CASE STUDY

Ryanair: 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 Ryanairand the concept of sustainable competitive advantage. The case illustrates how a strategy that is grounded in theefficient deployment of assets/resources/competencies, whilst adding perceived value to customers, delivers asustainable strategic advantage. The case also illustrates the difficulties and obstacles that stand in the way ofachieving and retaining such advantage through changing circumstances.

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five years to 2009 was the most profitable airline in theworld, according to Air Transport magazine.

Despite this apparent success, Ryanair faced issues. The most pressing, shared by all airlines, was an industrythat was ‘structurally sick’ and ‘in intensive care’,ii withplunging demand in the global economic recession anduncertainty about oil prices. What strategy should Ryanairuse to weather this storm? Would the crisis produce a longterm change in industry structure? Could Ryanair takeadvantage of the situation as it had in the past, by growingwhen others were cutting back? A predicament of its ownmaking was Ryanair’s 29.8 per cent shareholding in AerLingus, the Irish national carrier, following an abortivetakeover attempt. Aer Lingus’ flagging share price hadnecessitated drastic write-downs, which had draggedRyanair into its first ever losses in 2009.

Overview of Ryanair

In 2009, Ryanair had 33 bases and over 850 routes across26 countries, connecting 147 destinations. It operated afleet of 199 new Boeing 737–800 aircraft with firm ordersfor a further 112. It employed over 7000 people and wasexpected to carry approximately 67 million passengers in2010.

Ryanair was founded in 1985 by the Tony Ryan familyto provide scheduled passenger services between Irelandand the UK, as an alternative to the state monopoly airline,Aer Lingus. Initially, Ryanair was a full service conventionalairline, with two classes of seating, leasing three differenttypes of aircraft. Despite growth in passenger volumes, bythe end of 1990 the company had faced many problems,disposing of five chief executives, and accumulating losses

There is only one thing in the world worse than being talkedabout, and that is not being talked about.

This is a quote from a novel by Oscar Wilde but it could be the mantra of budget airline Ryanair, Europe’s largestcarrier by passenger numbers and market capitalisation in2009. The airline is often controversial, whether it was byannoying the Queen of Spain by using her picture withoutpermission, or announcing plans to charge passengers touse toilets on its flights, or engaging in high-profile battleswith the European Commission. Ryanair also made newswith its achievements, winning international awards, likeBest Managed Airline, or receiving a 2009 FT-ArcelorMittalBoldness in Business Award. This Award announcementsaid that Ryanair had ‘changed the airline business outsideNorth America – driving the way the industry operatesthrough its pricing, the destinations it flies to and the passenger numbers it carries’.i Ryanair had been the budgetairline pioneer in Europe, rigorously following a low-coststrategy. It had enjoyed remarkable growth, and in the

This case was prepared by Eleanor O’Higgins, University College Dublin. It is intended as a basis for class discussion and not asan illustration of good or bad practice. © Eleanor O’Higgins, 2010. Not to be reproduced or quoted without permission.

Source: Reuters/Yves Herman.

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of IR£20 million. Its fight to survive in the early 1990s sawthe airline transform itself to become Europe’s first low fares,no frills carrier, built on the model of Southwest Airlines,the successful Texas-based operator. A new managementteam, led by Michael O’Leary, at first a reluctant recruit,was appointed. Ryanair was floated on the Dublin StockExchange in 1997 and is quoted on the Dublin and LondonStock exchanges and also on the NASDAQ since 2002.

Mixed fortunes

Mixed resultsRyanair designated itself as the ‘World’s Favourite Airline’on the basis that in 2009, IATA ranked it as the world’slargest international airline by passenger numbers. It wasnow the sixth largest airline in the world (when the largeUS carriers’ domestic traffic is included). Over the next five years, Ryanair intended to grow to become the secondlargest airline in the world, ranked only behind its rolemodel Southwest.

Releasing Ryanair’s Q3 2009 results in January 2010,Michael O’Leary observed, ‘The environment is, fromRyanair’s perspective, great, because it is awful. We’redoing remarkably well because this is the time when thelowest cost producer wins.’iii For the quarter, the com-pany reported a much smaller net loss than expected ofx10.9 million (£9.9m or $15m), instead of an earlier fore-cast loss of x35 million, with better than expected yields,falling 12 per cent rather than the forecast 20 per cent.Profits guidance for the full year improved to x275 millionrather than the original x200 million forecast.

The airline had cut lossmaking routes in the UK andIreland, replacing them with more profitable ones inFrance, Germany and Spain. Operating costs per passengerwere cut by 4 per cent, despite a 3 per cent increase in average flight distance. Ryanair planned to open 146 newroutes in 2010 and to increase market share thanks to the demise of several carriers.iv

These results and expectations for 2010 followed on full-year 2009 results (see Table 1), when Ryanair plungedto a x180 million loss, as its x144 million operating profitwas eradicated by a x222 million write-down of its AerLingus shares and an accelerated x51.6 million depreciationcharge. Excluding these exceptional charges, underlyingprofits fell 78 per cent from x480.9 million to x105 million.This was due largely to a surge in fuel prices as Ryanairfailed to hedge when oil prices rose to $147 a barrel in July 2008. Then, bowing to shareholder pressure to coveragainst rocketing prices, it locked in fuel costs at $124 abarrel for 80 per cent of its consumption during the thirdquarter – just as oil prices crashed to a low of $33 a barrelduring that period. Passenger numbers rose 15 per centfrom 50.9 million to 58.5 million. Average fares fell 8 per

cent to x40 and were forecast to decline steeply by a further15 to 20 per cent to about x32 in fiscal 2010. (Ryanair’sfinancial data are given in Tables 1a and 1b, and operatingdata are given in Table 1c.)

The airline contended that it could offer the lowest faresby cutting costs to levels that rivals could not achieve. Itwas planning to recruit 1200 new employees to service itsnew aircraft, but the number of passengers per employeewas still expected to rise thanks to economies of scale fromnew routes and a decline in airport charges by directingtraffic toward airports offering bargain deals. Having beencaught short in its fuel hedging for 2008/09, Ryanair tookadvantage of the low oil price to hedge 90 per cent of its fuel costs during 2009/10, locking in a full year fuel costsaving of about x460 million.

Ancillary revenuesRyanair provides various ancillary services connected with its airline service, including in-flight beverage, foodand merchandise sales. It also distributes accommodation,travel insurance and car rentals through its website. Thisenables Ryanair to increase sales, while reducing unit costs.In 2009, Ryanair’s website ranked 12th by number of visitsfor e-tailers in the UK (after EasyJet, which ranked 11th).Ancillary services accounted for 20.3 per cent of Ryanair’stotal operating revenues in 2009, compared to 18.0 percent in 2008. In fact, ancillary revenues had climbed by 22 per cent, considerably faster than passenger revenues at 5 per cent, generating x10.20 per passenger and withhigher margins.

Other ancillary revenue initiatives were introduced, suchas onboard and online gambling, and a trial in-flight mobilephone service in 2009. A poll of Financial Times readers hadproduced a 72 per cent negative response to the question,‘Should mobile phones be allowed on aircraft?’v However,Michael O’Leary declared ‘If you want a quiet flight, useanother airline. Ryanair is noisy, full and we are alwaystrying to sell you something.’vi Not all ancillary service initiatives were successful. In 2005, Ryanair pulled an in-flight entertainment system when passengers had resistedpaying x8 to rent a games and entertainment console.

Ryanair was the first airline to introduce charges forcheck-in luggage. Virtually all budget airlines have followedsuit, as they have with other Ryanair initiatives. It has continued to find ways of charging passengers for servicesonce considered intrinsic to an airline ticket. Passengerswere charged extra for checking in at the airport ratherthan online (which also incurs a charge), although thosewith hold luggage did not have the option of checking inonline. While avoiding pre-assigned seats, an extra chargeprocures ‘priority boarding’. Interestingly, Aer Lingus andBA have taken up a similar idea by enabling passengers topre-book seats online for an extra charge.

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Some of Ryanair’s revenue-generating ideas have provoked controversy – and publicity. One of the mosttalked about was its intention to charge passengers £1 to use the lavatory onboard, by installing a coin slot on its aircraft. While it has not implemented this concept (itmay contravene security rules), the idea generated muchpublicity. Another idea mooted by Ryanair was a ‘fat tax’for overweight passengers. In an online poll of over 30,000respondents, the fat tax idea was approved by one in three.However, the airline later announced that it would notimplement the surcharge because it could not collect itwithout disrupting its 25-minute turnarounds and onlinecheck-in process. The same online poll, supposedly to generate ideas for additional revenue, also gained 25 percent approval for a x1 levy to use onboard toilet paper with Michael O’Leary’s face on it.

Investor perspectivesSince its flotation in 1996, Ryanair has never declared or paid dividends on its shares. For the foreseeable future,Ryanair planned to retain any earnings to fund the busi-ness operations, including the acquisition of additional aircraft required for its planned entry into new markets,expansion of its existing services, and for routine replace-ments of its current fleet. The no-dividend policy, combinedwith its healthy cash position, has caused the company to seek alternative ways of improving the liquidity andmarketability of its stock, through a series of share buy-backs of the equivalent of about 1.2 per cent of the issuedshare capital between 2006 and 2009. When a deal toplace an aircraft order with Boeing foundered, Ryanairannounced that it would probably substitute the capital it would have spent to undertake a mixture of share

Table 1a Ryanair consolidated income statement

Year end Year end Year end31 March 2009 31 March 2008 31 March 2007

(e 000) (e 000) (e 000)

Operating revenuesScheduled revenues 2,343,868 2,225,692 1,874,791Ancillary revenues 598,097 488,130 362,104

Total operating revenues – continuing operations 2,941,965 2,713,822 2,236,895

Operating expensesStaff 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 62,983Finance 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 28.20Diluted earnings per ordinary share (Euro cents) (11.44) 25.62 27.97Number of ordinary shares (in 000s) 1,478,472 1,512,012 1,544,457Number of diluted shares (in 000s) 1,478,472 1,524,935 1,557,503

Source: Ryanair Annual Report 2009.

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buybacks and special dividends to shareholders after 2012,causing a 7.5 per cent rise in its share price.

Ryanair shares reached a high of x6.30 in April 2007and plummeted to x1.97 in October 2008, as global equitymarkets reeled. In early 2010, the shares were trading in the x3.30 to x3.60 range, with an expected mediumterm target of x4.20, based on expected earnings and a PE ratio of 13. In mid-2009, its rival easyJet shares had a PE ratio of 29. Ryanair had often underperformed otherbudget airline peers on its PE ratio.

Ryanair’s operations

Michael O’Leary said;

Any fool can sell low air fares and lose money. Thedifficult bit is to sell the lowest airfares and make profits.If you don’t make profits, you can’t lower your air faresor reward your people or invest in new aircraft or takeon the really big airlines like BA (British Airways) andLufthansa.’vii

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Table 1b Ryanair consolidated balance sheet

31 March 2009 31 March 2008

Non-current assetsProperty, plant and equipment 3,644,824 3,582,126Intangible assets 46,841 46,841Available-for-sale financial assets 93,150 311,462Derivative financial instruments 59,970 –

Total non-current assets 3,844,785 3,940,429

Current assetsInventories 2,075 1,997Other assets 91,053 169,580Current tax – 1,585Trade receivables 41,791 34,178Derivative financial instruments 129,962 10,228Restricted cash 291,601 292,431Financial assets: cash > 3 months 403,401 406,274Cash 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 liabilitiesTrade payables 132,671 129,289Accrued expenses and other liabilities 905,715 919,349Current maturities of debt 202,941 366,801Current tax 425 –Derivative financial instruments 137,439 141,711

Total current liabilities 1,379,191 1,557,150

Non-current liabilitiesProvisions 71,964 44,810Derivative financial instruments 54,074 75,685Deferred tax 155,524 148,088Other creditors 106,549 99,930Non-current maturities of debt 2,195,499 1,899,694

Total non-current liabilities 2,583,610 2,268,207

Shareholders’ equityIssued share capital 9,354 9,465Share premium account 617,426 615,815Capital redemption reserve 493 378Retained earnings 1,777,727 2,000,422Other 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.

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Certainly, Ryanair has stuck closely to the low-cost/low-fares model. Ever decreasing costs is its theme, as itconstantly adapts its model to the European arena andchanging conditions. In this respect, Ryanair differs in itsapplication of the Southwest Airlines budget airline pro-totype, and its main European rival, easyJet, as the lattertwo are not as frill-cutting. One observer described the difference between easyJet and Ryanair as: ‘easyJet, youunderstand is classy cheap, rather than just plain cheap.’viii

The Ryanair fleetRyanair continued its fleet commonality policy, usingBoeing 737 planes to keep staff training and aircraft main-tenance costs as low as possible, with an expected fleet of over 300 by 2012. Over the years, it has purchasednewer, more environmentally friendly aircraft, reducingthe average age of its aircraft to 2.4 years, the youngestfleet in Europe. The newer aircraft produce 50 per cent lessemissions, 45 per cent less fuel burn and 45 per cent lowernoise emissions per seat. Winglet modification providedbetter performance and a 2 per cent reduction in fuel consumption, a saving which the company believed couldbe even further improved. Despite larger seat capacity, new aircraft do not require more crew. In 2009, in aircraft buying mode, Ryanair sought to repeat its 2002 coupwhen it placed aircraft orders at the bottom of the market.

However, in December 2009 a plan to purchase 200 jetsfrom Boeing was cancelled when negotiations over pricecollapsed: ‘Eventually you lose interest dealing with a bunchof idiots who can’t make a decision’, declared MichaelO’Leary when the deal fell through.ix

Notwithstanding strict adherence to Boeing 737 planes,in an attempt to extract ever greater discounts from Boeing,Ryanair invited Airbus, the European aircraft manufacturer,to enter into preliminary bidding for a multimillion-dollarorder for 200-plus short-haul aircraft. However, Airbusrebuffed the Ryanair invitation, declaring this sales cam-paign would be too expensive and time-consuming.

Staff costs and productivityRyanair’s 2009 employee count of 6369 people, compris-ing over 25 different nationalities, had almost doubled overthe previous three years. This was accounted for almostentirely by flight and cabin crew to service expansion.Ryanair’s 2009 Annual Report claimed that its average pay,including commissions to cabin crew for on-board sales,was x45,333, higher than almost all other major Europeanairlines. Most of the company’s pilots concluded negotiationswith Ryanair to move them to new roster patterns withsubstantial pay increases of up to x10,000 per captain.Cabin crew also negotiated a new five-year pay agreementwith the company, earning them significant pay increases,

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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 0.070Average yield per available seat miles (‘ASM’) (a) 0.050 0.054 0.059 0.058Average fuel cost per US gallon (a) 2.351 1.674 1.826 1.479Cost per ASM (CASM) (a) 0.058 0.051 0.054 0.052Break-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 41.23Ancillary 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 34,768,813Revenue passenger miles 39,202 m 34,452 m 26,943 m 20,342 mAvailable seat miles 47,102 m 41,342 m 32,043 m 24,282 mBooked passenger load factor 81% 82% 82% 83%Average length of passenger haul (miles) 654 662 621 585Sectors flown 380,915 330,598 272,889 227,316Number of airports served 143 147 123 111Average daily flight hour utilisation (hours) 9.59 9.87 9.77 9.60Employees at period end 6,616 5,920 4,462 3,453Employees per aircraft 36 36 34 35Booked 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.

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claimed Ryanair. By tailoring rosters, the carrier maximisedproductivity and time off for crew members, complying withEU regulations which impose a ceiling on pilot flying hoursto prevent dangerous fatigue. Its passenger-per-employeeratio of 9195 was the highest in the industry.

Passenger service costsRyanair pioneered cost-cutting/yield-enhancing measuresfor passenger check-in and luggage handling. One was priority boarding and web-based check-in. Over half of itspassengers use this, thus saving on check-in staff, airportfacilities and time. Charging for check-in bags encouragedpassengers to travel with fewer bags or even zero check-inluggage, thus saving on costs and enhancing speed. BeforeRyanair began to charge for checked-in bags, 80 per cent of passengers were travelling with checked-in luggage; two years later this had fallen to 30 per cent. From October2009, it adopted a 100 per cent web check-in policy,enabling a reduction in staff numbers, calculated to savex50 million per year. Ryanair claims that:

passengers love web check-in. Never again will they haveto arrive early at an airport to waste time in a uselesscheck-in queue. As more passengers travel with carry-on luggage only, they are delighted to discover that theywill never again waste valuable time at arrival baggagecarousels either. These measures allow Ryanair to saveour passengers valuable time, as well as lots of money.x

A natural next step announced by Ryanair was a move to 100 per cent carry-on luggage. Additional bags would be brought by passengers to the boarding gate, where they would be placed in the hold, and returned to them as they deplane on arrival. These efficiencies would allowmore efficient airport terminals to be developed withoutexpensive check-in desks, baggage halls, or computerisedbaggage systems, ‘and enable Ryanair to make flying even cheaper, easier and much more fun again’, claimedthe company.xi The feasibility of the proposals to requirepassengers to carry hold baggage through security to theaircraft was yet to be tested.

Airport charges and route policyConsistent with the budget airline model, Ryanair’s routeswere point-to-point only. It reduced airport charges byavoiding congested main airports, choosing secondary andregional destinations, eager to increase passenger through-put. Usually these airports are significantly further from the city centres they serve than the main airports, ‘fromnowhere to nowhere’ in the words of Sir Stelios Haji-Ioannou, founder of easyJet, Ryanair’s biggest competitor.xii

It uses Frankfurt Hahn, 123 kilometres from Frankfurt; Torp,100 kilometres from Oslo; and Charleroi, 60 kilometresfrom Brussels. In December 2003, the Advertising Standards 1 BAA is owned by Spanish company Ferrovial.

Authority rebuked Ryanair, and upheld a misleadingadvertising complaint against it for attaching ‘Lyon’ to itsadvertisements for flights to St Etienne. A passenger hadturned up at Lyon Airport, only to discover that her flightwas leaving from St Etienne, 75 kilometres away.

Ryanair continued to protest at charges and conditionsat some airports, especially Stansted and Dublin, two of its main hubs. It opposed vehemently the British AirportAuthority (BAA)1 monopoly plans to build a ‘£4bn goldplated Taj Mahal at Stansted which we believe could bebuilt for £1bn’. The airline was:

deeply concerned by continued understaffing of security at Stansted which led to repeated passenger andflight delays . . . management of Stansted security isinept, and BAA has again proven that it is incapable of providing adequate or appropriate security services atStansted. This shambles again highlights that BAA is an inefficient, incompetent airport monopoly.xiii

When BAA appealed its break-up, ordered by the UK Com-petition Commission in 2009, Ryanair secured the right tointervene in the appeal in support of the Commission.

In July 2009, Michael O’Leary made a high-profileannouncement that Ryanair would cut winter capacity atStansted by 40 per cent, because of Stansted’s rejection of Ryanair’s demand for cuts in airport charges and the UK government’s plan to raise departure duty from £10 to£11 per passenger. In protest at rising charges at DublinAirport from January 2010 and a x10 per passengertourist tax in Ireland, Ryanair was also intending to reduce its Dublin traffic by 20 per cent.

However, both BAA and some observers deridedRyanair’s threats to cut traffic by 40 per cent at Stansted.‘Michael O’Leary’s ability to spin a tale has reached a new level this week. Along with the gullibility of parts of the media in accepting it. Hook, line and sinker.’xiv This was based on the contention that the airline should have compared its projected winter capacity of 24 aircraft atStansted, not with its summer capacity of 40, but with itsprevious winter capacity of 28. Thus, the reduction wouldbe only 14 per cent, not 40 per cent.

Marketing strategyFollowing the introduction of its internet-based reservationsand ticketing service, enabling passengers to make reserva-tions and purchase tickets directly through the website,Ryanair’s reliance on travel agents has been eliminated. Ithas promoted its website heavily through newspaper, radioand television advertising. As a result, internet bookingsaccount for 99 per cent of all reservations.

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Ryanair minimises its marketing and advertising costs,relying on free publicity, by its own admission, ‘throughcontroversial and topical advertising, press conferencesand publicity stunts’. Other marketing activities includedistribution of advertising and promotional material andcooperative advertising campaigns with other travel-related entities, and local tourist boards.

As referred to earlier, one of Ryanair’s publicity stuntswas its unauthorised use of a photograph of Spanish Queen Sofia after she took a £13 flight from Santander inNorthern Spain to London. When it incurred the Queen’sdispleasure, Ryanair apologised and promised to donatex5000 to a charity of her choice. In another instance ofcontroversy over using pictures of the rich and famous, in 2008 Ryanair was forced to pay a fine of x60,000 toPresident Sarkozy of France and his Italian bride Carla Brunifor using their images with the slogan, ‘With Ryanair, allmy family can come to my wedding’.

So, what about Aer Lingus?

According to a commentator in the Financial Times‘Ryanair’s bid for Aer Lingus was a folie de grandeur’.xv EvenMichael O’Leary admitted ‘it was a stupid investment. Atthe time, it was the right strategy to go for one combinedairline but it has now proven to be a disaster.’xvi

During 2007, in a shock bid, Ryanair had acquired a25.2 per cent stake in Aer Lingus, only a week after theflotation of the national carrier. It subsequently increasedits interest to 29.8 per cent, at a total aggregate cost ofx407.2 million. By July 2009, the investment had beenwritten down to x79.7 million. At the time of the initial bid Ryanair declared its intention to retain the Aer Lingusbrand and:

up-grade their dated long-haul product, and reducetheir short-haul fares by 2.5 per cent per year for a minimum of 4 years . . . one strong Irish airline groupwill be rewarding for consumers and will enable both to vigorously compete with the mega carriers in Europe. . . there are significant opportunities, by combining thepurchasing power of Ryanair and Aer Lingus, to sub-stantially reduce its operating costs, increase efficiencies,and pass these savings on in the form of lower fares toAer Lingus consumers.xvii

It had been an achievement for the Irish government finallyto have floated Aer Lingus after several false starts over anumber of years. Aer Lingus and its board firmly rejectedthe Ryanair approach, stating that it had acted in ‘a hostile,anticompetitive manner designed to eliminate a rival at aderisory price’. A combined Ryanair–Aer Lingus operationwould account for 80 per cent of all flights between Irelandand other European countries. Affirming that his company

2 Manchester United and Liverpool have a longstanding legendaryrivalry in English football.

was fundamentally opposed to a merger with Ryanair,even if it raised its price, then Aer Lingus Chief ExecutiveDermot Mannion stated:

I cannot conceive of the circumstances where the AerLingus management and Ryanair would be able to workharmoniously together . . . this is simply a reflection ofthe fact that these organisations have been competinghead to head, without fear or favour, for 20 years. Itwould be like merging Manchester United and Liverpoolfootball clubs.xviii,2

In fact, the bid was opposed by a loose alliance represent-ing almost 47 per cent of Aer Lingus shares. This includedthe Irish government, which still retained a 25.4 per centholding, two investment funds operated on behalf of AerLingus pilots accounting for about 4 per cent of shares, andIrish telecom tycoon Denis O’Brien, who bought 2.1 percent of shares deliberately to complicate Ryanair’s move. Acritical 12.6 per cent of the shareholding was controlled by the Aer Lingus employee share ownership trust (ESOT),which had the right to appoint two directors, and has astake in future profits. Its members rejected the Ryanairoffer by a 97 per cent majority vote.

Having abandoned this bid due to the shareholder opposition and a blocking decision by the EuropeanCommission on competition grounds, Ryanair renewed itsbid in December 2008, with an offer of x1.40 per share, a premium of approximately 25 per cent over the closingprice. It proposed to keep Aer Lingus as a separate companymaintaining the Aer Lingus brand, to double Aer Lingus’short-haul fleet from 33 to 66 aircraft and to create 1000associated new jobs over a five-year period. It claimed that if the offer was accepted, the Irish government wouldreceive over x180 million and the ESOT members andother employees who owned 18 per cent of Aer Linguswould receive over x137 million in cash. However, inJanuary 2009, when the offer was rejected by Aer Lingusmanagement and by the ESOT and other parties, Ryanairdecided to withdraw it.

Aer Lingus’ fortunes continued to deteriorate, announc-ing losses for 2008 and projecting even worse for 2009. In July of that year its shares were trading at less thanx0.50. In April, its CEO Dermot Mannion resigned aftercontroversy over a potential secret pay-off deal in the eventof a hostile takeover. While Ryanair did not have a seat onthe board, it continued to denigrate Aer Lingus, forecasting‘a bleak future as a loss-making, subscale, regional airline,which has a high cost base and declining traffic numbers’.xix

Meanwhile, the two airlines continued to compete vigor-ously, especially within the Irish market.

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In July 2009, Aer Lingus appointed a CEO to replaceDermot Mannion. This was Christoph Mueller, known asan ‘axe man’, former CEO of Sabena Airlines before it wentbust in 2001. Mr Mueller had already crossed swords withRyanair when it compared its fares to those of Sabena in advertisements that were alleged to be misleading, offensive and defamatory. When Ryanair lost a court caseover the matter, and was ordered to publish an apology inBelgian newspapers and on its website, it used the apologyto continue its publicity about its relatively lower fares.

Risks and challenges

In addition to the fallout from its foray into Aer Lingus,Ryanair faced various challenges in 2009, some specifc toitself and some general to the aviation industry.

Sharp economic downturnThe recession of 2008/09 created unfavourable economicconditions such as high unemployment rates and restrictedcredit markets, with reduced spending by leisure and busi-ness passengers alike. This constrained Ryanair’s scope toraise fares, putting downward pressure on yields. Continuedrecession could restrict the company’s planned passengervolume growth.

Growth and reducing yieldsGrowth plans by Ryanair entailed investment in new air-craft and routes. If growth in passenger traffic did not keeppace with its planned fleet expansion, overcapacity couldresult. Related pressures were additional marketing costsand reduced yields from lower fares to promote additionalroutes, especially to airports new to the Ryanair system. In its drive for growth, Ryanair was likely to encounterincreased competition, putting even more downward pressure on yields, as airlines struggled to fill vacant seatsto cover fixed costs.

Industrial relationsIn the light of the recession and financial losses, Ryanair negotiated with all employee groups and secured a payfreeze for 2008/09 and 2009/10. It also planned to make250 people redundant at Dublin Airport.

Ryanair came under fire for refusing to recognise unionsand allegedly providing poor working conditions (for example, to reduce the company’s electricity bill, staff arebanned from charging their own mobile phones at work). Itconducts collective bargaining with employees on pay, workpractices and conditions of employment through internalelected Employee Representation Committees. However, therewas pressure from the British Airline Pilots Association(BALPA) to enlist Ryanair pilots based in Britain.

In July 2006, the Irish High Court ruled that Ryanairhad bullied pilots to accept new contracts, where pilots

would have to pay x15,000 for re-training on new aircraftif they left the airline, or if the company were forced tonegotiate with unions during the following five years. SomeRyanair managers were judged to have given false evidencein court. Meanwhile, Ryanair was contesting the claims ofsome pilots for victimisation under the new contracts. By2009, only 11 of the 64 pilots who had lodged the claimremained with the company and still had claims.

Ryanair was ordered to pay ‘well in excess’ of x1 millionin legal costs after a court refused the airline access to thenames and addresses of pilots who posted critical commentsabout the company on a site hosted by the British and Irishpilots’ unions. Michael O’Leary claimed anonymous pilotswere using a website to intimidate and harass foreign-basedpilots to dissuade them from working for the company.Nonetheless, Ryanair appeared to have no problems recruit-ing crew, including pilots, to meet its needs.

Input costs

FuelPerhaps the greatest concern is fuel prices. Jet fuel pricesare subject to wide fluctuations, increases in demand anddisruptions in supply-factors which Ryanair can neitherpredict nor control. In such unpredictable circumstances,even hedging is a risk. The situation is compounded byexchange rate uncertainties, although a decline of the USdollar against the euro and sterling worked in Ryanair’sfavour, as fuel prices are denominated in dollars. Conversely,a weak euro against the dollar works against Ryanair.Ryanair’s declaration of ‘no fuel surcharges ever’ and itsreliance on low fares limit its capacity to pass on increasedfuel costs.

Airport charges and government taxesRyanair is especially sensitive to airports which raise charges,like Stansted and Dublin. Indirectly, it is also vulnerable to extra taxes and charges, such as the x10 tourist taximposed by the Irish government.

Passenger compensationOn 17 February 2005, a new EU regulation came intoeffect, providing for standardised and immediate assistancefor air passengers at EU airports for delays, cancellations anddenied boarding. It was expected that the compensationcosts would amount to a sector-wide bill of x200 millionannually.

Passengers affected by cancellations must be offered a refund or rerouting and free care and assistance whilewaiting for their rerouted flight – specifically, meals,refreshments, and hotel accommodation where an over-night stay is necessary. Financial compensation is payable,unless the airline can prove unavoidable exceptional

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circumstances, like political instability, weather conditions,security and safety risks, or strikes. For Ryanair, the typicalcompensation cost would fall into the x250 category, basedon the average distance of its flights. Passengers subject tolong delays would also be entitled to similar assistance.However, four years after its introduction the new regula-tion was largely ignored and had no material impact onRyanair, despite the emergence of online ‘advisors’ to helppassengers make claims when their flights have been cancelled or delayed.

Environmental concernsAviation fuel has been exempt from carbon taxes, but the EU has established an Emissions Trading Scheme toencompass the aviation industry commencing in 2012.Ryanair was predicted to be the fourth most adverselyaffected airline in the world with a shortfall of 2.8 tonnes inCO2 allowances, equivalent to x40 million in extra costs.This is despite its young fleet of fuel-efficient, minimal pollution aircraft. Ryanair has contended that any environ-mental taxation scheme should be to the benefit of moreefficient carriers. Airlines with low load factors that generatehigh fuel consumption and emissions per passenger, andthose offering connecting rather than point-to-point flights,should be penalised.

Sundry legal actionsRyanair has been in litigation with the EU about allegedreceipt of state aid at certain airports. An EU ruling in 2004held that Ryanair had received illegal state aid from publicly owned Charleroi Airport, its Brussels base.Ryanair was ordered to repay x4 million. The Belgianauthorities were claiming back a further x2.3 million in theIrish courts for its reimbursement to Ryanair of start-upcosts at Charleroi. On appeal, the original EU decision wasoverturned in December 2008, Ryanair was refunded itsx4 million and the Belgian authorities withdrew their claim.Nonetheless, the EU launched further investigations intoallegations of illegal aid, subsidising Ryanair at publiclyowned airports, such as Lubeck and Frankfurt Hahn inGermany, and Shannon in Ireland. Other legal challengeswere launched against Ryanair by competitors. On anotherfront Ryanair was vigorously opposing French governmentattempts to protect Air France–KLM by forcing easyJet andRyanair to move their French-based staff from Britishemployment contracts to more expensive French ones.

Often, Ryanair took the initiative on alleged illegal aid to rivals. For example, it filed a complaint with the EUCommission accusing Air France–KLM of attempting toblock competition after the French airline filed a case alleg-ing that Marseille was acting illegally by offering Ryanairdiscount airlines cut-price fees at its second, no-frills termi-nal. That complaint came a month after Ryanair called on

the Commission to investigate allegations that Air Francehad received almost x1 billion in illegal state aid, benefitingunfairly from up to 50 per cent discounted landing and passenger charges on flights within France. Adverse rulingson these airport cases could curtail Ryanair’s growth, if it was prevented from striking advantageous deals withpublicly owned airports and was confined to the fewer privately owned airports across Europe.

On another front, Ryanair was being sued by BAA for its refusal to pay increased landing charges at Stansted. Inother legal cases Ryanair has been accused of misleadingpassengers on its website by exaggerating price differentialswith its competitors.xx

Customer services and perceptionsIn 2003, Ryanair published a Passenger Charter, whichincludes doctrines on low fares, customer redress and punctuality. Its annual report offers figures claiming superiority over competitors with respect to punctuality,completed flights and fewest bags lost per 1000 passengers.

However, its Skytrax 2 star rating is among the worst for budget airlines. In Europe, only bmibaby and Wizzairachieve as low a rating. There have been suggestions that Ryanair’s ‘obsessive focus on the bottom line mayhave dented its public image. In an infamous incident, itcharged a disabled man £18 (x25) to use a wheelchair’.xxi

In response to protests over the charge, Ryanair imposed a 50-cent wheelchair levy on every passenger ticket.Campaigners for the disabled accused Ryanair of pro-fiteering, declaring that the levy should be no more than 3 cents. It was the only major airline in Europe to imposesuch charges.

There was growing attention to extra charges continu-ally being imposed by Ryanair on passengers, many onunavoidable services, such as check-in. In some instances,these extra charges make Ryanair more expensive thanBA.xxii Examples were a family of four travelling to Ibizafrom London with three bags for a two-week holiday cost-ing £1157 with Ryanair compared to £913 with BA and£634 with easyJet. A single passenger travelling to Venicefrom London for a week at Christmas with one bag wouldpay a total £139 on Ryanair compared to £89 on BA and£121 on easyJet.

Ryanair features on many consumer complaint inter-active websites, and some blogs have been establishedspecifically to disparage the airline. In a blog entitled ‘20reasons never to fly Ryanair’, extra charges for bookingfees, baggage overweight and low weight limits, premiumrate helplines, and the fact that ‘you are always beingflogged stuff ’ were enumerated?xxiii When the Irish Times putRyanair customers’ gripes to its head of communications,Stephen McNamara, his response was to dismiss them as‘ “subjective and inaccurate rubbish” and even implied

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they had been made up to further some anti-Ryanairagenda’.xxiv Among the complaints were:

Customers want to be treated like a human being, to get to their desired destination (not 50/60 miles away). . . to be allowed to bring luggage without persecution. . . a complete and utter lack of communication whenflights run late . . . I’m sick of that miserable bookingcharge/service charge/admin charge system.

So, why are so many people willing to put up with an airline that, in the words of The Economist, ‘has become a byword for appalling customer service, misleading advertising claims and jeering rudeness’?xxv Ryanair hasresponded to such comments, declaring that, in effect, customers vote with their feet by choosing Ryanair for itsfour tenets of customer service – low fares, a good on-timerecord, few cancellations and few lost bags. ‘If you wantanything more – go away’, warns Michael O’Leary.xxvi TheFinancial Times aerospace correspondent observed thatRyanair still offered relative value compared to rail altern-atives, at least on a journey from London to Scotland, even when Ryanair extras are factored in.

Other risks and challengesAs listed in its own report, Ryanair faced other risks – pricesand availability of new aircraft, threats of terrorist attacks,dependence on key personnel (especially Michael O’Leary)and on external service providers and its internet websiteand the continued acceptance of budget carriers withrespect to safety. Tied in with the latter are potential rises ininsurance costs.

Ryanair’s competitive space

Globally, the airline industry lost $11 billion in 2009, on top of $8.5 billion in 2008, with European airlines contributing $1 billion of that loss. Of the large Europeancarriers, only Lufthansa was expecting to make a profit.BA, Air France–KLM and Scandinavian Air Systems (SAS) experienced severe losses, due to declining trafficfrom long-haul business class passengers. The woes of theselegacy carriers were compounded by huge pension funddeficits.

Some industry analysts considered the economic reces-sion of 2009 could offer an opportunity for budget carriers,as passengers who continued to travel were expected totrade down. By mid-2009, budget airlines accounted forover 35 per cent of scheduled intra-European traffic.Ryanair was the clear market share leader, with easyJetanother dominant force (Table 2). The two were often compared and contrasted, since both operated mainly outof the UK and served the same markets. One issue waswhether easyJet’s use of primary airports would be better

than Ryanair at capturing the traffic trading down fromnetwork carriers.

Other budget carriers, of diverse size and growth ambi-tions, trajectories and regional emphases varied in differentlevels of services to passengers and use of main versus secondary airports. The comparison with the US budgetairline market in Table 2 indicates that penetration inEurope is less than in the US, which suggests scope forgrowth in the sector in Europe. It also raises the question asto whether the extent of dominance enjoyed by Southwestoffers a model for Ryanair to assert itself further. Anotherpossible development trajectory for Ryanair was to followup on its announcement in 2007 to offer x10 transatlanticflights, an idea which had not taken flight and appeared to have been shelved as of 2009.

Leading Ryanair into the future

‘It is good to have someone like Michael O’Leary around.He scares people to death.’ This praise of Ryanair’s CEO camefrom none other than his fellow Irishman, Willie Walsh, CEOof BA.xxvii He has been described as ‘at turns, arrogant andrude, then charming, affable and humorous, has terrorisedrivals and regulators for more than a decade. And so far, theyhave waited in vain for him to trip up or his enthusiasm to wane.’xxviii In fact, Michael O’Leary has been pronounc-ing his intention to depart from the airline ‘in two years’time’. He has declared that he would sever all links with the airline, refusing to ‘move upstairs’ as chairman. ‘ “Youdon’t need a doddery oldie hanging around the place”, heproclaimed.’xxix

O’Leary stays in budget hotels, always flies Ryanair,startling fellow passengers by taking their boarding passesat the gate and by boarding the plane last where he invari-ably gets a middle seat. He does not sit in an executivelounge, has no BlackBerry and does not use email.

In 2009, Michael O’Leary held 4.06 per cent of Ryanair’sshare capital, having sold 5 million shares at x3.75. AlthoughO’Leary consistently praised his management team, Ryanairwas inextricably identified with him. He was credited withsingle-handedly transforming European air transport. In2001, O’Leary received the European Businessman of theYear Award from Fortune magazine; in 2004, the FinancialTimes named him as one of 25 European ‘business stars’who have made a difference. The newspaper described himas personifying ‘the brash new Irish business elite’ and possessing ‘a head for numbers, a shrewd marketing brainand a ruthless competitive streak’.xxx

Present and former staff have praised O’Leary’s leader-ship style. ‘Michael’s genius is his ability to motivate andenergise people. There is an incredible energy in that place.People work incredibly hard and get a lot out of it. Theyoperate a very lean operation. It is without peer’ said Tim

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Jeans, a former sales and marketing director of Ryanair,currently CEO of a small low-cost rival, MyTravelLite.xxxi

O’Leary’s publicity seeking antics are legendary. These included his ‘declaration of war’ on easyJet when,wearing an army uniform, he drove a tank to easyJet’sheadquarters at Luton Airport. In another stunt, whenRyanair opened its hub at Milan Bergamo he flew thereaboard a jet bearing the slogan ‘Arrividerci Alitalia’. He hasalso dressed up as St Patrick and as the Pope to promoteticket offers.

O’Leary’s outspokenness has made him a figure of public debate. ‘He is called everything from “arrogant pig”to “messiah” ’.xxxii His avowed enemies include tradeunions, politicians who impose airport taxes (he called UK Prime Minister Gordon Brown a ‘twit’ and a ‘Scottishmiser’xxxiii), environmentalists, bloggers who rant aboutpoor service, travel agents, reporters who expect free seats,

regulators and the EU Commission, and airport owners likeBAA, whom he once called ‘overcharging rapists’.xxxiv AnEU Commissioner, Philippe Busquin, denounced MichaelO’Leary as ‘irritating . . . and insists he is not the onlyCommissioner who is allergic to the mere mention of thename of Ryanair’s arrogant chief ’.xxxv

An Irish Times columnist, John McManus, suggested that‘maybe it’s time for Ryanair to jettison O’Leary’, assertingthat O’Leary has become a caricature of himself. Perhapsthe last words should go to Michael O’Leary himself: ‘Wecould make a mistake and I could get hung’, he said. Hereiterated a point he had often made before:

It is okay doing the cheeky chappie, running aroundEurope, thumbing your nose, but I am not Herb Kelleher(the legendary founder of the original budget airline,Southwest Airlines). He was a genius and I am not.xxxvi

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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 24.6Air Berlin 28.6 4 126 Allegiant Air 3.9Belle Air 0.46 24 American Trans Air (ATA) 0.4Bmibaby 3.87 2 32 Frontier Airlines 10.1Brussels Airlines 5.4 3 62 GoJet Airlines 1.5Clickair5 6.3 3 40 Horizon Airlines (Alaska Air) 6.5easyJet 44.6 3 110 Island Air Hawaii 0.5FlyBe 7.5 3 65 JetBlue Airways 20.5Germanwings 7.6 3 70 Midwest Airline Inc. 3.0Jet2.com 3.5 3 51 Shuttle America Corp. 3.5Meridiana 1.9 3 30 Southwest Airlines 101.9Monarch Airlines 3.9 21 Spirit Airlines 5.5Myair.com5 1.5 27 Sun County Airlines 1.3Niki Airline 2.1 3 33 USA 3000 Airlines 0.8Norwegian 9.1 3 85 Virgin America 2.5Ryanair 57.7 2 140Sky Europe5 3.6 3 30Sterling5 3.8 39Sverigeflyg 0.5 15transavia.com 5.5 3 88TUIfly 10.5 75Vueling Airlines 5.9 3 45Windjet 2.7 28Wizz Air 5.9 3 581 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 186.4Ryanair as % of Total – 26% Southwest as % of Total – 55%

Key Population Data Key Population DataPopulation EU 27 (m) 500 Population US (m) 307

Key Population Ratios Key Population RatiosBudget ratio to EU 27 population 0.45 Budget ratio to US population 0.61

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So, how do these comments (and the Aer Lingus bid) fitwith Michael O’Leary’s declaration to part company withRyanair? Would he really go, and if so, what would happento Ryanair and its ambitions? No one really knows theanswer to these questions, but it is O’Leary’s propensity tosurprise his admirers and detractors alike.

References:i ‘The FT ArcelorMittal Boldness in Business Awards’, Financial Times

supplement, 20 March 2009, p. 25.ii K. Done, ‘Airline industry in intensive care’, Financial Times,

25 March 2009, p. 22.iii P. Clark, ‘Upbeat Ryanair rides out the storm’, Financial Times,

2 February 2009, p. 20.iv K. Done, ‘Ryanair sees opportunities in rivals’ distress’, Financial

Times, 28 July 2009, p. 15.v Financial Times, 9 September 2006, p. 16.vi K. Done and T. Braithwaite, ‘Ryanair to allow mobile phone calls

next year’, Financial Times, 31 August 2006, p. 1.vii Ryanair Annual Report, 2001.viii J. Guthrie, ‘Sir Stelios beknighted as suits prove bolder risk takers’,

Financial Times, 30 July 2009, p. 16.ix P. Clark, ‘O’Leary in attack on Boeing’, Financial Times, 19 December

2009, p. 1.x Ryanair Annual Report 2009.xi Ibid.xii S. Lyall, ‘No apologies from the boss of a no-frills airline’, The New

York Times, 1 August 2009 (The Saturday Profile).xiii Ryanair 2007 half yearly results.xiv B. Groom, ‘Hot air from Ryanair’, Financial Times, 23 July 2009, p. 16.xv LEX, Ryanair, Financial Times, 3 June 2009, p. 16.

xvi L. Noonan, ‘O’Leary admits stake in Aer Lingus was stupid disaster’,Irish Independent, 6 March 2009.

xvii Statement from Ryanair’s half yearly results presentation, 6 November 2006.

xviii S. Pogatchnik, ‘Aer Lingus rejects Ryanair takeover offer’, Business Week online, 3 November 2006.

xix Ryanair Full Year Results 2009.xx Ryanair press release, 29 May 2009.xxi D. Milmo, ‘Ryanair – the world’s least favourite airline’,

Guardian, 26 October 2006.xxii R. Waite and S. Swinford, ‘Ryanair more expensive than BA on some

flights’, Sunday Times, 9 August 2009.xxiii Money Central – Times Online – ‘WBLG: Twenty reasons never to fly

Ryanair’, 20 March 2009.xxiv C. Pope, ‘Pricewatch Daily’, Irish Times, 14 August 2009, p. 11.xxv Lyall, ‘No apologies from the boss of a no-frills airline’.xxvi Ibid.xxvii K. Done, ‘O’Leary shows it is not yet the end for budget air travel’.

Financial Times, 2 August 2008, p. 11.xxviiii ‘The FT ArcelorMittal Boldness in Business Awards’, Financial

Times supplement, 20 March 2009, p. 21.xxix D. Dalby, ‘I’m going for good, O’Leary tells Ryanair’, Sunday Times,

20 November 2005, News, p. 3.xxx B. Groom, ‘Leaders of the new Europe: Business stars chart a

course for the profits of the future’, Financial Times, 20 April 2004.xxxi G. Bowley, ‘How low can you go?’ Financial Times Magazine,

No. 9, 21 June 2003.xxxii Ibid.xxxiii Lyall, ‘No apologies from the boss of a no-frills airline’.xxxiv Ibid.xxxv S. Creaton, ‘Turbulent times for Ryanair’s high-flier’, Irish Times,

31 January 2004.xxxvi Bowley, ‘How low can you go?’

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