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Five Forces Model on Ryanair

Essay by review  •  June 19, 2011  •  Essay  •  1,690 Words (7 Pages)  •  2,424 Views

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Apart from analysing the macro-environment, the micro environmental factors must also be analysed. The Airline is one of the major industries in the world today and is greatly affected by Michael Porter's "Five Forces" model. These are internal factors that have a direct impact on the industry and a business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business.

Internal Rivalry within the Industry

The central force of Porter's model is Internal Rivalry within the Industry. In case of the Airline industry, this is the most important force today, especially since the market is completely saturated.

First Mover Advantage

Ryanair were among the first movers because many 'copycat' airlines have tried to follow suit. 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. Since deregulation, of the 80 low cost operators that had begun operations, 60 had gone bankrupt.

Large number of competitors

The LCC market is highly competitive. There are more service providers than needed in both local as well as international markets. There are already many new budget airlines with Ryanair and easyJet as the famous ones, but also Virgin Express, Debonair, KLMuk, Go and Air One. However the competitive rivalry between those two groups stays moderate, while it is quite high within each group. However, for Ryanair, low levels of existing rivalry as the two major low-cost airlines have avoided direct head to head competition by choosing different routes to serve. If any company does decide to compete on the same basis as Ryanair there will be heavy pressure on prices, margins, and hence on profitability

Price competition

There is not much differentiation between services. Competition within the budget sector is very high because of quite similar "no frills" flights only sometimes different in price.

Price is the main differentiating factor and airlines are continually competing against each other in terms of prices, technology, in-flight entertainment, customer services and many more areas. Most cost advantages can be copied immediately by competitor airlines.

Operational Routes

Budget airlines operate on secondary airports. In order to avoid too much competition they try to concentrate on different routes, hubs and airport bases. easyJet and Ryanair both operated an important hub at Stansted and encountered each other in the same markets so they try to distinguish themselves in other areas. Ryanair favours secondary airports with convenient access to major population centers (e.g. London Stansted Airport) and regional airports (e.g. Brussels-South Charleroi airport). Firstly these have more competitive access and handling costs but also provide a higher rate of on-time departures, fewer terminal delays and faster turnaround times (it is much quicker to land, unload and reload passengers and luggage and take off again at smaller less congested airports than at a major airport such as Zaventem or Heathrow which have to accommodate many planes at the same time). The fast turnaround is a key element in Ryanair's efforts to maximize aircraft utilization. Ryanair's average turnaround time for the fiscal year ended March 31, 2003 was approximately 25 minutes. This has allowed the possibility to fit in two extra flights a day

Buyers' Bargaining Power

There are many determinants to the power possessed by buyers in the airline industry.

Price Sensitivity

The various airlines are competing for the same customer, which also results in strengthening the buyer power. Customers are price sensitive and would purchase in regards to price as they are concerned with low price otherwise they would travel on the main airlines. The products are more homogeneous concerning the services the passenger buys, and only differ in prices.

Switching Cost

Switching to another airline is relatively simple and is not related to high costs (Internet-all airlines are online). If the same departure airport and destination airport is required by the customer they will switch to the cheaper fare easily as low cost airlines do not offer the services and luxuries if differentiate them from other low cost airlines. Customers know about the cost of supplying the service. Customers access perfect competitive pricing information through the Internet, and virtually zero switching costs to move between airlines, so they are bargain hunters. 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.

No Loyalty

Buyers usually do not have loyalty in low cost airlines as the trip is purchased according to price unlike the main airlines where there is more loyalty as the frequent flyer program allows customers to benefit from the airlines and claim mileage.

Bargaining Power of Suppliers

Fuel, labor, airports, and security services are all suppliers with great power to increase prices.

Limited aircraft Suppliers

There are only 2 possible suppliers of planes - Boeing and Airbus. Boeing is Ryanair's main supplier. Switching costs from one supplier to the other is high because all mechanics, parts and pilots would have to be retrained.

Fuel

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. As the price of aviation fuel is directly related to the cost of oil (Ryanair controls these through hedging).

Airports

Regional Airports have little bargaining power as they are heavily dependant on one airline. Bigger airports, where Ryanair's competitors operate, have greater bargaining power. Ryanair's policy is to try and avoid these

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