Ryanair: Its Vulnerability and Exposure to the Macroeconomic Environment

Topics: Average cost, Airline, Cost curve Pages: 8 (2136 words) Published: November 27, 2012
Ryanair: Its vulnerability and exposure to the macroeconomic environment

Business vulnerability is a measure of how susceptible an organization is to external events and the possible consequential impact on its business costs and profits. In this essay, I will assess the vulnerability of Ryanair and its degree of expose to macroeconomic shocks. I will also analyse Ryanair’s performance since 2000 in comparison to its rival BA, as well as their strategies in how effective they are in raising profits and minimizing their exposure.

Ryanair is a low cost Irish airline and one of the most profitable in the airline industry. However, it can be seen as vulnerable and exposed to macroeconomic shocks. To a degree this is due to Ireland’s openness. Desmond Gillmor describes it as “one of the most open of economies,” and “because of this high degree of openness, the economy is strongly influenced by the external conditions prevailing in the international economic system.” (Gillmor 1985, p.5)

The airline industry in which Ryanair operates is fairly elastic as shown below.

(Knight, B. 2006, p. 14)

From the graph, one can see that if the GDP increases or decreases by 1 per cent, the demand for air travel will increase or decrease by 1.7 per cent: air travel and Ryanair is fairly exposed.

A firm’s average total cost curve (shown below) and the steepness of it can express the firm’s vulnerability. The steepness of the curve is mainly determined by the scale of fixed costs and as a result, those firms will experience more volatility in their financial performance. In addition, increasing returns to labour which is particularly found in professional services also impacts on the gradient. Furthermore, firms which are dependent on external inputs, for example, in construction, are vulnerable to shifts in the curve due to increases in the costs of their inputs. output

saucer e.g. shoe shiner
flute e.g. airlines
saucer e.g. shoe shiner
flute e.g. airlines

The ‘flute’ curve shown above reinforces the vulnerability of Ryanair due to its steepness. This can be explained by high fixed costs such as a large number of fleet and the heavy dependency on external inputs such as fuel. The graph below shows that since 2003 Ryanair has more than doubled their fleet to 163 aircraft.

(Ryanair, 2008, p. 3)

The latest Chairman’s Report released by Ryanair reports on the effect of fuel prices: “The high and rising price of fuel is of major concern to Ryanair and the entire aviation industry. Last year our hedging programme delivered fuel at an average cost of $65 per barrel. Today we are facing prices of approximately $130 a barrel. Ryanair has responded to these higher oil prices by reducing costs across all other areas.” (Ryanair, 2008, p. 4) They are also exposed to fluctuations in foreign exchange rates, the extent to which they made a loss of over €5m due to changes in the American dollar and British Sterling exchange rates against the euro. This exposure can be minimized by hedging with financial derivatives.

Even though Ryanair incur costs that they have little control over such as fuel, “there are others that will influence the costs per seat-km flown that they can influence. These include aircraft utilisation, aircraft turnround times, seat pitch, the use of fewer crew and cheaper secondary airports, along with direct selling and paperless ticketing.” (Pitfield, D. E. 2007, p. 77) These factors all form a part of Ryanair’s strategy to penetrate the market further and reduce its vulnerability by exploiting market imperfections.

“Ryanair has responded to these higher oil prices by reducing costs across all other areas. A company wide pay freeze was implemented and redundancies have been suffered at our Dublin call centre. Significant cost reductions have also been achieved on airport, maintenance, and handling contracts, and we will benefit from the addition to our fleet of cheaper...
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