Five Forces model, Ryanair free essay sample

Ryanair benefiting from large economies of scale and have massively reduced long run average costs. They have struck deals with Boeing and Airbus for reduced prices (1/3rd of listed price) on 737 aircraft in bulk buying therefore new entrants to the market will not get these reduced prices as they do not hold a similar relationship and they will not be able to order in bulk. Ryanair have struck deals with many local airports over flight paths and air-time, Ryanair therefore aren’t charged with air traffic time, but in return, promise these local airports a set amount of passengers to enter that airport each year, which leads to passengers spending money in these airports. These deals have seen Ryanair further reduce costs, as well as restrict suitable air traffic slot availability to the airport as there are limited routes. Ryanair operates in 180 airports over 29 countries, flying 1,611 routes with over 1,500daily departures whilst easily outstripping competitors and increasing barriers to entry. We will write a custom essay sample on Five Forces model, Ryanair or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Increasing global fuel costs will not hit Ryanair’s profits as their costs elsewhere are the lowest in the flying industry. As a result of these low costs, Ryanair have been able to charge the lowest average fair of any low carrier airline in the UK, further increasing barriers to entry as new firms will not set those prices seen below. Despite Ryanair recording 18% profits on capital return, in a very profitable industry, threat of entry is still low due to exploited economies of scale and very low long run average costs that Ryanair have reduced over time. Low threat of substitute products or services Main substitutes are Trains/Buses/ Ferries Eurostar ticket ranges from ? 50-? 180 single ticket therefore more expensive and takes longer. Companies such as Eurolines have cheaper rates than Ryanair, but not as comfortable and more time consuming to get to destination. Ferries again tend to be a similar price to Ryanair’s flights but again they are more time consuming and are therefore not seen as a strong substitute. These threats are weak at the moment, however this could change given increasing global environmental awareness in the future leading to fewer passengers travelling on planes. Also CUSTOMER DISSATISFACTION WITH RYANAIR MAY LEAD TO ALTERNATIVES. However, given Ryanair’s ability to reduce costs and maintain the newest and most efficient fleet, the threat of substitute products is low. Bargaining power of customers (buyers) Customer satisfaction with Ryanair is very low and this could see it lose much of its brand loyalty in the future. The bargaining power of customers is therefore high given the alternative low cost airlines and substitutes to flying and these buyers could force down prices by switching their preferences away from Ryanair. However, Ryanair see this as an opportunity and have started to take advantage of this having experienced growing cash flows and operating profits since the recession. Ryanair have started to implement policies such as friendlier websites and less fines for overweight baggage. This should start to win over passengers from more costlier airlines, without Ryanair having to change their obsessive cost cutting business model too much. Ryanair need to target social media as well as increase advertising to start winning customers over with brand loyalty otherwise the tendency for  customers to leave with any change in price over fares or bad customer service will be much higher. Bargaining power of suppliers There are only 2 producers Boeing and Airbus- Market for production of planes is a duopoly therefore the bargaining power of suppliers is very high. This means that these companies have been charging very high prices for their planes to all airline companies. Boeing sells only 737 mo dels to Ryanair, further increasing its bargaining power over Ryanair as no other company makes the 737. Despite this high bargaining power, Ryanair have avoided paying premium prices for Boeing 737s for 2 main reasons: 1. Ryanair is Boeing’s fastest growing customer having recently gained 20% of EU market share, therefore a change of preference towards Airbus or an alternative aircraft producer would lead to a rapid fall in production of planes as demand would decline 2. Ryanair bought the bulk of its fleet in 2005 where demand was at a record low post 9-11 and the Gulf War in 2003. It is believed that Ryanair paid 1/3rd of listed price given the low demand and therefore shows that Boeing may not have the bargaining power over Ryanair that you would expect in a duopoly Additionally, the reported emergence of an aircraft producer in China could undercut costs of Airbus and Boeing, decreasing their bargaining powers further. Low Intensity competition Ryanair’s cost cutting business model seen above reduces competition in the following ways: 1. Experiencing enormous economies of scale has reduced threat of entry and helped them gain 20% of EU market share making it easily the largest low cost airline company in the EU 2. This has allowed them to reduce the price of the average fair significantly as shown in the table above, further increasing their customer base and therefore the market. 3. Plans for the future including buying 175 more in the next 5 years. Ryanair already has the largest and the newest fleet (4 years) therefore making the planes more cost effective and further increasing their competitive advantage As a result, Ryanair is now the top Airline in Spain, Italy, Poland and Ireland. Even though Ryanair may lose some of their competitive advantage through lack of advertising, their economies of scale combined with their ever-expanding fleet and number of flight paths means that there is a low intensity of competition.