MAN9N4 OPERATIONS MANAGEMENT

Assignment Spring 2010

Ryanair – Operations Strategy and Capacity Management

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Contents

1. Summary …………………………………………….. 3

2. Discussion ……………………………………………. 4

2.1. Ryanair’s strategic decisions ………………….... 4

2.2. Ryanair’s five performance objectives ………..... 4

2.3. Ryanair’s capacity management ……………...…. 5

3. Suggestions for improvements ………………………. 7

4. Conclusion …………………………………………… 9

5. References …………………………………………… 10

6. Appendix …………………………………………….. 11

1. Summary

This report aims to analyze Ryanair’s operations strategy by identifying its strategic decisions. The five

performance objectives quality, speed, dependability, flexibility, and cost will be looked at individually and put

in context with its operations.

The focus will then be on suggestions for improvements, so that Ryanair will be able to maintain or even

strengthen its position. The approach chosen is based on an importance/ performance matrix to determine

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Ryanair’s current position in the landscape of low-cost carriers. These suggestions will include marketing,

expanding supplementary services, reducing costs through fuel-efficient aircrafts, increased load factors, further

streamlining of operations, and improving staff-customer interactions.

Finally, the report will conclude that in the long run Ryanair will have to extend its destinations and services in

order to maintain its leading position as a low-cost carrier in Europe.

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2. Discussion

2.1. Ryanair’s strategic decisions

Ryanair, as the leading low-cost carrier in Europe, has an operations strategy to provide air travel at minimal

cost, while maximizing its operating margin.

To achieve this, strategic decisions such as implementing a lean structure and cutting back on operations,

services and overheads have been rigorously pursued. These include

Maintaining a common aircraft fleet resulting in utmost efficiency in operations and maintenance;

Increasing the aircraft seat capacity;

Its “seat only” policy, charging for all additional services such as luggage, online check-in, priority

boarding, snacks, etc.;

Supplementary services such as hotel bookings, car rentals, or online gaming;

Using secondary airports;

Keeping wages, maintenance and other operating costs to a minimum;

Outsourcing some operations, such as non-routine aircraft maintenance, ticketing, and luggage

handling;

Aggressive marketing.

These strategic decisions have a significant impact on the operational structure and infrastructure, since

structural decisions can only be made in the framework of the infrastructural setting.

2.2. Ryanair’s five performance objectives

To maintain or ultimately increase Ryanair’s competitiveness, it is useful to analyse its operations with the help

of five performance objectives:

Quality: In the long run, even the most competitive price structure will not attract customers if the quality of the

service offered is below a certain standard. This includes maintenance, efficient booking and luggage handling,

reliability, punctuality, and interaction with Ryanair staff.

Speed: The areas where speed matters most for Ryanair are turnaround time of aircrafts, reservations, luggage

handling, and aircraft maintenance, all of which have a direct impact on costs. Although Ryanair has

implemented many steps to increase speed, it also depends on service providers that are not directly under its

control.

Dependability: This relates mostly to flights being on schedule and reliability of luggage service. The figures

for the third quarter of 2009 indicate 89% on-time flights and 0.3 missed bags per 1,000 passengers (Table 1).

This compares very favourably with competitors, where punctuality is similar, but the missed bag/passenger

ratio is orders of magnitude higher. This excellent record has to do with the fact that Ryanair offers only point-

to-point flights, thereby eliminating the risk of luggage mismanagement during connecting flights.

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Flexibility: Customers have a high degree of flexibility in choosing the level of service, since only the basic

airfare is charged and any additional services must be paid for. Increasing flexibility for the customer would

mean offering additional options. From Ryanair’s perspective, flexibility comes with diversification of

supplementary services on the one hand, and, with increasing market strength, the ability to negotiate

alternatives for various service sectors, such as maintenance agreements, outsourced functions, etc.

Cost: The most critical cost factor for any airline operations is fuel prices. There are enormous fluctuations, and,

unlike its competitors, Ryanair has committed to a policy of not imposing fuel surcharges. Thus any fluctuations

have to be absorbed by Ryanair. As a result, Ryanair reported its first annual loss in 2009 when oil prices were at

a record high. (BBC Online News, 2 June 2009)

2.3. Ryanair’s capacity management

The policy of offering extremely low airfares while remaining profitable can only work with very careful

capacity management so that all resources are optimally used and all demands are met. In terms of medium- and

long-term capacity planning, Ryanair has taken a number of steps that have proven to be very successful. It is

constantly adding new hubs as a basis for operations in a particular area. It continuously expands its fleet to offer

new destinations and more frequent service. Through the acquisition of the loss-making Buzz airline from KLM

in 2003, Ryanair took over routes to which it previously did not have access and could thus increase its market

share. An effort to take over Aer Lingus in 2007, however, failed, due to a ruling by the European Commission,

which argued that this would lead to a monopoly that might be disadvantageous for the customers.

Short-term capacity management can be determined by external factors that are beyond the control of the

management. Examples are the Gulf War in 1991 or the terrorist attacks in 2001 which led to a drastic downturn

of passengers. While such events have dramatic negative impacts, experience has shown that these are relatively

short-term and therefore have only limited reflection on capacity management.

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3. Suggestions for improvements

Since any such analysis has the ultimate goal of improving operations while simultaneously reducing costs, the

following suggestions are offered on how to achieve this. Before doing so, it may be useful to look at the

importance/performance matrix described by Slack (1994), to determine where Ryanair stands with respect to its

competitors regarding its objectives and performance. Using this matrix, one can distinguish between order-

winning (i.e., those that determine the competitive advantage), qualifying (i.e., those that are comparable with

competitors), and less important objectives (i.e., those that are not critical elements in the considerations of

potential customers). Regarding order-winning objectives, the most outstanding advantage of Ryanair is low-cost

and reliable service. Concerning qualifying objectives, one might mention areas such as supplementary services

offered; for less important objectives, comfort or service on board comes to mind.

Once these objectives are determined, one can measure performance to identify whether the company is doing

better, equal, or worse than its competitors and identify where improvements are necessary. Ryanair clearly has

better performance in terms of airfares, punctuality and luggage reliability. It is comparable to competing airlines

in the services on the ground and on board. However, its policy to fly to secondary airports can be seen as a

disadvantage.

What can Ryanair do to secure or even strengthen its market position?

Aggressive marketing campaigns to attract new customers. Excellent examples of such a campaign

were when on the occasion of Ryanair’s 20th

birthday, it offered 100,000 sets at 99p, or the current

offering of one million seats for GBP5.00. It should be noted, however, that this is a useful temporary

capacity management instrument reaching out to new customers, but with such prices it will be

impossible to sustain a profitable development.

Negotiate attractive deals with other service providers. Along the lines of the current agreements with

Hertz or On Air, other cooperations can be envisaged, for example, special deals with hotel chains,

ground transportation, or online shopping portals.

Cost reductions. Replacing more aircrafts for new fuel-efficient generations will make Ryanair less

vulnerable to high fuel prices. However, by 2005 Ryanair had the youngest fleet in the world, with an

average aircraft age of two years. Considering the lifetime of aircrafts, replacement can therefore only

be a long-term goal. In the shorter term, increasing the average load factor per aircraft will bring down

the total costs, as will a reduction of the time aircrafts are on the ground. Looking at intangible

resources such as passenger loyalty (through its “value for money” strategy), staff loyalty (through an

attractive salary and incentive structure based on productivity), and efficiency (through streamlined

operations), there is also a potential to cut costs.

Careful selection of reliable service providers. With steadily increasing market share, Ryanair is in a

strong position to negotiate favourable deals.

Expanding destinations. Although Ryanair already has an impressive coverage, there is still room for

expansion. There is relatively little coverage of eastern European countries, and cities like Vienna are

missing, which is an important hub to the East. Such expansions will directly link back to capacity

management.

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Improvements in staff-customer interactions. Numerous complaints have been filed against Ryanair for

inadequate staff training and appalling services. A survey carried out by the German Stiftung Warentest

in 2009 saw Ryanair in last place out of 10 low-cost airlines in terms of information and booking. This

shows that there is a considerable need to improve this aspect.

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4. Conclusion

The steady growth of Ryanair, in a time when some of its competitors have disappeared from the landscape,

indicates that operational decisions taken by the management have so far been correct. (Table 2) One could

argue that the quality of services provided by Ryanair is held at the absolute minimum to ensure low cost for the

airline as well as for its passengers. While Ryanair customers do not have high expectations of what they can get

for the price they pay, they do expect on-time flights and reliable luggage handling.

The competition Ryanair is facing is fierce. The challenges for the airline industry are growing since the terrorist

events of recent years, and the cost of security can be expected to increase. It is therefore essential for Ryanair to

look for expansion in terms of destinations and services offered, much in the sense of the motto of its CEO

Michael O’Leary: “We pile it high and sell it cheap.”

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5. References

BBC Online News, 2 June 2009 http://news.bbc.co.uk/2/hi/business/8078349.stm

Mullins L.J. (2007) Management and Organisational Behaviour. 8th ed. Harlow, FT Prentice Hall

Ryanair: The Story So Far http://www.ryanair.com/en/about

Ryanair: Investor Relations: Ryanair Q3 Results 2010 Presentation

http://www.ryanair.com/en/investor/investor-relations-news

Slack N. (1994) The Importance-Performance Matrix as a Determinant of Improvement Priority.

International Journal of Operations and Poduction Management, Vol. 14, No. 5, pp 59-75.

Slack N., Chambers, S., Johnston, R. (2010) Operations Management. 6th edition, Harlow, FT Prentice

Hall

Stiftung Warentest survey, Feburary 26, 2009 http://www.test.de/themen/freizeit-reise/test/Billigflieger-

Zehn-Airlines-im-Test-1758245-1756516/

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6. Appendix

Table 1. Reliability statistics November 2008 to March 2009

% of flights on

time

Missed bags per 1,000

passengers

Ryanair 89 0.3

Lufthansa 85 10.9

British Airways 83 15.6

Air France 83 18.0

Alitalia 78 19.6

Source: http://www.ryanair.com/en/investor/investor-relations-news

Table 2. Growth in terms of passengers and employees 1985 to 2008

Year passengers employees 1985 5,000 51 1986 82,000 151 1987 322,000 212 1988 592,000 379 1989 644,000 477 1990 745,000 493 1991 651,000 477 1992 945,000 507 1993 1,120,000 503 1994 1,666,000 523 1995 2,260,000 523 1996 2,950,000 605 1997 3,730,000 659 1998 4,629,000 892 1999 5,358,000 1,094 2000 7,002,000 1,262 2001 9,355,000 1,467 2002 13,419,000 1,547 2003 19,490,000 1,746 2004 24,635,000 2,288 2005 30,946,000 2,700 2006 42,509,000 3,991 2007 50,932,000 5,262 2008 58,566,000 6,369

Source: http://www.ryanair.com/en/about