Analysis Of Ryanair's Failure To Provide Effective Agreements With Their Employees

Understanding and application of economic theory is one of the key aspects of running a successful business. Based on this fact we can understand why Michael O’Leary, graduate of Trinity University with a bachelor in economics, has effectively turned his company, Ryan Ltd. into the leading airline in Europe based on passengers carried. However, due to a recent report of severe shortage of pilots Ryanair has had to cancel 18,000 flights over a 5-month period. Does this indicate Michael O’Leary has forgotten to stick to his economic roots? Or is this proof that economic theories don’t always apply to complex real-world scenarios? This report aims to delve into the economic concept of creating and capturing value through the prism of Ryanair Ltd.’s recent troubles and hopes to give a better understanding as to whether Ryanair have abandoned these theories in their recent failings or whether the real world is too complex for theories to characterise it.

Ryanair’s failure to monitor the activities of their pilots forced the decision to cancel flights for 400,000 passengers. They developed a new ‘Low Cost’ business model, later establishing Ryanair as a giant. Allowing them to become successful in the market as consumers could receive a low-cost ticket price, meaning transaction costs for consumers were low, whilst consumer surplus increased. The decrease in fees consumers must pay became very appealing to the eye, resulting in an easier and more satisfying purchase decision process. Highlighting that Ryanair captured the value of consumer behaviour. The airline grasped the opportunity to capture value through cross-subsidy, encouraging aggressive on flight sales while maintaining low cost seats. A strategy of charging higher prices for one aspect of the business to support the lower prices for another.

Business evolves through creating and capturing value, essential to maintain and regularly improve areas of the company- helping them survive. Competition from other European airlines acknowledged the new market trend, adapting to capture this value. Fighting to compete. Pricing, product/service and employees are all different techniques of creating and capturing value. Ryanair suffered a major loss regarding their employees, failing to capture the value of their pilots. The inefficiency of employment contracts, meant pilots had no motivation to stay. As a result, Ryanair's pilots were receiving better contracts by competitors, increasing their value within the industry.

A key limit to capturing value is that one competitive advantage simply isn’t enough, often is the case that value created is rather easy but is difficult to capture. Ryanair effectively created value by developing the “low cost” model within the airline industry. The introduction of a new product/service will frequently provide a situation where there is limited supply, with high demand- scarcity principle. As a result, competitors of the firm aim to duplicate the new value that was created and receive these rewards. Competition can be a motivator that beneficial to consumers. Although a huge consequence of competition is the risk of an equilibrium, an increasing supply of the service will cause a fall in the price paid, gradually causing supply and demand to be equal.

In my opinion, the concept creating and capturing value is key to the performance of a company in an industry. Helping establish the company, introducing new products and services to benefit ALL in society. Ryanair succeeded the capturing of value to a certain extent, until pilots rightly-so doubted their worth. The lack of appraisal shown towards the pilot’s emphasised little value Ryanair had of their employees, therefore causing an increasing trend of pilots leaving the company causing the concept to fail and impact the company heavily.

Another limit of creating and capturing value is the often-unspoken notion of luck. This unembodied notion is often at the forefront of many company's competitive advantages that generate firm value. The theory of capturing value is flawed in that it would suggest that firms who capture value are those with the best ability to create a competitive advantage, when in reality it is often the case of sheer luck as to who develops the advantages. It is impossible to take into account all the conditions under which specific bundles of value capture mechanisms are most likely to generate a competitive advantage for the firm and it is due to this that the hand of luck takes the place of theory in deciding where the advantage lies.

Although creating and capturing value is a theory with many limits, it is currently the most accurate we have on the matter as “we have yet to develop a robust theory that allows us to unbundle the characteristics of institutions, industries, firms, and individual technologies that affect the selection of particular value capture mechanisms.' For creating and capturing of value to succeed, it requires regular modification or a series of competitive advantages to constantly add value, however in many markets, such as the airline, its difficult. In my opinion Ryanair failed to constantly add to the value they'd already created, peaking without a planned strategy. Where do they go from here?

Improvements are required within Ryanair, most importantly on employment. All involved should reach an agreement, constructing a fair and an approved contract, including a restrictive covenant. Forbidding their employees from leaving Ryanair to compete against them with another airline, an on-going issue that's proving costly. Contracting the pilots, will help capture their true value, meaning Ryanair and their consumers will experience this. All employees should sign an agreement of confidentiality, meaning all business discussions are not aired for others to know- protecting future models.

Regarding the business strategy of Ryanair, small steps can be taken to protect their model-reducing risks of duplication. The airline industry only has five different business models, indicating the difficulty of protection. As a result, the only improvements Ryanair can make to their strategy is to modify it. Improvements can be encouraging customer feedback forms. Directly asking their consumers what changes they would encourage, highlighting strengths and weaknesses of their full experience with Ryanair. Regular adaptations will add value, and also increase the return rate of consumers- increasing profits. To conclude, Ryanair's failure to provide effective agreements with their employees has ultimately led to a significant decrease in the firm's value. The lack of value capture has therefore caused the severe lack of staff and the last-minute cancellation of flights. However, as they are Europe's most successful low-cost airline, this highlights their ability to create and capture value within the aviation markets. Immediate improvements are required to rectify the current problems they are experiencing.