October 16, 2024

Regulation: The Key to Harmonizing Sustainability and Growth in Competitive Markets?

An essay I made for my introduction to business class

In our current global economy, where the global GDP keeps climbing with an average growth of 3% in 2023 (Statista, 2024), companies are under constant pressure to increase their value every year by similar or even higher percentages to keep investors engaged. To achieve this, many businesses expand their operations or dive into new ventures through globalization. A good example of this phenomenon is Ryanair, by taking advantage of the European market's unification in 1992 under the Single European Act, they were able to quickly move into new markets and were then able to dominate specific routes. By seizing this moment, Ryanair didn't just meet existing demand, they also created new demand. Over six years, they saw their total income grow by more than 400% and profits by more than 32,000%! (Rivkin, 2006), (Rivkin, 2007)

However, this endless pursuit of growth presents a critical dilemma: In a world of finite resources, how can companies balance expansion and sustainability without compromising competitiveness? Confronted with this challenge, businesses often prioritize short-term growth over sustainability goals, even when regulations may ruin their strategy. To alter the opportunity cost associated with rapid growth that neglects environmental and community impacts while leveling the playing field for sustainable companies, the implementation of preventive regulation seems like the sole solution.

By examining Ryanair’s rapid expansion in the European airline industry, this essay will explore the tensions businesses face when prioritizing growth over environmental and community impacts, and discuss how preventive regulation can help companies maintain competitiveness while being sustainable.

In the 1990s, Ryanair capitalized on a significant opportunity appearing from the deregulation of the European airline industry, which ended the monopolies held by national airlines in Europe. This deregulation allowed new entrants like Ryanair to compete on routes previously dominated by established airlines such as Aer Lingus and British Airways. However, these incumbents responded with aggressive price wars aimed at undermining Ryanair's market entry by reducing fares on popular routes like Dublin-London to as low as 70 Irish pound. (Rivkin, 2000)

Confronted with intense competition and constrained by their limited financial resources, Ryanair adopted an extreme cost-cutting strategy to achieve market dominance. Emulating Southwest Airlines' business model, the company eliminated all non-essential expenses, only landed its airplanes at secondary airports, and introduced a companywide cost conscious mentality, often stealing pens at hotels and keeping sweets in locked containers at their headquarters. All those measures were adopted to keep operational costs at a minimal, enabling Ryanair to offer fares approximately 50% lower than competitors, making air travel accessible to a bigger percentage of the population. (Rivkin, 2006)

The immediate effect was a substantial increase in demand, a good example of this situation would be that new routes normally experienced passenger growth exceeding 100%.(Rivkin, 2006) While this expansion was beneficial for consumers and stimulated economic activity, it also led to significant environmental and community impacts. The surge in air travel contributed to increased CO2 emissions, furthermore, the immense influx of tourists caused problems in the local infrastructures and led to overtourism in cities like Barcelona and Venice, disrupting community life and degrading cultural sites. (Heymann & Stechert, 2018)

In the quest for an endless increase in revenue, businesses face complex challenges when prioritizing rapid expansion over environmental and societal considerations. This can lead to more challenges in the future due to the increased scrutiny by regulators and a worse public perception without mentioning the collective environmental debt. Ryanair's pursuit of growth under competitive pressure exemplifies how companies may compromise on sustainability to achieve short-term objectives. However, without those extreme measures and the adoption of aggressive price cutting strategy, Ryanair would not achieve this amount of success in such a small timeframe if they needed to also be the leader in sustainability measures. The only way to make sustainability a good option for those type of companies would be an equalization of the market by increasing regulations to change the opportunity cost of every option.

If the European Union had imposed environmental regulations simultaneously with the liberalization of the aviation market in the early 1990s, it could have led to a more optimal outcome for both sustainability and industry competition. The advantages would have been twofold :

Firstly, stricter sustainability regulations, such as mandatory carbon emission limits, would not only have mitigated the aviation industry's impact on global pollution and protected local communities from the adverse effects of overtourism but also maintained Ryanair's competitiveness by leveling the playing field. By requiring all airlines to adhere to the same environmental standards, these regulations would prevent competitors from gaining unfair advantages through cost-cutting measures that ignore everything that is not profitable. This would compel all airliners, including Ryanair, to invest in newer, more efficient aircraft and adopt sustainable practices, decreasing carbon dioxide emissions per flight. This type of regulation ensure that competition is based on operational efficiency and innovation rather than environmental compromises. Ryanair could continue to offer low fares compared to competitors while meeting sustainability goals, preserving its market position and contributing to a more ecological industry overall.

Secondly, by focusing regulations on promoting ESG criteria’s, airlines that previously held monopolies, often state-owned companies like Aer Lingus and British Airways, would have been required to rebalance their operations to comply with new sustainability mandates instead of engaging in predatory pricing strategies. These incumbents had resorted to intense price wars, such as reducing the Dublin-London flight at such a rate that their planes were at near maximal capacity, aiming to strangle Ryanair’s cash flow and suppress competition. (Rivkin, 2000) Stricter ESG regulations would have diverted their focus toward internal compliance efforts. Established companies, typically burdened by larger organizational structures and slower decision-making processes, would have taken longer to adapt to new regulations compared to smaller, more agile competitors like Ryanair. This scenario would have given an advantage to emerging airlines, enabling them to remain competitive in new global markets without compromising on sustainability. In the end, those regulatory measures would have fulfilled the European Union’s goal of cultivating a more competitive and environmentally responsible aviation industry.

Ryanair's story in the 1990s shines a light on the difficulties to balance fast growth with sustainability. While being an innovating beacon among dinosaurs by making airplane flights cheap and accessible, they needed to sacrifice their ecological goals. Without a government body imposing regulations, companies will inevitably ignore their ethical guidelines to gain money in the short term. If stricter environmental regulations had been in place when the airline industry opened up, all airlines would've had to play by the same rules, pushing them to find innovative ways to grow sustainably. With rising global tensions and new opportunities emerging, the question remains : will the next generation of leaders be able to break free from the pursuit of short-term profits and prioritize sustainability, or will the cycle of sacrificing the environment for immediate financial gain continue to persist? The answer will shape the future of the world.

Citations :

Heymann, E., & Stechert, M. (2018, November 21). *Air transport and tourism: More and more serious global challenges*. Deutsche Bank Research. https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000482348/Air_transport_and_tourism%3A_more_and_more_serious_g.xhtml

Rivkin, J. W. (2000). Dogfight over Europe: Ryanair (B) (Case No. 9-700-116). Harvard Business School Publishing.

Rivkin, J. W. (2006). Dogfight over Europe: Ryanair (C) (Case No. 9-700-117). Harvard Business School Publishing.

Rivkin, J. W. (2007). Dogfight over Europe: Ryanair (A) (Case No. 9-700-115). Harvard Business School Publishing.

Statista. (2024). Global GDP growth from 1980 to 2023, with forecasts until 2029. https://www.statista.com/statistics/273951/growth-of-the-global-gross-domestic-product-gdp/