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CASE STUDY : 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.

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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. ’ 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

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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

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Table 1a Ryanair consolidated income statement

Year end Year end Year end 31 March 2009 31 March 2008 31 March 2007 (e 000) (e 000) (e 000) Operating revenues Scheduled revenues 2,343,868 2,225,692 1,874,791 Ancillary revenues 598,097 488,130 362,104 Total operating revenues – continuing operations 2,941,965 2,713,822 2,236,895 Operating expenses Staff costs (309,296) (285,343) (226,580) Depreciation (256,117) (175,949) (143,503) Fuel and oil (1,257,062) (791,327) (693,331) Maintenance, materials and repairs (66,811) (56,709) (42,046) Marketing and distribution costs (12,753) (17,168) (23,795) Aircraft rentals (78,209) (72,670) (58,183) Route charges (286,559) (259,280) (199,240) Airport and handling charges (443,387) (396,326) (273,613) Other (139,140) (121,970) (104,859) Total operating expenses (2,849,334) (2,176,742) (1,765,150) Operating profit – continuing operations 92,631 537,080 471,745 Other income/(expenses) Finance income 75,522 83,957 62,983 Finance expense (130,544) (97,088) (82,876) Foreign exchange gain/(losses) 4,441 (5,606) (906) Loss on impairment of available-for-sale financial asset (222,537) (91,569) – Gain on disposal of property, plant and equipment – 12,153 91 Total other income/(expenses) (273,118) (98,153) (20,708) (Loss)/profit before tax (180,487) 438,927 451,037 Tax on (loss)/profit on ordinary activities 11,314 (48,219) (15,437) (Loss)/profit for the year – all attributable to equity holders of parent (169,173) 390,708 435,600 Basic earnings per ordinary share (Euro cents) (11.44) 25.84 28.20 Diluted earnings per ordinary share (Euro cents) (11.44) 25.62 27.97 Number of ordinary shares (in 000s) 1,478,472 1,512,012 1,544,457 Number of diluted shares (in 000s) 1,478,472 1,524,935 1,557,503 Source: Ryanair Annual Report 2009.

Some of Ryanair’s revenue-generating ideas have Investor perspectives provoked controversy – and publicity. One of the most Since its flotation in 1996, Ryanair has never declared talked about was its intention to charge passengers £1 or paid dividends on its shares. For the foreseeable future, to use the lavatory onboard, by installing a coin slot on Ryanair planned to retain any earnings to fund the busi- its aircraft. While it has not implemented this concept (it ness operations, including the acquisition of additional may contravene security rules), the idea generated much aircraft required for its planned entry into new markets, publicity. Another idea mooted by Ryanair was a ‘fat tax’ expansion of its existing services, and for routine replace- for overweight passengers. In an online poll of over 30,000 ments of its current fleet. The no-dividend policy, combined respondents, the fat tax idea was approved by one in three. with its healthy cash position, has caused the company However, the airline later announced that it would not to seek alternative ways of improving the liquidity and implement the surcharge because it could not collect it marketability of its stock, through a series of share buy- without disrupting its 25-minute turnarounds and online backs of the equivalent of about 1.2 per cent of the issued check-in process. The same online poll, supposedly to share capital between 2006 and 2009. When a deal to generate ideas for additional revenue, also gained 25 per place an aircraft order with Boeing foundered, Ryanair cent approval for a x1 levy to use onboard toilet paper announced that it would probably substitute the capital with Michael O’Leary’s face on it. it would have spent to undertake a mixture of share Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 621

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Table 1b Ryanair consolidated balance sheet

31 March 2009 31 March 2008 Non-current assets Property, plant and equipment 3,644,824 3,582,126 Intangible assets 46,841 46,841 Available-for-sale financial assets 93,150 311,462 Derivative financial instruments 59,970 – Total non-current assets 3,844,785 3,940,429 Current assets Inventories 2,075 1,997 Other assets 91,053 169,580 Current tax – 1,585 Trade receivables 41,791 34,178 Derivative financial instruments 129,962 10,228 Restricted cash 291,601 292,431 Financial assets: cash > 3 months 403,401 406,274 Cash and cash equivalents 1,583,194 1,470,849 Total current assets 2,543,077 2,387,122 Total assets 6,387,862 6,327,551 Current liabilities Trade payables 132,671 129,289 Accrued expenses and other liabilities 905,715 919,349 Current maturities of debt 202,941 366,801 Current tax 425 – Derivative financial instruments 137,439 141,711 Total current liabilities 1,379,191 1,557,150 Non-current liabilities Provisions 71,964 44,810 Derivative financial instruments 54,074 75,685 Deferred tax 155,524 148,088 Other creditors 106,549 99,930 Non-current maturities of debt 2,195,499 1,899,694 Total non-current liabilities 2,583,610 2,268,207 Shareholders’ equity Issued share capital 9,354 9,465 Share premium account 617,426 615,815 Capital redemption reserve 493 378 Retained earnings 1,777,727 2,000,422 Other reserves 20,061 (123,886) Shareholders’ equity 2,425,061 2,502,194 Total liabilities and shareholders’ equity 6,387,862 6,327,551 Source: Ryanair Annual Report 2009.

buybacks and special dividends to shareholders after 2012, Ryanair’s operations causing a 7.5 per cent rise in its share price. Michael O’Leary said; Ryanair shares reached a high of x6.30 in April 2007 and plummeted to x1.97 in October 2008, as global equity Any fool can sell low air fares and lose money. The markets reeled. In early 2010, the shares were trading difficult bit is to sell the lowest airfares and make profits. in the x3.30 to x3.60 range, with an expected medium If you don’t make profits, you can’t lower your air fares term target of x4.20, based on expected earnings and a or reward your people or invest in new aircraft or take PE ratio of 13. In mid-2009, its rival easyJet shares had on the really big airlines like BA (British Airways) and a PE ratio of 29. Ryanair had often underperformed other .’vii budget airline peers on its PE ratio. Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 622

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Table 1c Ryanair selected operating data

2009 2008 2007 2006 Average yield per revenue passenger mile (‘RPM’) (a) 0.060 0.065 0.070 0.070 Average yield per available seat miles (‘ASM’) (a) 0.050 0.054 0.059 0.058 Average fuel cost per US gallon (a) 2.351 1.674 1.826 1.479 Cost per ASM (CASM) (a) 0.058 0.051 0.054 0.052 Break-even load factor 98% 79% 77% 75% Operating margin 5% 20% 21% 22% Total break-even load factor(a) 79% 67% 66% 65% Average booked passenger fare (a) 40.02 43.70 44.10 41.23 Ancillary revenue per booked passenger (a) 10.21 9.58 8.52 7.45

Other data: 2009 2008 2007 2006 Revenue passengers booked 58,565,663 50,931,723 42,509,112 34,768,813 Revenue passenger miles 39,202 m 34,452 m 26,943 m 20,342 m Available seat miles 47,102 m 41,342 m 32,043 m 24,282 m Booked passenger load factor 81% 82% 82% 83% Average length of passenger haul (miles) 654 662 621 585 Sectors flown 380,915 330,598 272,889 227,316 Number of airports served 143 147 123 111 Average daily flight hour utilisation (hours) 9.59 9.87 9.77 9.60 Employees at period end 6,616 5,920 4,462 3,453 Employees per aircraft 36 36 34 35 Booked passengers per employee 8,852 8,603 9,527 10,069 (a) Total break-even load factor is calculated on the basis of total costs and revenues, including the costs and revenues from all ancillary services. Source: Ryanair Annual Report 2009.

Certainly, Ryanair has stuck closely to the low-cost/ However, in December 2009 a plan to purchase 200 jets low-fares model. Ever decreasing costs is its theme, as it from Boeing was cancelled when negotiations over price constantly adapts its model to the European arena and collapsed: ‘Eventually you lose interest dealing with a bunch changing conditions. In this respect, Ryanair differs in its of idiots who can’t make a decision’, declared Michael application of the Southwest Airlines budget airline pro- O’Leary when the deal fell through.ix totype, and its main European rival, easyJet, as the latter Notwithstanding strict adherence to Boeing 737 planes, two are not as frill-cutting. One observer described the in an attempt to extract ever greater discounts from Boeing, difference between easyJet and Ryanair as: ‘easyJet, you Ryanair invited Airbus, the European aircraft manufacturer, understand is classy cheap, rather than just plain cheap.’viii to enter into preliminary bidding for a multimillion-dollar order for 200-plus short-haul aircraft. However, Airbus The Ryanair fleet rebuffed the Ryanair invitation, declaring this sales cam- Ryanair continued its fleet commonality policy, using paign would be too expensive and time-consuming. Boeing 737 planes to keep staff training and aircraft main- tenance costs as low as possible, with an expected fleet Staff costs and productivity of over 300 by 2012. Over the years, it has purchased Ryanair’s 2009 employee count of 6369 people, compris- newer, more environmentally friendly aircraft, reducing ing over 25 different nationalities, had almost doubled over the average age of its aircraft to 2.4 years, the youngest the previous three years. This was accounted for almost fleet in Europe. The newer aircraft produce 50 per cent less entirely by flight and cabin crew to service expansion. emissions, 45 per cent less fuel burn and 45 per cent lower Ryanair’s 2009 Annual Report claimed that its average pay, noise emissions per seat. Winglet modification provided including commissions to cabin crew for on-board sales, better performance and a 2 per cent reduction in fuel was x45,333, higher than almost all other major European consumption, a saving which the company believed could airlines. Most of the company’s pilots concluded negotiations be even further improved. Despite larger seat capacity, with Ryanair to move them to new roster patterns with new aircraft do not require more crew. In 2009, in aircraft substantial pay increases of up to x10,000 per captain. buying mode, Ryanair sought to repeat its 2002 coup Cabin crew also negotiated a new five-year pay agreement when it placed aircraft orders at the bottom of the market. with the company, earning them significant pay increases, Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 623

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claimed Ryanair. By tailoring rosters, the carrier maximised Authority rebuked Ryanair, and upheld a misleading productivity and time off for crew members, complying with advertising complaint against it for attaching ‘Lyon’ to its EU regulations which impose a ceiling on pilot flying hours advertisements for flights to St Etienne. A passenger had to prevent dangerous fatigue. Its passenger-per-employee turned up at Lyon Airport, only to discover that her flight ratio of 9195 was the highest in the industry. was leaving from St Etienne, 75 kilometres away. Ryanair continued to protest at charges and conditions Passenger service costs at some airports, especially Stansted and Dublin, two of Ryanair pioneered cost-cutting/yield-enhancing measures its main hubs. It opposed vehemently the British Airport for passenger check-in and luggage handling. One was Authority (BAA)1 monopoly plans to build a ‘£4bn gold priority boarding and web-based check-in. Over half of its plated Taj Mahal at Stansted which we believe could be passengers use this, thus saving on check-in staff, airport built for £1bn’. The airline was: facilities and time. Charging for check-in bags encouraged passengers to travel with fewer bags or even zero check-in deeply concerned by continued understaffing of luggage, thus saving on costs and enhancing speed. Before security at Stansted which led to repeated passenger and Ryanair began to charge for checked-in bags, 80 per cent flight delays . . . management of Stansted security is of passengers were travelling with checked-in luggage; inept, and BAA has again proven that it is incapable two years later this had fallen to 30 per cent. From October of providing adequate or appropriate security services at 2009, it adopted a 100 per cent web check-in policy, Stansted. This shambles again highlights that BAA is xiii enabling a reduction in staff numbers, calculated to save an inefficient, incompetent airport monopoly. x50 million per year. Ryanair claims that: When BAA appealed its break-up, ordered by the UK Com- passengers love web check-in. Never again will they have petition Commission in 2009, Ryanair secured the right to to arrive early at an airport to waste time in a useless intervene in the appeal in support of the Commission. check-in queue. As more passengers travel with carry- In July 2009, Michael O’Leary made a high-profile on luggage only, they are delighted to discover that they announcement that Ryanair would cut winter capacity at will never again waste valuable time at arrival baggage Stansted by 40 per cent, because of Stansted’s rejection carousels either. These measures allow Ryanair to save of Ryanair’s demand for cuts in airport charges and the our passengers valuable time, as well as lots of money.x UK government’s plan to raise departure duty from £10 to £11 per passenger. In protest at rising charges at Dublin A natural next step announced by Ryanair was a move Airport from January 2010 and a x10 per passenger to 100 per cent carry-on luggage. Additional bags would tourist tax in Ireland, Ryanair was also intending to be brought by passengers to the boarding gate, where reduce its Dublin traffic by 20 per cent. they would be placed in the hold, and returned to them However, both BAA and some observers derided as they deplane on arrival. These efficiencies would allow Ryanair’s threats to cut traffic by 40 per cent at Stansted. more efficient airport terminals to be developed without ‘Michael O’Leary’s ability to spin a tale has reached a expensive check-in desks, baggage halls, or computerised new level this week. Along with the gullibility of parts of baggage systems, ‘and enable Ryanair to make flying the media in accepting it. Hook, line and sinker.’xiv This even cheaper, easier and much more fun again’, claimed was based on the contention that the airline should have xi the company. The feasibility of the proposals to require compared its projected winter capacity of 24 aircraft at passengers to carry hold baggage through security to the Stansted, not with its summer capacity of 40, but with its aircraft was yet to be tested. previous winter capacity of 28. Thus, the reduction would be only 14 per cent, not 40 per cent. Airport charges and route policy Consistent with the budget airline model, Ryanair’s routes Marketing strategy were point-to-point only. It reduced airport charges by Following the introduction of its internet-based reservations avoiding congested main airports, choosing secondary and and ticketing service, enabling passengers to make reserva- regional destinations, eager to increase passenger through- tions and purchase tickets directly through the website, put. Usually these airports are significantly further from Ryanair’s reliance on travel agents has been eliminated. It the city centres they serve than the main airports, ‘from has promoted its website heavily through newspaper, radio nowhere to nowhere’ in the words of Sir Stelios Haji- and television advertising. As a result, internet bookings Ioannou, founder of easyJet, Ryanair’s biggest competitor.xii account for 99 per cent of all reservations. It uses Frankfurt Hahn, 123 kilometres from Frankfurt; Torp, 100 kilometres from Oslo; and Charleroi, 60 kilometres from Brussels. In December 2003, the Advertising Standards 1 BAA is owned by Spanish company Ferrovial. Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 624

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Ryanair minimises its marketing and advertising costs, was fundamentally opposed to a merger with Ryanair, relying on free publicity, by its own admission, ‘through even if it raised its price, then Aer Lingus Chief Executive controversial and topical advertising, press conferences Dermot Mannion stated: and publicity stunts’. Other marketing activities include I cannot conceive of the circumstances where the Aer distribution of advertising and promotional material and Lingus management and Ryanair would be able to work cooperative advertising campaigns with other travel- harmoniously together . . . this is simply a reflection of related entities, and local tourist boards. the fact that these organisations have been competing As referred to earlier, one of Ryanair’s publicity stunts head to head, without fear or favour, for 20 years. It was its unauthorised use of a photograph of Spanish would be like merging Manchester United and Liverpool Queen Sofia after she took a £13 flight from Santander in football clubs.xviii,2 Northern Spain to London. When it incurred the Queen’s displeasure, Ryanair apologised and promised to donate In fact, the bid was opposed by a loose alliance represent- x5000 to a charity of her choice. In another instance of ing almost 47 per cent of Aer Lingus shares. This included controversy over using pictures of the rich and famous, the Irish government, which still retained a 25.4 per cent in 2008 Ryanair was forced to pay a fine of x60,000 to holding, two investment funds operated on behalf of Aer President Sarkozy of France and his Italian bride Carla Bruni Lingus pilots accounting for about 4 per cent of shares, and for using their images with the slogan, ‘With Ryanair, all Irish telecom tycoon Denis O’Brien, who bought 2.1 per my family can come to my wedding’. cent of shares deliberately to complicate Ryanair’s move. A critical 12.6 per cent of the shareholding was controlled by the Aer Lingus employee share ownership trust (ESOT), So, what about Aer Lingus? which had the right to appoint two directors, and has a According to a commentator in the Financial Times stake in future profits. Its members rejected the Ryanair ‘Ryanair’s bid for Aer Lingus was a folie de grandeur’.xv Even offer by a 97 per cent majority vote. Michael O’Leary admitted ‘it was a stupid investment. At Having abandoned this bid due to the shareholder the time, it was the right strategy to go for one combined opposition and a blocking decision by the European airline but it has now proven to be a disaster.’xvi Commission on competition grounds, Ryanair renewed its During 2007, in a shock bid, Ryanair had acquired a bid in December 2008, with an offer of x1.40 per share, 25.2 per cent stake in Aer Lingus, only a week after the a premium of approximately 25 per cent over the closing flotation of the national carrier. It subsequently increased price. It proposed to keep Aer Lingus as a separate company its interest to 29.8 per cent, at a total aggregate cost of maintaining the Aer Lingus brand, to double Aer Lingus’ x407.2 million. By July 2009, the investment had been short-haul fleet from 33 to 66 aircraft and to create 1000 written down to x79.7 million. At the time of the initial associated new jobs over a five-year period. It claimed bid Ryanair declared its intention to retain the Aer Lingus that if the offer was accepted, the Irish government would brand and: receive over x180 million and the ESOT members and other employees who owned 18 per cent of Aer Lingus up-grade their dated long-haul product, and reduce would receive over x137 million in cash. However, in their short-haul fares by 2.5 per cent per year for a January 2009, when the offer was rejected by Aer Lingus minimum of 4 years . . . one strong Irish airline group management and by the ESOT and other parties, Ryanair will be rewarding for consumers and will enable both decided to withdraw it. to vigorously compete with the mega carriers in Europe Aer Lingus’ fortunes continued to deteriorate, announc- . . . there are significant opportunities, by combining the ing losses for 2008 and projecting even worse for 2009. purchasing power of Ryanair and Aer Lingus, to sub- In July of that year its shares were trading at less than stantially reduce its operating costs, increase efficiencies, x0.50. In April, its CEO Dermot Mannion resigned after and pass these savings on in the form of lower fares to controversy over a potential secret pay-off deal in the event Aer Lingus consumers.xvii of a hostile takeover. While Ryanair did not have a seat on It had been an achievement for the Irish government finally the board, it continued to denigrate Aer Lingus, forecasting to have floated Aer Lingus after several false starts over a ‘a bleak future as a loss-making, subscale, regional airline, number of years. Aer Lingus and its board firmly rejected which has a high cost base and declining traffic numbers’.xix the Ryanair approach, stating that it had acted in ‘a hostile, Meanwhile, the two airlines continued to compete vigor- anticompetitive manner designed to eliminate a rival at a ously, especially within the Irish market. derisory price’. A combined Ryanair–Aer Lingus operation would account for 80 per cent of all flights between Ireland 2 Manchester United and Liverpool have a longstanding legendary and other European countries. Affirming that his company rivalry in English football. Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 625

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In July 2009, Aer Lingus appointed a CEO to replace would have to pay x15,000 for re-training on new aircraft Dermot Mannion. This was Christoph Mueller, known as if they left the airline, or if the company were forced to an ‘axe man’, former CEO of Sabena Airlines before it went negotiate with unions during the following five years. Some bust in 2001. Mr Mueller had already crossed swords with Ryanair managers were judged to have given false evidence Ryanair when it compared its fares to those of Sabena in court. Meanwhile, Ryanair was contesting the claims of in advertisements that were alleged to be misleading, some pilots for victimisation under the new contracts. By offensive and defamatory. When Ryanair lost a court case 2009, only 11 of the 64 pilots who had lodged the claim over the matter, and was ordered to publish an apology in remained with the company and still had claims. Belgian newspapers and on its website, it used the apology Ryanair was ordered to pay ‘well in excess’ of x1 million to continue its publicity about its relatively lower fares. in legal costs after a court refused the airline access to the names and addresses of pilots who posted critical comments Risks and challenges about the company on a site hosted by the British and Irish pilots’ unions. Michael O’Leary claimed anonymous pilots In addition to the fallout from its foray into Aer Lingus, were using a website to intimidate and harass foreign-based Ryanair faced various challenges in 2009, some specifc to pilots to dissuade them from working for the company. itself and some general to the aviation industry. Nonetheless, Ryanair appeared to have no problems recruit- ing crew, including pilots, to meet its needs. Sharp economic downturn The recession of 2008/09 created unfavourable economic Input costs conditions such as high unemployment rates and restricted credit markets, with reduced spending by leisure and busi- Fuel ness passengers alike. This constrained Ryanair’s scope to Perhaps the greatest concern is fuel prices. Jet fuel prices raise fares, putting downward pressure on yields. Continued are subject to wide fluctuations, increases in demand and recession could restrict the company’s planned passenger disruptions in supply-factors which Ryanair can neither volume growth. predict nor control. In such unpredictable circumstances, Growth and reducing yields even hedging is a risk. The situation is compounded by Growth plans by Ryanair entailed investment in new air- exchange rate uncertainties, although a decline of the US craft and routes. If growth in passenger traffic did not keep dollar against the euro and sterling worked in Ryanair’s pace with its planned fleet expansion, overcapacity could favour, as fuel prices are denominated in dollars. Conversely, result. Related pressures were additional marketing costs a weak euro against the dollar works against Ryanair. and reduced yields from lower fares to promote additional Ryanair’s declaration of ‘no fuel surcharges ever’ and its routes, especially to airports new to the Ryanair system. reliance on low fares limit its capacity to pass on increased In its drive for growth, Ryanair was likely to encounter fuel costs. increased competition, putting even more downward pressure on yields, as airlines struggled to fill vacant seats Airport charges and government taxes to cover fixed costs. Ryanair is especially sensitive to airports which raise charges, like Stansted and Dublin. Indirectly, it is also vulnerable Industrial relations to extra taxes and charges, such as the x10 tourist tax In the light of the recession and financial losses, Ryanair imposed by the Irish government. negotiated with all employee groups and secured a pay freeze for 2008/09 and 2009/10. It also planned to make Passenger compensation 250 people redundant at Dublin Airport. On 17 February 2005, a new EU regulation came into Ryanair came under fire for refusing to recognise unions effect, providing for standardised and immediate assistance and allegedly providing poor working conditions (for for air passengers at EU airports for delays, cancellations and example, to reduce the company’s electricity bill, staff are denied boarding. It was expected that the compensation banned from charging their own mobile phones at work). It costs would amount to a sector-wide bill of x200 million conducts collective bargaining with employees on pay, work annually. practices and conditions of employment through internal Passengers affected by cancellations must be offered elected Employee Representation Committees. However, there a refund or rerouting and free care and assistance while was pressure from the British Airline Pilots Association waiting for their rerouted flight – specifically, meals, (BALPA) to enlist Ryanair pilots based in Britain. refreshments, and hotel accommodation where an over- In July 2006, the Irish High Court ruled that Ryanair night stay is necessary. Financial compensation is payable, had bullied pilots to accept new contracts, where pilots unless the airline can prove unavoidable exceptional Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 626

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circumstances, like political instability, weather conditions, the Commission to investigate allegations that Air France security and safety risks, or strikes. For Ryanair, the typical had received almost x1 billion in illegal state aid, benefiting compensation cost would fall into the x250 category, based unfairly from up to 50 per cent discounted landing and on the average distance of its flights. Passengers subject to passenger charges on flights within France. Adverse rulings long delays would also be entitled to similar assistance. on these airport cases could curtail Ryanair’s growth, if However, four years after its introduction the new regula- it was prevented from striking advantageous deals with tion was largely ignored and had no material impact on publicly owned airports and was confined to the fewer Ryanair, despite the emergence of online ‘advisors’ to help privately owned airports across Europe. passengers make claims when their flights have been On another front, Ryanair was being sued by BAA for cancelled or delayed. its refusal to pay increased landing charges at Stansted. In other legal cases Ryanair has been accused of misleading Environmental concerns passengers on its website by exaggerating price differentials Aviation fuel has been exempt from carbon taxes, but with its competitors.xx the EU has established an Emissions Trading Scheme to encompass the aviation industry commencing in 2012. Customer services and perceptions Ryanair was predicted to be the fourth most adversely In 2003, Ryanair published a Passenger Charter, which affected airline in the world with a shortfall of 2.8 tonnes in includes doctrines on low fares, customer redress and punctuality. Its annual report offers figures claiming CO2 allowances, equivalent to x40 million in extra costs. This is despite its young fleet of fuel-efficient, minimal superiority over competitors with respect to punctuality, pollution aircraft. Ryanair has contended that any environ- completed flights and fewest bags lost per 1000 passengers. mental taxation scheme should be to the benefit of more However, its Skytrax 2 star rating is among the worst efficient carriers. Airlines with low load factors that generate for budget airlines. In Europe, only bmibaby and Wizzair high fuel consumption and emissions per passenger, and achieve as low a rating. There have been suggestions those offering connecting rather than point-to-point flights, that Ryanair’s ‘obsessive focus on the bottom line may should be penalised. have dented its public image. In an infamous incident, it charged a disabled man £18 (x25) to use a wheelchair’.xxi Sundry legal actions In response to protests over the charge, Ryanair imposed Ryanair has been in litigation with the EU about alleged a 50-cent wheelchair levy on every passenger ticket. receipt of state aid at certain airports. An EU ruling in 2004 Campaigners for the disabled accused Ryanair of pro- held that Ryanair had received illegal state aid from fiteering, declaring that the levy should be no more than publicly owned Charleroi Airport, its Brussels base. 3 cents. It was the only major airline in Europe to impose Ryanair was ordered to repay x4 million. The Belgian such charges. authorities were claiming back a further x2.3 million in the There was growing attention to extra charges continu- Irish courts for its reimbursement to Ryanair of start-up ally being imposed by Ryanair on passengers, many on costs at Charleroi. On appeal, the original EU decision was unavoidable services, such as check-in. In some instances, overturned in December 2008, Ryanair was refunded its these extra charges make Ryanair more expensive than x4 million and the Belgian authorities withdrew their claim. BA.xxii Examples were a family of four travelling to Ibiza Nonetheless, the EU launched further investigations into from London with three bags for a two-week holiday cost- allegations of illegal aid, subsidising Ryanair at publicly ing £1157 with Ryanair compared to £913 with BA and owned airports, such as Lubeck and Frankfurt Hahn in £634 with easyJet. A single passenger travelling to Venice Germany, and Shannon in Ireland. Other legal challenges from London for a week at Christmas with one bag would were launched against Ryanair by competitors. On another pay a total £139 on Ryanair compared to £89 on BA and front Ryanair was vigorously opposing French government £121 on easyJet. attempts to protect Air France–KLM by forcing easyJet and Ryanair features on many consumer complaint inter- Ryanair to move their French-based staff from British active websites, and some blogs have been established employment contracts to more expensive French ones. specifically to disparage the airline. In a blog entitled ‘20 Often, Ryanair took the initiative on alleged illegal aid reasons never to fly Ryanair’, extra charges for booking to rivals. For example, it filed a complaint with the EU fees, baggage overweight and low weight limits, premium Commission accusing Air France–KLM of attempting to rate helplines, and the fact that ‘you are always being block competition after the French airline filed a case alleg- flogged stuff’ were enumerated?xxiii When the Irish Times put ing that Marseille was acting illegally by offering Ryanair Ryanair customers’ gripes to its head of communications, discount airlines cut-price fees at its second, no-frills termi- Stephen McNamara, his response was to dismiss them as nal. That complaint came a month after Ryanair called on ‘ “subjective and inaccurate rubbish” and even implied Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 627

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they had been made up to further some anti-Ryanair than Ryanair at capturing the traffic trading down from agenda’.xxiv Among the complaints were: network carriers. Other budget carriers, of diverse size and growth ambi- Customers want to be treated like a human being, to tions, trajectories and regional emphases varied in different get to their desired destination (not 50/60 miles away) levels of services to passengers and use of main versus . . . to be allowed to bring luggage without persecution secondary airports. The comparison with the US budget ...a complete and utter lack of communication when airline market in Table 2 indicates that penetration in flights run late . . . I’m sick of that miserable booking Europe is less than in the US, which suggests scope for charge/service charge/admin charge system. growth in the sector in Europe. It also raises the question as So, why are so many people willing to put up with an to whether the extent of dominance enjoyed by Southwest airline that, in the words of The Economist, ‘has become offers a model for Ryanair to assert itself further. Another a byword for appalling customer service, misleading possible development trajectory for Ryanair was to follow advertising claims and jeering rudeness’?xxv Ryanair has up on its announcement in 2007 to offer x10 transatlantic responded to such comments, declaring that, in effect, flights, an idea which had not taken flight and appeared customers vote with their feet by choosing Ryanair for its to have been shelved as of 2009. four tenets of customer service – low fares, a good on-time record, few cancellations and few lost bags. ‘If you want Leading Ryanair into the future anything more – go away’, warns Michael O’Leary.xxvi The Financial Times aerospace correspondent observed that ‘It is good to have someone like Michael O’Leary around. Ryanair still offered relative value compared to rail altern- He scares people to death.’ This praise of Ryanair’s CEO came atives, at least on a journey from London to Scotland, from none other than his fellow Irishman, Willie Walsh, CEO xxvii even when Ryanair extras are factored in. of BA. He has been described as ‘at turns, arrogant and rude, then charming, affable and humorous, has terrorised Other risks and challenges rivals and regulators for more than a decade. And so far, they As listed in its own report, Ryanair faced other risks – prices have waited in vain for him to trip up or his enthusiasm and availability of new aircraft, threats of terrorist attacks, to wane.’xxviii In fact, Michael O’Leary has been pronounc- dependence on key personnel (especially Michael O’Leary) ing his intention to depart from the airline ‘in two years’ and on external service providers and its internet website time’. He has declared that he would sever all links with and the continued acceptance of budget carriers with the airline, refusing to ‘move upstairs’ as chairman. ‘ “You respect to safety. Tied in with the latter are potential rises in don’t need a doddery oldie hanging around the place”, he insurance costs. proclaimed.’xxix O’Leary stays in budget hotels, always flies Ryanair, startling fellow passengers by taking their boarding passes Ryanair’s competitive space at the gate and by boarding the plane last where he invari- Globally, the airline industry lost $11 billion in 2009, ably gets a middle seat. He does not sit in an executive on top of $8.5 billion in 2008, with European airlines lounge, has no BlackBerry and does not use email. contributing $1 billion of that loss. Of the large European In 2009, Michael O’Leary held 4.06 per cent of Ryanair’s carriers, only Lufthansa was expecting to make a profit. share capital, having sold 5 million shares at x3.75. Although BA, Air France–KLM and Scandinavian Air Systems O’Leary consistently praised his management team, Ryanair (SAS) experienced severe losses, due to declining traffic was inextricably identified with him. He was credited with from long-haul business class passengers. The woes of these single-handedly transforming European air transport. In legacy carriers were compounded by huge pension fund 2001, O’Leary received the European Businessman of the deficits. Year Award from Fortune magazine; in 2004, the Financial Some industry analysts considered the economic reces- Times named him as one of 25 European ‘business stars’ sion of 2009 could offer an opportunity for budget carriers, who have made a difference. The newspaper described him as passengers who continued to travel were expected to as personifying ‘the brash new Irish business elite’ and trade down. By mid-2009, budget airlines accounted for possessing ‘a head for numbers, a shrewd marketing brain over 35 per cent of scheduled intra-European traffic. and a ruthless competitive streak’.xxx Ryanair was the clear market share leader, with easyJet Present and former staff have praised O’Leary’s leader- another dominant force (Table 2). The two were often ship style. ‘Michael’s genius is his ability to motivate and compared and contrasted, since both operated mainly out energise people. There is an incredible energy in that place. of the UK and served the same markets. One issue was People work incredibly hard and get a lot out of it. They whether easyJet’s use of primary airports would be better operate a very lean operation. It is without peer’ said Tim Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 628

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Table 2 Budget airlines sundry data – Europe and US (2008/09)

European market position US market position Airline Pax (m)1 Rating3 Airports4 Airline Pax (m)2 Aigle Azur 1.46 26 AirTran 24.6 Air Berlin 28.6 4 126 Allegiant Air 3.9 Belle Air 0.46 24 American Trans Air (ATA) 0.4 Bmibaby 3.87 2 32 Frontier Airlines 10.1 5.4 3 62 GoJet Airlines 1.5 Clickair5 6.3 3 40 Horizon Airlines (Alaska Air) 6.5 easyJet 44.6 3 110 Island Air Hawaii 0.5 FlyBe 7.5 3 65 JetBlue Airways 20.5 Germanwings 7.6 3 70 Midwest Airline Inc. 3.0 Jet2.com 3.5 3 51 Shuttle America Corp. 3.5 Meridiana 1.9 3 30 Southwest Airlines 101.9 Monarch Airlines 3.9 21 Spirit Airlines 5.5 Myair.com5 1.5 27 Sun County Airlines 1.3 Niki Airline 2.1 3 33 USA 3000 Airlines 0.8 Norwegian 9.1 3 85 Virgin America 2.5 Ryanair 57.7 2 140 Sky Europe5 3.6 3 30 Sterling5 3.8 39 Sverigeflyg 0.5 15 transavia.com 5.5 3 88 TUIfly 10.5 75 Vueling Airlines 5.9 3 45 Windjet 2.7 28 Wizz Air 5.9 3 58 1 Sources: European Low Fares Airlines Association (ELFAA), Company reports. 2 Sources: CIA, Bureau of Transportation Statistics. 3 Skytrax star rating from 1 to 5 – not all airlines rated. 4 Number of airports served; Sources: European Low Fares Airlines Association (ELFAA), Company reports. 5 These airlines have ceased operations.

Total passengers (pax) European budget airlines 223.9 Total pax US budget airlines 186.4 Ryanair as % of Total – 26% Southwest as % of Total – 55% Key Population Data Key Population Data Population EU 27 (m) 500 Population US (m) 307 Key Population Ratios Key Population Ratios Budget ratio to EU 27 population 0.45 Budget ratio to US population 0.61

Jeans, a former sales and marketing director of Ryanair, regulators and the EU Commission, and airport owners like currently CEO of a small low-cost rival, MyTravelLite.xxxi BAA, whom he once called ‘overcharging rapists’.xxxiv An O’Leary’s publicity seeking antics are legendary. EU Commissioner, Philippe Busquin, denounced Michael These included his ‘declaration of war’ on easyJet when, O’Leary as ‘irritating . . . and insists he is not the only wearing an army uniform, he drove a tank to easyJet’s Commissioner who is allergic to the mere mention of the headquarters at Luton Airport. In another stunt, when name of Ryanair’s arrogant chief’.xxxv Ryanair opened its hub at Milan Bergamo he flew there An Irish Times columnist, John McManus, suggested that aboard a jet bearing the slogan ‘Arrividerci Alitalia’. He has ‘maybe it’s time for Ryanair to jettison O’Leary’, asserting also dressed up as St Patrick and as the Pope to promote that O’Leary has become a caricature of himself. Perhaps ticket offers. the last words should go to Michael O’Leary himself: ‘We O’Leary’s outspokenness has made him a figure of could make a mistake and I could get hung’, he said. He public debate. ‘He is called everything from “arrogant pig” reiterated a point he had often made before: to “messiah” ’.xxxii His avowed enemies include trade unions, politicians who impose airport taxes (he called It is okay doing the cheeky chappie, running around UK Prime Minister Gordon Brown a ‘twit’ and a ‘Scottish Europe, thumbing your nose, but I am not Herb Kelleher miser’xxxiii), environmentalists, bloggers who rant about (the legendary founder of the original budget airline, poor service, travel agents, reporters who expect free seats, Southwest Airlines). He was a genius and I am not.xxxvi Z01_JOHN2020_09_SE_EM13.QXD 10/13/10 9:06 Page 629

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So, how do these comments (and the Aer Lingus bid) fit xvi L. Noonan, ‘O’Leary admits stake in Aer Lingus was stupid disaster’, with Michael O’Leary’s declaration to part company with Irish Independent, 6 March 2009. xvii Statement from Ryanair’s half yearly results presentation, Ryanair? Would he really go, and if so, what would happen 6 November 2006. to Ryanair and its ambitions? No one really knows the xviii S. Pogatchnik, ‘Aer Lingus rejects Ryanair takeover offer’, answer to these questions, but it is O’Leary’s propensity to Business Week online, 3 November 2006. xix Ryanair Full Year Results 2009. surprise his admirers and detractors alike. xx Ryanair press release, 29 May 2009. xxi D. Milmo, ‘Ryanair – the world’s least favourite airline’, References: Guardian, 26 October 2006. i ‘The FT ArcelorMittal Boldness in Business Awards’, Financial Times xxii R. Waite and S. Swinford, ‘Ryanair more expensive than BA on some supplement, 20 March 2009, p. 25. flights’, Sunday Times, 9 August 2009. ii K. Done, ‘Airline industry in intensive care’, Financial Times, xxiii Money Central – Times Online – ‘WBLG: Twenty reasons never to fly 25 March 2009, p. 22. Ryanair’, 20 March 2009. iii P. Clark, ‘Upbeat Ryanair rides out the storm’, Financial Times, xxiv C. Pope, ‘Pricewatch Daily’, Irish Times, 14 August 2009, p. 11. 2 February 2009, p. 20. xxv Lyall, ‘No apologies from the boss of a no-frills airline’. iv K. Done, ‘Ryanair sees opportunities in rivals’ distress’, Financial xxvi Ibid. Times, 28 July 2009, p. 15. xxvii K. Done, ‘O’Leary shows it is not yet the end for budget air travel’. v Financial Times, 9 September 2006, p. 16. Financial Times, 2 August 2008, p. 11. vi K. Done and T. Braithwaite, ‘Ryanair to allow mobile phone calls xxviiii ‘The FT ArcelorMittal Boldness in Business Awards’, Financial next year’, Financial Times, 31 August 2006, p. 1. Times supplement, 20 March 2009, p. 21. vii Ryanair Annual Report, 2001. xxix D. Dalby, ‘I’m going for good, O’Leary tells Ryanair’, Sunday Times, viii J. Guthrie, ‘Sir Stelios beknighted as suits prove bolder risk takers’, 20 November 2005, News, p. 3. Financial Times, 30 July 2009, p. 16. xxx B. Groom, ‘Leaders of the new Europe: Business stars chart a ix P. Clark, ‘O’Leary in attack on Boeing’, Financial Times, 19 December course for the profits of the future’, Financial Times, 20 April 2004. 2009, p. 1. xxxi G. Bowley, ‘How low can you go?’ Financial Times Magazine, x Ryanair Annual Report 2009. No. 9, 21 June 2003. xi Ibid. xxxii Ibid. xii S. Lyall, ‘No apologies from the boss of a no-frills airline’, The New xxxiii Lyall, ‘No apologies from the boss of a no-frills airline’. York Times, 1 August 2009 (The Saturday Profile). xxxiv Ibid. xiii Ryanair 2007 half yearly results. xxxv S. Creaton, ‘Turbulent times for Ryanair’s high-flier’, Irish Times, xiv B. Groom, ‘Hot air from Ryanair’, Financial Times, 23 July 2009, p. 16. 31 January 2004. xv LEX, Ryanair, Financial Times, 3 June 2009, p. 16. xxxvi Bowley, ‘How low can you go?’