Market opportunity recognized
A key driver of the emerging market opportunities is the evolution of the competition environment after the market deregulation. Both Ryanair and Southwest started their business a few years before the liberalization of their respective market: they were already ―in the business‖, meaning that they had time to acquire knowledge, routes and customers. Since the number of contended routes with enough traffic was limited, first movers had the opportunity to gain a competitive edge. After the deregulation process, no one of the major carriers went directly inside the rivals served market: they focused on strengthened their intercontinental hub & spoke system.
New entrants likes Ryanair clearly recognized the opportunity to take advantage from high inefficiency level of incumbents on specific routes. In the United States this highly efficient business model had been already introduced by Southwest, based in the idea of offering ―the speed of the plane at the price of car‖: similarly, Ryanair‘s initial idea was to offer a better alternative to the Ireland-Britain car/ship journey. In this new perspective of competition, their intent was to catch that part of the demand unmatched by traditional airlines due to high fares, based on the intuition that price elasticity was bigger than usually
1 Year ended Mar-31
assumed. Therefore, the implication was to cut all unnecessary services, so-called ―frills‖, in order to lower fares as much as possible. The key Ryanair‘s success factor was the ability to understand the real price-demand curve and to develop a business model able to catch unsatisfied demand trough the introduction of many solutions adopted by charters on scheduled service. Finally, the opportunity, offered by new technologies and the new regulation, to rebalance the supply chain value eroding part of the profit retained by the other actors (GDS, aircraft manufacturer, airports).
Strategy
It is important to highlight how Ryanair‘s low cost business model resources were managed in order to catch the emerging market opportunity. The possibility of quickly adopting and implementing the low cost airline model made possible by regulatory evolution during the 1990s in Europe could only have been reached by a firm facing little constraints on growth. These constraints could arise both on internal and external resources and be related to availability of cash, assets, technology, human capital and other intangibles.
External resources. In order to rebalance the proportion of value retained in the supply chain, Ryanair took direct phone and internet reservations, excluding usage of the GDS system and avoiding high fee commission, close to 7-8 % of total operating costs and approximately 40% of total distribution cost increasing, at the same time, the customer behavior knowledge. Secondly, and alongside the choice of specific market segments, the low cost airlines‘ goals were routes that enabled them to offer simple services, thus avoiding
―complexity costs‖, to price-sensible passengers. Consequently Ryanair used secondary uncongested airports with cheaper fees (landing, aircraft parking or handling facilities); as a first mover it chooses only selected airports that, due to the growth opportunity lead by Ryanair, engaged advantageous long term contracts. Finally, Ryanair has a homogeneous fleet (all Boeing 737s) that allows a reduction in costs of training and maintenance, mainly outsourced.
Internal resources. All the decisions are oriented to obtain the maximum utilization level of internal asset. Air flight networks were point to point routes, whereas traditional airlines used the hub & spoke system to increase connectivity with intercontinental flights. The choice of the latter over the former increased dramatically the amount of resources required at the peak times, constraining the entire scheduling system. In order to maximize aircrafts use, Ryanair minimized turnaround time and tended to start flights earlier in the morning and to end them later in the night. In so doing, each plane yielded eight to ten hours per day of activity compared to the five or six of traditional airlines on the same routes. Moreover, secondary airports were less congested and therefore it was easier to obtain slots, facilitating quicker turnaround time. Lastly, time was reduced through quicker check in and boarding procedures and no free food helped keeping the aircraft substantially clean, reducing ground handling facilities.
Human resources. A large portion of the airline cost was related to labor, accounting for up 40% of the total cost, and thus productivity was paramount. Homogeneous fleets allowed a significant higher level of flexibility and significantly reduced training costs. Furthermore,
through its higher aircraft utilization rates, Ryanair showed the highest level of productivity in terms of passengers per employee.
Intangible resources. The intangible assets are composed by brand value and market knowledge. In the analysis of the market opportunities we have highlighted how the basic customer needs were to arrive safely at a desired destination. Ryanair was able to demonstrate and convince customers that lower costs were not associated with lower safety standards. The second strategic resource was related to a deep customer knowledge management: in the trade-off between a low fares strategy and the necessity to reach financial break even, decisions on prices could only have been based on a deep knowledge of the market and of customer behavior. The introduction of direct sales and limited offer range – only one fare available at a certain time, simple and clear for passengers – made it possible to find precisely the right price levels on those routes that were reaching enough overall revenues.
Entrepreneurial dimension. Ryanair was not, of course, the most docile competitor that any airlines was hoping to face, and perhaps neither an easy ally. When Ryanair entered new routes, it always did so with the most warlike approach, cutting fares by 50% and facing fierce price competition despite the airline industry being characterized by traits such as the regulatory framework, multi-market contacts and several duopolistic routes that clearly allowed collusion.
In figure 3 we summarize the competitive scenario faced by Ryanair, in terms of opportunities and threats on the part of new entrants, suppliers, competitors, customers and substitutive business.
Figure 3. Competitive analysis pre-low cost.
Table 4. Ryanair’s offer with respect to the period 1997-2009 Year No. Routes
(one way) Seats No. Flights Average Flight Distance (km)
1997 40 5,213,060 41,170 455
1998 64 6,474,089 50,063 545
1999 70 7,569,110 56,510 607
2000 90 9,854,466 70,625 674
2001 116 12,507,807 86,641 710
2002 154 16,099,639 105,388 739
2003 276 25,231,130 158,875 784
2004 332 31,304,380 184,715 872
2005 496 40,025,856 220,537 944
2006 688 49,145,859 260,031 955
2007 1112 58,753,977 310,887 1,009
2008 1364 70,682,482 374,215 1,025
2009 1767 77,999,544 412,696 995
Source: OAG database