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Business Essays – Ryanair Price Competitive

Ryanair Price Competitive

Ryanair: It ‘s Environment, Competition and Share Price

Introduction – Ryanair’s Share Price

Ryanair’s portion monetary value has dropped aggressively over the last 12 months and, in peculiar, during the period from November 2007 to May 2008.

This paper explores the causes behind the bead in Ryanair’s value by analyzing countries which have impacted on Ryanair: its external environment ( subdivision A ) , the competitory environment ( subdivision B ) and factors specific to Ryanair ( subdivision C ) .

Section A: Analysis of External Factors act uponing the Low Cost Carrier ( LCC ) Sector

Three sets of factors have facilitated the development of Ryanair and the low cost bearer ( LCC ) sector in general.

Legal Issues

First, the legal conditions necessary for being able to wing between any two airdromes in the EU, irrespective of the airline’s nationality, came into force in 1993. At the clip, this “third package” , as it was known, affected 15 EU Member States.

The size of the EU itself is a critical influencing factor. In 2004, ten farther states, chiefly in eastern Europe, joined the EU on the same twenty-four hours and two farther states joined in 2007. By 2008, the air bundle covered non merely all 27 EU member provinces but besides Switzerland, Iceland and Norway. From a demographic point of view, the expansion permitted citizens of EU states to go to and work in other member provinces.

The UK in peculiar placed no limitations on the 10 states which joined in 2004 ; the effect has an detonation in rider Numberss. In 2003, for illustration, entire rider volumes between the UK and Poland was 512,000 riders. In 2007, 4.4 million rider motions between the two states were recorded, with flights available from several metropoliss in both states.

Although a STEP and competitory analysis are frequently undertaken in isolation, we have here a authoritative illustration of bidirectional influence: although the freedom of motion of several hundred million people within the EU has doubtless contributed to the development of the LCC sector, the low menus and the addition in volume and geographically of available flights provided by Ryanair and its rivals has besides caused the volume of riders to increase. Therefore, the two sets of factors can be seen as reciprocally re-enforcing.

Economic Factors

Another country act uponing demand is the Euro. The majority of Member States have either adopted the Euro or else the national currency is locked into the Euro with a fixed exchange rate ( the Danish krone, for illustration ) . From a consumer’s point of view, one of the hazards of foreign travel has been removed, viz. incurring losingss through inauspicious exchange rate motions and monetary value transparence, in that a German tourist to Greece sees the monetary values in the holidaymaker’s ain currency.

Beginning: Platts

Fuel histories now for up to 40 % of air hose costs and the additions have fed through to higher menus via fuel addendums. Of the ?36 costs incurred by easyJet, for illustration, ?10 ( i.e. 28 % ) is accounted for by fuel costs ; for Ryanair, in the 12 months to March 2008, fuel costs were 37 % of entire operating costs.

The ground for the difference is due to fuel hedge policy. easyJet has 40 % of its fuel hedged at $ 75 per barrel until September 2008, the terminal of its fiscal twelvemonth. By contrast, Ryanair took a hazard – and lost – on the monetary value of fuel as, until late, it had no fudging on its fuel at all. However, it has fixed the monetary value of its fuel at around $ 125 for the remainder of the twelvemonth ; in other words, at a significantly higher degree than its largest challenger.

Technology

Ryanair and other LCCs distribute their gross revenues either chiefly or wholly through the cyberspace. Use of the cyberspace in states which the LCCs service is hence a critical success factor. We can see from the Eurostat tabular array below that, in three old ages, the proportion of families holding broadband cyberspace entree has increased well in eastern European states.

2004

2007

Poland

8 %

30 %

Lithuania

4 %

34 %

Slovak republic

4 %

27 %

United kingdom

16 %

57 %

Beginning: Eurostat

The three “new EU” states sampled can be seen to be merely a twelvemonth or two behind the UK in developing mass entree to high velocity cyberspace services.

Social Factors

A cardinal societal factor that has influenced demand for air travel is a tendency off from holding one big vacation and indulgence in more metropolis interruptions. Once once more, nevertheless, it is hard to insulate whether this altering societal behavior is act uponing the industry or whether it is competitory behavior in the LCC sector which is driving the tendency for short interruptions.

Section B: Ryanair and its rivals

Market Definition

Ryanair’s market is best defined as travelers within Europe and the Mediterranean country. The air hose has bases in several European states and is by no agencies wholly dependent on the UK for traffic volume. Therefore, Ryanair’s existent market is the intra-European air travel market, whilst its possible market besides includes trips made by other manners.

Ryanair and the Competition

The grade of competition is on three degrees. First, within the LCC market, Ryanair is the market leader in footings of riders carried and profitableness. The following two largest participants are easyJet and Air Berlin. There are several other participants in this market including Wizzair and Sky Europe ( based in cardinal Europe ) , BMIBaby and Thomsonfly ( UK ) , Air One ( Italy ) and so on.

The tabular array below indicates the comparative size of Ryanair and its two largest rivals antecedently and for the latest full twelvemonth available.

Passengers carried

2003

Latest

Ryanair

21.4

54.2 ( Year to July 2008 )

easyJet

21.1

42.0 ( Year to July 2008 )

Air Berlin

9.6

27.9 ( 2007 )

Beginning: assorted air hose one-year studies and traffic figures

Minimum growing has been at easyJet, which still managed an one-year mean growing of about 19 % per annum, which is more than ternary GDP growing.

It should be remembered that the low cost sector is portion of the wider commercial air power sector and, so, easyJet believes that its biggest rival is in fact British Airways instead than Ryanair. However, the entire portion of European travel covered by LCCs has been turning. Whilst LCC activity more than doubled between 2003 and 2007, overall European growing in air riders was 31 % over the same period ( see appendix ) .

For trips non affecting the UK, Ryanair has further competition from other manners ( holding to utilize Eurotunnel is comparatively complex and expensive compared to leaping into a auto ) . Europe’s high velocity railroad web is being developed in Spain, Italy, France, Germany and the Benelux states and, as these railroads continue associating across boundary lines, competition from railroads will escalate ( for illustration, air hoses have given up winging between Brussels and Paris, thanks to inveigh competition ) .

Last, and by no agencies least, is competition from the private auto. Car has two major advantages over Ryanair: there is no demand to book and the cost of the trip does non increase with the figure of riders.

Customer markets

Ryanair has traditionally targeted markets which are different to other LCCs. An scrutiny of the path webs of easyJet and Ryanair reveals that whilst easyJet has a major portion of its web devoted to vacation traffic between the UK and the Mediterranean, Ryanair has been more focussed on other markets such as workers going abroad and the VFR ( Visiting Friends and Relatives ) market. For illustration, the extended path web Ryanair now has between western and eastern Europe marks chiefly east Europeans working and populating outside their place state.

Pricing Strategy of Ryanair

Ryanair has a two portion pricing scheme. First, it aims to offer the lowest menus of any of its rivals and, thanks to its lower cost base, it is able to accomplish this aim. Furthermore, Ryanair runs really frequent monetary value publicities: it is presently offering 2 million seats for sale in October, with monetary values get downing from ?10 return ( including fees and revenue enhancements ) .

However, this menu covers merely the nucleus flight and excludes managing fees of ?4 per individual per flight for credit/debit card payments, look intoing in a bag ( ?8 one manner ) and airport check-in ( ?4 per individual per flight ) . Ryanair would besides trust to derive income through optional accessory gross watercourses such as in flight nutrient and drink or auto leases booked via its site through Hertz.

The importance of the accessory gross watercourse to Ryanair can be seen by comparing the one-year studies of 2003 and 2008. In 2003, accessory gross accounted for 13 % of Ryanair’s entire gross watercourse. Thankss to the new charges for luggage and airdrome check-in, the proportion had climbed to 18 % five old ages subsequently. With additions in luggage handling costs and booking fees holding increased in 2008, the 2009 proportion should mount to over 20 % of the sum.

Core

Accessory

Ancillary / Total

2003

732

111

13 %

2008

2,226

488

18 %

Section C: Historical Performance

Ryanair has historically had two sustainable competitory advantages: it ordered most of its new fleet at a clip when aircraft monetary values were badly down and, harmonizing to IATA ( International Air Transport Association ) , it enjoys an operating cost advantage through really high use of its aircraft and the usage of secondary airdromes which attract lower costs.

For illustration, Ryanair flies to several metropoliss in Poland from the UK, but non Warsaw. Besides, Ryanair uses Weeze airdrome ( one hr off from Dusseldorf ) instead than the closer but more expensive Dusseldorf airdrome.

However, Ryanair’s portion monetary value signals its trust on the UK economic system above all, with 70 of its 159 aircraft based in the UK ( Ryanair does non supply a dislocation of riders by path or state ) . Therefore, the combined market of UK citizens going abroad and aliens sing the UK either for work or leisure intents is by far the company’s largest market. With the exclusion of foreign leisure travelers, these markets are influenced by the province of the UK economic system.

A speedy manner to analyze an airline’s wellness is to look into the company’s burden factor ( the proportion of seats sold on its aircraft ) . In the 12 months to July 2008, Ryanair’s burden factor stood at 81 % . By contrast, in the 12 months to July 2005, the burden factor was 84 % . Therefore, demand for Ryanair’s flights is non maintaining up with the additions in capacity provided, as signalled by the beads in GDP during 2008.

Although a three per centum point bead may look like a fringy difference, it means that on every Ryanair flight, there were an norm of 5.7 seats empty which would hold been filled in 2005 ( Ryanair’s aircraft have 189 seats ) . As the cost construction of Ryanair and other air hoses includes a high proportion of fixed costs, the fringy gross from these empty seats would hold delivered a important betterment to the company’s bottom line. With over 1,000 flights per twenty-four hours, say 350,000 per annum and presuming an mean gross per client of ˆ40, the loss incurred by Ryanair due to the lower burden factor is 350,000 * 5.7 * ˆ40 = ˆ80 million.

The bead in load factor is non a phenomenon particular to Ryanair. Harmonizing to the European Low Fares Association, which covers 12 LCCs but non Air Berlin, burden factors has been bit by bit dropping from 83 % in 2006 to 81 % in the 12 months to June 2008.

Not merely has the UK been hit harder by the recognition squeezing than most other European states ( for illustration, mortgage blessings have dropped for 14 months in sequence and are now at their lowest of all time degree ) but the combination of the crunch and the deteriorating economic state of affairs has affected consumers’ willingness to set about outgo. Consumer assurance, as measured by Nationwide Building Society’s index, has fallen every month since September 2007

However, although there are specific factors driving the decrease in Ryanair’s portion monetary value – in peculiar, the monetary value it is paying for its fuel in 2008 remains unhedged – the chief factor is the downswing of the economic system, the strength of the ˆ against the ? ( the exchange rate has weakened from ˆ1.50 to ˆ1.26 or so within a twelvemonth, which makes Euro states more expensive for UK visitants ) , the recognition crunch every bit good as the monetary value of oil. So, we can see that easyJet and TUI Travel, the UK’s largest circuit operator, have besides suffered slides in their portion monetary values ( see appendix ) .

Decision

There are three generic factors which can consequence a company’s portion monetary value:

  • external factors, over which the company has little or no control ;
  • competitory factors within the industry ; and
  • company-specific issues.

In this paper, I have given illustrations of all three factors in drama, viz. the oil monetary value and the degree of economic activity in the market place, overcapacity in the industry ( as witnessed by worsening load factors ) and Ryanair management’s determination on fuel hedge.

Appendix

Share Price of Other Major Players In The UK Travel Industry

easyJet

TUI Travel ( Thomson )

Air Passenger Volumes by Member State, 2003-2007

Beginning: Eurostat

Mentions

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CAA Airport Statistics, seen at hypertext transfer protocol: //www.caa.co.uk/default.aspx? catid=80 & A ; pagetype=88 & A ; pageid=3 & A ; sglid=3 [ accessed on August 20th 2008 ]

Centre for Asia Pacific Aviation, “Ryanair ‘s bludgeon now favourite to crush rivals scalpels” hypertext transfer protocol: //www.traveldailynews.com/pages/show_page/26766

[ accessed on August 21st, 2008 ]

ELFAA, Statistics, June 2008 hypertext transfer protocol: //www.elfaa.com/statistics.htm [ accessed on August 21st, 2008 ]

Eurostat, “Families holding entree to the Internet, by type of connexion – ( as % of all families) ” , see at hypertext transfer protocol: //epp.eurostat.ec.europa.eu/tgm/table.do? tab=table & A ; init=1 & A ; plugin=0 & A ; language=en & A ; pcode=tin00073 [ accessed on August 20th 2008 ]

IATA, Economics Briefing no. 5, “Airline Cost Performance” , 2006, hypertext transfer protocol: //www.iata.org/NR/rdonlyres/09078492-F854-4B38-980D-2B0E0048F725/0/890200_Airline_Cost_PerformanceSummary_Report.pdf [ accessed on August 20th 2008 ]

Mortishead C. , “Low-cost air hoses hit by recession and fuel monetary value escalation” , April 2neodymium2008, seen at hypertext transfer protocol: //business.timesonline.co.uk/tol/business/columnists/article3662046.ece [ accessed on August 20th 2008 ]

Countrywide Building Society, “Countrywide Consumer Confidence Index” , August 2008, seen at “http: //www.nationwide.co.uk/NR/rdonlyres/556107BB-D21F-4DAF-89CF-7AB878850BFE/0/JulyNCCI6August2008.pdf [ accessed on August 22nd 2008 ]

Osborne H. , “Mortgage blessings hit record depression” , July 29 2008, seen at

hypertext transfer protocol: //www.guardian.co.uk/money/2008/jul/29/mortgages.property [ accessed on August 20th 2008 ]

Ryanair,“Annual Report 2008” seen at hypertext transfer protocol: //www.ryanair.com/site/about/invest/docs/2008/Annual % 20report % 202008 % 20web.pdf [ accessed on August 21st 2008 ]

Ryanair,“Roadshow Presentation: Full Year Results -31 March 2008” seen at hypertext transfer protocol: //www.ryanair.com/site/about/invest/docs/present/quarter4_2008.pdf [ accessed on August 20th 2008 ]

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