The Effects of the Environment on a Business

Introduction

As part of my work placement with the EDU, (Economic Development Unit) I have been asked to write a report on a large business which trades in the EU. After researching many businesses, the business I have chosen to report on is Ryanair, a budget airline company from Ireland which was founded in 1984 and has headquarters in Dublin, Ireland, with its main operational bases at Dublin and at London’s Stansted airport.

My report addresses the environment in which Ryanair operates and evaluates how it has dealt with past changes in the market and business environment and suggests how it may react to future changes.

Findings

External Environment

I have chosen to assess this by using a PESTLE analysis:

• Political

Quite recently there has been an increase in terrorist attacks in the UK, France, Belgium and Germany, which have affected tourism. Fortunately, the Governments /Intelligence Agencies intervention appears to have combatted these, as otherwise the demand for air travel could have been significantly reduced, which would have impacted considerably on Ryanair.

Brexit continues to be challenging for the business environment, and when the UK leaves the European Union (EU) there will be much uncertainty for the aviation businesses. If the UK stays in the Open Skies agreement with the EU, there is unlikely to be any change. However, it is very unlikely that the will UK will remain, the outcomes of which could negatively influence Ryanair. Until such time as Brexit is complete, Ryanair continue to focus on growth away from the UK.

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• Economic

Less than a year ago, the Organisation of Petroleum Exporting Countries (OPEC) raised oil prices and as fuel is one of the biggest costs for airlines, Ryanair were concerned this would impact on their profitability but as these remain at approximately $50 a barrel, this will assist Ryanair.

After the UK leaves the EU, the pound will be weak and this will therefore affect the prices of fares.

• Social

Low-cost airlines’ expansion is largely due to the growth of disposable income of the middle class and the accompanying lifestyle changes that allow travellers to afford multiple short-trips each year. In addition to that, there’s also been a rise in business travel on the continent.

However, some consumers have opted for high speed rail rather than flying for short haul routes, so Ryanair have had to keep their ticket cost low.

Today’s fliers expect a high a level of customer service without having to pay top prices and generally value those airlines that offer advanced technological solutions to manage itineraries.

• Technological

In the past, less emphasis was placed on technology but now technology is extremely important and therefore Ryanair and other airlines have been required to adopt a different digital communication strategy to reach out to their target audience.

The development of business taken care of over the internet has generated funds for the airlines to improve its sales through online advertising. However, as other airline companies are also using the same marketing technique as Ryanair, their competition has increased, as the internet has formed a platform for people to purchase inexpensive tickets for European destinations

Technology has also provided Ryanair and other airlines with an opportunity to gain a deeper understanding of customer behaviour by analysing customer data voluntarily shared on digital platforms such as social media.

• Legal

Recently Ryanair was subject to a lawsuit by the European Commission for gaining state aid, (which occurs when state resources are used to provide assistance that gives organisations an advantage over others) at the French airport of Montpellier.

The legal challenge the European airline industry is facing revolves also around Brexit. However, future aviation laws governing UK flights (in the EU) are unknown but demand for air travel between the UK and the EU could be reduced. Unless legal consensus is reached on this matter soon, Ryanair believe that suspending all flights between the UK and the EU is probable.

• Environmental

The power of environmental problems like greenhouse gases and noise level control breaching has deteriorated over time.

The airline industry has been increasing concern over the carbon footprint with suggestions to decrease it, which doesn’t just involve the aircraft. Many plans to expand airports have been delayed or even in some cases cancelled in an attempt to decrease the carbon footprint of the airline business.

The most recent concern for the industry is heat waves, which are becoming a frequent phenomenon causing temperatures to rise above aircrafts maximum ground operations temperature. Therefore, airlines may have to seek an alternative operations strategy to adjust to climate change. Even if Ryanair is using a modern and fuel-efficient aircraft fleet, there is a growing concern that low-cost airlines will have to make a contribution to carbon emissions as part of the EU regulation, which would of course increase costs for Ryanair.

However, Ryanair operates a fleet of Boeing 737-800NG aircraft which is under 6 years old and has the lowest emissions intensity in comparison to other airlines.

Internal Environment

Approximately five years ago Michael O’Leary, Ryanair’s Founder and CEO decided to reinvent Ryanair by keeping all that was considered good about it, but to improve upon customer service.

Ryanair’s website was redesigned enabling a booking to be made in 5 clicks rather than 17 and a phone app followed a year later resulting in booking time halving from 3 minutes 47 seconds to 1 minute 54 seconds.

The baggage fees were amended and the fines for excess loads were cut by half. The fee for storing luggage in the hold was reduced and the ?60 penalty fee for failing to print a boarding pass was reduced to ?15.

Allocated seating was introduced and the staff on the airlines and at check in desks also smiled.

The aircraft interiors were toned down along with their new uniforms for the cabin crew and new menus. However, this was very much intended to attract business customers as oppose to the usual customers.

However, these changed weren’t enough to entice the business customers and therefore business class was introduced.

Ryanair’s Head Office was also refurbished at a cost of ?18 million and featured a giant emergency aircraft slide to take people down to reception, in addition to having a games room and incorporated motivational quotes on the walls and a huge screen portrayed every airborne Ryanair flight.

Those who booked a flight with Ryanair often became members of its website which gave Ryanair a source of data and a reward scheme ‘My Ryanair Club’ offered customers discounts and free fights for using the airline.

Cabin crew were provided with handheld android devices as a sales device, providing information on the food and drink which passengers were likely to buy.

Almost three years ago, Ryanair was able to offer its customers a choice of accommodation.

All of these changes contributed towards Ryanair’s success and profit, resulting in the shares hitting an all-time high.

However, in September/October 2017, a shortage of pilots across Europe resulted in Ryanair having to cancel up to fifty flights a day, which resulted in angry passengers and negative media coverage and the pilots who were in a strong position, threatened to strike and on 15th December 2017. At this point, Ryanair made possibly the most important announcement in history, which was that it would negotiate with trade unions representing the pilots in Ireland, UK, Germany, Italy, Spain and Portugal

Competitive environment

Ryanair’s major competitors are EasyJet, Wizz Air, Aer Lingus, Flybe, Alitalia and Air Berlin.

Ryanair was one of the first airlines to offer low cost fares in Europe enabling them to gain a high market share. However, Ryanair are facing increased competition from their competitors.

I have chosen to use a SWOT analysis to show the benefits and importance of maintaining a competitive advantage:

Strengths

Ryanair is the biggest airline company in Europe even though it is only a budget airline and low-cost fares continue to be a key competitive advantage

Ryanair is established in the European market covering over 200 destinations and 1800 routes and sells it tickets online and by telephone enabling customers to run their own schedules without having to rely on a travel agent, which results in additional savings.

Ryanair has a good network of business partners and their strong negotiating powers helps to gain better competitive advantages, which is a vital tactic in regulating expense. Ryanair also outsources its ground crew operations to contractors in airports outside Dublin.

Its strong balance sheet and consistent shareholder returns allows development in additional markets and its strong brand name is great for marketing purposes.

Weaknesses

Ryanair’s fleet expansion may result in them being overloaded in the future.

Work relations and change in employee compensation could have an impact on Ryanair’s business.

Ryanair is often related to bad customer service and unclear service agreements, like baggage policies, with unfair pricing performances that misinform customers to raise additional income, which has been proved by the number of lawsuits Ryanair has faced.

The aftermath of recent terror attacks could have an effect on Ryanair’s profitability across the markets in which its currently dominating, which increases Ryanair’s vulnerability to budget travel demand and its unpredictability.

Along with the rest of the EU, Ryanair has powerful presence in the UK market which opens up the company to Brexit risks.

Ryanair is also well known for directly provoking its competitors rivals.

I personally feel that while the Chief Executive Officer Michael O’Leary has brought the airline up to standard and attained profitability, there appears to be an excessive dependency on him which might cause instability for the airline when he leaves this position.

Opportunities

Ryanair has the opportunity to get better at customer services and awareness and also has the opportunity to beat budget airline competitors like Easy jet and Jet 2 on budget in the EU.

The decline of the charter flight sector provides an opportunity for Ryanair. Additionally, the large amount of aircraft which Ryanair purchase, allow the airline to reinforce its position in the European market and expand providing a good opportunity to increase income, while reducing their environmental effect and fuel usage by using up to date aircraft.

While the possibility of long-haul flights becoming budget flights is discussed, the airline specialists suggest that the needs for transatlantic long-haul flights may rise in the future.

Threats

The pound depreciated almost 20% after the Brexit referendum, and as Ryanair get a portion of its annual income in GBP, it is likely that their income will be affected by as much as ?8 million.

Additionally, to enable Ryanair to operate as a low-cost airline, it depends heavily on low fuel prices. However, Ryanair has limited control over this and should fuel prices rise, this may threaten Ryanair’s low-cost policy and impact on tis profitability.

Ryanair faces increasing competition from other airlines, but especially Wizz Air and Easy Jet.

Strikes and Air Traffic Staff shortages affected flight schedules enormously in 2018, resulting in thousands of flights had to be cancelled and several Ryanair departures were delayed.

External influences, such as financial recession or terror attacks may also affect the need and want to travel by air and it is also possible for large airline companies, as seen recently with BMI Baby, to go into liquidation.

Ryanair’s demand is the number of flights and destinations in which Ryanair’s customers desire and how much there willing to pay for them and therefore an important influence is the customers income. Should their income increase, then the demand for cheap getaways will also increase. However, if their income falls the demand will also decrease.

Their supply is influenced by the number of destinations and flights Ryanair provide to the budget airline market.

Ryanair have some very loyal customers who will only fly with Ryanair, even if other budget airlines like Air Lingus are offering cheaper flights, which keeps the demand for Ryanair constant. However, if these customers didn’t exist, Ryanair’s demand would decrease.

Some Government policies directly affect the airline industry. Fiscal policies, such as excise taxes on airline tickets, increase customer prices which also effects demand.

Consumer protection legislation requires airlines to limit tarmac time during bad weather and delays increase flight cancellations which decrease income.

Monetary policies control interest rates and determine an airlines ability to buy aircraft.

Fuel policies include oil suppliers’ decisions, refinery expansion by oil companies and government decisions to open offshore drilling. Fuel is the most important cost, as this affects Ryanair’s feasibility.

Global environmental policies in relation to emissions and lack of control over international routes may affect airline operations in the future.

Ryanair is also massively affected by different seasons

I have chosen to use Porter’s five forces analysis to show the different market structures that Ryanair operates in, impact on pricing and output decisions:

Threat of entry (Low)

Since 1985 Ryanair has been a very strong and popular airline within Europe, so any new competitors entering the airline industry would need to spend a generous amount on advertising to be in with a chance of competing with them in the European airline business.

Once Ryanair had established the online booking and reservation system “Skylights”, it made the decision to promote its website by advertising in newspapers, radio and on television advertising.

Competitive rivalry (High)

Ryanair is also expanding its short-haul flight routes. It performs this by using a point-to-point approach which reduces the flight turnabouts and lessens the expense.

On the other hand, rival airlines compete in price rising competition, which is aimed at the customers who are more price sensitive and this technique has large customer advantages.

In the budget airline industry EasyJet is Ryanair’s main competitor. However, they don’t compete directly with each other but instead pose more of a threat to weaken sales as a form of competitive rivalry.

Bargaining power of suppliers (High)

For airline companies, suppliers are generally limited to the aircraft and the supply of fuel and Ryanair have achieved healthy relationships with its selected plane stockist Boeing.

Ryanair created a vast contract with Boeing during 2002’s economic downturn and are required to generate around 150 of their 737-800 aircraft specifically for Ryanair, besides providing them with additional technical support and spare parts.

Expansion of the airline fleet enables Ryanair to offer their customers more European destinations at budget prices, resulting in them becoming the most vigorous transporter within the EU and second major airline in the world.

The jet fuel price is administered by world trade and fuel market and governed by countries in the Middle East but Ryanair still has to meet its budget policy.

Bargaining power of buyers (High)

In the airline industry, there is standard product, flexible demand, airline brand and the quality of service for consumers to determine. The main reason Ryanair can provide competitive prices is due to selling flight tickets to customers through its online system.

Threat of substitute (Low)

Europe offers an immense network of railways, some of which connect to the major cities in which Ryanair fly to. Nevertheless, Train fares are much more expensive than Ryanair’s prices and with rail travel and the journeys are lengthier too.

Another option is to travel by car, but this is also more time consuming than flying with Ryanair, and additionally there are often roadworks.

The final option is video conference, which is global communication technology and deals with agreements via web-camera, computer and internet network. This option is much cheaper than Ryanair and often more convenient for businesses.

Conclusion

Ryanair has done very well for itself since it was established in 1985. Its success is aided by the conducive nature of its industry and external environment. The airline industry has its challenges such as intense competition, the threat of new entrants and the climatic concerns but the expansion of the EU, the increase in the travel demand, low supplier bargaining etc have aided the growth of the low-cost airlines such as Ryanair.

Internally, Ryanair strengths and activity map shows it to be a company with a strong sense of direction and potential. It appears determined to grow within the industry and remain the largest low-cost airline in Europe. However, its weaknesses which include its dependence on its CEO, its poor relationship with other companies in the industry must be addressed. The CEO might want to delegate some of his duties to other people in the company and ensure that adequate training is provided to the management so that in the event of his resignation, the business will remain standing.

Ryanair is still Europe’s number one airline, as it carries over 130 million customers each year. Another reason why it’s the airline market leader is because it has 2000 flights each with 350,000 people flying daily and every day flying from 85 different bases. Which all helps to connect to 216 different destinations.