The Business Models of EasyJet vs RyanAir - Case Study Example

EasyJet vs RyanAir This report aims at providing a complete overview of the two major airlines of the Europe, the EasyJet and the RyanAir. The report contains introduction to the business models of the airlines, their business strategies, SWOT analysis , analysis the porter’s five forces, financial analysis and the comparison of the performances of both the airlines. 2. A brief introduction to the assignment and the industry The Core business of both these is the airline services provided in U.K. This report contains detailed analysis of the financial aspects, key performance growth, detailed study of its operations, the regulatory, environmental influences on both the companies, the market strategies adopted and some other key business aspects. Easy Jet is a public limited company incorporated in U.K having a registration number 3959649. The company’s registered office is in London. Ryan Air is incorporated as a limited company in Ireland. Business models Ryan Air: In 2010, Ryan Air published a report in which it discusses in detail about the business models adopted by the company. In 2011, it again published a report focusing on the changes in its business model and in 2013 it changes its business strategies by publishing another report focusing on its new business model. All these three models are very much different from each other. In the report published in 2013 the company’s business model focuses on the main aspects to carry out the business effectively and with profits. This business model comprises of two main parts, the detail of which is as follows: 1 The bringing of the elements of success with each other. 2 To protect and maximize its revenues. 1. The bringing of the elements of success with each other: This part further comprises of three main elements: a Choice of Airport: High reliance of Ryanair on tax discounts and subsidies b) Ryanair’s major focus to be the lowest cost producer c) Sending a maximum number of passengers in the air a) Choice of Airport: High reliance of Ryanair on tax discounts and subsidies When Ryanair’s success started to begin, there is a careful and a deeply observed and calculated picking of airports. Ryanair has flown around 180 airports in the year 2012 and a lot of these airports are secondary airports irrespective of the confusing names regarding the destinations. Due to this reputation of “Flying from nowhere to nowhere” 1. Many opposing airlines didn’t vacillate mocking the deceptive names of Ryanair destinations. 2. However, there’s slight to giggle about as selecting secondary airports above larger centers allowed Ryanair to relish a significant modest edge. b) Ryanair’s major focus to be the lowest cost producer One task which has inadequately been related to the Ryanair’s business model is disciplined. Doubtfully, the company’s profits flew because it has been running like a clock. Also, they are “religiously low-fares”. This devoutness has a disadvantage, all the other human resources and planes are generally treated in the same way. Though commercially successful, this vision of the accountant has greatly spoiled the airline’s reputation this year. Ryanair’s cost of labor and productivity is one of its main assets, however, it may make the airline’s working conditions controversial. All over Europe (France, Sweden, Norway and the U.K.,) affairs have flashed involving cabin crews, staff members and pilots alike. Among additional things, the contract with the company was recurrently integrated to “slave contracts”, although a more serious analysis allows a healthier understanding of processes. In real fact, in Ryanair business, contracts are normally broken into two types: pilot’s and cabin crew’s contract. c) Sending a maximum number of passengers in the air Ryanair has attained an unbelievable performance by transporting almost 80 million passengers in 2012. This remarkable success was clearly urged by its attractive low fares, which appeal passengers notwithstanding its unusual methods to get cheap tickets. Also, the airline fetches constant alteration to its aircraft design and structure and usage policy in order to be able to carry as many passengers as are possible – and improve its advantage of unit cost during the process. 2. To protect and maximize its revenues. This part further comprises of three main elements: a Ancillary Revenues: b Tax optimization: Ryanair Holding, a jewel of fiscal engineering c An offensive, and proactive legal attitude a Ancillary Revenues At the beginning, the real charge of flying with Ryanair, ancillary/auxiliary revenues signified a chance for the customers to advantage from custom-made flights and inferior ticket prices. Though, it soon became outbreak for the passengers as soon as they increased and prohibited them from having an evident view on what we’re paying them for. As for Ryanair, the company had been recurrently growing its auxiliary revenues, which almost amount to around 22% of its total profits. The charge for passengers taking baggage in the grip has known such severe increase that sometimes it costs less to transport them through courier rather than essential to fly with them. b Tax optimization: Ryanair Holding, a jewel of fiscal engineering Once Ryanair has attained tremendous financial profit and success, the next way of their achievement is shielding their income from taxes. Among all companies known for tax evasion, Ryanair has reputation, truth or lie, by coming up with extravagant tricks to cut costs and maximize their profits. The most moneymaking of these artifices is largely concealed in the company’s financial structure. c An offensive, and proactive legal attitude Ryanair appears to steadily understand the law to their advantage and due to this variation of thoughtful has led them to numerous proceedings – for example, in Marseille, France the thoughtful of the law is at the essential of the case. For tickets, airports, personals, the pattern is the similar and the company obtains all the incomes it can from the European local legislations and European. EasyJet Airlines: The EasyJet’s strategy had been very straight forward. Among the first airlines those skipped the travel agent, easyjet also made its mark in the list. They started to make advertisements on their planes. The tradition was broken by the easyjet with airline loyalty programs. They said, No loyalty! But clear was their offering. They offered a Point to point strategy for the price of a reasonable pair of jeans. The question here arises as how the airline manages to able to offer its services in a lower price charge? The answer to this question lies in the fact that the easyjet has a standardized fleet for which the maintenance cost is relatively low as compared to the competitors. Easyjet considers its airline business serious and spend most of its time in the air transporting rather than being at the gates in the airports. EasyJet is perfect in managing partnerships with having good skills in hand. It offers Rental Cars, Starbucks Coffee, Hotel rooms and Collection for Charity as some extra services. But if someone wants additional services, he just needs to pay and the easyjet will make it all clear then. PEST Analyisis RyanAir: Political policies affect the operations of RyanAir. As in this era, there is significant danger of terrorism so many policies and rules have been implemented for the outgoing and incoming passengers, which affect the operations of the RyanAir up to some extent. Environmental factors like weather, rain, and storm also affected the operations of Ryanair. Social effects on the company are vital to its performance. In past, the company had managed to keep its annoyed personnel quite, but now the personnel has made a decision that the airline’s exclusive information be released to the public to damage the company. Technical factors influences upon the business of Ryanair as some technical flaws in the planes disrupted its operations. EasyJet The following are some factors that may have an effect on the easyjet airlines and these needed to be considered while framing easyJet’s Marketing Plan. Politico-legal factors The Air Miles system is not deemed ato be a taxable perquisite by the government in the form that they tax the company cars.this may let easyJet to contest on more equal terms with the likes of BA. Economic factors Expectations of increase in congestion, fuel costs and other restrictions in the environment, as well as the vision of higher insurance and security costs due to the risk of terrorism will surely affect the airline. The company will have to consider its travel expenses as the recession is expected to continue for some more time. However, the traffic should boost up in the long-run due to globalization. The introduction of the single currency in Europe is likely to bring more business to easyJet as Europe becomes more integrated. Socio-cultural factors To have a success over the German and French publics might be a problem as there seems still to be an overall hesitancy in using credit cards over the Internet and phone. Generally, the public looks quite friendly to the vision of inexpensive flights. But, they may be annoyed when they see newspaper promotions where the flight are priced for £10 only and the actual cost told to them is much higher for the specific time or the day they want to fly on. Technological factors A key concern will be the degree to which technical developments can balance upward pressures on costs and prices. EasyJet needs to keep a path of technical advancements in e-commerce and jet manufacturing so that it may gain a competitive advantage. Marketing strategies RyanAir The primary strategy of Raynair is to focus consumer/customer service, influencing the company to increase its profit right along the brand name it holds. Raynair assess low air tariffs with increased passengers and it charges on the baggage with value added taxes. The success of Rayn air lies behind some secrets: the inexpensive accessibility of its air tickets in various charges for various classes, the charges applied on the baggage on both business and economy class is the same. The key difference lies in the quality of that is required in airplanes. Proper upkeep and operational model of network that connects from various bases has been the fruitful strategy. (RyanAir Annual Report 2013, strategy p, .59) Easyjet Easyjet offers its consumers some value-added options that enable the consumers in enhancing an already decent service; they have raised themselves upstairs the progressively low-end Ryanair and accordingly increased their per seat revenue. The easyjet has now build very strong number 1 and number 2 network position. It has attained 1st or 2nd position in Europe’s 21 of the 100 best airports. In the recent few years, easyJet has continuously improved its cost per seat benefit by the increment of the number of A320 airplanes seating 180 in the fleet and decreasing the number of A319 airplane seating 156. This has improved its cost per seat benefit by the economies of scale, ownership, efficiencies in crew, fuel and maintenance. The introduction and implementation of allocated seating has been very beneficial for the airline. In the financial year 2013, this strategy has contributed a 0.9 percentage points of 7.1% continuous currency rise in the revenue per seat. Additionally, now easyJet appeals to a wider choice of passengers, for example business passengers and retirees, who signify the confidence of an allocated seat. After increasing the payout ratio of the ordinary dividend in November 2012, easyjet had another strong financial performance year, 2013. In the financial year 2013, easyJet projected an ordinary dividend (33.5 pence per share) amounting to £133 million and a special dividend (44.1 pence per share) amounting to £175 million. This has resulted due to the strong position of the balance sheet, low gearing level and the top after tax profit in the history of the Company’s operations. (easyJet plc Annual report and accounts 2013, our strategy in action, p. 22) Porter’s Five Forces RyanAir Threat of new entrants Requirement of high capital investment Fuel and labor intensive industry Requirement of flight authorization Restricted slots Threat of substitutes Customers’ Low brand loyalty Customers’ Low switching costs Other transport modes like trains, cars etc. are available. Bargaining power of buyers Buyers are ‘price sensitive’ Switching costs are low Transparency on services and price provided Customers are not buying large volumes Bargaining power of suppliers 2 a/c manufacturers only High switching costs Price of aeronautics fuel is directly related to the oil costs Competitive rivalry Easy to copy cost advantages Differentiation factors are low; prices especially Restricted/limited route availability High risk of alternatives/substitutes EasyJet Threat of new entrants There is a very weak level of threat of new contestants coming into the airline industry is because the lack of landing and take-off slots and the huge capital required are the obstacles. Threats of substitute products There is present a medium substitution threat because of no substitutes for the long distances air travelling as it is more safe and requires less time than the other substitute such as travel by train or sea. Buyer power The buyer power is high in the airline industry in the UK because there are numerous buyers in this industry seeking the low charge airline industry. Competitive rivalry In UK, the rivalry within this style industry is deemed to be at the average low level. A strong rivalry amongst rivals all targeting for a part in the airline market has also been. Key Drivers RyanAir Perceptions of Key Success Drivers The ability to focus was the management’s key success driver: to emphasis in the long-term on nourishing low-cost position, fixing low-fares and finding additional revenues from secondary services: and, to emphasis in the short-term on the utmost serious matters and keeping the business supple in order to answer to the issues. Organizational Success Drivers Low costs strategy is an essential part of corporate culture of the Ryanair. This has been the main organizational victory factor which the airline had focused on. For examples, the airline encourages the employees to bring pens from home or lift them from the hotel rooms. The compensation system also shows a low-cost spirit. Majority of the employees receive pays based on sales on-board, number of flights etc. (i.e., productivity). The pilots of Ryanair are not paid according to the industry practice (i.e., on the basis of their tenure). For employees’ motivation, the management encourages mainly from within and encourages involvement of employees in the management by Employee Representation Committees. The employees are updated on current affairs and the challenges faced by the company collaborating everyday performance and other information with the help of TV stations or other information systems in the offices. Competitive Success Drivers Ryanair’s key competitive success driver is its small cost structure. Additional success driver for the airline is the continuous focus on secondary sources of income, for example on-board sales and allowing advertisements on the exterior as well as inside the aircrafts. (Bhagavan M., Ertekin O., Geijerman P., Kuznetsov V.) EasyJet Capital discipline The company has a firm balance sheet status in order to withstand external shocks, an aerospace closure for example. The company pays a significant amount of profit to its shareholders and considers it to be the company’s one of major policies. Compelling network The airline flies in very attractive catchments from the main airports and ensures it presence on the top 100 routes of Europe. Culture people and platform The company tries hard for simple processes and systems and has very friendly and passionate staff. Customer demand, conversion and yield The company’s low fares are made available to customers through visiting the website which is daily visited by more than one million people. Cost advantage Low cast base is an important feature of the airline. The customers are amused by the excellent service even with sufficiently low fares. These fares are kept low because the company has made itself to incur very low overhead costs ensuring profits though the fares are kept low. SWOT Analysis RyanAir Strength Strong/Well Established Foothold in LCC Segment in European Market UK market’s strong player High flight frequency and over 160 destinations Supplies to more than 75 million travelers Among the largest airline carriers with more than 300 aircrafts. Weakness Image is affected unproven stressed employee relations Low global presence and limited international penetration Opportunity Newer markets are tapped by its Brand New Fleet Attained customer confidence due to being in business for a long time Increase international destinations and routes also Threats Increasing employees managing costs along with fuel price EasyJet Strength Easy to remember brand name easyJet and hence higher brand recall Very attractive flying choice as it flies to Europe’s main destinations Single model aircraft reducing maintenance, training and supervisory costs LCCs’ first to introduce e-tailing, hence removing distribution costs and intermediaries A steady supply of cabin crew and pilots is ensured by the EasyJet academy Weakness Missing out on the benefit to have a repeated flier program Very sensitive to any extra taxes or duties imposed by government because of its lower operating borders Dependency on only two providers could be hazardous if the provider has any operational issues Opportunity EasyJet academy may be a source of additional income. Leverage on easyJet holidays and easyJet hotels to increase attract customers and brand awareness. During the travel recession seasons, new fleet may be leased out. Threats Strict aviation regulations and Govt policies Customers’ high bargaining power in the LCC segment Enterance of major players in the LCC segment. Financial analysis RyanAir Ryanair Holding plc stands to be a low fare and world’s biggest financial budget airline. With 160 airports and 44 bases business, the airline is operating in 27 countries and on more than 1200 routes. In terms of flights numbers, profits and flown of passengers, it is now the most successful airline. The ratio analysis has shown that the company has got a good financial position regarding profit, but some events occurred in 2010 occurred which resulted in 9400 flights cancelled and delayed flights of more than 12000. The events caused a serious loss to the company in just 6 months which amounted almost to €100m. The profits of the company were also greatly affected by these events. EasyJet Easyjet maintained a steady growth regarding operational performance. For each of the recent three years, he said performance got better and was relatively more favorable than the main competitor. However, no-consistency was seen in the profits and was poorer than the key competitor’s profitability. In the period of three years, Easyjet could manage effectively its resources and its performance in the said area was considerably better than the main competitor. The company kept a good liquidity position. However, though it remained above the danger zone, the liquidity still got weaker. The airline could not perform well regarding the return to the investors. The statistics were far below the major competitors. A positive step was seen as the company’s surplus cash funds were invested in the currency market. Analyzing the three years performance, it can be judged that Easyjet PLC’s the total business and financial performance itself as well as compared to the key competitors’ performance was satisfactory. However, a declining trend was followed by the performanceseen. Comparative Analysis and Conclusions The present economic slump has increased the competition amongst the airlines with a need to establish a small charge base to guarantee survival. Ryanair already has implemented this with their present activities as a result of high gearing not deemed sustainable. Easyjet made it availability to generate additional finance, introduce additional savings and further brand divergence during the economic recession. The availability to commence additional purchases during the economic recession while the other businesses suffer reduced the market standards will rise the future profit limits for Easyjet subsequent to the consolidation of the fresh assets. The financial actions in Ryanair limit the availability to produce extra financing in the times of the economic recession whereas Easyjet has chance to increase finance if seeing the purchase for Aer Lingus in 2011. Though, it may be desirable not to go into a firm bidding conflict with Ryanair planned acquisition of Aer Lingus that should be defied only to raise the purchase charges relevant for Ryanair. This tactic will exhaust Ryanair financially if Aer Lingus’ market value is contested. References Bhagavan M., Ertekin O., Geijerman P., Kuznetsov V., Budget Airlines – Ryanair: High Technology Entrepreneurship & Strategy EasyJet plc Annual report and accounts 2013, our strategy in action Patrick (2011) Easyjet Business Model, a source of inspiration Retrieved from: http://www.businessmodelsinc.com/easyjet-business-model-a-source-of-inspiration/#sthash.KgMN4wjG.dpuf RyanAir Annual Report 2013, strategy p Read More