{"id":7438,"date":"2015-12-09T23:24:20","date_gmt":"2015-12-10T04:24:20","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/ryanair-the-lowest-cost-airline-in-europe\/"},"modified":"2015-12-09T23:27:52","modified_gmt":"2015-12-10T04:27:52","slug":"ryanair-the-lowest-cost-airline-in-europe","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/ryanair-the-lowest-cost-airline-in-europe\/","title":{"rendered":"Ryanair: The lowest cost airline in Europe."},"content":{"rendered":"<p class=\"p1\">Launched 30 years ago, the Irish low-cost carrier Ryanair disrupted the European airline industry and started the low-cost revolution in Europe. Ryanair is now Europe\u2019s largest airline with more than 90 million passengers per year and shows record profits of 875 million euros [1].<span class=\"Apple-converted-space\">\u00a0 <\/span>Behind the success of Ryanair is the very effective\u00a0alignment of its customer value proposition with its low-cost operating model.<\/p>\n<p class=\"p1\"><b>The Business Model\u00a0<\/b><\/p>\n<p class=\"p1\">Ryanair\u2019s low-cost model was initially copied from the U.S-based\u00a0airline Southwest. The company\u2019s business model is straightforward: To offer cheap air transportation to fare-conscious customers. Ryanair targets customers who might otherwise choose alternative modes of transportation or not travel at all [1].<span class=\"Apple-converted-space\">\u00a0 <\/span>The company focuses mostly on inter-European, short-haul flights.<\/p>\n<p class=\"p1\"><b>The Operating Model\u00a0<\/b><\/p>\n<p class=\"p1\">With an aggressive approach of \u201cinnovation by substraction\u201d [3], the company simplified the operating model further and &#8216;outSouthwested&#8217; Southwest. Ryanair\u2019s operating model disrupted many common industry practices and allowed the company to outperform all of its competitors on costs per seat and per passenger [4] (Ryanair&#8217;s closest competitor, EasyJet, has a cost per passenger 67% higher [9])<\/p>\n<p class=\"p1\">One can analyze Ryanair\u2019s operating model through two different components: Structural and Executional. The structural component is related to the operations strategy or \u201cdoing the right things\u201d, while the executional component is more about the efficiency of \u201cdoing things right\u201d.<\/p>\n<p class=\"p1\"><span style=\"text-decoration: underline\"><span class=\"s2\">Operating Model: Structure:<br \/>\n<\/span><\/span><\/p>\n<ul class=\"ul1\">\n<li class=\"li1\"><b>Airports: <\/b>Ryanair<b> <\/b>flies to small secondary airports, which are sometimes located further away from the city centers. This not only helps reduce airport taxes, but also allows Ryanair to secure subsidies from local city councils who want to attract Ryanair\u2019s tourists! [5] These airports also allow a quick turnaround time, which means that the company can achieve a high fleet utilization.<\/li>\n<\/ul>\n<ul class=\"ul1\">\n<li class=\"li1\"><b>Point-to-Point Routes: <\/b>As opposed to a hub-and-spoke model used by national airlines, Ryanair\u2019s model is a point-to-point model, which reduces customer transfer costs.<\/li>\n<\/ul>\n<ul class=\"ul1\">\n<li class=\"li1\"><b>Distribution:<\/b> In order to improve its margins without increasing end-customer prices, Ryanair opted for online direct to customer sale and bypassed the expensive intermediary that travel agencies are.<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline\">Operating Model: Execution<\/span><\/p>\n<ul class=\"ul1\">\n<li class=\"li5\"><b>Labor Costs: <\/b>Ryanair<b> <\/b>has<b> <\/b>the lowest labor costs in the industry (6\u20ac per passenger \u2013 vs<span class=\"Apple-converted-space\">\u00a0 <\/span>9\u20ac and 17\u20ac<span class=\"Apple-converted-space\">\u00a0 <\/span>for competitors EasyJet and AirBerlin [5]). To achieve these results, Ryanair has used three levers:<\/li>\n<\/ul>\n<ul class=\"ul1\">\n<ul class=\"ul1\">\n<li class=\"li5\"><b>Labor Utilization:<\/b> A large majority of Ryanair\u2019s pilots are actually not salaried employees but third party contractors [5]. With these type of contracts, Ryanair only pays pilots when they are effectively flying and fully utilized.<\/li>\n<\/ul>\n<\/ul>\n<ul class=\"ul1\">\n<ul class=\"ul1\">\n<li class=\"li5\"><b>Professional Fees:<\/b> Employees compensation is set-up to include any potential professional fees. This incentivizes the employees to use low cost hotels and transports. (e.g. Crews have been reported to be staying at a low cost camping resorts in the south of France ! [5])<\/li>\n<\/ul>\n<\/ul>\n<ul class=\"ul1\">\n<ul class=\"ul1\">\n<li class=\"li5\"><b>Salaries<\/b><span class=\"s5\">: <\/span>By using Irish labor contracts with its employees, the company avoids the rules on wages and social benefits that are required by some European countries [6].<\/li>\n<\/ul>\n<\/ul>\n<ul class=\"ul1\">\n<li><b>Standard Fleet: <\/b>Ryanair uses a single type of jet (Boeing 737) for its entire fleet. This enables Ryanair to reduce its Maintenance,<b> <\/b>Repair and Overhaul costs, reduce its staff training, and increase flexibility in staff allocation.<\/li>\n<\/ul>\n<p class=\"p1\"><b>The Virtuous Cycle of Business and Operating Model Alignment <\/b><\/p>\n<p class=\"p1\">Ryanair\u2019s business and operating model\u2019s alignment create virtuous cycles through which the business model enables the operating model, which in turn strengthens the value proposition and the competitive advantage of the company [2].<\/p>\n<p class=\"p1\">For example, the company\u2019s business model is about offering low prices, these low prices generate high volumes, which strengthen the company\u2019s operating model: The high volumes enable the company to gain a strong bargaining power with suppliers and secure high fleet utilization, both of which lead to even lower costs, lower prices and increased competitiveness.<\/p>\n<p class=\"p1\">Similarly, because the business model is centered on low prices, the value proposition means that customers have lower quality expectations, which in turn allows the company to not offer free checked-in luggage or meals, something that leads to even lower costs and prices [2]. According to Ryanair\u2019s CEO, the business decision to stop offering free checked-in luggage was not expected to create a revenue stream. It was a way to shift customer behavior into carrying less luggage and simplify Ryanair\u2019s operations (e.g by shutting down the \u2018lost bags operation\u2019). This allowed\u00a0the company to significantly reduce their costs.<\/p>\n<p class=\"p1\"><b>The way forward <\/b><\/p>\n<p class=\"p1\">Ryanair is currently undergoing a shift in its strategy: It is now aiming to improve its customer service and target business travelers [5]. It will be interesting to see if and how the operating model is going to be adjusted to match the new business model, in order to create new virtuous cycles.<\/p>\n<p class=\"p1\">Sources :<\/p>\n<p class=\"p10\"><span class=\"s6\">[1] <a href=\"https:\/\/investor.ryanair.com\/wp-content\/uploads\/sites\/4\/2015\/07\/Annual-Report-2015.pdf\"><span class=\"s2\">https:\/\/investor.ryanair.com\/wp-content\/uploads\/sites\/4\/2015\/07\/Annual-Report-2015.pdf<\/span><\/a><\/span><\/p>\n<p class=\"p10\"><span class=\"s6\">[2] <a href=\"https:\/\/hbr.org\/2011\/01\/how-to-design-a-winning-business-model\"><span class=\"s2\">https:\/\/hbr.org\/2011\/01\/how-to-design-a-winning-business-model<\/span><\/a><\/span><\/p>\n<p class=\"p10\"><span class=\"s6\">[3] <a href=\"http:\/\/www.innovationmanagement.se\/imtool-articles\/innovation-by-subtraction\/\"><span class=\"s2\">http:\/\/www.innovationmanagement.se\/imtool-articles\/innovation-by-subtraction\/<\/span><\/a><\/span><\/p>\n<p class=\"p11\"><span class=\"s6\">[4]<\/span> <span class=\"s6\"> <a href=\"http:\/\/centreforaviation.com\/analysis\/ryanair-swot-low-costs-remain-the-key-strength-even-as-customer-service-enhancements-take-root-186145\"><span class=\"s2\">http:\/\/centreforaviation.com\/analysis\/ryanair-swot-low-costs-remain-the-key-strength-even-as-customer-service-enhancements-take-root-186145<\/span><\/a><\/span><\/p>\n<p class=\"p11\"><span class=\"s6\">[5] <a href=\"http:\/\/www.challenges.fr\/entreprise\/transports\/20150902.CHA8941\/ryanair-la-machine-a-cash-contrainte-au-virage-force.html\"><span class=\"s2\">http:\/\/www.challenges.fr\/entreprise\/transports\/20150902.CHA8941\/ryanair-la-machine-a-cash-contrainte-au-virage-force.html<\/span><\/a><\/span><\/p>\n<p class=\"p11\"><span class=\"s6\">[6] <a href=\"%22\"><span class=\"s2\">http:\/\/www.bloomberg.com\/news\/articles\/2015-06-22\/ryanair-clashes-with-denmark-over-labor-laws<\/span><\/a><\/span><\/p>\n<p class=\"p11\"><span class=\"s6\">[7] <\/span><span class=\"s2\">http:\/\/www.telegraph.co.uk\/finance\/newsbysector\/transport\/10996171\/Why-do-you-pay-to-check-in-baggage-with-Ryanair.html<\/span><\/p>\n<p class=\"p11\">[9]\u00a0http:\/\/centreforaviation.com\/analysis\/ryanair-swot-analysis&#8211;michael-olearys-maniacal-focus-on-being-the-lowest-cost-producer-96465<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Launched 30 years ago, the Irish low-cost carrier Ryanair disrupted the European airline industry and started the low-cost revolution in Europe. Ryanair is now Europe\u2019s largest airline with more than 90 million passengers per year and shows record profits of [&hellip;]<\/p>\n","protected":false},"author":503,"featured_media":7439,"comment_status":"open","ping_status":"closed","template":"","categories":[107,628,574,155,717,7],"class_list":["post-7438","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-airline","category-europe","category-low-cost-carrier","category-ryanair","category-tom-challenge-winner","category-winner"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/the-tom-challenge-tom-winners-and-losers-assignment\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Ryanair: The lowest cost airline in Europe. - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/ryanair-the-lowest-cost-airline-in-europe\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Ryanair: The lowest cost airline in Europe. - Technology and Operations Management\" \/>\n<meta property=\"og:description\" content=\"Launched 30 years ago, the Irish low-cost carrier Ryanair disrupted the European airline industry and started the low-cost revolution in Europe. 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