Understandingand application of economic theory is one of the key aspects of running asuccessful business. Based on this fact we can understand why Michael O’Leary,graduate of Trinity University with a bachelor in economics, has effectivelyturned his company, Ryan Ltd. into the leading airline in Europe based onpassengers carried. However, due to a recent report of severe shortage ofpilots Ryanair has had to cancel 18,000 flights over a 5-month period. Doesthis indicate Michael O’Leary has forgotten to stick to his economic roots? Oris this proof that economic theories don’t always apply to complex real-worldscenarios? This report aims to delve into the economic concept of creating andcapturing value through the prism of Ryanair Ltd.
‘s recent troubles and hopesto give a better understanding as to whether Ryanair have abandoned thesetheories in their recent failings or whether the real world is too complex fortheories to characterise it.Section ARyanair’sfailure to monitor the activities of their pilots forced the decision to cancel flights for 400,000 passengers. They developeda new ‘Low Cost’ business model, later establishing Ryanair as a giant.Allowing them to become successful in the market as consumers could receive alow-cost ticket price, meaning transaction costs for consumers were low, whilstconsumer surplus increased. The decrease in fees consumers must pay became veryappealing to the eye, resulting in an easier and more satisfying purchasedecision process. Highlighting that Ryanair captured the value of consumerbehaviour 1. The airline grasped the opportunity to capture value throughcross-subsidy, encouraging aggressive on flight sales while maintaining lowcost seats.
A strategy of charging higher prices for one aspect of the businessto support the lower prices for another 2.Businessevolves through creating and capturing value, essential to maintain andregularly improve areas of the company- helping them survive.Competitionfrom other European airlines acknowledged the new market trend, adapting tocapture this value. Fighting to compete. Pricing, product/service and employeesare all different techniques of creating and capturing value. Ryanair suffereda major loss regarding their employees, failing to capture the value of theirpilots.
The inefficiency of employment contracts, meant pilots had nomotivation to stay. As a result, Ryanair’s pilots were receiving bettercontracts by competitors, increasing their value within the industry. Section B A key limitto capturing value is that one competitive advantage simply isn’t enough, oftenis the case that value created is rather easy but is difficult to capture.Ryanair effectively created value by developing the “low cost” model within theairline industry. The introduction of a new product/service will frequentlyprovide a situation where there is limited supply, with high demand- scarcityprinciple 3. As a result, competitorsof the firm aim to duplicate the new value that was created and receive theserewards. Competition can be a motivator that beneficial to consumers. Althougha huge consequence of competition is the risk of an equilibrium, an increasingsupply of the service will cause a fall in the price paid, gradually causingsupply and demand to be equal 4.
In myopinion, the concept creating and capturing value is key to the performance ofa company in an industry. Helping establish the company, introducing newproducts and services to benefit ALL in society. Ryanair succeeded the capturingof value to a certain extent, until pilots rightly-so doubted their worth.
Thelack of appraisal shown towards the pilot’s emphasised little value Ryanair hadof their employees, therefore causing an increasing trend of pilots leaving thecompany causing the concept to fail and impact the company heavily. Anotherlimit of creating and capturing value is the often-unspoken notion of luck5. This unembodied notion is often atthe forefront of many company’s competitive advantages that generate firmvalue. The theory of capturing value isflawed in that it would suggest that firms who capture value are those with thebest ability to create a competitive advantage, when in reality it is often thecase of sheer luck as to who develops the advantages.
It is impossible to takeinto account all the conditions under which specific bundles of value capturemechanisms are most likely to generate a competitive advantage for the firm andit is due to this that the hand of luck takes the place of theory in decidingwhere the advantage lies.Althoughcreating and capturing value is a theory with many limits, it is currently themost accurate we have on the matter as “we have yet to develop a robusttheory that allows us to unbundle the characteristics of institutions,industries, firms, and individual technologies that affect the selection ofparticular value capture mechanisms.” 6Forcreating and capturing of value to succeed, it requires regular modification ora series of competitive advantages to constantly add value, however in manymarkets, such as the airline, its difficult. In my opinion Ryanair failed toconstantly add to the value they’d already created, peaking without a plannedstrategy.
Where do they go from here?Improvementsare required within Ryanair, most importantly on employment. All involvedshould reach an agreement, constructing a fair and an approved contract,including a restrictive covenant. Forbidding their employees from leavingRyanair to compete against them with another airline, an on-going issue that’sproving costly 7. Contracting the pilots, will help capture their true value,meaning Ryanair and their consumers will experience this. All employees shouldsign an agreement of confidentiality, meaning all business discussions are notaired for others to know- protecting future models.Regardingthe business strategy of Ryanair, small steps can be taken to protect theirmodel-reducing risks of duplication.
The airline industry only has fivedifferent business models, indicating the difficulty of protection 8. As aresult, the only improvements Ryanair can make to their strategy is to modifyit. Improvements can be encouraging customer feedback forms.
Directly askingtheir consumers what changes they would encourage, highlighting strengths andweaknesses of their full experience with Ryanair. Regular adaptations will addvalue, and also increase the return rate of consumers- increasing profits. Toconclude, Ryanair’s failure to provide effective agreements with theiremployees has ultimately led to a significant decrease in the firm’s value. Thelack of value capture has therefore caused the severe lack of staff and thelast-minute cancellation of flights. However, as they are Europe’s mostsuccessful low-cost airline, this highlights their ability to create andcapture value within the aviation markets.
Immediate improvements are requiredto rectify the current problems they are experiencing.