flexible to change, whilst at the same time enabling it to continue to sustain and achieve the successes of the past. This will mean combining cost reduction with a production and supply system that reduces the impact of potential tax increases, whilst at the same time enabling Ryanair to meet the increasing demands of reducing its environmental impact.
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