Case Study

LOW PRICES, HIGH PROFITS- BUT INCREASING COSTS

When the Ryanair family launched Ryanair as Europe’s first low fare, no frills airline in 1985, travelers wondered how the firm would ever make money offering 99 Euros from Dublin to London when the cheapest flights available on British Airways or Aer Lingus cost more than twice as much. But the Irish company has not only made money, it has grown into one of Europe’s largest and most profitable airline, hauling nearly 51 mn passengers in the fiscal year ending in March 2008 and earning 481  mn Euros net profit on revenues  of 2.7 bn Euros.

From the beginning, the firm’s executives have pursued a very straightforward corporate strategy. It focused exclusively on providing low cost air transportation for consumers within the European  Union, and it sought a competitive advantage by offering the lowest fares of any airline operating in Europe.

Of course, a low price competitive strategy can be profitable only when the firm’s costs are also low. Therefore all of Ryanair’s functional activities and operating policies are designed with efficiency in mind. For instance, the firm owns rather than leases its airplanes and nearly all of those planes are Boeing 737s, thereby allowing standardization of maintenance activities and parts inventories. The company also concentrates its flights to and from underutilized regional airports such as Stansted Airport outside of London and Charleroi south of Brussels. Such airports offer the company more favorable terms with respect to taxes, facilities fees and ground handling charges than more popular and congested airports closer to major cities. The lack of congestion helps reduce turnaround times and thereby lower costs by increasing utilization rates from planes and flight crews. It also helps Ryanair achieve the best on time record of any European airline, 89 percent.

The firms operating efficiencies have helped it successfully implement its low price competitive strategy and holds its average fare below 35 Euros; substantially lower than even EasyJet’s, its strongest low price competitor. Unfortunately, many of its los cost savings come at the expense of customer comfort and convenience. Not only do customers have to find their way to and from small airports far from big cities, they have to carry and stow their own bags and do without meals, drinks and other in flight services. And there is not much room for them to stretch out and relax during their flights since it carries 15 % more seats per aircraft than traditional airlines. It is even harder for customers to buy their tickets because the company pays no fees to computer reservation systems and no commission to travel agents.

Advertising and promotion, however, are among the few areas where Ryanair has not tried to cut costs below its competitors. With the exception of the sales commissions mentioned above, the company’s marketing costs are about the same per passenger kilometer as those of more traditional airlines. Even the most frugal flyers would not seek out its cheap fares without being aware- and being frequently reminded- that they exist. And the firm must also maintain an extensive Website and call centre to facilitate the direct sale of tickets.

While Ryanair’s low-cost/low-price strategy has been very successful so far, there may be some turbulence on the company s horizon. The European Commission has ruled that the million incentive that the airline received from the Charleroi air-port in Belgium was excessive and anti competitive, and it ordered the firm to pay back 4 million. Consequently, the company may have to  renegotiate its agree- ments  with other airports and thus will higher operating costs, costs which have already escalated  in recent years because of soaring fuel prices.

Some analysts also question whether its corporate development strategy and growth objectives might be overly optimistic. In 2007, the airline was operating 134 Being 737s, and it had placed firm orders for 117 more planes to be delivered over five years. The firm’s growth objective was to double in size to over 84 mn passengers by 2012.But some experts doubt that the segment of travelers willing to sacrifice comfort and convenience for low fares is sufficiently large to make such aggressive development plans obtainable. While Its cost structure should enable the firm to make money at lower fares than the major airlines can match, some customers may see those low fares as a poor value since they have to carry their own bags and do without frequent-flier miles.

                                                     On the other hand, while the double whammy of soaring fuel prices and slowing economic growth in Europe are like to squeeze it profitability in fiscal 2010, it threatens to generate major losses for the full service carriers like British Airways. In order to survive, those carriers are cutting flights to smaller cities, charging extra baggage and snacks, and reducing the seats available for frequent flyers. With competition like that, maybe its low-cost, no-frills flights aren’t such a bad value after all.

Questions

·         DO A SWOT

·         What is the benefit of having own aircraft against lease aircraft?

·         What more can a low cost carrier do to earn revenues?

·         How can the STP be done further?

·         Comment on IMC discussed in class with special focus on web marketing and PR as well as publicity