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Ryanair: Europe's no-frills giant
By Sebastian Steinke
For Ryanair the financial year 2006/2007 ended on 31 March with an entrepreneurial triumph: the Irish carrier had handled 42.5 million passengers, 22 percent more than in the previous year, in its white, blue and yellow low-cost fleet which as of that date consisted of 133 Boeing 737-800's. Between now and 2012 when the airline plans to be carrying 84 million passengers, an average of three new aircraft will be arriving every month. Sales for 2006/2007 rose by a massive 32 percent to EUR 2.2 billion, surpassed only by a 33 percent rise in post-tax profit to EUR 401 million. With cash reserves of EUR 2.2 billion and a market value of around EUR 9 billion, Ryanair has one of the highest market capitalisations in the world for an airline and has long been in the same league on the stock market as prestigious traditional carriers such as British Airways and Lufthansa. Ryanair's after-tax profit margin was still 18 percent for the last financial year. Its strategy of operating shuttle services linking Europe's conurbations out of secondary and tertiary airports at the lowest prices possible seems to have been vindicated.
Although CEO Michael O'Leary had every reason to smugly congratulate himself on these figures, the manager has recently adopted unusually low-key tones. At the latest presentation of the annual accounts, he predicted that in the present financial year 2007/2008 profit growth would plummet from 33 percent to only five percent, while revenue declined by up to five percent and costs rose by 7 percent. “We are planning circumspectly for the next year. The markets are weaker than we thought.” Revenue and utilisation had fallen since April, and for the third and fourth quarters of the present financial year, i.e. for the winter months, O'Leary was even predicting small losses, the first in the ten-year history of the low fare airline. At the same time average aircraft utilisation fell by one percent in the last accounting year – albeit still an impressive 82 percent. Is the no-frills concept up against its limits, could the high price of oil even destroy the entire “low-cost” business model?
“Experience with Southwest Airlines and Tesco [a big UK supermarket chain] shows that the cheapest operators do the most business,” says O'Leary, denying this possibility. The CEO of 3,453 employees (2006) was adamant in his confidence over the medium term. “Within five years we will double our traffic volume and profits.” But in the short term there is no getting away from the fact that Ryanair is threatened by a cost problem. Thus, unit costs rose last year by nine percent, largely due to the 50 percent hike in the price of kerosene to EUR 693 million.
In an interview with FLUG REVUE, O'Leary conceded that Ryanair's hedging (securing future fuel requirements through advance orders at a fixed price) over the last two years had misfired. “But now,” the Irishman is pleased to announce, “the oil price has fallen again and many airlines have kept their fuel surcharges, which is driving their passengers to us.” Another encouraging development is that in the second half 2007 he will be paying ten percent less for his fuel than a year earlier.
The main cost drivers, he points out, are airports which are planning overambitious new buildings. “A terminal the same size as Frankfurt Hahn, which cost only EUR 60 million, will now cost EUR 200 million in Dublin. In Stansted they are planning to build another Taj Mahal.” London's Stansted airport recently doubled its charges. O'Leary estimates that Ryanair accounts for about 65 percent of flight operations in Stansted and will be especially hard hit by the hike in charges, whereas easyJet will get off more lightly as it generates only 20 percent of the traffic there. For cost reasons, Ryanair now plans to withdraw some of its midday flights from its British operating centre, which enjoys full utilisation with its single runway in the morning and evening, even now that it has become so pricey. As an alternative, the airline will for the first time operate its own terminal in Bremen, which it bought off the airport and is fitting out itself. But, O'Leary points out, “In principle we don't want to be operating or managing our own airports.”
The subject of airports is causing Ryanair problems with the EU Commission. The EU is demanding that that special local subsidies Ryanair received in Charleroi are returned. “The only way to fight the lobbyists and bureaucrats is to take legal action,” says the airline CEO bitterly. “I don't have any faith in the EU Commission. Alitalia has just had its fifth round of illegal state subsidies approved.” O'Leary is also critical of the politicians when it comes to air traffic control services. “We have to fly a lot of detours because air traffic control is not properly coordinated in Europe. En-route charges are the fourth biggest item in our operating budget.” Again, he regards the more stringent, time-consuming security checks at airports as a measure which artificially dampens demand, for which he holds the politicians responsible.
However, O'Leary has no hesitation in acknowledging the benefits of the single EU market. Virtually no other airline has taken the political concept of “the Europe of the regions” so literally, linking development-hungry supposedly provincial locations to modern mass air travel. Often cheap Ryanair flights have provided the impetus to develop whole tracts of land, as illustrated, for example, by the rise in property prices and even the new school buildings which have sprung up around Ryanair destinations in the south of France which are benefiting from throngs of British newcomers.
To improve the performance of its aircraft and reduce their fuel consumption, Ryanair is currently working with Boeing to introduce head-up displays into its cockpits within the next 12 to 15 months. Electronic indicators projected onto the flightdeck's windscreen will then show the pilots how to attain the most fuel-efficient flight profiles and enable punctual landings in poor weather even at poorly equipped small-town runways. Again, the entire Ryanair fleet is currently being retrofitted with fuel-efficient winglets. All its new 737-800 aircraft are routinely being fitted with this extra. Ryanair is systematically replacing its older jets with new aircraft which feature more fuel-efficient and environmentally friendly technology. He therefore plans to retire 46 of the oldest 737-800's over the next five years.
O'Leary is already thinking about his next generation of aircraft. “We want an aircraft which has exactly 199 seats as this is the maximum number of seats that we are still allowed to operate with only four flight attendants. With aircraft having over 200 seats, the 25 minute turnarounds we require would no longer be feasible.” According to the CEO, it will still take some time before lightweight aircraft fuselages become available. “Boeing says they cannot yet make a 787-style carbon fibre fuselage the size of a 737. So far this technology only works on long-distance aircraft.”
Instead, O'Leary has his sights set on the savings potential of the engines. “We need an engine that consumes 40 to 50 percent less fuel. Let us invest in better engines!” Could Ryanair perhaps have in mind new turboprop powerplants with extremely low fuel consumption? “They can't build turboprop aircraft that are big enough and fast enough to manage all the daily round trips. We definitely prefer jets,” says O'Leary, dismissing the idea.
He is also decidedly cool on the subject of long-haul flights. Now that it has its first flight destinations in Morocco, strictly speaking, Ryanair can call itself an intercontinental airline. “We only did that on account of a new traffic agreement so as to keep up our fleet utilisation in the winter. I'm not interested in flying long-haul.”
However, at the most recent annual press conference O'Leary admitted he was thinking about founding a separate airline purely for long-haul operations, whose Business Class would have to be at least the standard of Virgin Atlantic's Business Class. Moreover, his company has acquired a 25.2 percent stake in the privatised, former arch-rival, Aer Lingus, which also operates long-haul flights. But whether the full takeover which Ryanair would like will come off is not yet certain.
Meanwhile Ryanair is refining its no-frills onboard concept, which is based on the idea that extra comfort has to be paid for as an extra. It is thanks to this approach that the airline is able to earn average revenue of EUR 53 per passenger per segment, despite its average ticket price being only EUR 44 and its average costs EUR 43. In addition to the surcharge of EUR 2.50 levied for credit card Internet bookings, the airline charges EUR 6 per bag carried in the hold if pre-booked electronically and a hefty EUR 12 per bag spontaneously handed in at the check-in counter. However, prams, wheelchairs and portable walking aids are carried free.
Onboard offerings include chocolate bars for EUR 1.50, coffee and tea for EUR 2.75 and even hot snacks like hot dogs, pizza and sandwiches for between four and six euros. The most expensive item on offer is a mini-bottle of champagne for EUR 14.
This year alone the Irish have opened or announced they will shortly be opening five new bases for their aircraft, plus 153 new routes. Despite the current dip in demand, Ryanair plans to expand its fleet to between 262 and 302 aircraft by 2012, at which point it will then be carrying 87 million passengers and its market share will have risen from the present seven percent to eleven percent.
From FLUG REVUE 8/2007
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