Ryanair, Europe’s first and largest low fares airline, was established in 1985 by the Ryan family. Ryanair is a low fare scheduled passenger airline serving short haul, point to point routes between the UK, Ireland, Continental Europe and Morocco with headquarters based in Dublin. After accumulating 20 million pound in losses in 1990/91, the Ryan family invested 20 million into the company, imitated Southwest Airlines low fares model and re-launched under new management headed by Michael O’Leary as Europe’s first low fares airline.
Ryanair is Europe’s top airline consisting of a fleet of over 400 Boeing 737 aircrafts and a team of more than 14,500 highly skilled aviation professionals. They operate more than 2,000 daily flights from 86 bases connecting 215 destinations in 37 countries. Ryanair has a 33-year unblemished safety record and is the highest rated airline in terms of flight punctuality, overtaking competitors such as Easyjet, Lufthansa and Aer Lingus. Ryanair started year one operations with a count of 5,000 passengers and became the first European airline to have carried over one billion passengers in 2017. Ryanair serve on average 130 million customers per annum and had the most visited airline website in 2017/2018 (History of Ryanair | Ryanair’s Corporate Website 2018).
Ryanair’s profit margins have exceeded those of other European airlines making it one of the greatest business successes in the airline industry. Ryanair has vowed to connect the people of Europe with low cost travel and are committed to reducing the cost of air travel while reducing their impact on the environment (Ryanair Annual Report. 2018).
Ryanair’s Cost Leadership Strategy
Regardless of size, all organisations must have a mission to establish the direction of the business and a strategy to identify how it will get there. Ryanair’s mission is “to offer low fares that generate increased passenger traffic while maintaining a continuous focus on cost containment and efficiency operation (Ryanair Annual Report. 2018).
Strategies are used to utilize opportunities and strengths, defuse threats and evade weaknesses. The competitive strategies of a company are significant because the chosen strategy has a major effect on how the organisation considers the ten operations management decisions. The three main strategies include differentiation, cost leadership and response. Although there is potential to compete on all three at once, most organisation concentrate on one of these strategies. Each strategy creates an opportunity for an organisation to gain a competitive advantage within the market. The concept is to establish customer value in an efficient, effective and sustainable manner (Heizer, Munson and Render 2017).
Ryanair has experienced steady growth throughout the years and has consistently turned over profit year on year. Much of this success is due to Ryanair’s cost leadership strategy. A low-cost strategy involves scrutinizing all ten operations management decisions in detail to lower costs while maintaining the customers expectation of value. A low-cost strategy does not suggest low value or low quality, it simply means achieving maximum value as perceived by the customer, thereby building a sustainable competitive advantage (Heizer, Munson and Render 2017).
Strategic OM decisions in place that drive Ryanair’s low-cost strategy
This assignment will focus on two of the ten operations management decisions, location and service design, to establish how they are utilized to compliment Ryanair’s cost leadership strategy.
With the growing global nature of business, location is one of the most important strategic decisions made by organisations. Location has a huge impact on both fixed and variable costs, overall risk and revenue. Location choice may also be motivated by taxes, wages, cost of materials and rent. Location decisions that effect a low-cost strategy are of particular importance and the organisation must take all aspects into careful consideration (Heizer, Munson and Render 2017).
1.1 Airport charges and routes
Ryanair has strategically chosen the location of its airport destinations and routes to compliment their low-cost strategy. Ryanair prioritises airports that offer competitive prices. The company has managed to decrease airport charges such as landing fees, passenger loading fees, aircraft parking fees and noise surcharges by selecting secondary airport destinations. For example, Ryanair has selected Stansted as its primary London airport over the more hectic airports, Gatwick and Heathrow. This decision has enabled Ryanair to bypass the busy main airports and significantly reduce airport related charges (Johnson, Scholes and Whittington 2008).
With Ryanair operating many daily flights they have been able to bargain for more attractive access fees due to the high capacity they provide for the airports. They also keep costs down by selecting cheaper gates and making use of outdoor boarding stairs instead of jetways. Ryanair also take advantage of the less congested airports by delivering higher rates of on time departures, quicker turnaround times and less delays (Geller, Folan and Shain 2013).
Ryanair also contract out certain services at some airports as an additional method to save on costs. Ticketing, passenger and aircraft handling and various other services are carried out by third parties. They negotiate competitive rates by entering into fixed-price, multi-year contracts.
Ryanair have also chosen to operate direct flights to avoid paying the costs of providing through services such as baggage transfer, passenger assistance and delays resulting from late connecting flights associated with interlining with other airlines (Ryanair Annual Report. 2018).
1.2 Dublin Headquarters
Ryanair’s profits are subject to the Irish corporation tax and this tax has a major impact on Ryanair’s cash flow, financial position and operation systems. Irelands corporation tax is currently at a statutory rate of 12.5%, a significantly lower rate that most other European Union member states, further cutting costs for Ryanair (Ryanair Annual Report. 2018).
1.3 Growth of new routes and bases
Ryanair opened 4 new bases in 2018 including Burgas, Memmingen, Naples and Poznan. The fleet size is also expected to increase in 2019 to almost 460 aircrafts, facilitating further growth of traffic to 139m guests. Ryanair’s new Polish charter airline, Ryanair Sun, provided charter flights to and from Poland for the Summer of 2018 and is expected to turn over profit within its first year in operation (Ryanair Annual Report. 2018).
2. Ryanair’s Service design
Every aspect of Ryanair’s service is designed with cutting costs in mind. The aim is to provide the customer with the highest level of service attainable at the lowest possible price. In 2017, despite a challenging trading environment due to congestion in Europe, increased fuel prices and the recovery from the September 2017 rostering issue, Ryanair’s services yet again produced another strong performance. Profits after tax increased by 10% to 1.45bn, traffic increased by 9% to over 130m, average fare fell 3% to 39.40, unit costs were cut by 1% (Ryanair Annual Report. 2018).
2.1 Fare Prices
Ryanair’s whole business model is to cut costs as much as feasibly possible and to pass these savings on to the customer in the form of low fares. The low fares are intended to encourage demand, and in particular, to make flights more attractive to passengers that would usually take other forms of transport. The tickets are sold on a one-way basis, thereby eliminating minimum stay requirements for passengers and making the tickets even more attractive. The prices of the fares are based on demand, with higher ticket prices set for flights in high demand. The fares also increase closer to departure dates (Ryanair Annual Report. 2018).
In October 2009, in an attempt to further cut costs, Ryanair abolished all traditional check-in desks in favour of simple baggage drops (Geller, Folan and Shain 2013). Today, all Ryanair flight bookings are made through the company’s website, mobile app or Global Distribution Systems, eliminating travel agent commission. All passengers are required to check-in online, a system used by Ryanair to condense check-in lines and passenger handling expenses, passing further savings on to the customer (Ryanair Annual Report. 2018).
Ryanair strategically use a young homogenous fleet from one single manufacturer to reduce the cost of fuel, maintenance, staff training, overheads and the purchases and storage of spare parts. Ryanair exclusively operate a fleet of Boeing 737-800 jets, each with 189 seats with an average fleet age of 6.7 years (Ryanair Annual Report. 2018).
Although Ryanair depreciates its aircrafts over an estimated useful life of 23 years, the company disposes of its aircrafts well before the end of their useful economic lives. To further save on maintenance costs, Ryanair usually sell them on the secondary market prior to the first major maintenance repairs (Geller, Folan and Shain 2013).
Ryanair’s cost saving measures also take cabin design into consideration. The high-density layout of the entirely economy class cabins and high load factors capitalize on the number of passengers per flight. Robust light weight seats also conserve fuel by decreasing the weight carried (Ryanair Annual Report. 2018).
2.3 Future fleet growth
Ryanair is Europe’s greenest and cleanest airline. Fleet growth is managed in a cost effective and environmentally conscious manner. By investing in new aircraft and engine technology, Ryanair can conduct aircraft operations in the most environmentally sustainable way possible while reducing costs such as fuel consumption and maintenance. The company expects to increase their fleet size to 585 aircrafts by March 2024 (Ryanair Annual Report. 2018).
The Boeing 737-MAX-200 (“Gamechanger”), is due to deliver in Spring 2019. These new aircrafts will seat 197 passengers, 8 more than the current 189 seat Boeing 737. New engines combined with aerodynamic advances will reduce the quantity of fuel consumed by up to 16% per seat compared to the Boeing 737 (Ryanair Annual Report. 2018).
2.4 In-flight Service
The low prices offered by Ryanair are facilitated by offering customers a lower level of service. This lower level of service is evident both pre-flight and in-flight. Ryanair do not offer the option of business lounges and there is no segregation of first class and economy class seats. Instead, all aircrafts only offer standard economy seating options.
By operating point-to-point short haul flights, Ryanair has cut the unnecessary “frills” from flights such as free in-flight meals and movies. The absence of complimentary food and drinks in-flight has resulted in less clean up time in between flights has also contributed to quicker turnaround times. However, Ryanair still make small food items and drinks available in-flight for purchase but at fairly high prices, turning a potential cost into a source of revenue (Ryanair Annual Report. 2018).
Future Challenges for Ryanair’s Operations – Brexit
As the U. K’s largest airline, Ryanair had actively pushed for a “remain” vote in the recent Brexit referendum. With the outcome undesirable for Ryanair, a period of political and economic uncertainty is currently in place, both in the U.K and the EU. Ryanair has chosen to remain cautious during this fragile situation aiming to reduce any possible economic damage or plunge in consumer confidence. The uncertainty for the business and regulatory environment has forced Ryanair to put contingency plans in place for all eventualities. Ryanair have now decided to focus growth away from the U.K market with an emphasis on developing growth within the European airports over the next two years (Ryanair Annual Report. 2018).
Ryanair has excelled at remaining the dominant low-cost no-frills airline in the European market. Their low-cost strategy and operational management decisions has guaranteed them a competitive advantage within the market and allowed them to preserve low costs while securing elevated profits and rapid expansion. However, due to the broadening of the airline industry post deregulation and the continued expansion of the industry, Ryanair must adapt and find ways to maintain their competitive advantage in order to retain profitability.
Due to competitors edging closer to Ryanair’s low prices, regulations and fluctuating fuel prices, Ryanair may have to work to improve the publics image of the company to retain passenger loyalty and numbers.