[BUS35]

UNIVERSITY OF BOLTON

BOLTON BUSINESS SCHOOL

BA (HONS) ACCOUNTANCY PATHWAY BY

DISTANCE LEARNING

MOSCOW INTAKE 1 & 2

SEMESTER 1 EXAMINATIONS 2007/2008

CORPORATE STRATEGY

MODULE NO: ACC3005DL

Date: 11/02/2008 Time: 3Hours

INSTRUCTIONS TO CANDIDATES: There are FOUR questions on this

paper.

Answer ALL questions.

Note:
1. This is an open book
examination. During the
examination you are allowed to
use your own notes (not textbooks
or module handbook).
2. A fresh copy of the Case Study
is attached to the examination
paper.

Candidates are advised that the examiners attach importance to legibility of

writing and clarity of expression.
 Page 2 of 7

Bolton Business School

BA (Hons) Accountancy Pathway by Distance Learning
Semester 1Examination 2007/2008
Corporate Strategy
Module No. ACC3005DL

Case Study: “Ryanair: King of the Low Cost Airlines”

Exam Case
11 February 2008
Ryanair: King of the Low Cost Airlines

The European Open-Skies Treaty of 1992 radically altered the nature of the airline
industry in Europe. Prior to its implementation national governments restricted
access to their airspace to expensive ‘flag-carriers’, such as British Airways or
Lufthansa. After the treaty airlines could fly anywhere they wished in the European
Union without government approval. This change of legislation led to the growth of a
number of low cost airlines, the largest and most established being Ryanair,
EasyJet, MyAir, and Air Berlin. These airlines changed the face of air travel within
Europe by dramatically cutting fares.

Ryanair started operations in July 1985 prior to the European Open-Skies legislation,
flying between Waterford in the southeast of Ireland and London’s Gatwick airport.
Three brothers, Catlan, Declan and Shane Ryan were the founding shareholders of
the company, which was set up to offer low-cost no-frills services between Ireland
and London.
By the end of the first year, Ryanair had carried 5,000 passengers and had a staff of
57. To meet increased operational requirements, Ryanair purchased two more
planes (24-year-old 50-seaters) from Dan Air.
The airline began operations with a fifteen-seater turbo prop commuter plane which
was leased to the company by Guinness Peat Aviation (GPA), of which their father,
Tony Ryan, was the chairman. Ryanair got an early break when, shortly after its
formation, the UK and Irish governments signed a new air services agreement that
deregulated air traffic between the two countries. In anticipation of the increased air
traffic between the two countries, the Irish government decided to license a second
Irish operator on the route from Dublin to London. Ryanair happened to be the only
airline to apply for the license. It was granted the license to operate on the Dublin
(Ireland)-Luton (London) route.
The airline quickly realised that it could capitalise on the market by offering cheap
fares, and set its initial fare at IR £95 (1 Irish Pound was equal to approximately 1.44
US Dollars) for a return ticket. The price was 20 percent lower than the cheapest fare
of its competitors. Gradually, the airline replaced its old aircraft with newer aircraft
purchased from TAROM, a Romanian air transport company. By the end of 1986,
services to London were firmly established. However, further expansion had been
blocked because the requisite licenses could not be obtained. To overcome this,
Ryanair acquired an 85 percent stake in London European Airways (LEA, a Luton-
based airline). LEA had been flying scheduled flights to Amsterdam and Brussels
from London, but the flights had been suspended in early 1987.
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Bolton Business School

BA (Hons) Accountancy Pathway by Distance Learning
Semester 1Examination 2007/2008
Corporate Strategy
Module No. ACC3005DL

Being the oldest low-cost carrier in Europe, Ryanair had some advantages over its
competitors. For one thing, it had the advantage of experience, and secondly, its
brand enjoyed good recognition. However, after the deregulation of air travel in
Europe in the early 1990s, a number of start up airlines emerged in the low-cost
market. There initial success was also boosted by encouraging economic conditions
in the European Union at that time. And of course in those days there was little
concern about the environmental damage being caused by emissions from the
growing number of flights across the continent.
Notable among the competitors was EasyJet, the discount airline set up in 1995 by
Greek shipping magnate, Stelios Haji-Iaonnou. EasyJet was based in London’s
Luton airport and competed on some of the same routes as Ryanair. Although
Ryanair and EasyJet both operated in the low-cost segment and had similar
operational models, there were some inherent differences between the two airlines.
Firstly, Ryanair made a major portion of its profits by flying to secondary airports
which were a long distance away from the main cities.
By the late 1990s, Ryanair was the biggest low-cost airline in Europe. However, in
2002 rival EasyJet bought Go, the low-cost subsidiary of British Airways (BA), to gain
a larger market and a bigger combined fleet. This pushed Ryanair into second place.
However, Ryanair has again regained the top position with 33.4 million passengers
in 2005 making them Europe’s 5th largest airline and 14th in the world. Their primary
income, their fares, are priced as single segment one way trips. If you wish to
change planes in a hub then you must book the two segments separately, and there
is no transfer of baggage. You can book a return at the same time as the outbound
but you get no discount for doing so. Ryanair charges a credit card fee of 2,50 Euro
per person and segment, and if you miss a second flight due to a delay in the earlier
Ryanair flight, you will not get a refund for the missed flight and will be forced to buy
a new ticket.

Ryanair’s operations were originally based on the operational model of the most
successful US airlines discounter the Dallas-based Southwest airlines. The Irish
company adopted most of the operational policies which made Southwest Airlines so
successful. Along with an operational model to support its strategy of cost focus, the
airline also made use of extensive – sometimes brash publicity, to make its brand
more popular.

By early 2003, the low-cost airlines segment in Europe showed signs of

consolidation. Ryanair and EasyJet had emerged as the major players in the market.
Now the two airlines were positioned against each other.

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Bolton Business School

BA (Hons) Accountancy Pathway by Distance Learning
Semester 1Examination 2007/2008
Corporate Strategy
Module No. ACC3005DL

Most discount airlines in Europe sell their tickets exclusively over their website or the
phone, and tickets are not available via travel agents. Most are ticketless; you simply
turn up at the check-in desk with your passport and confirmation number. A credit or
debit card is mandatory for booking tickets.

The pricing structure is complex, with fares fluctuating strongly according to demand,
often on an hourly basis, and there are no hard rules for obtaining the cheapest
fares. In fact, fares can vary from as little as £1 or £2 on special promotions, right up
to £500 – such as a London-Geneva return flight, during the Feb half-term weekend.

Many discount airlines such as Ryanair try to lower airport fees, so they often use
smaller airports, sometimes quite far away from the city they state they fly to. For
example Paris Beauvais Airport is some 90 km from Paris, the bus costs about €13
one-way and it takes about 1h15 to get to Paris (TAXI would be €130-150 one-way).
Following competition from discount airlines, main carriers such as BA have also cut
their fares on competing routes, and are often only about 20% more expensive than
discount airlines, a price worth paying if the journey to the airport is cheaper and
faster. Sometimes they can even be cheaper than discount airlines, especially during
public holidays.

Many discount airliners are “point-to-point” airlines, and do not sell connecting tickets
if you need to take two planes to reach your destination. This means you might need
to collect your luggage and check it in again for the next leg of the journey.
Ryanair has recently been criticised for its introduction of charges for baggage of
4.50 Euro per bag, up to 15kg before excess charges apply. This in contrast to most
European airlines which allow 1 free checked bag up to 20kg. It has endured bad
press due to treatment of staff and customers and also for charges levied on the use
of wheelchairs by disabled passengers. Such publicity would seem to halt the
airline’s progress but in spite of this the company seems to move from strength to
strength. This is perhaps that every aspect of negative publicity is counteracted by
more positive promotion. For example, taking a look back at marketing performance
in 2002 gives an insight into their prowess in the marketing arena. At that time
Ryanair was among the brands whose commitment to marketing was recognised
when it was awarded a prize in that year’s Chartered Institute of Marketing/Marketing
Week Marketing Effectiveness Awards. The company’s online booking portal
Ryanair.com took the top slot in the Leisure and Travel category (92% of all flight
bookings are made online via Ryanair.com. It is now the largest travel website in
Europe, selling over 800,000 seats over the web each month).

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Bolton Business School

BA (Hons) Accountancy Pathway by Distance Learning
Semester 1Examination 2007/2008
Corporate Strategy
Module No. ACC3005DL

2002 also saw Ryanair receive another significant award when Chief Executive
Michael O’Leary was named Entrepreneur of the Year. It is generally acknowledged
that much of the credit for the company’s success must go to him. When founder
Tony Ryan asked him into the company, O’Leary requested 20% of the profits in
return. In the four years before he arrived, Ryanair had lost I£120 m. In the first year
that O’Leary took charge, it turned in a profit of I£200,000.Having joined the
company at a time when it was struggling to survive he now owns a significant share
of the organisation.
O’Leary understands marketing and he is quick to spot opportunities. He says that
threats of a war with Iraq did not faze him. In the aftermath of the September 11
attacks, he said that people stopped travelling for a few days because they were
watching the news. ‘’We offered 1 million seats at £9.99 – we had people moving
within a week.’’
O’Leary has also been responsible for much of the airline’s advertising – which has
often come in for some harsh criticism from industry watchdogs. Campaigns have
been banned for attacking rivals, using sexual suggestiveness, calling Newquay the
drugs and sex capital of Cornwall and offending the Pope.
Ryanair operate a huge network in Europe, and are generally (but not always) the
cheapest airline on the routes where they compete with another airline. They have
hubs in Shannon, Dublin, Glasgow (Prestwick), Liverpool, London (Stansted &
Luton), Brussels (Charleroi), Frankfurt (Hahn), Stockholm (Skavsta), Milan,
Bergamo, Rome, Barcelona and add more practically monthly. They serve 82 other
European destinations as well as Morocco, with over 209 routes.

They keep low prices by providing the most basic offering (typically an airport to
airport travel without on flight meal and hand luggage only), and placing additional
fares for every addition you need. So you’ll be able to catch a €20fare for a London –
Milan flight, but you’ll be heavily charged for on flight meal, excessive luggage weight
and so on. If you need a basic and cheap transport service, Ryanair is definitely a
good choice.

In order to allow passengers with only hand luggage a faster check-in, Ryanair have
recently introduced the possibility for them to check-in in advance via their website
and a fixed fare €7.00 return per checked suitcase, if booked in advance (else
doubled at the airport). Luggage weight limits are 10kg for hand luggage and
checked luggage is sold in 20 kg increments.

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Bolton Business School

BA (Hons) Accountancy Pathway by Distance Learning
Semester 1Examination 2007/2008
Corporate Strategy
Module No. ACC3005DL

Compared to most other budget airlines, Ryanair provides very limited compensation
in the event of flight cancellations, despite the EU regulations. Typically, Ryanair will
only provide a replacement seat on a later Ryanair flight (which can depart up to 3
days later than the original flight), or a full refund of the single journey price.
Alternative travel arrangements and accommodation is not normally provided by
Ryanair. Passengers wishing to return on the same day are normally forced
purchase a new non-advance ticket with a different airline, which can easily exceed
the price of the original ticket by a factor of ten. Therefore, it is not advisable to travel
with Ryanair if you’re not insured against flight cancellation or if you have important
work commitments the day after the return flight.

It should also be noted that Ryanair is very strict about checking in, the limit being no
later than 40 min prior to the scheduled departure time. Passengers arriving at the
check-in desk even one minute late have been known to be refused boarding, even if
they only carried hand-luggage and despite the flight being delayed.

Ryanair’s major competitor, EasyJet, have also been heavily influenced by the
business model of US based Southwest. The rivalry between them and Ryanair is
intense (especially on Ryanair’s side from its high profile chief executive Michael
O’Leary). As previously mentioned the two companies have slightly different
strategies. EasyJet flies mainly to leading airports while Ryanair uses far more
secondary airports to reduce costs. However, EasyJet also places more focus on
attracting business travellers as well as leisure travellers, although all its aircraft
have single-class cabins.

Ryanair claim that EasyJet’s average fares are higher and its average punctuality is
consistently lower. As of 2006, Ryanair flies more passengers, but EasyJet has a
higher turnover, leading both of them to claim to be “Europe’s number one low cost
airline”. The Irish airline claims to be 50% cheaper than EasyJet, despite their fees
and taxes often being much higher than those of their rival. It should also be noted
that Ryanair’s apparent practice of building additional “leeway” into the scheduled
duration of flights suggests that EasyJet’s punctuality is lower than Ryanair’s.

On the other hand, EasyJet has recently come under criticism in Germany for not
observing EU-law 261/2004. In the case of annulment, passengers are granted the
right of being reimbursed within one week. EasyJet does not return the money paid
for a ticket unless massive pressure is exerted; e.g. by the media. So passengers
regularly have to wait for months for reimbursement of their expenses.

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Bolton Business School

BA (Hons) Accountancy Pathway by Distance Learning
Semester 1Examination 2007/2008
Corporate Strategy
Module No. ACC3005DL

It is interesting to compare the routes of Ryanair and EasyJet which can be studied
on their respective websites. Their reach is impressive and although it could be
argued that they serve a different market to traditional airlines such as British
Airways, Air France and Lufthansa there is no doubt that they have affected the
thinking and pricing policy of these more traditional relatives. In the UK and Europe,
despite earlier consolidation of the market, new players such as BMI Baby continue
to emerge. And beyond Europe in India and China low cost players have started to
break into the market and shake up the prior monopolies of traditional airlines.

The question marks for the future may revolve around environmental issues given
lobby group and governmental concerns relating to fuel emission damage, and to the
balance of service versus low cost in the industry.

Question One

Identify Ryan Air’s strengths and weaknesses and critically discuss how they
have impacted on the company’s growth during the last ten years. (35 marks)

Question Two

Critically discuss the corporate, business and operational strategies of

Ryanair with reference to the company’s continuously improving performance.
(40 marks)

Question Three

Critically evaluate the performance of Michael O’Leary as leader of Ryan Air

and assess the management issues he may face as Ryan air moves into its
next growth phase. (15 marks)

Question Four

Critically discuss any-the socio-cultural, technical and environmental and

ethical issues (i.e. a partial macro environment analysis) which are likely to
impact on the future growth of the company. (10 marks)

TOTAL: 100 MARKS

END OF QUESTIONS