Ryanair (2005): Successful Low Cost Leadership

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CASE DESCRIPTION

The primary subject matter of this case concerns strategic management in the airline industry in Europe. Secondary issues examined include international marketing, operations management and business ethics. The case has a difficulty level of four or five, and the case is designed to be taught in one 90-minute class session. It is expected that students will need to devote three to four hours of outside preparation for the class discussion.

CASE SYNOPSIS

Ryanair is a 20-year-old international air carrier based in Dublin, Ireland. It is now the largest low cost airline in Great Britain and Europe and has modeled its operations (since 1991) on the very successful Southwest Airlines Low Cost Leadership model. Ryanair's CEO, Michael O'Leary, is an accountant by training but a combative entrepreneur by inclination. He has angered trade unions, government officials and competitors with his "bare knuckle " tactics but has achieved dramatic growth and profitability in the very competitive airline industry.

As of the end of the year 2004, Ryanair was flying 25 million passengers annually with a staff of less than 2,500 personnel. Ryanair flies only Boeing 737s and is rapidly transitioning to the newest 737 models - the 737-800. Challenges to the airline at the end of 2004 included escalating fuel costs, intensity of competition and the sometimes less than favorable attitude of the regulatory bodies in Great Britain, Ireland and the EU.

INTRODUCTION

On Thursday, May 26, 2005, Ryanair Holdings, PLC (Ryanair) celebrated its 20th birthday in a central Dublin hotel with a birthday cake and a party. At the celebration, Ryanir's CEO Michael O'Leary - confidently predicted that Ryanair would overtake British Airways by carrying 3.5 million passengers a month in 2005. He went on to say, "The very fact that a Mickey Mouse Irish airline can start in a field in Waterford 20 years ago, and in 20 years, overtake the world's selfstyled, self-proclaimed favourite airline is testament to the demand for low-airfare travel around Europe" (Business Ticker, 2005).

EARLY HISTORY OF RYANAIR

Ryanair was founded in July, 1985, by Cathal and Declan Ryan with the financial backing of their father, Tony Ryan. The elder Ryan had, for many years, been Aer Lingus' leasing manager and had gone on to found Guinness Peat Aviation, which eventually became the largest aircraft leasing company in the world. Aer Lingus is Ireland's national airline - principally owned by the Irish government. Ryanair began operations with a staff of 25 and a single 15-seat Bandeirante turbo-prop, flying between Waterford and London. In 1986, Ryanair received permission from the regulatory authorities to begin flying four flights a day on the Dublin-London route with two 46-seat BAE748 turbo-props. In doing so, they challenged the high-cost monopoly of British Airways and Aer Lingus with fares that were set at half the prevailing fare of £209. Ryanair's strategy (initially) was to offer simple, low-cost fares and exemplary customer service. In 1986 (the first full year of operations), they flew 82,000 passengers and began negotiations to acquire their first jet aircraft and additional routes.

During the later part of the 1980s, Ryanair continued to compete vigorously with British Airways and Aer Lingus while adding additional routes and jet aircraft. By the end of 1989 Ryanair had six BAC-111 jets and three ATR 42 turbos. In 1990, Ryanair suffered a £20 million loss and was forced to completely restructure. A new, brash CEO - Michael O'Leary - was brought in to manage the turnaround and the Ryan family invested an additional £10 million. O'Leary, at the suggestion of Tony Ryan, visited Southwest Airlines in Dallas, TX, to learn the fundamentals of Low Cost Leadership in the airline industry. Southwest, of course, was by far the most profitable of the American carriers, and their business model was quite different from the traditional flagship carriers. …