How does Ryanair use its supply chain to keep cost down
In the 1980’s the first low cost carriers started expanding their operations into mainland Europe. Previously the concept of flying from London to Barcelona on a regular basis would have been very costly and timely on the incumbent scheduled carriers. The emergence of new low cost carriers transformed these and other routes. The airline industry and the legacy carriers soon realised that competition for custom had been taken to a new level. Ryanair started flying in 1985 with a single fifteen seater aircraft flying from Ireland to London, by March 2010 the company had recorded revenues of $4223.4 million and operating profits of $568. 3 million (Datamonitor 2010). Ryanair had proved that low cost carriers can post creditable financial data.
The sustainability of the Ryanair product can be accredited to many factors which include; labour productivity, use of secondary airports, a policy of outsourcing, robust route networks and a strong emphasis on cost control. This paper will look at the Ryanair supply chain and how it is utilized to drive down cost and therefore price for its end consumers. Debate continues about the strategies Ryanair uses to keep expenditures down whilst servicing its 73 million customers (Ryanair.com 2012) this paper will also look at these apparent tensions. How is the ‘marketing promise’ operationalised into the working of Ryanair’s service delivery system? A considerable amount of literature has been published on the way Ryanair has chosen to market its business. They have chosen a marketing standpoint which is rarely copied in the airline industry. Whilst this cannot be linked to directly to its handling of the supply chain it operates in, it does help to provide a context and an indication of how they like to operate.
The CEO of Ryanair was quoted as saying “the core of our marketing strategy is to spend as little money as possible on advertising” (Datar R 2003). Michael O’Leary the CEO of Ryanair is very visible and often voices his opinion on matters which he believes impact the profitability of the company. His opinions can be controversial and he often uses a tactic of issuing law suits if he feels strongly about an issue. These suits have been taken against other airlines, airports and even government institutions.
This helps Michael O’Leary to frame Ryanair as the upstart still fighting against the indigenous institutions. The marketing collateral released to the press reinforces this ideal. See below for three recent examples: (Brandchannel. com 2001) (Copyranter. com 2010) (Thedrum. co. uk 2010) Ryanair uses advertising to aggressively challenge other carriers and to reinforce their own low cost promise. The marketing literature appears to be focused upon transaction marketing for new customers rather than any relationship marketing. This is reinforced by the lack of any loyalty or frequent flyer program.
The culture of keeping costs to a minimum pervades through Ryanair and the marketing of the brand reinforces this. The service delivery system which includes the facilities, processes and skills needed to provide the service (Stevenson p146) also follows this ideal. Many product features of conventional airlines have been unbundled out of the Ryanair product. Products such as seat allocation, food and drink service have been removed. The use of point to point routes is also less expensive to provide than interline hubs (Barrett p95).
According to Slack (2007) “A major airline can be viewed as one large planning problem which is usually approached as many independent, smaller (but still difficult) planning problems”. Ryanair have taken all of the processes which make up service delivery and attempted to identify the drivers where cost can be taken out. This may mean outsourcing elements or driving bargains at opportune times. One incidence of this approach was to seen to occur when Ryanair achieved significant capital cost savings by negotiating with Boeing soon after the events of 9/11 (Barrett, 2004 p94).
It would be easy to criticise the timing of the deal but one could argue that this was an example of great opportunistic management. Another reflection on Ryanair is the attitude it has to staff and their unionisation. Ryanair is undoubtedly a very lean organisation and one which could never be accused of being over manned. Workforce incentives are simply not employed. Unlike its American counterpart Southwest airlines who engaged with staff on a commitment/partnership approach (Hoffer Gittell and Bamber 168) Ryanair decided on a policy of control/union avoidance (Hoffer Gittell and Bamber 168).
This gave Ryanair the power to use its workforce more fluidly to suit its own objectives rather than engaging heavily in employee led ideals. The model below reflects this ideology: Relationships with unions AvoidAccommodate Partner Control Relationship With Employees Commitment Source Bamber et al (2009a) p170 following Walton, Cutcher-Gershenfeld and McKersie (1994) What are the opportunities and challenges of keeping the unit cost low while delivering service quality? In this section I want to focus upon the use of the supply chain by Ryanair.
The model Ryanair uses does not appear to relate to any formal models or any sophisticated consulting practices. It is instead a reflection on its fixation with cost reductions. The initial area to look at is the passenger booking methodology. Conventionally this service was delivered by travel agents who in turn garnered a fee. Ryanair refused to recompense agents for their services and use of their Global Distribution Systems. Instead they decided to utilise their own telesales teams and latterly encouraged direct sales through their web portal www. ryanair. com.
By 2007, 99% of all bookings came through the web (Tim McCormick p28). The decision to remove travel agents from the booking process upset the travel trade who traditionally had relationships with all carriers. These tensions still exist and it would be a difficult judgement to make as to whether the company would be more profitable if it supported agents. But this standpoint is a reflection Ryanair’s approach to business and minimising costs. Ryanair has been a leading proponent of accruing ancillary sales, exploiting revenue streams is a fundamental tenant of Ryanair’s business model.
If you book flights in advance the price is considerably lower than that of late bookers. The skilful use of yield management sees a high load factor on their flights and extra income is derived from: airport check ins, hold luggage, credit card payments, the provision of wheelchairs, inflight food and beverage sales and affiliate marketing on its website. The affiliate marketing has seen Ryanair tie up with insurers, hotel bed banks, car hire providers and phone companies. Ancillary sales in 2009-10 made up 22% of its revenue (McCormick p29) When it comes to operations, every process is rationalised.
Check in, baggage handling and ticketing are reduced down to the necessities and where possible customers are encouraged to take on the process themselves. Ryanair only selects airports with low handling charges, if the charges increase Ryanair will pull out. This happened at Manchester in August 2009, Stephen McNamara of Ryanair said “Ryanair continues to lower fares to encourage travel, but with passengers paying lower fares airports must lower their charges -particularly high-cost airports like Manchester” (Herald Scotland 2009).
In repost Manchester Airports Managing Director Andrew Cornish said “Ryanair made us an offer we could refuse” (Yorkshire evening post 2009) This is a classic example of how Ryanair tried to force a member of its supply chain to adhere to its own costing strategy. If components of the supply chain refuse to compromise their fees Ryanair will simply move its operations elsewhere. As you can see from the previous example one of the most significant aspects of supply change management is selecting a supplier to procure from. Meredith points out that they need to “deliveries on time….have fair prices…the supplier need to be reactive…. and to continually improve” (p295). Ryanair contracts out any process which they believe they have no competitive advantage. They do this when it comes to maintenance of their fleet but it also includes cabin crew and ground handling. Every charge is examined; McCormick notes that they once went to battle over the cost of ice (p30). It is clear that there are no costs too small to try and reduce, if this means upsetting an existing relationship to improve profitability that will happen.
Comparisons can be made here with British supermarkets that historically have pressurised their value chain to their competitive advantage. I have already touched upon Ryanair’s objection to unionisation; their human resource procedures are reflective of their lean philosophies. Extreme efficiency is central to this. In 2006 Michael O Leary argued that: ”a plane does not need two pilots……really you only need one pilot, let’s take out the second pilot and let the bloody computer fly it in” (Cappell & Foust 2006). This was never incorporated into company policy.
It is debatable as to whether legally you could remove the second pilot but it is symptomatic of the endeavours to minimalize cost and use the media to publicise the brand. Staff are also expected to pay for their own training, not charge mobile phones at work, assist with cleaning and take free hotel stationary whenever possible (McCormick p30). Ryanair have clearly and explicitly attempted to create a culture of hard work and cost control. Every element of its value chain is scrutinised constantly to ensure best value. It would appear that the principles and policies of its rivals often prevent them from accepting some of the more radical frugalities found by Michael O Leary and Ryanair. How successful is the bargain between customers and profitability fulfilled and what appears to be the basis of the system? This section will analyse how Ryanair’s customers tolerate (if at all) the policy of low cost. It is safe to assume that their dedication to cost control has an effect on the customer experience. Tim Jones, a principal at London innovation confirms that “At every chance Ryanair tries to squeeze just that little bit of extra margin out of its passengers” (Cappell & Foust 2006).
The generalisation of much published research on Ryanair can be problematic. There is a huge amount of literature on the intensive focus on cost control and this inevitably has an unambiguous effect on the end consumer. It is clear that the majority of Ryanair customers are fully aware of the relationship they have with the carrier. It is an explicitly cost driven commodity and they are surely aware that any infringement any of the rules there will be a cost associated to this. The UK media have seized upon the many opportunities afforded to them by Ryanair to outline the nature of the relationship.
The Daily Mail wrote a piece outlining the story of a passenger having a suspected heart attack and being offered a sandwich and drink; he was latterly charged ? 4 and ? 2 respectively (Daily Mail 2010). Stories like this are many fold and the majority of Ryanair customers understand that when using Ryanair every element of the process has a cost associated with it. These days, when using flight companies you often get the feeling that you are nothing more than cattle. The difference with Ryanair is that they will call you a cow, lick their lips and then discuss how you will be carved up for lunch.
They believe that passengers are not likely to come back because of the free perks offered by the scheduled carriers. Instead they are willing to undertake a degree of indignity just as long as they reach their final terminus cheaply and with their baggage. It appears that in trade for low prices customers will put up with baggage charges, persistent in flight sales teams, limited customer service, tight seats and flights to destinations often many miles from the actual city. Conclusion
Ryanair is a commodity business and people respond to price, expect Ryanair to keep costs down and offer lead in fares at even cheaper prices. Ryanair keep the lead in prices attractive by driving down cost wherever possible. The supply chain is micro managed to ensure that there is a constant emphasis on best value. If an element of the supply chain is actually or even perceived to be costly Ryanair and its management team will endeavour to rectify it. If a part of the supply chain refuses to bow to the pressure Ryanair will simply move to another supplier or even look at vertically integrating the business.
It is accurate to suggest that Ryanair’s starting prices for air travel are competitive. That said every element apart from the fare is at an additional cost to the customer. It appears that customers are prepared to accept this is return for competitive fares. Customers seem to understand the business model adopted by Ryanair. They may not be happy with it but judging by the ever increasing profit and turnover it does not appear to affect the bottom line.