Description

Ryanair1

From industry-based, resource-based, and institution-based views, how can we understand the

drivers behind Ryanair’s success? From an ethical standpoint, is CEO Michael O’Leary a loose

cannon or an astute strategist?

Charles M. Byles, Virginia Commonwealth University

Always in the news and not shy of adverse publicity, Ryanair has been soaring in profits for the past

few years. In November 2011, CEO Michael O’Leary announced a 20% increase in profits that in his

words was “a testament to the strength of Ryanair’s lowest fare/lowest cost model.” Ryanair did not

start with this model, however. Founded in 1985 with its headquarters in Dublin, Ireland, Ryanair

began flights between Ireland and the UK and later launched services on the lucrative Dublin-

London route after challenging the British Airways-Aer Lingus duopoly. But its initial foray into the

airline business was not profitable. As a result of severe financial losses in 1990, Ryanair changed its

strategy, adopting the Southwest Airlines business model and becoming the pioneer of low fares in

Europe. The next two decades showed growth from 745,000 passengers in 1990 to 73.5 million in

2010. Based on passengers carried, the airline is now Europe’s largest low-cost carrier and second

largest airline.

Resources and Strategy

While Ryanair competes primarily on low cost, it also differentiates (through certain aspects of

customer service) and raises revenues on non-ticket items (through ancillary services) as a means of

offsetting the lower fares. Although successful, this strategy has been controversial. The airline has

been accused of concealing its ancillary fees and offering customer services that are only available for

a fee. How does Ryanair deliver on its low-cost strategy? Five value chain activities are key to its low-

cost advantage: (1) operations, (2) human resource management, (3) customer service, (4) use of the

Internet, and (5) ancillary revenues.

Operations

Use of a single model of aircraft (the Boeing 737-800) is the primary method of cost control because

it allows minimization of training and maintenance costs, efficient management of spare parts

inventory, and more flexible scheduling of flight crews. The popularity of the 737 model also means

that flight crews are more readily available for hire. Finally, because Ryanair purchases a large

number of aircraft from Boeing it can negotiate price concessions.

Other cost savers are the use of secondary and regional airports that offer competitive prices, the use

of outdoor boarding stairs instead of jetways, having all passengers check in on the Internet, and the

introduction of a checked bag fee, which reduces the number of bags carried by passengers (hence

reducing handling costs and the number of check-in desks). Airports are chosen because of their low

fees rather than for market reasons. Some agreements with secondary and regional airports base the

airline’s fees on traffic volume.

The short-haul flights operate without the costs of meals, movies, and other in-flight services

expected by passengers on longer flights. While the distance of the secondary airport from the main

cities and the charge for checked baggage are inconvenient, a benefit is more frequent on-time

arrivals, quicker turnarounds (fewer bags to check), and more frequent on-time departures because

these airports are less congested. Quicker turnarounds and more frequent on-time departures are

also enhanced because the airline offers neither connecting flights nor the transfer of baggage to

other flights, whether operated by Ryanair or not.

Human Resource Management

The productivity-based incentive system is another activity contributing to greater ancillary revenues

and efficiency. Flight attendants receive commissions for onboard sales and, along with pilots,

payments based on the number of hours or sectors flown. For the 2010 fiscal year, productivity-

based incentives accounted for approximately 39% of a typical flight attendant’s total earnings and

37% of a typical pilot’s total compensation. The cost of customer service is reduced by outsourcing

ticketing and other services at airports. For these services, Ryanair has been successful in negotiating

fixed-price multi-year contracts.