Understanding of consumer behaviour [1]. The airline grasped

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.

Section A

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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 1. 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 2.

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. 

Section B

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 3.  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 4.

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
5.  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.” 6

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 7. 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 8. 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.