Challenges in the Business Model of Low-Cost Airlines: Ryanair Case Study

Introduction

As a consequence of the 2008 economic and financial crisis which seriously impacted the financial sector and the loss of purchasing power of the population, companies based on a low-cost business model proliferated in the airline industry, thus offering a service, which had always been designed for the upper-middle class, to a wider public (Dobruszkes, 2006). With the rest of the economy having difficulties, this low-cost model, led by the Irish airline Ryanair, flew their planes at full capacity and offered new routes. It rapidly became a model admired by both passengers and competitors (Malighetti et al., 2010).

However, the sustainability of its competitive advantage achieved in costs entailed precarious working conditions for its workers as well as having an impact on its customer service and after-sales service (Barrett, 2016). In other words, it is a model that focuses its attention on generating short-term economic-financial benefits, forgetting about the creation of value in both social and environmental dimensions in the long term (Valle et al., 2019). We are therefore talking about a short-term business model in which managers lack a bifocal vision and suffer from various syndromes such as strategic inertia and the strategic shortcut. In spite of this, its financial data shows that it is the leading airline in Spain, notably above its competitors such as Vueling and Iberia, and that its profit margin is unbeatable.

The discussed model therefore presents advantages and disadvantages; therefore, its strategic and organizational adjustment is worth studying. Over the years, strikes carried out by its employees along with the unions, unresolved complaints and changes of baggage policies among others, have led to an increase in transaction costs that the service generates on the customer (Martín, 2018). Therefore, Ryanair faces two major challenges: on the one hand, to achieve the sustainability of its competitive advantage in the long term, and on the other hand, to continue generating superior value for the consumer, or at least trying to diminish it as little as possible.

The business model of low-cost airlines appeared at the end of the 1990s, more specifically from 1997, when the deregulation of the intra-European air transport market took place and led to a significant increase in competition between airlines and airports (Lieshout et al., 2016). The liberalisation of the market ultimately led to the emergence of low-cost business models. In addition, Lieshout et al. (2016) also argue that changes in airline competition have been more pronounced in areas that were previously not well served, such as more remote regions of the UK, Spain and Italy. This is due to the fact that these types of airlines, and more specifically Ryanair, generally operate in secondary airports, and away from large populations (Gillen & Morrison, 2003; Dziedzic & Warnock-Smith, 2016). This issue will be discussed in detail during the case study of Ryanair.

Furthermore, taking advantage of the economic and financial crisis of 2008, and following the loss of purchasing power of the population, this new business model resurfaces with great force to offer solutions to their economic problems, as it allows them to obtain high value products and services (Servera-Francés & Piqueras-Tomás, 2019). Thus, the impact on their private economies would be less affected. In addition, they were able to take advantage of the opportunities of the technological revolution (Guo-Fitoussi, 2019) and managed to create a website and booking system that was clear, simple and attractive to the consumer.

So, these companies are created to focus entirely on the client and able to adjust their production costs to the minimum in order to respond to market demands. In this sense, this type of business model can be defined as an efficient system, which has managed to eliminate unnecessary costs for the company and reach a higher level of agility in the organization's processes (Sanchis-Palacios, 2018). In addition, they have managed to bring products traditionally focused on a middle and upper class to all types of public. The fact that Ryanair's prices are very low implies a high level of competitiveness in the sector and forces competitors to strengthen their competitive position and find alternative strategies to face the cost leadership led by Ryanair. Initially, this situation of high competitiveness in this sector may have benefited the consumer.