Case study 4: Ryanair and the revolution in low-cost air travel

The low-cost airline, pioneered by Southwest Airlines in the US, offers the passenger a no-frills service at a lower price than the traditional service with food and entertainment which has been the mainstay of the major airline companies The two companies which have developed the low-cost model most successfully in !urope have been easy"et and #yanair $oth have enjoyed phenomenal growth, building mar%et share at the e&pense of the major flagship carriers such as $ritish Airways '$A( and )ufthansa, in effect revolutioni*ing air travel within !urope )ow-cost travel now enjoys a mar%et share of over +, per cent of intra-!uropean air travel -f the two companies, #yanair has been the more radical in its low-cost strategy, charging as little as under +, euros for a flight $ut how sustainable is this strategy in the long term. #yanair relies on high volume, filling as many seats as possible on each flight, and also adding capacity to its networ%, which it has rapidly built up /ichael -)eary, the 0!- of #yanair, says1 This is Tesco 2ow is Tesco cheaper compared with other stores. They buy more and sell it at low prices '3elsted, 4 5ovember 6,,7( #yanair flew ++ 7 million passengers in 6,,7, 48 per cent up on 6,,6 )oad factor is the number of seats sold as a proportion of those seats available on each flight #yanairs load factor fell from over 9, per cent in 6,,6 to :: per cent in 6,,7 'which is still high for the industry(, partly because of a ;, per cent increase in the number of seats available -)eary loo%s for every possible means of reducing costs in the operation Almost all seats are boo%ed via the internet, saving costs in administration Aircraft are operated on tight schedules with <uic% turnaround times of only 68 minutes, allowing more flying time in a day than rival carriers1 it can run two more flights a day than rivals such as $A #yanair pilots fly 99: hours a year, close to the legal limit of =,, hours, and more than the :9, hours a year flown by easy"et pilots The company has invested in older aircraft, for which depreciation costs are less steep >ith its ambitious e&pansion plans, it has ordered +,6 new $oeing aircraft, which will entail significant depreciation costs This is one of the factors which might affect future profits -n the other hand, the new aircraft have greater capacity and are more fuelefficient ?espite its older planes, #yanairs maintenance costs are lower than those of easy"et, and lower than would be e&pected by industry e&perts, but the company denies that safety is being compromised #yanairs major cost savings have come from its use of secondary airports, where fees are lower than those of major hubs @t is estimated that its landing costs per passenger are only A4 =, out of an average fare of A77, compared with A+, :8 per passenger out of an average !asy"et fare of A4;, arriving at a major airport /oreover, -)eary has been successful in doing deals with these underused airports, including, for e&ample, provision of hotel accommodation for crews 2owever, this strategy suffered a setbac% with the !uropean 0ommission ruling that such a deal with 0harleroi airport in $elgium, which is state-owned, amounted to a state subsidy, which is disallowed under !uropean law >hile some observers saw this as a blow to the #yanair business model, -)eary shrugged off such comments as unfounded, confident that cheap airport deals are still possible 3or #yanair, 6,,4 was a calmer year, with slower growth, in which capacity increased only +; per cent and passenger volumes increased += per cent Brofit margins were down, from 69 per cent in 6,,7 to 66 per cent, as shown in the figure @s this a sign that the boom days are over. #yanair, registered in ?ublin, pays corporation ta& in @reland, where the rate has dropped to +6 8 per cent A less advantageous ta& regime would affect its position and, in particular, any future ta& on fuel !nvironmentalists have singled out the high level of emissions from short-haul flights as a cause of global warming -ther costs, such as operating costs, rising oil prices and higher airport charges, are also under pressure -)eary remains upbeat about #yanairs long-term future, while pointing to li%ely casualties among the many newer entrants into the low-cost sector
Sources1 ?ombey, ? , ?one, C , and 3elsted, A , As regulators launch an in<uiry into suspected illegal subsidies, is cheap air travel in !urope too good to last., 3inancial Times, +6 ?ecember 6,,6D 3elsted, A , E!veryone is loo%ing for the secret under the bed F 0an /ichael -)eary sustain #yanairGs low-cost success., 3inancial Times, 4 ?ecember 6,,7D 3elsted, A , $udget airlines fly on a %nife edge, 3inancial Times, ++ August 6,,6D ?one, C , #yanair tal%s of disaster, but the low-cost revolution flies on, 3inancial Times, : 3ebruary 6,,4D ?one, C , #yanair suffers first net profit drop in +8 years, 3inancial Times, 6 "une 6,,4

Case questions + >hat are the essential elements of #yanairs low-cost strategy. 6 >hat factors will affect its long-term sustainability.

@ #yanairs website is http1HHwww ryanair com

Notes for lecturers: Ryanair and the revolution in low-cost air travel
Question 1: >hat are the essential elements of #yanairs low-cost strategy. ?epending on time available, it would be helpful to begin with some of the bac%ground to the case study >hy is the growth of low-cost air travel referred to as a revolution. !ssential elements1 5o-frills approach to the basic service offered the consumer, who benefits from fares that can be a fraction of those charged by the established carriers 2igh volumes I the need to have a high load factor Briority on reducing costs in every possible way, including internet boo%ing and tight schedules Use of secondary airports - this is an aspect of the previous point, which can be discussed separatelyD public policy issues are involved, such as the possible subsidies offered by local authorities eager to attract commercial investment and visitors Question 2: >hat factors will affect long-term sustainability. Any fall in passenger volumes, which will reduce profit margins #ises in fuel costs Burchase of new aircraft, which, while more fuel efficient, involve higher depreciation costs 3ierce competition for the low-cost traveller1 !asy"et is the most established competitor, but there are many others, whose services include, for e&ample, allocation of seats, which appeals to many consumers )egal changes in the use of secondary airports, whether from the !uropean 0ommission or local authorities !nvironmental pressures I low-cost air travel is a rapidly growing source of greenhouse gas emissions, as well as noise >hile governments are unli%ely to curtail their growth directly, a possibility is the increase in ta& on fuel and strict regulation for the e&tension of airports or the building of new ones