Case Study Ryanair

Ryanair: The lowest cost airline in Europe.

There is a tough competition between the three airlines Ryanair, Easyjet, and Air Berlin.
The last recession increased not only the awareness of tourists who are tight with money for flight prices –
but also managers nowadays are forced to care about prices for their business trip. Nearly all go for the
cheapest offer. So, when the airlines could not increase prices during the world financial crisis they invented
somewhat hidden charges for former standard services such as luggage, on-board service and
entertainment, or check in at the airport. Ryanair – calling it the “no frills” concept – makes nearly a fifth of
its revenues with those secondary charges.
The biggest difference between the airlines can be seen in their financial statements. Only the ones with
solid financials and high earnings can bear increasing costs. Additionally, during possible economic
downturns they are able to purchase planes and other companies at favorable prices. Ryanair clearly
dominates this criterion with a high equity share of about 40 per cent and a net profit ratio of about 20 per
cent – simply overwhelming for the airline industry.
Cheap, brash and no-fuss, Ryanair has transformed Europe's aviation industry since it was founded with a
single 15-seat plane operating from Waterford to Gatwick in 1985. The Dublin-based carrier now carries 24
million passengers annually to destinations as far afield as Finland and Poland, using a fleet of 86 mainly
brand-new Boeing 737s.
Its success has been masterminded by a belligerent, rugby-loving chief executive, Michael O'Leary, who
has a taste for profanity and a mission to make air travel available to the masses, rather than merely to "rich
fuckers". He once summed up his business philosophy by claiming that with air fares as low as 99 cents,
passengers had little right to complain.
Ryanair’s low-cost model was initially copied from the U.S-based airline Southwest. The company’s
business model is straightforward: To offer cheap air transportation to fare-conscious customers. Ryanair
targets customers who might otherwise choose alternative modes of transportation or not travel at all. The
company focuses mostly on inter-European, short-haul flights. With an aggressive approach of “innovation
by substraction”, the company simplified the operating model further and ‘out-Southwested’ Southwest
Airlnes. Ryanair’s operating model disrupted many common industry practices and allowed the company to
outperform all of its competitors on costs per seat and per passenger. Ryanair’s closest competitor,
EasyJet, has a cost per passenger 67% higher.
One can analyze Ryanair’s operating model through two different components: Structural and Executional.
The structural component is related to the operations strategy or “doing the right things”, while the
executional component is more about the efficiency of “doing things right”.
Ryanair flies to small secondary airports, which are sometimes located further away from the city centers.
This not only helps reduce airport taxes, but also allows Ryanair to secure subsidies from local city councils
who want to attract Ryanair’s tourists! These airports also allow a quick turnaround time, which means that
the company can achieve a high fleet utilization. As opposed to a hub-and-spoke model used by national
airlines, Ryanair’s model is a point-to-point model, which reduces customer transfer costs.
In order to improve its margins without increasing end-customer prices, Ryanair opted for online direct to
customer sale and bypassed the expensive intermediary that travel agencies are.
Ryanair has the lowest labor costs in the industry (6€ per passenger – vs. 9€ and 17€ for competitors
EasyJet and AirBerlin). To achieve these results, Ryanair has used several levers: A large majority of
Ryanair’s pilots are actually not salaried employees but third party contractors. With these types of
contracts, Ryanair only pays pilots when they are effectively flying and fully utilized. Moreover, employees
compensation is set-up to include no potential professional fees. This incentivizes the employees to use low
cost hotels and transports (e.g. Crews have been reported to be staying at low cost camping resorts in the
south of France). By using Irish labor contracts with its employees, the company avoids the rules on wages
and social benefits that are required by some European countries. Unions have dubbed it the world's
stingiest company. Top of the list of concerns is the way Ryanair recruits. It encourages young cabin crew
with offers of hefty wages, but requires them to pay as much as £2,700 upfront for training. The pool of
willing Irish workers is drying up, so the company is recruiting contract labor from agencies as far away as
the Baltic States and Poland. Pilots were recently told that in order to graduate from older planes to newer
aircraft, they would have to stump up for their own retraining, leaving some complaining of "constructive
dismissal", pointing out that ageing aircrafts were rapidly being phased out.
Ryanair uses a single type of jet (Boeing 737) for its entire fleet. This enables Ryanair to reduce its
maintenance, repair and overhaul costs, reduce its staff training, and increase flexibility in staff allocation.
Additionally, the Ryanair-Boeings have a much higher passenger-capacity than the planes of e.g. Air Berlin
what finally cuts the costs per passenger. EasyJet in contrast runs two different plane types, and Air Berlin
has seven different types in their fleet. That certainly increases costs, as each plane type needs a different
organization with a dedicated maintenance – a very expensive operating model. Additionally, Air Berlin’s
planes are mostly older and have higher kerosene consumption. And although it has a much smaller fleet
than Ryanair, it offers as many destinations causing a higher complexity of the flight network and schedule.
For Ryanair costs are only 3.6 cent to fly a passenger one kilometer.
Ryanair’s business and operating model’s alignment create virtuous cycles through which the business
model enables the operating model, which in turn strengthens the value proposition and the competitive
advantage of the company. For example, the company’s business model is about offering low prices; these
low prices generate high volumes, which strengthen the company’s operating model: The high volumes
enable the company to gain a strong bargaining power with suppliers and secure high fleet utilization, both
of which lead to even lower costs, lower prices and increased competitiveness. Similarly, because the
business model is centered on low prices, the value proposition means that customers have lower quality
expectations, which in turn allows the company to not offer free checked-in luggage or meals, something
that leads to even lower costs and prices. According to Ryanair’s CEO, the business decision to stop
offering free checked-in luggage was not expected to create a revenue stream. It was a way to shift
customer behavior into carrying fewer luggage and simplify Ryanair’s operations (e.g. by shutting down the
‘lost bags operation’). This allowed the company to significantly reduce their costs.

Questions:

1. What is Ryanair‘s competitive advantage in the airline industry?

2. How is Ryanair‘s value chain designed to achieve this advantage? Based on the information
provided in the case and your own experience, proceed as follows:
a. What does an airline‘s value chain look like?
b. How is Ryanair’s value chain designed to achieve its competitive advantage?

Sources:
https://www.theguardian.com/business/2005/apr/23/theairlineindustry.transportintheuk;
https://rctom.hbs.org/submission/ryanair-the-lowest-cost-airline-in-europe/;