Ryanair - Economic Analysis

Topics: Airline, Low-cost carrier, Southwest Airlines Pages: 12 (3532 words) Published: December 1, 2010
ANALYSIS OF RYANAIR LTD. IN EUROPE

OBJECTIVE
The objective of this report is to The aim of this report is to analyse Ryanair using appropriate economic tools and models such as Structure- Conduct- Performance Model, Porter’s Five Forces and PESTEL Analysis. Recommendations will then be provided based on the analysis.

INTRODUCTION TO RYANAIR
Ryanair is an Irish airline founded in 1985 by Tony Ryan who teamed up with Christy Ryan and Liam Lonergan to set up the airline (Creaton 2004). The company started off with 5,000 passengers in 1985 and in 2009, they carry over 65 million customers (Airport Watch 2009). In 1991, when Michael O’Leary became the deputy CEO, he developed a strategy heavily influenced by Southwest Airlines in the US, the world's first low-cost carrier and has posted its first ever profit since it started operating (Vallely 2006). By December 2009, Ryanair is Europe’s leading low cost airline serving 26 countries with 150 destinations and through 1000 routes (ELFAA 2009). As shown in Appendix A, Ryanair is ranked the fifth in Europe for the largest airline company measured by the number of passengers carried (Europa 2010a). Among the low cost carriers in Europe, Ryanair has the biggest market share, accounting for 40% as shown in Appendix B. Besides air flights, Ryanair also provide non-flight services such as car rentals, accommodations, travel insurance, internet-related services and in-flight merchandise sales. These non-flight services have accounted for 20% of Ryanair’s total revenue for the financial year ended 2009 (Annual report 2009).

STRUCTURE-CONDUCT-PERFORMANCE

Structure
The aviation industry in Europe carried 798,324,338 passengers in 2008. In the low cost carrier (LCC) airline industry in Europe, the 3 largest companies hold approximately 79% of the market share in 2009 (ELFAA 2010). The rest of the market share is held by many other smaller LCC companies. The emergence of LCC airlines as drastically increased the number of passengers travelling by air, as shown in the graph below.

Data for passengers on route to London

Source: CAA airline/airport statistics

The numbers of passengers travelling by LCC airlines are also increasing ever since its entrants as shown in the statistics below:

Total annual air passenger movements in 1997 and 2003

Source: Commission for Integrated Transport

The LCC market is an oligopoly market as there are 3 major airlines which dominate approximately 70% of the market. The products are homogeneous, which is low cost air travel though there are slight differentiation in terms of customer service, travel destinations and flexibility of travel times. The firms within the market engage in price wars where they cut prices to grab a larger market share. The firms maintain their customers’ loyalty by offering the low air fares and brand themselves through advertising. Some customers may stick to an airline provider for some reasons such as convenience, flexibility and brand loyalty. Therefore, when another firm sells at a higher price, it doesn’t mean that the customer will switch airlines. However, it also doesn’t mean that the customers won’t switch because are no restrictions or switching costs involved. A factor which may cause customers to switch is when the price difference is too high to tolerate. In this market there is a significant barrier to entry because of the high set up cost. It is also difficult to penetrate the market because of the 3 major firms which accounts for a huge market share. The LCC market also shows some characteristics of monopolistic competition because of there are many other LCC airlines. There are also no legal barriers to entry because there are legal restrictions to enter the market. Moreover, the governments show that they want to encourage competition in this industry when the Irish government rejected a takeover of Aer Lingus by Ryanair in 2009 (Reuters).

Conduct
Ryanair conducts its business by...

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