Ryanair: A TOM winner from Europe.
Ryanair, Europe's largest airline is a low cost carrier with a formidable track record of implementing low-cost carrier business model, by keeping costs low, volumes high and finding additional revenue sources.
Ryanair is a low-cost airline headquartered in Dublin, Ireland. It is the largest airline in Europe, serving 185 destinations. In the last fiscal year Ryanair flew over 90M passengers on its 308 aircraft. It serves destinations across Europe, as well as in North Africa and Middle East. Its main hubs are located in London and Dublin. The airline has 76 smaller bases across Europe.
The airline may serve as a great example of alignment between business and operating model. Its strategy is to offer low cost, no frills, yet accessible and dependable service. Ryanair has successfully implemented a range of operational measures that helped the airline implement this strategy.
Ryanair offers low cost air transportation throughout Europe. It appeals to cost conscious passengers, looking to travel mainly for non-business purposes. Its service is simply seat on the plane flying between two points. Ryanair benefits from easy travel regulations between European countries which stimulate leisure traffic. It also benefits from the enlargement of the European Union into Eastern European countries. Their migrant workers and increasingly affluent societies generate growing demand for international air travel.
Ryanair has used a number of ways to successfully implement this model. These measures may be divided into two categories:
i) keeping costs down
ii) generating high volume of passengers and additional (ancillary) revenue.
– Low costs
The airline flies only one aircraft type – Boeing 737. This gives Ryanair a stronger negotiating position when it comes to aircraft purchases. It also results in cheaper maintenance and faster turnaround times.
The airline has been successful in keeping airport costs in check. Passengers have to check in online, which saves Ryanair expenses on check-in kiosks at airports. Furthermore, the airline mainly flies to second-tier airports, which typically charge airlines lower fees. Ryanair has been known for its tough approach to negotiations with airports. In fact, the airline decided to withdraw in a few cases where it could not reach an agreement, e.g. from Budapest or Verona.
Another measure that helps Ryanair keep costs in check is its fuel policy. Ryanair’s aircraft run on minimal amount of fuel needed to cover their route. This saves costs as planes are lighter and therefore burn less fuel. However, it also resulted in a few emergency landings when flights had to be redirected. Nevertheless, Ryanair was able to handle the media coverage of these emergency landings effectively.
– High volume, and extra revenues
Ryanair uses its aircraft very efficiently, keeping them in the air on average for 9.5 hours per day. A key driver of this is turnaround time at only about 25 minutes. One key driver of that is low levels of hold baggage. These are a result of hold baggage fees at levels that increase travel price by a significant percentage, thereby incentivizing passengers to stick to hand-baggage.
As a no-frills airline, Ryanair derives substantial portion of its revenues from ancillary sources. Apart from checked-in bags, key examples include food on board as well as mobile phone texting service, priority boarding, preferred seat bookings and others.
The airline made a significant effort in terms of careful expansion of its routes into Eastern Europe. Many Eastern Europeans migrated to UK and Ireland following EU enlargement in 2004. In the light of this, Ryanair started flights from numerous airports in the region to UK and Ireland, often offering fares lower than long distance bus services. This enabled Ryanair to grow volume by penetrating entirely new market segments.
A very powerful feature of Ryanair’s model is its apparent flexibility.
As passengers gradually grew tired with the airline’s ruthless emphasis on low frills, the airline implemented a set of carefully selected measures which included:
- Free additional carry-on bag
- Allocated seating
- Mobile app
- Improved website
These improved passenger experience, broadly without compromising Ryanair’s low cost model.
Another sign of flexibility is Ryanair’s offer to business travellers. As businesses emerged from the recession with additional degree of cost consciousness, Ryanair started offering bundled “Business Plus” fares. These include priority boarding, fast security lane and preferred seating, offering an experience somewhat resembling a regular business class flight, yet at a significantly lower cost.
All the above resulted in a formidable growth trajectory. Ryanair’s passenger numbers grew from c.60M in 2009 to c.90M in 2015, with revenue growing steadily from 3B Euro to almost 6B. The airline has remained profitable with the most recent profit margins at c.20%. Ryanair continues to lead the European low cost airline space and is likely to leverage to successful short-haul model launch intercontinental flights in the coming years.
Image source: Aviation Week
Student comments on Ryanair: A TOM winner from Europe.
Ryanair is not only one of the airlines I would like to use, but also a successful low cost carrier business model, which I would like to learn more. In Japan, efforts to introduce LCC model failed unfortunately and costs to flight remain high. One of the reasons that Ryanair can enjoy its high volume (the biggest reasons for its success I think) seems to be partially because of the geographical feature of Europe, where people in different countries live within a relatively small area. I assume this feature accelerate frequency and number of people traveling within Europe.
Even though Ryanair was backed by this feature, I need to address it seems to be the only successful LCC in Europe and competitors are not visible. I would like to know more about the competitive landscape of this industry and how Ryanair keeps its position so far against its competitors.
Songi, thanks for the comment! Here are some thoughts.
Re: Japanese experience
It think you are right.
What Ryanair definitely benefits from is:
i) a lot of destinations 1-2h flight from each other. That of course is not a feature of Japan / East Asia
ii) easy international mobility – again not the feature as you need passports and visas
I think the same things benefit people like Southwest in the US.
However, I thought that AirAsia has emerged (I guess driven by East Asian societies getting more affluent) as a player comparable to Ryanair to some extent?
Re: other European low cost carriers
There are a few LCCs around, although less well known:
– WizzAir – a Hungarian LCC focused on flying people from Eastern Europe to Western European destinations. They are pretty successful. I think they benefitted a lot from the fall of Malev (Hungarian flag carrier) and the general limited ability of people like LOT Polish or Czech Airlines to offer low priced flights
– EasyJet – similar to Ryanair, but slightly less low-frills. They have a lot of destinations and i think they are doing okay
– German Wings and Vueling – a different model – low cost carrier owned by a traditional flag carrier (German belongs to Lufthansa, Vueling to Iberia)
– AirBerlin – which has become more of a traditional airline now but until recently was a German low cost carrier
The single type of aircraft model is very interesting and seems to be the direction in which the industry is heading. In addition to the advantages you mentioned, it also leads to pilots being needed to be trained on just that one aircraft model. Moreover, in cases of delay, etc, it is easier to swap planes without any major changes in seating charts, etc. In fact, this strategy is one of the primary drivers behind India’s only profitable airline – IndiGo.
The minimum fuel strategy is something that I had not heard of before. I suppose the use of second-tier airports in major cities helps as there is comparatively less traffic at those airports, so landing slots are easier to get without the need to hover around in the air due to traffic. I wonder if this strategy is public knowledge, though, and how customers would react to it from the safety standpoint. This is not commonplace in India as none of the cities have multiple commercial airports, so planes often have to hover around for even up to an hour before they get landing clearance, making it essential to carry extra fuel.
Thanks for the great comment Saaket! I am sure many of the factors you mention play out here, and indeed your point about secondary airports is very illuminating. One thing I would add is that Ryanair is probably unlikely to take any risks – with their reputation for cost savings they are under constant implicit scrutiny – “are they saving on my safety?”. My guess is that a serious incident due to savings would be really an extreme blow to their reputation. So I think they do maintain a safety margin still. Perhaps they realized that normally you take way too much fuel and so they optimized on that to some extent.
Thanks for a great post! It will be interesting to see how the company, as a predominantly regional player, reacts to the recently announced plan to boost Europe’s aviation industry by striking deals with governments around the world in a move towards a single EU “Open Skies” market.
See link below:
Thanks for the great point Mondli! Indeed they have been looking at long haul for quite some time. I believe one thing is that they really need to use the new generation aircraft (most likely A350) because in order to offer low fare intercontinental travel on something like B777 or A340 the extent to which you have to squeeze people is just prohibitively uncomfortable for a long haul journey. Once they get their aircraft, there seems to be a lot of upside from Open Skies as you point out.
Great post! I am really interested in the growth of Ryanair, particularly as its offering evolves compared with other carriers. I’m curious, given that we do see Ryan moving away from the rock bottom no frills experience towards a little more tiered offering with simple perks, do you think they will alter their model further? Also, how do you see the legacy carriers altering their product to take on the challenge of Ryanair? It seems like Ryanair’s fuel policy may be a bit harsh but perhaps there is room for improvement there?
Ben thanks for the comment!
On fares: my bet is they are going to remain the bottom segment of the market. The modifications they have made to date do not in any way go against their core model – they just adjusted a few things that were pretty easy to implement.
On legacy carriers: this is an entirely different discussion. Some became seriously competitive on fares and cut on the sandwiches, off-line checkin and wine on short haul – example is SAS. Others stayed as they are but acquired low fare airlines to benefit from this growing segment – like Lufthansa and German Wings
On fuel policy: any serious accident due to savings on safety could be a fatal blow to them so I’m sure they still leave plenty of margin!
Thank you for an interesting post. I must admit I agree with your assessment that this is an excellent business and operating model in what is traditionally a very difficult industry. That said, I also question the sustainability of this business model. During the global recession and the slow recovery, people have down traded in an attempt to save money, and a business model focused on very low price and no frills has done well.
However, has Ryanair taken it too far? Will they be able to fight off the consumer backlash to their brand and to Michael O’leary (CEO)? May people say Ryanair makes its largest margins from clever consumer tricks (e.g. 2% credit card charge, a £70 penalty for failing to print out your boarding pass, €3 (£2.52) for a small bottle of water). As a representative of the UK, I can tell you that Ryanair has an awful reputation beyond price, and that many people now refuse to ever fly Ryanair because the service was that bad or the air-hostesses were that rude. It is worth noting that the other low cost airlines such as Easyjet do not have the same reputation. An interesting example I will cite is this summer Ryanair lost a court battle about their payments to consumers when flights are delayed and are now due a liability almost equal to their net income.
As the economy continues to recover, will consumer get fed up with Ryanair and trade back up?
Peter thanks a lot for the comment! I agree it is a valid question. Certainly long term.
In the mid-term I would lean towards saying it is largely sustainable.
When I was writing this post, I looked at their most recent financials and apart from the hiccup in 2013 that your link points to they seemed to have been doing really well… Certainly not much inverse correlation between pax volumes and economic recovery.
Key reason might be that there are large customer segments who will not trade up despite rude staff and other such aspects, because their demand is just too price elastic:
i) mid-to-low budget tourists visiting London- especially families – on their once in a couple of years / lifetime visit to London
ii) UK tourists from this budget category
iii) tourists on weekend trips, where airfare matters a lot more
v) business people – two types – shoestring business travellers, as well as usual ones flying to low volume destinations that Ryanair serves direct and where the likes of Lufthansa, SAS or Aitalia would require two legs
In addition, EasyJet (I believe) is not doing nearly as well… perhaps there is a no-man’s land at least for now between low frills and flag carriers? It might be the case given how many of the flag carriers have traded down – e.g. AerLingus or SAS. Or even BA in some instances.