Oxford Brookes UniversityBSc (Hons.) in Applied Accounting

RESEARCH AND ANALYSIS PROJECT

Topic number 8:

The business and financial performance of an organisation over a three year period

List of contents Page

Introduction3Information Gathered5Use of Analysis techniques and Models7Ryanair: The Company Overview9Financial Analysis 10Business Analysis 25Conclusion 28Appendix 1 30Appendix 2 32Appendix 3 35Appendix 4 39

Skills and Learning Statement 42

INTRODUCTION

This research report contributes towards the Research and Analysis Project for submission to the Oxford Brookes University. This research report, in all respects, is prepared in accordance with the codes and guidelines prescribed by the University and does not breach confidentiality and anonymity of the organisation(s) involved and the industry being analysed.

THE TOPICHaving read all the research topics approved by the University, one of them sounded like a familiar choice among all and seemed the most interesting. Therefore I chose to work on The Business and Financial Performance of an Organisation over a three year period.The reason I chose this topic was that being an ACCA student I have always been interested in analysing the published Annual Reports of companies and I took this research work as an opportunity to exploit my technical and professional skills. The other reason for choosing this topic was that there was a vast amount of financial and business-related information available from many different sources.

THE ORGANISATION

For the purpose of this research work I have chosen RYANAIR HOLDINGS PLC. The reason I chose this organisation was simply because of my familiarity with the airline industry. Even in the European Airline Industry there was a vast choice of airlines which could be strategically categorised as: Scheduled Airlines (Flag carriers) Charter AirlinesLow Cost Airlines (Budget airlines) RYANAIR is strategically placed in the Low Cost Airlines industry. To me RYANAIR was the best choice for this analysis because of its rapid expansion, profitability, the success of it low cost business model and its capture of the market share Europe-wide. According to the figures provided by International Air Transport Association (IATA) in 2009, RYANAIR is the largest airline in terms of annual international passenger numbers. And secondly in terms of information, taking the fact that RYANAIR is the market leader, I was able to find a vast amount of published information on this particular airline.

THE OBJECTIVES AND THE APPROACHAs the name suggests, this research project will be focused on the business and financial analysis of RYANAIR extending over a period of three years. Through this analysis I will be able to conclude the financial position and performance of RYANAIR and analyse its business strategy and the industry it operates in. For the purpose of this analysis this report has been divided into two sections.(A) FINANCIAL ANALYSISTo serve this purpose the financial analysis of RYANAIR will be conducted on the published audited financial statements for the years 2007, 2008 and 2009 under:1) Trend Analysis Comparison of present financial ratios with the historic or future ratios to evaluate whether RYANAIR is financially improving or deteriorating under:

Profitability Liquidity Gearing Investor

2) Industry Comparison Comparison of the financial ratios and market-share of RYANAIR with that of a competitor in the same industry, EASYJET Airline Company Ltd.

(B) BUSINESS ANALYSISAnd to serve this purpose the following business models and analysis techniques will be brought into use:1) Five Forces model Porters 5-Forces Model will be used to analyse the European airline industry under:

Threat of new Entrants Substitute Products Power of Suppliers Power of Customers Industry Competitors

2) SWOT AnalysisAnalysing and identifying:

Strengths Weaknesses Opportunities ThreatsINFORMATION GATHERED

For any research process the information is vital and it is quite a task to gather relevant information for analysis and evaluation. The nature of the information gathered for an analysis depends largely upon the purpose. The information sources can be categorised as: Primary SourcesThis is the data collected by the researcher by means of questionnaires, interviews, surveys etc.Secondary SourcesThis is the data collected by other people but which can be used by the researcher for his own purpose.

SOURCES USED AND DATA COLLECTION TECHNIQUES

To carry on with this project I decided to take into account only the secondary information sources to obtain relevant organisation and industry data. The main secondary sources used are listed below: Annual Reports & Published AccountsAs for the financial analysis I had to gather financial data of the two companies (RYANAIR and EASYJET) for the years 2007, 2008 and 2009. This contained the annual audited accounts, the financial and business overview of the companies and the summary of the business activities. I obtained these reports from the investor relations websites of the respective companies. This secondary data was easiest to gather as it was publicly available and could be used for the purpose of this research.

European Low Fares Airline Association (ELFAA)This body represents the budget airlines operating in the Europe. Their website contained detailed statistics of the low-cost airline industry. Their published statistics served as a means to reconcile the Annual Reports of the companies operating in the industry. Their publications were accessed online.

International Air Transport Association (IATA)IATA is the global trade organisation of the air transport industry in the world. It is a representative body of about 93% of the scheduled airlines operating in the world. It served as a means of preliminary research into the airline industry via online access.

Civil Aviation Authority (British and Irish)CAA is the regulatory authority of all the aspects of aviation. This was a good source of overall regulatory framework observed by the airlines. This was again accessed online and their publications which were free to be used and downloaded were considered at different stages of this analysis.

Articles and Online News ArchivesThe BBC, The Financial Times and The Economist are only a few to mention under this category. Their articles and news archives were a great means of obtaining financial and business news. These again were all online accesses and the data collected was of vital use.

Other Relevant Secondary SourcesThis contained the online access to the websites which were used for the understanding of the business models and books used to grasp better knowledge of the financial indicators. Also included in this was the material accessed to get a thorough understanding of the key purposes of this RAP and acquire technical business report writing skills. The best sources were the Wikipedia, Google and other search engines.

LIMITATIONS AND ETHICAL ISSUES

During the process of information gathering, I came across many sources that were subject to copyright and that material could not be used or copied without the express consent of the organisation involved. This proved to be a barrier to the analysis as I decided not to use any of the copyrighted material. Therefore in this project, all of the data gathered is free to use and is publicly available. All the data is from the secondary sources and no primary sources were used and so no other ethical issues arose during the data collection process. During the process there was no access to confidential information, data was free from financial inducements and the research complied fully with the ethical standards published by the University.

USE OF ANALYSIS TECHNIQUES & MODELS

In this section the underlying principles of the financial techniques and business analysis models have been elaborated. It is important to highlight the issues and the body of knowledge that underpins each concept and the principles followed throughout this report. These are dealt as under:

(A) FINANCIAL ANALYSIS

Method used by the stakeholders to evaluate past, current and projected condition and performance of the firm and ratio analysis is the most common method.(Allbusiness.com Inc., 2010)

The two types of financial analysis techniques listed under the approach heading are taken as standard and are self explanatory. They are used as indicators and can be calculated from the information available from the financial statements. There are many uses of the financial ratios but these uses come with certain limitations which are as follows: There is no absolute definition of calculating a ratio Ratios can be subject to manipulation Ratios can vary according to the accounting policies adapted Only takes into account the financial numbers ignoring the more important non-financial indicators that affect the companys performance Does not take into account the time value of money

(B) BUSINESS ANALYSIS

Investigation into the operation of the business to expose the causes behind the results achieved, and the effects of those results on the business.(WebFinance inc., 2010)

To carry on a business analysis, I came across a number of techniques and models. For this purpose I decided to use the two models mentioned earlier. Here I take the opportunity to further elaborate each of the models used for this research.

1) Five Forces model This is a business analysis model, one of the most popular works of the famous Michael E. Porter of the Harvard Business School, used for the development of strategy and the analysis of the industry in which an organisation operates. Porters five forces are used to determine the intensity of the competition in the market and the attractiveness of the industry.This model assists an organisation in: Evaluating the dynamics in an industry Establishing competitive advantage Strategic decision making Analysing the outcomes of the strategy(The Management Centre, 2006)

2) SWOT Analysis

SWOT is a framework used to generate strategic alternatives from the analysis of situation of a firm. The strengths and weaknesses (Internal Analysis) are compared to opportunities and threats (External Analysis).

(Learned Edmund P. et al. 1969)

This is one of the easiest to understand and most effective of the strategic analysis frameworks.

RYANAIR: THE COMPANY OVERVIEW

THE FACTS

RYANAIR is a low cost airline having its headquarter at the Dublin Airport, Ireland. RYANAIR is floated on the Dublin and the NASDAQ Stock Exchanges. It serves over 150 destinations in 26 countries and operates over 1000+ routes. RYANAIR has a fleet size of 210 aircrafts (233 as of March 2010). RYANAIR serves routes across Europe and has a well-established market share particularly in the UK and in the EU. It continues to operate from over 40 bases Europe-wide and has a long history of growth and rapid expansion after the deregulation of the European airspace in 1997. Until the end of December 2009, RYANAIR had captured 40.18% of the market share of the total European passengers making it a market leader in its strategic group (i.e. 65.3 million passengers travelled with RYANAIR out of the total 162.5 million European passengers that travelled on low cost airlines.) (ELFAA, 2009)

In terms of international passengers carried per year, RYANAIR is the largest airline of the world. (IATA, 2009) (Ryanair PLC, 2009)

THE BUSINESS STRATEGY

In its early years, RYANAIR operated as a secondary carrier in Ireland but later as a result of the deregulation of the European airspace in 1990s it diversified into the Low-Cost Carriers Industry.

RYANAIR has a cost-based competition business strategy. This low-cost airline business model has been explicitly adapted from the USAs Southwest Airline.This business model has always kept RYANAIR in direct competition with other Low-Cost Airlines and Flag-carriers such as EasyJet, AerLingus, and British Airways etc.

(Bamber et al, 2009)

RYANAIR has a no-frills low-cost strategy and has a standard fleet, provides just the very basic services and charges its customers for whatever it can, saving company the costs and generating revenues. (Osborne A., 2009)

Part A: FINANCIAL ANALYSIS

(1) Trend AnalysisThis is the comparison of the Financial Ratios of RYANAIR for 2007, 2008 and 2009. Please see Appendix 2 for calculations and Appendix 3 for the Financial Statements.

PROFITABILITY RATIOSIt measures a firms use of its assets and its cost control to generate an acceptable return.(Groppelli, A. et al.2000)

Operating Profit Margin2007 At 21.1%, the Operating margin was highest this year, 1% lower compared to 2006. There was an overall 32% increase in sales.

Scheduled passenger revenue was up by 31% to 1874.8m reflecting a 7% increase in average fare to 44. Ancillary revenue increased by 44% due to growth in on-board sales and non-flight scheduled revenues.

There was an increase of 33% in total operating expenses partially due to:

The growth of the airline. Other contributing factors were higher fuel prices which rose by 50% due to 28% increase in cost per gallon Rising route and airport charges at some sectors which increased by 21% and 27% respectively.

The total operating profits were up 26% to 471.7m.

2008 Decreased by 1.3% to 19.8% inconsistent with the growth of the airline. Total revenues increased by 21% to 2713.8m.

Scheduled passenger revenue increased by 19% with 1% decrease in fares and a 20% increase in passengers due to the launch of 201 new routes this year. Ancillary revenue increased by 35% to 488.1m as compared to 362.1m last year.

Total operating expenses increased by 23%, excluding the 10.6m Accelerated depreciation to 2166.1m. This was due to:

Higher staff costs, up by 26% to 165.3m due to a 32% increase in employees. 23% increase in fleet size resulting in higher depreciation charge. Higher lease cost due to addition of 25 leased aircrafts. Route and airport charges increase by 30% and 45% respectively due to addition of new routes, rising passengers and doubling of the charge at a few bases and airports. Fuel cost rose by 14% to 793.1m. This was due to the increase in hours flown. This was offset by fuel hedging and making aircrafts fuel efficient. Fuel accounts for 37% of the total operating expenses.

Total operating profits increased by 14% to 537.1m.

2009 There was a steep decline of 16.7% compared to the previous year. Total revenues increased by 8% to 2942m which was inconsistent with the 15% actual increase in passengers.

Scheduled passenger revenues increased by 5.3%, lower than the 19% growth the previous year. There was an 8% decrease in average fare (i.e. 40) Ancillary revenues increased by 22.5%, an increase of about 110m.

There was an overall increase of 30.9% in the total operating costs. This was due to the following:

Increase in the number of passenger and sectors flown. There was a 21% increase in the number of employees which was partially offset by a decrease in the average rates of pay. The cost of fuel increased by 59% from 791m in 2008 compared to 1257m in 2009. An increase of 11% in the fleet size. 45.6% rise in depreciation and amortisation due to additional aircrafts. A 10.5% increase in route charges and 11.9% increase in airport charges was another cause.

Total operating profit decreased 82.7% to 92.6m.

Net Profit Margin2007 At 17.9%, it was again the highest this year. Net profit was 42% higher amounting to 435.6m. Adjusted net profit increased by 33% to 401.4m. Finance income was higher due to rise in cash balances and rising interest rates and the Finance expense was up 12%, again due to rising payable interest rates.

2008 Showed a decline of 0.2%. Net profit was 10% lower than previously. The adjusted net profit showed an increase of 20% and amounted to 480.9m. Finance income increased by 33% due to higher deposit rates but partially offset by lower cash balances. Finance cost increased by about 17% due to drawing of new debts and higher rates of interest.

2009 Fall of 14% reported this year, bringing the net profit margin to 3.6% of sales (excluding exceptional items). From 2008s profit for the year of 390.7m, a 143% decline was reported; making it a loss for the year 2009 of 169.2m. Adjusted net profit decreased by 78% to 104.9m from 480.9m. Finance income fell 10.9% due to lower deposit rates, offset by higher cash balances. Finance expense increased 34.5% to 130.5m due to increase in debts.

Return on Capital Employed

2007 ROCE was 10.3% which was about 0.4% higher than 2006. Operating profit increased by 28% The shareholders equity increased by 547.8m, this increase can be justified by:

Adjusted profits of 401.4m transferred to retained earnings. 11.2m exercised as share options. And 99m merely because of the treatment of items according to IFRS.

The non-current liabilities increased by 184.3m (net of payments). The increase in equity and debt has been largely offset by the rising income.

2008 This was 11.3%, 1% higher than the previous year. There was a 14% rise in operating profits this year and the airline showing stable growth and returns. Shareholders equity decreased by 37.6m reflecting the following:

390.7m transferred to retained earnings as profit for the year. 8.4m exercised as share options. And a reduction of 436.7m due to IFRS treatment of specific items.

There was a net increase of 404.4m in the long-term debt.

2009 There was a decline of 9.5% in ROCE this year bringing the 11.3% return in 2008 to1.8% in 2009. This is mainly attributable to a lower operating profit this year due to rapid increase in operating costs of the business. The operating profit was 16.7% lower than 2008. There was a 3% fall in the shareholders equity mainly because of the reported loss for the year of 169.2m transferred to retained earnings. Long-term debt increased by 14% mainly due to debts drawn to finance the purchase the non-current assets.

LIQUIDITY RATIOS

These ratios measure the ability of a company to meet its short-term debt. These indicate the short-term financial stability of the company.

Current RatioIt is the rule of thumb that the current ratio be at least 2.0 times, meaning that a company should have current assets that are twice the current liabilities.

2007 A ratio of 2.1 times suggests that the current assets were twice the amount of current liabilities. Although a drop of 12.5% as compared to 2006, yet it was stable.

Total current assets increased by 300.7m (14.6%) to 2354.3m in 2007, this change was mainly due to:

164% increase in Other Assets which includes prepayments, interest receivable etc. A 22% decrease in Trade Receivables was reported. There was a 180% increase in Derivative Financial Instruments consisting of cash deposits, fuel derivatives and interest rate swaps. There was a 6.5 %( 93m) decrease in cash.

There was a 32% decrease in current liabilities. This was due to:

31% (i.e. 24.5m) decrease in trade payables. Accruals and other liabilities increased by 237m (41.6). There was a 100% increase in the Derivative financial instruments. Current tax rose by about 5m (33%) in 2007. 2008 In 2008, the current ratio decreased by 28.5% to 1.5 times. This is a continued trend from the year 2006/2007 when the ratio decreased 0.3 times. If such a trend continues, then the company could be in severe liquidity problems.

Total current assets decreased by 32.8m to 2387.1m, a change of 1.0% which could be linked to:

Significant rise (118%) in Other Assets of 92m. A decrease of about 42m in derivative financial instruments and a 33.6m rise in other derivatives offsets each other. There was an increase on 124m in cash balances

Current liabilities increased by 439m, a rise of 39%. This was mainly due to the following:

Trade payables increased by 136% to 129.3m. A 105%, about 188m, rise in current maturities. And 85.6% (85.6m) rise in financial instruments. These were the borrowings falling within one year. These were the main reasons for a falling current ratio.

A drop in the ratio of current assets/current liabilities concludes that RYANAIR had to borrow more and more to finance its sales growth of 21%.

2009 Current ratio in 2009 increased by 20% to 1.8 times. Although the ratio was lower than in 2007 (2.1 times), RYANAIR showed signs of financial stability.

There was a 7% rise (156m) in the total current assets which is attributable to:

Increase in cash balances of 112m (8% change). Derivative financial instruments increased by 119.7m. This increase was due to the gains on cash-flow hedging instruments.

The total current liabilities decreased by 11.4% to 1379m i.e. a change of 178m. This change was mainly due to:

A 1% decline of 13.6m in Accrued expenses and a 3% decrease in Trade payables. A decrease of 164m in current maturities of debt.

A rise in the current ratio this year shows a stable financial position of RYANAIR.

Quick RatioA quick ratio is similar to the current ratio but the current assets in the numerator do not include inventories in the calculation. RYANAIR carried an average inventory of 2.2m in each of the three years. This amount is relatively immaterial to the balance sheet and therefore does not bring any change to the quick ratio.Thus, an analysis of the quick ratio will be exactly same as of the current ratio.

GEARING RATIOS

This is a measure of financial risk incorporated in a company.Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.(Investopedia ULC, 2010)

Interest CoverIt is a measure to determine the ability of a company to meet its interest payments on its debts.

2007 There was a12% rise in the ratio in 2007 as compared to 2006 and the interest cover ratio was 5.7 times. This was due to 26% rise in operating profits to 471.7m. A 100% increase in lease financing to 183.1m. To finance the aircrafts and simulators, the company drew 185m (net of repayments) in loans. Bank loans increased by 12% to 82.4m. Due to the above, the total interest charge increased by 12.2% to 82.8m.

2008 In 2008, the ratio decreased by 3.5% to 5.5 times. The total operating profits increased by 14% to 537m. Loans raised to finance the assets increased by 22% (404m). There was a 72% increase in finance leases to 316m. As a result the total annual interest charge to the income statement increased by 17%, more than the increase in operating profits, thus decreasing the cover ratio.

2009 This year, interest cover ratio decreased drastically by 87% to 0.7 times. The operating profit was in steep decline and reduced by 82.7% to 92.6m. This was mainly due to some exceptional items and rising fuel prices. Finance lease liabilities increased by 32% to 435m. Loans raised to finance the assets increased 5.8%, a change of 132m. Therefore the total interest charge increased 34% to 130.5m.

Debt to Equity RatioThe debt to equity ratio indicates the relative proportion of shareholders equity and debt used to finance the companys assets.(Peterson, 1999)

2007 The debt to equity ratio was 80.1% in 2007, indicating that the debt was 80.1% of the total shareholders equity. This is a decrease of 11.2% compared to the previous year. The total non-current debt increased by 13% to 2033.7m. (The reasons of its increase have been outlined in the Interest Cover ratio of the same year). The total shareholders equity increased by 27.5% to 2539.7m due to:

The share capital and premium accounts increased by 1.8%. This was due to the issue of new ordinary shares and the exercise of the share-options. The change in Other Reserves was due to the changes in accounting policies (adoption of IFRS in the prior year). The remaining increase was in the retained earnings i.e. profits for the year.

2008 The D/E ratio increased by 13% to 90.6% this year, reflecting an increase in the financial risk to the company. The total non-current debt increased by 12% to 2268.2m. Shareholders equity decreased this year by 1.0% to 2502.2m. This decrease was due to the net effect of:

The issue of 3.2m new shares and the cancellation of 59.5m shares relating to a share buyback. The change in reserves was due to the net effect of the addition of the profit for the year to retained earnings and a loss on the fair value of available for sale financial assets.

2009 This year the D/E ratio increased 17.5% to 106.5% as the total non-current debt of RYANAIR was more than the shareholders equity. This year the company was very highly geared representing a very high financial risk. The total non-current debt increased by 14% to 2583.6m. (Reasons outlined in the Interest Cover ratio). The shareholders equity decreased by 3% due to the effect of the following:

The issue of 0.7m new shares and the cancellation of 18.1m shares through buyback. Losses of 169.2m suffered during the year, reducing the retained earnings. Other Reserve changed due to the gains on the fair valuation of financial assets, i.e. the impairment of investment in AerLingus.

INVESTMENT RATIOS

Earnings per Share (Basic)EPS is an indicator of a companys profitability. It is the portion of a firms profit allocated to each outstanding ordinary share.(Investopedia ULC, 2010)

2007 EPS increased by 41% to 28.2 Euro cents. Net profits increased by 42% to 435.6m. Ordinary shares increased by 0.7%

2008 A decrease of 8.4% dropped the EPS to 25.84 Euro cents in 2008. This was due to a 10% fall in the profits for the year. And a decrease of 2.1% in the no. of ordinary shares.

2009 EPS decreased by 144% to -11.44 Euro cents this year. A decrease of 143% in the net profits this year (a loss of 169.2m) led to the disastrous fall in the EPS. And a further 2.2% decrease in the ordinary shares.

Price-Earnings RatioIt is the valuation of the companys share price compared to its per-share earnings.(Investopedia ULC, 2010)

2007 P/E ratio increased by 5.6% to 20.7 times, this was due to:

A 48% (1.91) increase in the share price of RYANAIR in 2007. Increased EPS by 41% to 28.2 Euro cents.

2008 The P/E ratio decreased by 48% to 10.8 times, due to:

A fall of 3.03 (52% change) in the share prices. And a decrease of 8.4% in the EPS.2009 A fall of 334% was recorded in the P/E ratio this year, due to:

A 144% decrease in the EPS to -11.44 Euro cents this year. Although the share-price went up by 9.0 Euro cents (a 3% rise), it could not accommodate the heavy fall in the EPS and therefore a falling P/E ratio.

Dividend per ShareSince the incorporation, it is the policy of RYANAIR that it does not pay or intend to pay or declare any dividends to the holders of its ordinary shares. Such a dividend policy is formulated by the directors due to the capital intensive nature of the business and its growth prospects.(2) Industry Comparison

This is the comparison of the financial ratios of RYANAIR with that of its biggest competitor EASYJET, for the financial year 2009.

Comparison of Market-ShareIn the year 2009, the European Low-Cost Airline Industry showed a modest growth of 8.7% in passenger numbers. An analysis by passenger numbers and market share can be done as under:

(ELFAA, 2009)(ELFAA, 2008)

As compared to 2008, RYANAIRs EU market-share has increased by 3.6% to 40% whereas EasyJets share decreased by 6% to 28% in 2009. This is a clear indicator that RYANAIR has outperformed EasyJet and will remain the dominant firm in the European air-space.Comparison of Financial RatiosThe key financial ratios of the two companies are as under:RATIORYANAIREASYJET

20092009

PROFITABILITY RATIOS

Operating Margin (%)3.12.3

Net Profit Margin (%)3.62.3

Return on Capital Employed (%)1.82.3

LIQUIDITY RATIOS

Current Ratio (Times)1.81.4

Quick Ratio (Times)1.81.4

GEARING RATIOS

Interest Cover (Times)0.72.2

Debt to Equity (%)106.599.7

INVESTOR RATIOS

Basic Earnings per Share ( Cents)- 11.44 18.20

Basic Earnings per Share( Pence) - 16.62

P/E Ratio- 25.26 24.98

SUPPLEMENTARY INFORMATION

no of shares 31st Mar (in '000)1,478,472 -

no of shares 30th Sep - 428,300,000

price per share 31st Mar ( Cents) 289.00 415.2

price per share 30th Sep ( Pence) - 379.2

In 2009, although there was severe loss of profitability for RYANAIR yet its profit margins were higher than that of EasyJet. This indicates RYANAIRs better cost control techniques such as fuel hedging, interest rate swaps and a 3% cut down on other related costs.EasyJets revenue increased by 12.9% as compared to 8% of RYANAIRs which was due to lowering of average fares by 8%, but this was in-line with the industry growth of 8.7%. RYANAIRs financial risk in 2009 was more than that of EasyJet as it was financed more by the non-current debts than equity. This is a very high-risk capital structure adopted by RYANAIR and is primarily due to the capital intensive nature of the industry. Investors may perceive RYANAIR a high-risk investment as the Interest Cover is relatively low.RYANAIRs EPS fell by 144% while EasyJet sustained the downturn with only a 14.6% drop avoiding a loss this year. RYANAIRs loss was due to heavy losses on investments which can be treated as exceptional and therefore the company has very bright future prospects for investors taking in view its market dominance, profitability and growth potential. Through this comparison we can conclude that RYANAIR is a relatively high-risk investment with lower returns and its shareholders suffering capital losses.

Part B: BUSINESS ANALYSIS

Porters Five Forces model The nature and degree of competition in an industry hinge on five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services [where applicable), and the jockeying among current contestants.(Porter, 1979, p.137)

The analysis of the EU Airline industry is as follows:

1) Threat of new entrantsThis makes the industry less attractive for existing firms. For RYANAIR, this threat is moderate. European airspace is de-regulated and air lines can fly freely among the EU countries, eliminating any political constraints. The industry requires very high capital-injection which acts as a high barrier. Airlines already operating and the new-comers have to seek authorisations from the Civil Aviation Authorities. Availability of landing rights and slots at airports also acts as a barrier to entry. New entrants have to cope with immediate price-wars with existing firms who have already experienced the Experience Curve.

2) Power of CustomersThe customers of RYANAIR are powerful because: They are price-sensitive to the fares. There are no associated switching costs. Power of travel agents has been eliminated. The customers lack loyalty in no-frills airlines and are attracted only to low prices.

3) Power of SuppliersThe suppliers bargaining powers were moderate because: The industry is served only with two main aircraft suppliers, Boeing and Airbus, who are rivals themselves. Boeing is the main supplier to RYANAIR and there are very high switching costs. RYANAIR only uses secondary airports that are relatively low in power. There is no control over fuel suppliers as it is an international market issue. The low cost business model needs very high negotiations with suppliers.

4) Threat of SubstitutesThe substitute products/services threat was moderate due to: Other means of travel in the Europe, e.g. Eurostar, Ferries, by road etc. Lack of loyalty in customers and no switching costs. RYANAIR calls only to secondary airports which may increase the threat as customers may use alternate transport.

5) Industry Competitors

The market is very competitive with different airlines operating on the same segments. There was growth in customer numbers, indicating very high competitive environment. The competitors imitate the factors of competitive advantage to a firm. But having the highest market-share, RYANAIR remained dominant throughout.

Strength, Weaknesses, Opportunities and Threats (SWOT)

STRENGHTS Through aggressive pricing and marketing strategy, RYANAIR is a renowned brand name. Reputation of Europes largest carrier with the highest numbers of:

Daily flights, routes and destinations Passengers Permanent employees Aircrafts

Tendency to decrease costs through hedging of risks and lowering fares and providing customers with value-for-money. All online bookings and being most efficient in terms of punctuality, lost baggage etc. Creative reductions on costs. A uniform Boeing 737 fleet with high seat-density, high load factor, lower turn-around times and lower training and maintenance costs. A non-unionised labour force with lowest rates of pay in the industry.

WEAKNESSES Aggressive implementation of low-cost business model has led to unhappy customers with no loyalty to the airline. Issues of staff morale and loyalty as RYANAIR have the lowest pay rates and the employment contract includes the non-unionisation clause. Negative publicity through press which leads to a longer-term disadvantage. Allegations of controversial and misleading advertisements by the regulators. The low-cost business model has made RYANAIR to be very sensitive as all the costs and savings are transferred directly to the customers. Use of secondary airports which are, in most cases, far from the cities they actually serve. Very poor customer service, on the ground and even on-board the flight. Sensitivity to governments regulations over passenger air duty.

OPPORTUNITIES Orders of new aircrafts reflect tremendous growth potential of the airline and can be seen as an opportunity. Being a dominant firm, RYANAIR still has potential to capture more of the European market-share. Launch of long-haul routes in 2014 with a complete diversification towards Differentiation rather than Cost-based can prove to be very fruitful for RYANAIR. The current and continuing economic downturn has been good for the low-cost carriers profitability.

THREATS Rising fuel prices will adversely affect the companys profits. Customers are becoming more price-sensitive. There has been an increased competition with airlines directly targeting each other. Airport handling and other charges are rising significantly. Any adverse changes in the government regulations over passenger duty, tax and other matters may have severe consequences for the airline. Price wars with immediate competitors continue and the intensity of the competition keeps on rising. A ruling against RYANAIR by the Competition Regulators over the AerLingus take-over has limited the growth of airline through acquisition.

(Ryanair PLC, 2008)(Ryanair PLC, 2009)CONCLUSION

The European airline industry is very dynamic and is growing at a moderate pace. RYANAIRs current business strategy based on the low-cost operating model has been adapted from the Southwest Airline Company (USA) and since the early 1990s, it has been aggressively implemented. And as a result of this successful implementation of the low-cost business model, RYANAIR has emerged to be the largest airline in Europe with achievements such as the best in punctuality, Europe coverage, traffic growth, highest market capitalisation (5.3bn until May 2009), lowest average fares and highest number of international passengers carried are just to name a few. RYANAIR is currently the dominant firm in the European industry and If the current growth rate in the number of passengers continue, then in a few years time RYANAIR will probably face a monopoly situation.

FINANCIALS

RYANAIR has a history of growth in profitability and records an annual increase in the amount of assets held, thus a strong balance sheet. But at this point it should be noted that the future operating results of the company are dependent on the following factors: Passenger volume Fuel prices Competitive pricing Seasonal fluctuations Availability of finance Relations with suppliers Availability of airports (for growth) Economic and political conditions Terrorist threats(Ryanair PLC, 2009)

As far as the financial position and past performance of the company is concerned, from 2007 through to 2009, RYANAIRs total operating revenues (scheduled and ancillary) has been increasing (2007: +32%, 2008: +21%, and 2009: +8%). This increase is not in line with the rising number of annual passengers or even the rate of decrease in the average fares. Implementing the low-cost business model, RYANAIR tends to lower its fares to make itself attractive to the price sensitive customer which explains the falling scheduled revenues. But a significant proportion of the revenues are attributable to Ancillary Revenues generated from non-scheduled services, in-flight sales of beverages, foods and merchandise etc. RYANAIRs reliance on such revenues is vital and its slowing growth rate (2007: + 40%, 2008: +35% and 2009: +22%) could be a factor for the airline to place its focus on.The adjusted net profit figures (excluding exceptional items such as accounting for tax provisions, accelerated depreciations, investment fair value write-offs etc.) showed growth in 2007 and 2008, but in 2009, due to the rise in fuel costs (a 59% total increase) and other costs led RYANAIR to record a loss on operating activities affecting its Earnings per share and ultimately reducing its share prices.Such a performance, as compared to another firm operating in the same industry and faced with the same business environment, is almost in line with the industry averages as the financial performance and position of RYANAIR Holdings PLC was in many aspects very similar to those of EASYJET Airline Company Ltd. Such a comparison indicated that RYANAIR, as compared to EasyJet, was more profitable due to economies of scale leading to lower unit costs but the investment in EasyJet showed higher rates of return, lower associated financial risk, better longer-term solvency and rewarded its shareholders with higher capital gains.

BUSINESS

The Global Airline Industry in general and the European Low-cost Airline Industry in particular will continue to remain attractive for the firms already operating in it or other firms trying to enter it through market/product diversification. The analysis of RYANAIR reflected its strong dominance in the EU market and how it enjoyed its strategic position in such a competitive environment where there are many competitors.The competitive advantage to RYANAIR is its recognition (brand name), its economies of scale due to its being the largest international carrier, and its negotiation powers due to its relative size in the industry. Most of the Porters Five Forces remained in favour of RYANAIR as it enjoys a near monopoly market in Europe and has potential to cope with each of the five forces of competition in a positive way reflecting its current and very successful low-cost business strategy. Since the early 1990s, when RYANAIR was re-structured strategically (to a low-cost no-frills airline) by the current CEO Michael OLeary, the airline has continued to grow from a very small scale operation to a very large network serving across 26+ countries with 1000+ routes. If RYANAIR continues to grow as planned, exploits its strengths, overcomes its weaknesses and take full advantage of the opportunities, its success will be inevitable.

End of Report.APPENDIX 1: List of References

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APPENDIX 2: Ratio Analysis Spreadsheet

Calculation of Financial Ratios using Microsoft Excel 2007

Sample Formula Sheets

Calculation of Ratios: RYANAIR 2007 and 2008

Calculation of Ratios: Ryanair and EasyJet (2009)

APPENDIX 3: Financial Statements of Ryanair Holdings PLC

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APPENDIX 4: Presentation Slides

End of Statement.Research And Analysis Report: Ryanair Holdings PLCPage 41