Ryanair: Defying Gravity

IMD431 I N T E R N A T I O N A L v. 03.09.2007 RYANAIR: DEFYING GRAVITY Research Associate Atul The integration of the EU aviation market and the simultaneous Pahwa prepared this case emergence of low-cost airlines revolutionized the way people under the supervision of traveled across Europe. The pioneer of the low-cost movement Professor Adrian Ryans as a in Europe was Ryanair, which in 2004 was the most profitable basis for class discussion airline in the world (in terms of percentage operating profit), and rather than to illustrate either whose low-cost base and operating efficiency was the envy of effective or ineffective handling the airline industry. of a business situation. Ryanair had a strong commitment to price value with fares that were consistently the lowest in the industry. With almost one quarter of the seats given away for free (before taxes, fees and charges) and an average fare of €44, Europeans became accustomed to “doing a Ryanair” and heading out to far-flung cities across Europe for weekend jaunts. CEO Michael O’Leary was quoted as saying, “Our strategy is like Wal-Mart’s--we pile it high and sell it cheap.” However, Ryanair faced strong competition from traditional carriers, charter airlines and the almost 50 low-cost copycat carriers in Europe, threatening Ryanair’s ambitious plans to double its customer base within five years and deliver consistent returns to shareholders. More immediately, O’Leary had to respond for the first time to serious competition from easyJet, Ryanair’s larger low-cost rival, in its home market, Ireland. On September 23, 2004 easyJet announced its first three routes to the Republic of Ireland from London Gatwick and its CEO Ray Webster commented: These are our first services to the Republic of Ireland, where air fares have remained stubbornly high and have generated consistently strong year-round returns for the incumbent airline. We are bringing easyJet’s well-established brand to Ireland and will be flying to the right places at the right prices for hundreds of thousands of passengers. The great news for consumers is that all of these routes will be offered from Gatwick Airport in south London which will attract thousands of new passengers and give a new low-cost option for those who prefer to fly from Gatwick. Copyright © 2005 by IMD - International Institute for Management Development, Lausanne, Switzerland. Not to be used or reproduced without written permission directly from IMD. - 2 - IMD-3-1633 I N T E R N A T I O N A L Company Background In 1985 Ryanair began operations with a 15-seater airplane providing service from the southeast of Ireland to London. Within a year it was challenging the Aer Lingus and British Airways duopoly on the Dublin–London route, forcing the incumbents to reduce their prices by over 50% to match those of Ryanair. Over its first five years, a haphazard expansion of aircraft and routes attracted over 700,000 passengers, but also resulted in £20 million in losses. Insisting that this was an investment for the future, the Ryan family restructured the airline and infused another £20 million in capital, but not before sending a young manager, Michael O’Leary, to go and study Southwest Airlines. A brainchild of Herb Kelleher, Southwest had left an indelible mark on aviation history by running a highly successful airline, which offered point-to-point flights on a single type of aircraft, no assigned seating, a single class of service and a flight crew that could have moonlighted as stand-up comedians.1 O’Leary returned and convinced the company’s management team and founders that he could adapt and better the Southwest model for the European market by providing a no-frills low-fare service on an extremely low-cost base. With the backing of the founders and the lure of a significant financial upside if he managed to pull it off, O’Leary began to institute the necessary changes while taking on the role of deputy chief executive. Born again as the “value for money” airline, Ryanair adopted a no-frills approach while extending the Southwest model to drive down costs to levels well below that of the competition. In 1994 O’Leary became CEO and shortly thereafter launched an offensive on European routes typically dominated by duopolies of the national flag carriers, with the advent of the open-skies policy in the European Union.2 Over the next few years, Ryanair grew aggressively, sweeping through the European mainland like a capitalist hurricane, leaving a fundamentally altered airline market in its wake. Ryanair fares were priced on a one-way basis and depended on advance booking, seat availability and demand. Fares were typically much lower than competition, but were non-cancellable, non-refundable and had to be paid at the time of booking. Europeans, fed up with high-priced train tickets, motorway tolls and expensive airfares from traditional airlines, defected in droves. In the fiscal year ending March 2004 Ryanair carried 23 million passengers on 150 routes. Exhibit 1 shows the routes in operation in 2003, the number of passengers carried on those routes and the new routes that were to be launched in 2004. 1 Even Kelleher was known to routinely participate in the in-flight entertainment antics while traveling. On one flight he asked the passengers to put their hands together for a round of applause, for someone in the front of the plane had just turned 98 years of age. Shortly after, he would tell the passengers to make sure they wished the captain “Happy Birthday” on their way out. 2 In 1997, just as the industry was completely deregulated, only 6% of Europe’s routes were operated by three or more carriers; 30% by two carriers, the rest were monopolies. - 3 - IMD-3-1633 I N T E R N A T I O N A L By the end of 2004 Ryanair was expected to carry about 27 million passengers over 217 routes. It claimed to have the lowest fares and seat costs in Europe and reported net margins of over 28% for the six months ending September 2004. It also claimed several number ones--among them were the most punctual airline and the airline with fewest cancellations and lost bags. Passenger growth was at 27% CAGR over the previous decade, and for the fiscal year ending March 2004 revenues were €1.07 billion and profit after tax was €227 million (refer to Exhibit 2). Managing Costs Ryanair had a low-cost structure and a relentless focus on driving it down even further. Like most other leading low-cost carriers, it emphasized a strong brand and low fares, short-haul routes, direct and online bookings,3 ticketless travel, the use of secondary airports (though some competitors strayed away from this rule). Its point-to-point service provided a no-frills experience with everything from food on board to credit card payments costing extra. For a comparison of costs per available seat kilometer for several European airlines refer to Exhibit 3. At the heart of the Ryanair model was the emphasis on using virtually exclusively low-cost secondary airports. It advertised Frankfurt and flew to Hahn--about 125 km by road from the city center, and similarly chose secondary airports at Brussels, Hamburg, London and Stockholm. The major bases and the number of aircraft stationed at each one are shown in Exhibit 4. The airline was not only able to bargain hard and obtain significant discounts on airport charges, but also turn around its planes quicker in these less congested airports. This contributed to industry-beating aircraft-scheduled turnaround times of only 25 minutes. Point-to- point services meant that Ryanair avoided the costs of providing through services for connecting passengers including baggage transfer and transit passenger assistance. All this allowed it to keep its planes in the air about 30% more than the typical carrier. O’Leary noted that Ryanair could run two more flights a day in its schedule than rivals such as British Airways: “This is the most important cost advantage we have.” O’Leary was the driving force behind the aggressive cost cutting and negotiating with the company’s suppliers. He likened the airline industry to a commodity business where the lowest cost operator prevailed. Ryanair’s core strategy was based on striking good deals with under-utilized regional airports and local chambers of commerce, which hoped to reap substantial economic benefits from a stream of well-heeled foreign visitors. Ryanair negotiated with airport authorities at Charleroi in Belgium and obtained a 50% discount on landing charges, a preferential passenger handling charge of €1 (10% of the airport’s normal basic rate) and a contribution of €4 per passenger brought into the airport for up to 26 flights per day over the next 15 years. Similar deals had been struck at airports across the continent (it was rumored that Ryanair’s fees at Klagenfurt, Austria were only 10% of what Austrian Airlines was paying). Given the scale of Ryanair’s business, it was no wonder that no service provider had walked away in over 15 years. 3 About 97% of flight reservations were made through its website, Ryanair.com. - 4 - IMD-3-1633 I N T E R N A T I O N A L Ryanair, like Southwest, insisted on using a single aircraft family, the Boeing 737, thereby avoiding costly complexity in maintenance, spares and crew training. And the aircraft had been bought cheaply. Originally it was second-hand aircraft but as the airline prospered it started buying new aircraft.

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