Ryanair’s low-cost 30th birthday
Ryanair, the Dublin-based low cost carrier (LCC), celebrates its 30th birthday this year. Though some may scoff at the company’s claim to be “Europe’s favorite airline,” the numbers are hard to dispute. This year the airline will carry 105m customers between 200 airports across 31 countries and will overtake both IAG and Lufthansa in terms of passenger numbers.
The company’s business model is a ‘
copy and paste’ of the low cost carrier model first established by Herb Kelleher at Southwest Airlines – Michael O’Leary (Ryanair’s long-serving CEO) spent a number of weeks observing Southwest before taking over as CEO. What’s interesting is that Ryanair was not the only imitator of the Southwest model. EasyJet, Germanwings, Flybe, and countless others have attempted to follow the lost-cost and low-fare model in Europe. In fact, the abundance of low cost carriers has helped to consistently drive down the cost of air transport over the last number of decades.
Though many have tried to emulate the low cost model, Ryanair’s performance clearly stands out. It is estimated that Ryanair’s cost per passenger is approximately one third lower than that of EasyJet, the second largest LCC in Europe. Its success has been built on aligning all elements of its operating model with the company’s business model.
There are a number of elements to Ryanair’s operating model which are worthy of consideration:
Ryanair operates just one aircraft type
Ryanair only uses Boeing 737-800 aircraft helping to keep costs down in a number of ways. Firstly, it offers the airline full flexibility as aircraft can be deployed across all routes and crew can be staffed across all aircraft. Secondly, standardization helps Ryanair ‘work’ its planes harder than anyone else in the industry – the average time on the ground between flights is just 25 minutes. Thirdly, the scale of Ryanair’s relationship with Boeing has enabled the airline to negotiate low cost aircraft and to imposed detailed specifications (e.g., Ryanair achieves 189 seats per aircraft, compared with easyJet’s 156 on A319s and 174 on A320s).
Ryanair operates in low cost airports
Ryanair flies to very few major airports, choosing instead smaller and less congested terminals. Flying in and out of smaller airports has many advantages. It allows greater flexibility in choosing landing and take-off slots and greatly reduces the amount of time spent queuing for runways. And because Ryanair is willing to fly to smaller airports, it has been able to negotiate extremely advantageous rates. In fact, at one point, airports or local governments were paying Ryanair in order to bring passengers to their airport or region.
Ryanair sells direct-to-consumer
Ryanair has worked to disintermediate its sales channel refusing to deal with either travel agents or with GDS partners. All sales are made through Ryanair.com or through its dedicated booking line thereby eliminating the loss of value to intermediaries.
Ryanair has killed the ‘sacred cows’ of the airline industry
Once committed to the low cost model, Ryanair went about destructed many of the ‘sacred cows’ of the airline industry in order to radically simplify the operating model. It has dispensed of all free inflight hospitality and entertainment which reduces costs and frees cabin crew’s time for revenue generating activity. It offers only point to point flights thereby avoiding the need to transfer passengers or luggage. Finally, the airline went against conventional wisdom and scrapped its frequent flyer rewards system.
Ryanair Incentivizes its customers to play their part
The airline has taken many steps to ensure their customers do everything possible to reduce the airline’s costs. Passengers are charged punitively for printing a boarding pass or for checking in luggage. As a result, only a small portion of customers require these services thereby further streamlining Ryanair’s operation.
Results
Ryanair has delivered outstanding results as compared to peers. It is one of the only airlines in the world to consistently deliver economic profit (return on invested capital minus the weighted average cost of capital). If the airline can continue to closely align its business model and operating model, few would bet against Ryanair celebrating many more birthday’s as Europe’s most profitable airline, and maybe even its favorite.
References:
- Ryanair.com and Ryanair Investor Relations material
- Hua, “Airlines Middlemen Face More Than Lufthansa’s Headwind,” Wall Street Journal (2015). Available at: http://www.wsj.com/articles/airlines-middlemen-face-more-than-lufthansas-headwind-1434368784
- “Why airlines make such meagre profits,” The Economist Explains, (2014). Available at: http://www.economist.com/blogs/economist-explains/2014/02/economist-explains-5
- “Profitability and the air transport value chain An analysis of investor returns within the airline industry and its supply chain,” IATA Economics Briefing No. 10, (2013). Available at: https://www.iata.org/whatwedo/Documents/economics/profitability-and-the-air-transport-value%20chain.pdf
- Creaton, “Ryanair: How a Small Irish Airline Conquered Europe,” Aurum Press Ltd, (2004)
- Multiple websites including: www.statista.com, www.gurufocus.com, and www.centreforaviation.com
Great summary, what do you think of their prospects for cracking transatlantic travel? Feels like some of their competitors are beginning to steal a march on them in an important growth area
Of course you would write about Ryanair.
given the really low price, my question is how much of the financial success is driven solely from low-cost strategy (like the reduced space, faster turnarounds… all which I find brilliant) and how much is driven from the annoying extras (the endless advertising, cross-selling of insurance or car-rentals).
This is so interesting, I had definitely heard about Ryanair’s success but didn’t know all the details of their operating model. The industry is clearly moving in the direction of basic transportation and further away from the luxury model of the past. Ryanair does seem to have taken this model to the extreme and I wonder where the future growth can come from besides simply raising prices on all of the “extras.”
Thanks for sharing, Peter! I was interested to learn that Ryanair based its model off of Southwest, because though I see the similarities in terms of low-cost operations, there seems to be a huge divergence when it comes to customer service. Southwest prides itself on being a low-cost carrier that also maintains an inviting atmosphere, a friendly flight crew, and a customer loyalty program. On the other hand, Ryanair seems to have no commitment to customer service— for instance, I remember being dropped off at the wrong airport by a Ryanair flight when I was in Morocco, about 4 hours away from my original destination. Despite the atrocious service, it seems the Ryanair model works because of the extreme price elasticity in the airline industry outside of the business consumer segment. I wonder if there is a possibility for growth in the US of budget airlines with even lower prices than Southwest, with less of an emphasis on customer service, more analogous to the Ryanair model. Perhaps this is the segment Spirit is trying to capture?
Thanks a lot for sharing Peter. I love flying with Ryanair, because I feel I am saving money!
I think the most interesting element is that Ryanair operates only one aircraft, where they also save money on pilots (all of them are trained on one type of plane, and they can fly every plane of the fleet) and also on maintenance (maintenance people are trained on one plane only and repairs are easier). However I wonder how much capacity/demand they are losing by doing so: I am pretty sure an airline can only optimize the supply and demand by having both smaller and larger planes on some routes.
I also think it’s interesting that Ryanair is becoming “less low cost” and slowly moving up the quality chain: Ryanair is now available at Gatwick in London for example, and not only Luton/Stansted anymore.
Finally, I wonder when Ryanair will enter the long haul market, for example on transatlantic flights. I am sure they could be very successful!