Ryanair: the Low Fares Airline – Future Destinations? Eleanor O’Higgins

Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 618 CASE STUDY Ryanair: the low fares airline – future destinations? Eleanor O’Higgins The case focuses on the analysis of the airline industry environment, the internal resources/capabilities of Ryanair and the concept of sustainable competitive advantage. The case illustrates how a strategy that is grounded in the efficient deployment of assets/resources/competencies, whilst adding perceived value to customers, delivers a sustainable strategic advantage. The case also illustrates the difficulties and obstacles that stand in the way of achieving and retaining such advantage through changing circumstances. ● ● ● There is only one thing in the world worse than being talked five years to 2009 was the most profitable airline in the about, and that is not being talked about. world, according to Air Transport magazine. Despite this apparent success, Ryanair faced issues. This is a quote from a novel by Oscar Wilde but it could The most pressing, shared by all airlines, was an industry be the mantra of budget airline Ryanair, Europe’s largest that was ‘structurally sick’ and ‘in intensive care’,ii with carrier by passenger numbers and market capitalisation in plunging demand in the global economic recession and 2009. The airline is often controversial, whether it was by uncertainty about oil prices. What strategy should Ryanair annoying the Queen of Spain by using her picture without use to weather this storm? Would the crisis produce a long permission, or announcing plans to charge passengers to term change in industry structure? Could Ryanair take use toilets on its flights, or engaging in high-profile battles advantage of the situation as it had in the past, by growing with the European Commission. Ryanair also made news when others were cutting back? A predicament of its own with its achievements, winning international awards, like making was Ryanair’s 29.8 per cent shareholding in Aer Best Managed Airline, or receiving a 2009 FT-ArcelorMittal Lingus, the Irish national carrier, following an abortive Boldness in Business Award. This Award announcement takeover attempt. Aer Lingus’ flagging share price had said that Ryanair had ‘changed the airline business outside necessitated drastic write-downs, which had dragged North America – driving the way the industry operates Ryanair into its first ever losses in 2009. through its pricing, the destinations it flies to and the passenger numbers it carries’.i Ryanair had been the budget Overview of Ryanair airline pioneer in Europe, rigorously following a low-cost strategy. It had enjoyed remarkable growth, and in the In 2009, Ryanair had 33 bases and over 850 routes across 26 countries, connecting 147 destinations. It operated a fleet of 199 new Boeing 737–800 aircraft with firm orders for a further 112. It employed over 7000 people and was expected to carry approximately 67 million passengers in 2010. Ryanair was founded in 1985 by the Tony Ryan family to provide scheduled passenger services between Ireland and the UK, as an alternative to the state monopoly airline, Aer Lingus. Initially, Ryanair was a full service conventional airline, with two classes of seating, leasing three different types of aircraft. Despite growth in passenger volumes, by the end of 1990 the company had faced many problems, Source: Reuters/Yves Herman. disposing of five chief executives, and accumulating losses This case was prepared by Eleanor O’Higgins, University College Dublin. It is intended as a basis for class discussion and not as an illustration of good or bad practice. © Eleanor O’Higgins, 2010. Not to be reproduced or quoted without permission. Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 619 RYANAIR – THE LOW FARES AIRLINE 619 of IR£20 million. Its fight to survive in the early 1990s saw cent to x40 and were forecast to decline steeply by a further the airline transform itself to become Europe’s first low fares, 15 to 20 per cent to about x32 in fiscal 2010. (Ryanair’s no frills carrier, built on the model of Southwest Airlines, financial data are given in Tables 1a and 1b, and operating the successful Texas-based operator. A new management data are given in Table 1c.) team, led by Michael O’Leary, at first a reluctant recruit, The airline contended that it could offer the lowest fares was appointed. Ryanair was floated on the Dublin Stock by cutting costs to levels that rivals could not achieve. It Exchange in 1997 and is quoted on the Dublin and London was planning to recruit 1200 new employees to service its Stock exchanges and also on the NASDAQ since 2002. new aircraft, but the number of passengers per employee was still expected to rise thanks to economies of scale from Mixed fortunes new routes and a decline in airport charges by directing traffic toward airports offering bargain deals. Having been Mixed results caught short in its fuel hedging for 2008/09, Ryanair took Ryanair designated itself as the ‘World’s Favourite Airline’ advantage of the low oil price to hedge 90 per cent of its on the basis that in 2009, IATA ranked it as the world’s fuel costs during 2009/10, locking in a full year fuel cost largest international airline by passenger numbers. It was saving of about x460 million. now the sixth largest airline in the world (when the large US carriers’ domestic traffic is included). Over the next Ancillary revenues five years, Ryanair intended to grow to become the second Ryanair provides various ancillary services connected largest airline in the world, ranked only behind its role with its airline service, including in-flight beverage, food model Southwest. and merchandise sales. It also distributes accommodation, Releasing Ryanair’s Q3 2009 results in January 2010, travel insurance and car rentals through its website. This Michael O’Leary observed, ‘The environment is, from enables Ryanair to increase sales, while reducing unit costs. Ryanair’s perspective, great, because it is awful. We’re In 2009, Ryanair’s website ranked 12th by number of visits doing remarkably well because this is the time when the for e-tailers in the UK (after EasyJet, which ranked 11th). lowest cost producer wins.’iii For the quarter, the com- Ancillary services accounted for 20.3 per cent of Ryanair’s pany reported a much smaller net loss than expected of total operating revenues in 2009, compared to 18.0 per x10.9 million (£9.9m or $15m), instead of an earlier fore- cent in 2008. In fact, ancillary revenues had climbed by cast loss of x35 million, with better than expected yields, 22 per cent, considerably faster than passenger revenues falling 12 per cent rather than the forecast 20 per cent. at 5 per cent, generating x10.20 per passenger and with Profits guidance for the full year improved to x275 million higher margins. rather than the original x200 million forecast. Other ancillary revenue initiatives were introduced, such The airline had cut lossmaking routes in the UK and as onboard and online gambling, and a trial in-flight mobile Ireland, replacing them with more profitable ones in phone service in 2009. A poll of Financial Times readers had France, Germany and Spain. Operating costs per passenger produced a 72 per cent negative response to the question, were cut by 4 per cent, despite a 3 per cent increase in ‘Should mobile phones be allowed on aircraft?’v However, average flight distance. Ryanair planned to open 146 new Michael O’Leary declared ‘If you want a quiet flight, use routes in 2010 and to increase market share thanks to another airline. Ryanair is noisy, full and we are always the demise of several carriers.iv trying to sell you something.’vi Not all ancillary service These results and expectations for 2010 followed on initiatives were successful. In 2005, Ryanair pulled an in- full-year 2009 results (see Table 1), when Ryanair plunged flight entertainment system when passengers had resisted to a x180 million loss, as its x144 million operating profit paying x8 to rent a games and entertainment console. was eradicated by a x222 million write-down of its Aer Ryanair was the first airline to introduce charges for Lingus shares and an accelerated x51.6 million depreciation check-in luggage. Virtually all budget airlines have followed charge. Excluding these exceptional charges, underlying suit, as they have with other Ryanair initiatives. It has profits fell 78 per cent from x480.9 million to x105 million. continued to find ways of charging passengers for services This was due largely to a surge in fuel prices as Ryanair once considered intrinsic to an airline ticket. Passengers failed to hedge when oil prices rose to $147 a barrel in were charged extra for checking in at the airport rather July 2008. Then, bowing to shareholder pressure to cover than online (which also incurs a charge), although those against rocketing prices, it locked in fuel costs at $124 a with hold luggage did not have the option of checking in barrel for 80 per cent of its consumption during the third online. While avoiding pre-assigned seats, an extra charge quarter – just as oil prices crashed to a low of $33 a barrel procures ‘priority boarding’. Interestingly, Aer Lingus and during that period. Passenger numbers rose 15 per cent BA have taken up a similar idea by enabling passengers to from 50.9 million to 58.5 million. Average fares fell 8 per pre-book seats online for an extra charge. Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 16:07 Page 620 620 RYANAIR – THE LOW FARES AIRLINE Table 1a Ryanair consolidated income statement Year end Year end Year end 31 March 2009 31 March 2008 31 March 2007

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