Ryanair: „Lower price beats higher price every time”
Ryanair case – Low-cost philosophy revolutionized airline business in Europe
„Lower price beats higher price every time” – this simple motto led Micheal O’Leary to create Europe’s most popular low-fares airline. How was it possible to build a company that is transporting 88 million passengers, more than Lutfthansa or British Airways? All that in the age of high fuel prices and growing competition.
The company started in 1985 with one plane flying from Waterford in Ireland to London. Even after adding additional planes, the airline was not profitable, until it started to implement low-cost business model, which was first used in Southwest Airlines. Ryanair used their experience and later took this model to the next level. In 2015, Ryanair has 5.6B euro Revenues and almost 1B euro profit.
Nowadays, Ryanair is by far cheapest airline in Europe, beating other low cost carriers by 70% in terms of avg. fare price (2013), while normal airlines are 3-5 times more expensive on same routes. Basing on low-cost operating model, Ryanair is now considering entering transatlantic market, starting from $10 price for a flight from London to New York. Seems impossible? Maybe. But 15 years ago paying $10 for a flight between London and Berlin seemed even less likely.
Achieving this success would not be possible with building an operating model that is focused on Ryanair’s main business objective – bringing the cost as low as possible. To obtain that following principles were introduced:
- Using single type of a plane
Using single type of aircrafts not only allows to get great deals from manufacturers, but it also simplifies and decreases maintenance cost. Ryanair is focusing also on having relatively new fleet what decreases cost per passenger
- Increasing aircraft utilization
Ryanair’s main goal is to have its aircrafts flying as much as possible. Ryanair has introduced following actions to achieve that goal e.g.:
– Inconvenient flights times (e.g. 5am or 23.30pm) to increase utilization through planes flying almost 20 hours a day, what results in decreased ticket price
–Less/paid hold luggage to decrease loading/unloading time (not to mention decreasing fuel cost as planes will be lighter)
- Keeping Low overhead cost
All groups of overhead costs are kept on the low level e.g.:
-customers can only book tickets online via its website (savings on travel agents commisions, no airport check desks etc.)
–very limited spend on marketing – Ryanair uses guerilla marketing through its charismatic CEO whose every conference gets into media, or through ads that become viral e.g. when Ryanair illegally used marriage of France President Nicolas Sarkozy and supermodel Carla Bruni picture with a caption “’With Ryanair, my whole family can come to my wedding’ to promote their new ticket promotion. All European media wrote about it, while Ryanair was ordered to pay only $60,000 in damages to France’s President
–decreasing personnel cost – Michel O’Leary treats his staff “not as a biggest asset, but as a biggest cost”. Not only he decreases cost by increasing utilization and making people working really hard (especially pilots, within regulatory limits), but also he introduce payments for things which used to be free for employees like uniforms, trainings or food on the aircrafts
–not using city’s main airport – thanks to using smaller airports, Ryanair can decrease airport fees and improve its efficiency, as frequently Ryanair is the sole/main user of those airports, what gives them huge bargaining power
- Revenue model: dynamic pricing model, additional charges and subsidies
Ryanair is aiming for full utilization of aircraft seat capacity through offering tickets in promotional prices starting from $1 if booked few months ahead of the flight. The ticket price increases the closer it is to the flight and the more tickets for selected flight is sold (dynamic pricing), but initial low price gives a perception of low-cost airline (and we know from marketing, that “perception is everything”).
The key to profitability are additional charges. On top of base fee (e.g. $10), you need to add $6 admin fee (if you are not a member of Ryanair club), $10 for reserved seating, $10 for priority check-in/boarding, $15 to chck-in luggage and suddenly the price jumps to $50. Not to mention additional charges for infants, sports equipment, food on board of the aircraft printing a boarding pass, travel insurance, car hire and hotel booking upselling etc.
Furthermore, if Ryanair decides to fly to a small city (e.g. Bydgoszcz-London), he requires that those flights should be subsidized by local authorities, as they will get those money back through increased tourist and business spend.
Studies shown, that Ryanair price for the flight is similar as British Airways if all the extras are included. Ryanair’s success is tied to “mix and match” system in which you only pay for the extras you need – it’s a win-win situation for both parties, because Ryanair is providing only those extra services which add value to the particular customer.
Student comments on Ryanair: „Lower price beats higher price every time”
I agree that Ryanair’s asset utilisation is completely unrivalled and that this is key to its low cost strategy. As you mention, this has been achieved through a range of process innovations including reduced turnaround times (the company’s turnaround times are reported to be on average 25 minutes, versus 45-60 minutes for rival airlines) and inconvenient flight times. I also agree that filling seats is crucial. I was interested to learn that in the year to March 2015, Ryanair’s passenger load factor was 88% versus 80% for the whole market (http://www.iata.org/pressroom/pr/Pages/2015-05-06-01.aspx).
However, in recent years Ryanair has been deeply criticised for its poor customer service and in-flight experience. Therefore it has taken steps to improve this (e.g. allocated seating and updating its website). Obviously these steps come with costs that I can only assume are hindering the company’s relative cost advantage. Therefore, I wonder, going forward, as customers demand more for their money, do you think that Ryanair will be able to find further efficiencies in its operating model to subsidise these increased costs?
I truly believe that Micheal O’Leary will come up with creative ways to get more money from the customers – his newest ideas like paid restrooms in the plane or “standing seats” (http://news.bbc.co.uk/2/hi/8779388.stm) might be a marketing move to bring attention to Ryanair and low prices, but show the direction in which the company is going.
On the other hand, Ryanair has realized that in some cities, clients would rather pay premium (e.g. 10 USD more) for landing in the major airport instead of the small airport 100 km+ from the city center and is revising its strategy to take it into consideration.
So, interesting article and a just a few clarifying points on Ryanair. Their low labour cost is not quite due to “working really hard” but due to the use of non-unionised labour. This means they are able to employ fewer workers and pay them less than Lufthansa and their legacy agreements (who have c.120k employees vs. Ryanair’s 10k). Second, Ryanair are unlikely to pursue transatlantic flights in the near term as the economics simply aren’t as attractive as European short haul and they have a lot more market share to take from Euro flag carriers (see the following Bloomberg article http://www.bloomberg.com/gadfly/articles/2015-11-25/discount-airfares-don-t-make-sense-for-airasia-x). You are absolutely correct that they are trying to raise average fare per customer (although average fare per customer is nowhere near flag carriers like BA or Lufthansa), but instead by improving customer service through their “Always Getting Better” programme aimed at reversing years of poor perception, as well as a new Business traveller targeted product at a price premium.
I agree that long-haul low-cost flights will be difficult, but I believe that in perspective of 5-10 years they would be possible. Naturally, there would be few “$10” tickets, but bringing the fare down by 20-30% from current carriers might be possible e.g. through lower quality/no food, paid drinks, less space between the seats etc., (on top of the current levers like more effective service on the airport, which impact will be reduced as the planes will spend less time on the airports and more time in the air).
Marcin – thanks for this comprehensive piece. I wrote about Southwest so wanted to read about the parallels in the two airlines, of which I have found there are many. Some of the similarities are (i) use of a single aircraft type, (ii) use of secondary airports, and (iii) maximizing asset utilization.
However, I did notice some differences. The most striking is in the attitude of Southwest towards its employees. Southwest says that their employees come first, emphasizing a culture where-by happy employees leads to better customer service which leads to happier consumers. Southwest has a relentless focus on hiring personnel who fit their culture of mutual respect, positive attitude and willingness to go beyond expectations in customer service. I found this to be a sharp contrast to Ryanair calling their employees “not an asset”.
The other difference I see is in the approach to maximizing asset utilization. While Ryanair uses flights at odd hours, Southwest focuses on reducing turnaround time between flights. That is, by working as a collaborative and cohesive team on the ground, Southwest employees are able to de-board, clean and re-board flights for departure faster than any other airline.
I wonder to what extent Ryanair looked at Southwest when they were launching…
Yes, Southwest was an inspiration for Michel O’Leary and he brought this “low-cost” airline concept from USA.
CEO has a pretty accurate quote about what you just said:
“MBA students come out with: ‘My staff is my most important asset.’ Bullshit. Staff is usually your biggest cost. We all employ some lazy bastards who needs a kick up the backside, but no one can bring themselves to admit it.”
I do not agree with that, but it shows how much pressure is put on decreasing the costs, including salaries.