On Monday, Ryanair is set to reveal a strong set of financial results for the year to the end of March. Analysts estimate that profits after tax could hit over €1.2 billion – or €11 per passenger flown.
This will be a record performance. That is partly due to the sharp fall in jet fuel prices which reflect a collapse in oil markets. It will also be attributed to the new “all-singing and dancing” Ryanair, where smiling and being nice have become key performance indicators.
A narrative has developed around the notion that a simple tilt of the Ryanair customer interface from nasty to nice explains the recent power surge in its business. I disagree.
Something far more profound has happened to the company and its strategy. To understand it in full you have to roll back to the spring of 2013.
At that time Ryanair was already Europe’s most profitable airline. Its management wanted to achieve more. They were poring over monthly data from key competitor Easyjet and noting it was performing well in terms of both passenger volume and profitability.
They also knew that about 70 million passengers (equivalent to 90 per cent of their volume in 2013) were travelling point to point on short-haul European markets, mainly to primary airports, and paying higher fares, but not with Ryanair.
To complicate matters further, they were in the throes of a third bid for Aer Lingus, of which they owned almost 30 per cent.
These factors were all interwoven in the debate that raged about how to plot an expansion strategy. Finding a way to climb a mountain of growth was the challenge. Doing it while staying highly profitable was the hurdle.
Plan for Aer Lingus
At that time, the plan was to continue growing the core Ryanair no-frills, no-nonsense business while using Aer Lingus to attack the segment of the market occupied by airlines linking primary airports and offering a friendlier customer service.
That assumed getting control of the Irish flag carrier which, in April 2013, was no longer achievable.
Implacable opposition from the Irish establishment, trade unions, institutions including the EU and UK competition authorities and Aer Lingus itself killed the third Ryanair bid. Another roadmap was needed.
The idea of launching a new airline with a happy-clappy marketing message, a different brand and a fleet identical to the core was briefly debated to address the 70 million passenger market opportunity.
That was ruled out on grounds of complexity so a third and considerably more radical plan was hatched: re-engineer from the inside out.
Before contemplating any changes in the image of the company, however, two crucial foundation stones were put in place that straddled the summer of 2013.
These reflected the core belief within Ryanair that true equity value creation in short-haul air travel resided in lowest unit costs.
Without that, any marketing makeover would be doomed to failure.
The first move was a cracking piece of business with Boeing during April 2013 to acquire no less than 175 new Boeing 737-800s with a list price of $15 billion. This was negotiated at a time when Boeing was launching the all-new MAX aircraft.
These will replace the 737 from 2017 onwards, and Ryanair used end-of-line economics on the current-generation jet as leverage to secure favourable terms for each plane.
Aircraft are the single largest consumer of capital in any airline, so getting fleet costs right is a key objective. With this deal Ryanair had the capacity to grow the fleet by 50 per cent without compromising on flight cost per passenger. It has since expanded that order even further to add 100 units of the MAX with options on another 100.
These planes provide extra seats and new, efficient engines which will cut unit costs even more and further improve the carrier’s competitiveness.
The second cornerstone transaction happened in September of that year when the Manchester Airport Group, owners of Stansted airport, cut a deal with Ryanair to facilitate growth at the key London airport.
This multi-year scope deal gave the carrier ultra-low operating costs at its largest base once passenger volume growth was delivered.
New growth phase
Equipped with these core cost advantages, Ryanair was now set to roll out a new phase of growth. In September 2013, chief executive Michael O’Leary attended an investor event in Dublin.
Under questioning, he revealed that the airline planned to change its attitude to customers and become nicer and friendlier. Smiling and asking how passengers found their experience flying Ryanair would be hard-wired into the business, he joked.
Most people there, and many inside Ryanair itself, thought this was the latest of the headline-grabbing but ultimately gratuitous soundbites that often emanated from the business.
They were wrong.
Within days things changed within Ryanair itself. With the same ferocity that applied previously to collecting bag charges, a new mantra was broadcast across the company: be nice, or else.
A series of initiatives, including a new user friendly website and app, flying to primary airports and other changes, made the airline more appealing to existing and potential future customers.
The changes to the external skin of the business followed a thorough overhaul of the engine underneath. One without the other would have failed to deliver for shareholders. A spray-painted car without a tuned-up engine usually fails to impress for long.
Combined, an energised cost base coupled with an all-new customer interface opened up a new flank in the long war that is short-haul air travel in Europe, and gave Ryanair a roadmap to advance aggressively from its existing position.
Sherman tank versus go-kart.
Position of strength
A remarkable aspect of this transformation in the business and its strategy is that it started from a position of strength. Usually a board crisis, financial collapse or a change in chief executive marks an inflection point in a company’s strategic direction.
Ryanair’s makeover happened during a period of high profits. It was led by the current CEO, supported by two deputies who now sit on the board, and was executed by a management team that largely were in place during 2013.
In the last 36 months, Ryanair’s stock market valuation has rocketed from €7 billion to over €17 billion. Its passenger volume has swollen from 79 million in 2013 to 106 million this year. It is arguably the most successful low-cost airline in the world in terms of equity value creation and is a stand-out example of ambitious Irish entrepreneurship.
That outcome is a direct function of radical change.
On Monday, it will be explained, by Mr Nice Guy, as something much simpler.
Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.
An Analysis of Ryanair’s Corporate Strategy
Ryanair was founded in 1985 as a family business that originally provided full service conventional scheduled airline services between Ireland and the UK. The airline started to compete within the confines of the existing industry by trying to steal customers from their rivals, especially the state monopoly carrier Air Lingus, outlined by Chan Kim and Renée Mauborgne (2004) as “Bloody or Red Ocean Strategy”. Ryanair seemed to follow a “me-too strategy”; according to Osborne, K. (2005), they “tried to be all things to all people”. Even they started restructuring; their strategy was not enough differentiated and their cost advantage was too low to be profitable. In 1986, they got “stuck in the middle”, outlined by Porter (1985) as they had a limited cost advantage and no service advantage.
Ryanair then created a competitive advantage through the alignment of the three components of business systems;
1) Creating superior value for their customers (outside perspective)
2) Supplying their superior value-adding activities in an effective and efficient manner (which jointly form the “Value Chain”)
3) Possessing over the resource base required to perform the value-adding activities, (inside perspective)
According to Porter (1987), “corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts.” It is seen to be concerned with the overall purpose and scope of the organisation and to meet the expectations of major stakeholders. All aspects of Ryanair’s value chain are important to the company and their shareholders as Ryanair’s decisions add value to both.
The following report outlines the three perspectives of shaping Ryanair’s business system. The value creation dimension of Ryanair’s business model will be outlined, considering the theories of Porter and the more recent authors Kim and Mauborgne (2004). Further, the linkages in the airline’s value chain and their resource base will be analysed, considering Hamel and Prahalad’s (1990) core competency model (inside-out approach).
In section 2, the future challenges of the airline are considered. Ryanair’s strengths and weaknesses will be analysed, internal value creating factors such as assets, skills or resources, to consider how the airline can create alignment to its opportunities and threats, external factors. An stronger “outside – in” approach for Ryanair’s future corporate strategy will be considered, applying Porter’s five forces model, placing the market, the competition, and the customer at the starting point of the strategy process.
I An evaluation of Ryanair’s key strategic perspectives
1) Creating superior value for their customers
The low cost market segment
Ryanair has found a source of leveraging a competitive advantage; the knowledge about the opportunities associated with implementing the low cost strategy, which was created by Southwest Airlines. The Texas airline found a unique approach to the market through re-conceptualisation of market segments. In 1990, Ryanair successfully applied their model in the European market, becoming a “no frills” airline, focussing on short haul destinations and keeping its planes in the air as frequently as possible in a 24 hour period. The new low price market segment, which did not exist before in Europe, could be described as the development of a ‘blue ocean’, uncontested market space through the expansion of boundaries of the existing industry, outlined by Kim and Mauborgne (2004). Ryanair’s low fares created demand, particularly from fare-conscious leisure and business travellers who might otherwise have used alternative forms of transportation or would not have travelled at all (Case Study, p. 3). The competition became less relevant and allowed Ryanair to develop and sustain high performance in an overcrowded industry. Up to now the airline benefits from the early profitable and rapid growth within the blue ocean and successfully executes the low cost business model, which became obvious when the airline announced that it has beaten its own downbeat forecasts to record a 29 % increase in pre-tax profits and 19 % passenger growth, having carried more than 27.6 million passengers in the past financial year (Jameson, A., 2005).
Ryanair’s position within the industry
However, ‘blue oceans’ are not easily protected and Ryanair has been facing competitors that try to copy their low cost approach. Further, Ryanair has always been competing within the ‘red ocean’, by targeting a broad range of customers, e.g. the business segment and “stealing customer from rivals”. This outlines that Kim and Mauborgne’s strategy approach cannot be seen as exclusive. Competing with new entrants of competitors (and differentiators), Ryanair was able to launch an “all out war”, lowering prices and remaining profitable whilst increasing the frequency of flights and establishing new routes (Case Study).
According to Porter (1980, 1985), the relative competitive position within an industry lies at the core of success or failure of firms. He defined two basics types of competitive advantage; cost leadership and differentiation (and focus). Ryanair set out to be best in the budget market segment, becoming the lowest cost airline in its industry (cost focus), e.g. no paper tickets, no passenger meals, no pre-arranged seating, enabling to cope and remain profitable, even on low yields. The airline constantly strives to reduce or control four of the primary expenses involved in running a major scheduled airline; their aircraft equipment costs, personnel productivity, customer service costs, airport access and handling costs. The airline deals successfully with competitive forces and is Europe’s leader in low fares by generating a superior return on investment (Osborne, 2005). This supports Mintzberg’s argument of price leadership being more relevant to competitive advantage than cost leadership. Planning to turn into a “no-fares-airline” by offering flights for free (Case Study), Ryanair can be argued to follow price leadership as one of the six ways to differentiation outlined by Minzberg. According to Mr O’ Leary (2005), new planes will enable him to drive down average fares by 5% a year causing a “bloodbath”. We are going to show up in your market and trash your yields.” (“Ryanair rolls out plans for European domination”, 2005).
Differentiation through price outlines the superseding of Porter’s generic strategies by the resource/competence-based strategy frameworks. In addition to low prices, Ryanair’s branding emphasises on punctuality and efficiency, which is mainly achieved through operating from secondary airports. According to Ryanair, their success is not just due to their low fares “but also a winning combination of our No.1 on-time record, our friendly and efficient people and our new Boeing 737-800 series aircraft” (Ryanair, 2005). It can therefore be argued that in a globalized competitive environment, even cost leaders need to differentiate their message (‘hybrid strategy’), contradicting Porter’s original idea of fundamentally different routes to competitive advantage.