Porter’s 5 Forces of Ryanair
Forces Before the idea of Ryanair or indeed any low cost carrier was even devised the European airways industry was, as already illustrated, highly regulated. Therefore post 1992 and deregulation, great changes came about. By identifying with Porter’s “five forces,” one is able to ascertain what this meant for Ryanair within the European air transport market. These five factors are threat of entry, competitive rivalry, bargaining power of suppliers, bargaining power of buyers and the threat of substitutes.
Threat of entry analyses the threat that new entrants may enter the industry and diminish the returns of established companies. In the case of Ryanair a strong brand identity built up over the period since deregulation has meant that any potential new entrants would have to outlay quite an amount of money in terms of sunk costs in advertising to compete on a level playing field. Allied with this, direct bookings on the Ryanair website has meant that there have been savings in the region of 42. 6% in marketing and distribution costs.
Competitive Rivalry The cost of increased competition can be quite high with customers benefiting from price wars between rival airlines. This is why Ryanair has an advantage over other airlines because their policy of bundling low frills and low prices together means that they are competing for the more price sensitive customer. Demand for short haul flights around Europe is ever expanding. It is however vital that Ryanair were among the first movers because many ‘copycat’ airlines have tried to follow suit.
Davy (2003) believes that there are only two pan-European low cost operators where first mover advantage and scale and cost efficiencies gave the two largest players, Ryanair and Easyjet, a significant advantage. In fact, since deregulation, of the 80 low cost operators that had begun operations, 60 had gone bankrupt (Lee, 2000). Michael O’Leary is so confident that this particular aspect of Porter’s 5 forces is almost inconsequential for Ryanair that he has said “at the lower end of the market Easyjet and Go don’t really compete with Ryanair. Having said this, the threat of competitive rivalry is important for the industry because fierce competition can lead to a decline in sales. Bargaining Power of Suppliers At a very basic level the airline industry suppliers are limited in two areas: actual purchase of planes and the supply of fuel. Ryanair has a very healthy relationship with the main aeroplane supplier, Boeing. With the downturn in the economy airlines were putting their purchasing on hold. Not Ryanair however, as O’Leary saw this as the perfect opportunity to buy.
In addition to the 2002 contract with Boeing where they will supply up to 150 737-800 type aircraft for Ryanair, they are also required to provide various ancillary goods and services to Ryanair. These include technical support and training, spare parts support, training of the flight crews, software and field services engineering. On writing this essay, it was made public that Ryanair has ordered an additional 100 new Boeing 737-800’s to facilitate Ryanair’s rapid European growth plans.
On the same day as this news was made public, Ryanair opened up four new destinations in Europe, bought the airline Buzz and had thousands of seats on sale for 1 Euro. Ryanair also has also increased its option orders by 78 to 125. This will, over the next eight years, give Ryanair a fleet of 250 Boeing 737-800’s, making it the youngest carrier in Europe and the second largest worldwide behind Southwest in the U. S. In terms of the fuel price there is very little that Ryanair can do, because the price of fuel is governed by world trade and the Middle Eastern countries have market dominance.
Bargaining Power of Buyers There are many determinants to the power possessed by buyers in the airline industry. These include the standardization of the product, elasticity of demand, brand identity and the quality of the service. In this respect buyer power in the European airline industry in quite strong because switching costs are very small. For low cost carriers, the switching costs may be found by simply clicking on a rival’s website. The fact that most low cost carriers sell their seat via the internet means that any price discrepancies can be found very easily.
This means that Ryanair have to keep their prices competitive in relation to the industry level. The Threat of Substitutes The threat of substitutes to the airline industry comes in three main forms. These are road, rail and to a lesser extent the boat service. Of these, rail would seem to offer the greatest threat because, certainly around Europe, it offers an excellent continental service around the major cities that Ryanair fly to. Rail travel has several advantages over air in terms of the fact that they can be more localised and more accessible but one must endure a longer journey also.
Ryanair can offer a faster journey at prices that can often be far cheaper. As an example, a return ticket from Frankfurt to Amsterdam costs between 121. 20 Euros and 175. 60 Euros. This compares with Ryanair’s average fare of less than 50 Euros (Davy, 2003). In fact, there is even the perception that there is much greater penetration of fast trains in the EU than in the like of the US, and that this is a limiting factor on demand. However, trains in continental Europe are very expensive, which is reflected in the fact that Europeans think nothing of driving from one country to another to make a saving.
Car travel offers similar advantages to that of the railways but Ryanair will always be able to boast shorter journey with less hassles. Another, less obvious threat comes in the form of global communications. As technology develops there may be less of a need to actually meet with people as business meetings could take place via video conferencing. Although, relatively speaking, this is not very prevalent at the moment, there may be less of a need to physically meet up with associates in the future.