SAS must beat Ryanair at its own game

Posted: September 13, 2009 in Blue Ocean Strategy
Tags: , , , , , , ,

Am I suggesting that SAS should copy Ryanair? No, definitely not.

Don’t get me wrong, the existence of Ryanair has been tremendously good for the airline passengers of this world. After all, where would we be without the deregulation of 1996 – and someone to exploit it. Back in my years at university I used to go to London for my long summer holidays to brush up my English and make money to sweeten student life in the coming year. Back then, going by aeroplane wasn’t something we students even contemplated for one minute. I would take the train to Esbjerg, then go by overnight boat to Harwich and finally hop on another train in England that would take me into Liverpool Street Station. This would take well over 24 hours, but still cost me 3-5 times less than an plane ticket.

ryanair_vs_sasWith deregulation came low cost airlines. And mind you, not all of them did too well. Debonair, anyone? An early leader in no-frills airlines, who flew out of London Luton, but ended up bankrupt in 1999 having to dismiss some 500 employees? Or BA’s low cost subsidiary Go? Or last year’s collapse of Sterling Airlines? The point is this; simply being a low cost airline doesn’t automatically make you successful.


The illusion of free

Part of what Ryanair is really good at is the “illusion of free”. They can always quote prices on certain routes at €1 against competitors’ €50 ot €100. “Go to Rome, from €13”, whereas in reality most people will pay €113 for just the raw ticket. Then come online check-in fees, payment handling fees, checked baggage fees, infant fees, infant equipment fees, sports equipment fees, seat charges and you end up paying €180. Then you may arrive 75 km from the city you really wanted to go to and it may cost you an additional €100 return to get to and from the airport. The point is, people still have the illusion of free – or nearly free. It’s all about the way we (the travellers) think about the money we spend on a trip. In our minds we like to work in easy numbers and we like to think that we save money and make good deals. It’s almost as if we want to convince ourselves (or our wives or husbands) that we are being wise with our money.

It’s exactly the same mechanism in action when people decide to go to Italy by car. They end up with a myriad of expenses (petrol, hotels, bar drinks, meals (many), snacks (many), sweets (many) investing in DVD players for the kids etc.), but when they compare the “main numbers”, it’s a really good deal. In most cases it’s actually not. That’s why the illusion of free is so effective: We travellers want to fool ourselves, because we want to go on that trip. We’ll justify it and close our eyes on those “few” extra charges.

Ryanair’s edge

As the expression suggests, the “illusion of free” is just an illusion. Of course someone has to pay, especially when you see the financial success of Ryanair. Part of the secret is the use of revenue management. Seconds after Manchester United has drawn AC Milan in Champions League, the Ryanair revenue manager responsible for the route Manchester-Milan will ramp up prices by several hundred percent 1-4 days before and after the match. Most airlines these days have some form of revenue management, but some, like Ryanair, are particularly good (some may say ruthless) at applying it.

Ryanair is also second to none at advertising the illusion of free – and at ridiculing their competitors for being the exact opposite. Ryanair’s real edge is not being cheap – it’s giving us all (including their competitors) the illusion that they’re cheap. In strategy terms they have built a blue ocean on the combination of illusion of free, on managing revenue and on constantly provoking conventions in the media.

When I say that SAS must beat Ryanair at its own game, I’m not suggesting that they should copy Ryanair’s competitive parameters. It would, of course, never work and they would just end up being a failed me-too service. Some have tried to copy Ryanair and failed for various reasons, mainly because they didn’t understand the true reasons for Ryanair’s success or because they weren’t prepared to be as ruthless as Ryanair about it.

SAS must be true to their DNA

If SAS really, really want to strike back and drive long-term success, they must identify their own blue ocean differentiators. And in order to be credible at that, they must be authentic and true to their own airline DNA of being a service company. If they don’t, I’m pretty sure they will fail. On the other hand I’m equally certain that there’s another blue ocean waiting around the corner for SAS. And one of the key words is convenience. Convenience is hugely important to today’s consumer and air traveller – and we (the air travellers) are actually prepared to pay a certain premium for real (not fake) convenience. The trick is to offer convenience which doesn’t add significant cost to the airline company’s cost base.

Now, a good starting point is to start highlighting the convenience of not having to pay for checked baggage at the airport. Or the fee of €10, we once had to pay in cash as we went through customs at Knock Airport in Ireland (an almost exclusive Ryanair hub) for the ongoing development of the airport. Ryanair, of course, claimed that this had nothing to do with their ticket prices or fees, but a qualified guess is that the fee was introduced by the airport, because Ryanair had negotiated low/non-existent airport fees with Knock. At the end of the day, it was part of the price.

My point is that I believe Ryanair may be about to have taken their strategy to the point where inconvenience simply cannot be offset by the illusion of free. Rumoured to be one of their next money-making schemes is making passengers pay to use the toilet. My guess is that Ryanair

In one of my next blogs I will explore and examine the areas available to SAS if they are determined to win the battle of the blue oceans.

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Comments
  1. Simon says:

    Hi Ole,interesting blog. A good start for SAS would be fleet commonality. At the moment they operate the following:

    A319, A321, A330, A340, B737-600, B737-700, B737-800, MD-81, MD-82, MD-87, CRJ-100LR, CRJ-200LR, CRJ-900ER and RJ85. If you include SAS Norge you can add the B737-500 and Fokker 50 to the list. More aircraft types equals increased crew, operational and maintenance costs. Ryanair sticks to the KISS strategy by operating just the B737-800.

  2. olekassow says:

    Hi Simon, that’s so true. A well-tuned cost base is one of the basics of a successful blue ocean strategy. Actually first pioneered in the US in the seventies by Southwest Airlines with amazingly quick turn-around times, which cut the required number of aircraft down drastically.

    Another SAS challenge, from a cost base point of view, is the existence of die hard trade union agreements. Still, that’s a diminishing factor and one that I think they can actually use to support their strategy. After all, you need competent and friendly staff to run a service company – unlike Ryanair :)

  3. airobserver says:

    Hello Ole,

    Interesting post, I think SAS really can’t imitate Ryanair strategy; this will be the end of SAS in two month. You’re right in that way. However, all the major players have been taking example on the LCCs of late, all the while trying to maintain better in-flight experiences (see B.A, which is a perfect example). The danger is when Ryanair is charging for everything and becomes not cheap at all. If passengers realise that, one day Ryanair will have to find another way to attract new customers.
    What do you think about SAS’s advertising stunt of SAS Director of Communications Claus Sonberg? Funny, but hard to say who won

  4. Søren S says:

    Hey Ole – what a blog you got. God points about airlines – and any other business in same competitive situation – when you have been “overtaken on the inside” one solution can be to seek back to “where it all began” – DNA – so any further steps will be fundamentally secured…if you can still use the old strategy as a base. Annother good point is not to do as all your rivals – redefining migt be a key word. Anyway – thanks for nice input in thinking and doing our daily life and business!
    Søren

  5. olekassow says:

    Thanks, Søren. So true about identifying and getting back to your DNA. Another aspect of “DNA” that I’m trying to get to the bottom of is “entrepreneur DNA”. What is it? What is it that makes some people consistently successful entrepreneurs? The kind of people who attract investments and interest all the time!

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