hard times at ryanair
...e industry and classed as its raw materials are: - Oil - Airplanes Products that are also supplied to the industry but are not classed as essential in the business process are: - In flight meals The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services. The following section discusses goods that are supplied to the airline industry: Oil Oil is an essential raw material for strategic ambitions of the airline industry. If oil was not available then clearly the industry could not be classed as viable. However although the industry cannot operate without oil this itself does not put the industry in a weaker position due to the fact all substitute industries also rely on the need for oil so no industry or rival competitor can gain a competitive advantage over the low cost airline industry. Although the LCAI industry cannot force a lower price for oil from their suppliers it does not impinge on their business profitability. OPEC (Organisation of the Petroleum Exporting Countries) has the same price structure for all buyers throughout the world so no competitor entering this industry would again be able to gain a competitive advantage. Overall the industry is not at a loss because all suffer from the stringent costs involved with oil. In flight meals The low cost airline industry prides themselves on low cost travel at all costs. Thus they ensure customers know before they travel that if they want food they have to pay the additional price for, so “in flight meal” suppliers cannot hold the industry to ransom as 1, the industry could just eliminate all food and drink during flights 2, industry could switch to another supplier as there thousands of companies that could offer the same service. Thus the industry has the power over these suppliers Planes themselves On September 12th 2001 orders across the world for “new planes” were instantly cancelled. “Airliners” instantly knew problems were about to occur for the industry as passengers suddenly viewed airlines as real terrorist targets. Thus many “flag ship” airliners cancelled orders from airplane manufactures such as Airbus and Boeing to try and halt the decline in profits. This cannot be said for the “low-cost carriers”. In 2004 alone Ryanair placed an order for 150 Boeing 737s, a deal that ensures the Dublin-based carrier will remain purchasing Boeing airplanes for the next 10 years and in 2002 Easyjet purchased an additional 120 which goes to show the current industry leaders can only view the industry as a climber This shows that the “low cost” industry is still viewed as an expanding industry. Usually fly only one model of plane to keep down maintenance and training costs Thus overall low bargaining power exists for suppliers as · The market is served by hundreds of small food suppliers/cleaners · The airline industry has no control over the price of oil (neither do anyone else) · Switching costs from one supplier to another is low · There is no possibility of the supplier integrating forwards in order to obtain higher prices and margins. 3.2. BARGAINING POWER OF BUYERS In an era of increasing globalisation, foreign travel - whether for pleasure or on business - is now a common experience. The increasing affordability of air travel has opened up new destinations and possibilities; it has expanded people's horizons, opportunities and expectations “Future of Air Travel White paper” Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other- all at the expense of the industry (Porter 1980) For the purpose of this report and so that no doubt exists for the reader “buyers” are classed as passengers, this is because with the airline industry being a “service” the good they are producing is “getting people/cargo from where they are to where they want to be” As the low cost airline industry deals with members of the public and not businesses (on a large scale) the author feels the criteria set out by Porter is not directly relevant to this industry i.e. no buyers could possibly pose as a credible threat in regard to backward integration. · They buy in small numbers, there are millions of potential customers (AIRLINE) · The airline industry comprises a large number of operators but they operate in different regions so are not directly in competition with each other (AIRLNE) · The supplying industry operates with high fixed costs · The product is differentiated in that it can get you to your location for a low cost price and fast turnaround, regional airports. This cannot be said for channel tunnel or ferries, as the customer first needs to travel to the location and then need to get to the location once into Europe. · Switching to an alternative product is relatively simple and is not related to high costs. As airliners do not compete directly on destinations if a business flier they · Customers could not produce the product themselves, · The product is not of strategical importance for the customer in that people do not have to go on holiday- it as a need and not a necessity · There is no possibility that the customer could integrate backwards. Overall the airline industry has the power over the “buyer” but this is because they do not compete in direct competition with each other at “uk bases” and European destinations. Although it is up to the buyer where they would like to travel to in the end they pick which airline they would like to go with. 3.3. THREAT OF ENTRY New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. Prices can be bid down or incumbent’s costs inflated as a result, reducing profitability. (Porter 1980) · The threat of new entries will depend on the extent to which there are barriers to entry. These are typically · Economies of scale (minimum size requirements for profitable operations), · High initial investments and fixed costs, · Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets, · Brand loyalty of customers · Protected intellectual property like patents, licenses etc, · Scarcity of important resources, e.g. qualified expert staff · Access to raw materials is controlled by existing players, · Distribution channels are controlled by existing players, · Existing players such as Easyjet and Ryanair benefit from long established relationship with AIRBUS etc · High switching costs for customers · Legislation and government action 3.4. PRESSURE FROM SUBSTITUTE PRODUCTS All firms in an industry are competing, in a broad sense, with industries producing substitute products. Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge. (Porter 1980) A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products. Substitutes to the airline industry are as follows: · Ferries · Rail · Hovercraft · Euro Tunnel · Bus/Coach Similarly to the threat of new entrants, the treat of substitutes is determined by factors like · Brand loyalty of customers, · Close customer relationships, · Switching costs for customers, · The relative price for performance of substitutes · Current trends. · Price Performance 3.5. INTENSITY OF RIVALRY AMONG EXISTING COMPETITORS Rivalry among existing competitors takes the familiar form of jockeying for position- using tactics like price competition, advertising battles, product introduction, and increased customer service or warranties. Rivalry occurs because one or more competitors feels the pressure or sees the opportunity to improve position. (Porter 1980) This force describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry. Competition between existing players is likely to be high when · There are many players of about the same size, · Players have similar strategies to achieve low cost · Differentiation exists in the format of achieving low prices and also by operating in different locations · Low market growth rates (growth of a particular company is possible only at the expense of a competitor) · Barriers for exit are high (e.g. expensive and highly specialized equipment). In the UK airline market there are low exit barriers 3.6. MODEL APPLIED TO INDUSTRY 4. FIVE FORCES & PEST DISCUSSED FURTHER Overall the industry seems an attractive one for the current “low cost” airlines to be in. Although there is a large number of new entrants, Mintel suggest that even if the current growth rate halves it will still provide good business (February, 2003). There is currently a large degree of growth within the market and therefore the potential for carrier to continue expanding (such as Ryanair who have recently purchased an additional 150 planes). Even though there has been a high degree of new entrants into this industry over the past few years they are opening up new markets as opposed to stealing existing customers from the current operators. “Ryanair also launched 18 routes during the month, including its first flights to Estonia.” Times Newspaper However this may become more of an issue as the market begins to slow, ultimately these new entrants may well be taking potential customers if a number of airports support a small threshold area. Direct competition has recently started with Ryanair moving into Easyjet traditional home base of Luton. It is here that Easyjet would need to encourage brand loyalty. At the same time the current companies have longer established relationships with suppliers such as Boeing and Airbus so can therefore negotiate harder than small new entrants putting them at a cost advantage. Whilst there are a number of indirect substitutes for the “low-cost” industry they have a differentiated product in terms of cost and ease. This makes it difficult for indirect substitutes such as Euro Tunnel to compete, making it more expensive and time consuming to use it. Whilst at the same time direct substitutes such as BA can’t compete on price but also on ease, they have the online booking system but details of the booking cannot be altered afterwards as they can with Easyjet. It is this flexibility that cannot currently be competed with. The industry does however seem attractive to new entrants with low barriers to entry and relatively low buyer power in a market that is enjoying overall growth. However the author believes that even though Porters Model signals that this is an appealing market it is believe by the author that it would be hard for new airlines to try and create a presence here as one of the major advantages of Ryanair, easyjet, bmibaby and Flybe, is that because of the way they operate if a company did try and break in they would probably be swamped by them. Their combined market power is now such that whoever tries to compete will be confined to operations from a limited base and with a limited network, which may prove to be much less viable. From the analysis utilising both PEST Analysis and Porters Five Forces the “low cost” industry seems to be an attractive industry for all current “low cost” carriers to be in. Although the industry has attracted a large number of new entrants over the past few years and (on a European wide basis is likely to develop even further) Mintel suggest that even if the current growth rate halves it will still provide a good business for them to be in “currently the low cost industry is estimated to cater for over 50 million travellers a year. The average rate of growth is estimated at around 30%, whilst this cannot continue indefinitely even if the growth rate halves at the current rate it will still provide good business for operators (Mintel 2003). Event taking this further is that for the first time in the UK aviation industry, flights went past the 200 million figures and the government in its 2003 white paper (The future of air transport) predicts that numbers will continue to grow to 500 million by 2030, in addition also in this white paper the government credited the “low cost” revolution for the regeneration of several regional airports such as Liverpool John Lennon Airport and Southampton Airport. Furthermore the government have also pledged to support the expansion of several of these airports, as the government believe they are playing a key role in the economic growth of several regions. Thus the author believes that the government are clearly behind the “low cost revolution” in this aspect. Management of the different low cost companies must delight at hearing news such as this as it gives them a lot more bargaining power when it comes to negotiating the price of landing slots- the author feels the industry should take full advantage of this. The author recommends that management of all companies in this industry should develop appropriate marketing and sales strategies, as the simple fact is that it costs companies the same amount to fly 100 passengers from A to B as it does to fly 1 passenger so it is vital that “bums on seats” are in the highest number possible as this would keep overall costs to a minimum, and ensure that a higher return on investment is made. Overall for the company to enter this industry the author feels the only method would be to arrive in a “big ban” approach i.e. getting your brand known instantly by all- this could include something similar ti the Easyjet documentary on ITV. However for a new company to arrive in a big bang approach they would require a substantial amount of money to be able to compete with the present companies as the author believe in particular with Easyjet and Ryanair could retaliate by offering “free flight promotions” something that both companies have done on a number of occasion “ some part of the massive growth has been derived from massive free seat giveaways” Mintel 2003 Ryanair and Easyjet have been so successful in the low cost industry what they have also managed to see off “the worlds favourite airline” BA in the form of easyjet purchasing Go in…. Although this report was analysing the UK marker the author feels the obvious next step for all in this industry is to expand further across the rest of Europe to try and take a percentage of other countries markets. The opportunity is available for these companies to do this because the European Union has recently expanded by allowing another 10 countries in May to join the constitution Easyjet have already identified the potential available here “Easyjet set its sights on the European Union's newest entrants by revealing that it intends to begin serving Budapest and the Slovenian capital, Ljubljana. Flights to both cities will begin on May 1, the day they become part of the EU. An Easyjet spokeswoman said: "We've been looking at eastern European countries for quite some time." A stumbling block the author feel could occur is the reluctance of certain governments to allow the “low cost” carries to compete in a particular country. For example Ryanair recently had trouble with the French government following a complaint from Air France that they felt Ryanair were receiving “local government” money to fly from London to Strasbourg which Air France felt was anti-competitive, obviously the French government sided with Air France even though Air France is heavily subsidised itself by the French government. The outcome of this case will have a major ripple effect impact on the rest of the industry. 4.1. CRITIQUE OF PORTER MODEL Evidence to support the claim that the Five Forces analysis explains how profitable a firm is likely to be in an industry is inconclusive (Rumelt, 1991 cited by Bowman and Asch, 2002). It is very unlikely that Easyjet Ryanair etc would simply leave the market place if it were ever deemed unattractive. Research has suggested that firms are often best at staying put, as established firms such as Easyjet can still be profitable even if the market becomes unattractive. (Bowman and Asch, 2002) It also implies that each force acts in the same way to all competitors (Cambell et al, 2002). This is however not the case, for example Easyjet have built up a relationship with Airbus and Boeing and therefore supplier power may be reduced in comparison with small new entrants. At the same time Easyjet have developed a strong brand, which will put them at reduced risk from the threat of substitutes. 5. RECOMMENDATIONS The International Air Transport Association has compiled information showing that the overall the air transport market within Europe is set to grow substantially in the coming years. They showed an annual growth increase of 5.1% from 176 million passengers in 1999 to 215 million passengers in 2003 (Mintel, February 2003). Cranfield University compiled figures on behalf of Easyjet that showed low cost airlines held 4% of the total European domestic and international market and that this is expected to increase by 12-15% by 2010 (Mintel, February 2003) Currently the low cost system is estimated to cater for over 50 million travellers a year. The average rate of growth in the low cost market is estimated at around 30%, whilst this cannot continue indefinitely even if growth halves at the current rate it will still provide good business for operators (Mintel, February 2003) The analysis of the external environment highlighted that the overall aim of ‘low-cost’ airlines is to reduce their overall costs and pass this on to the passenger in terms of low airfares. The internet as played a crucial part in this and will continue to do so. Th...