Ryanair: Low prices without “unnecessarily pissing people off”
Ryanair is Europe’s largest low-fare airline and its focus on having the lowest possible cost also made it one of the most profitable airlines in the world. However, those profits came at the expense of, in Ryanair’s CEO own words, “unnecessarily pissing people off”.
Historical focus on cost and punctuality
Ryanair, the largest low-cost airline in Europe, was launched in 1985. In 1990, after a price war against Aer Lingus and British Airways, Ryanair had to go through a substantial restructuring to recover from a loss of £20m. The company decided to copy Southwest Airlines’ low fare business model by offering the lowest fares in every market. Ryanair believed that their target customer only cared about cost and punctuality so it focused its strategy on reducing fares without compromising on punctuality. The restructuring implied a lot of changes to align the airline’s operations to its goal of being Europe’s cheapest carrier.
Being a low cost airline
Ryanair’s focus on cost is undeniable. Its operating model is totally aligned with its objective of providing its customers with the lowest possible fares (see figure 1). Its operating model includes:
- High asset utilization: With high frequency flights, no layover, and quick turnaround at airports (25 min vs. an average of 45 min for other carriers), Ryanair is able to maximize the utilization of its aircrafts and personnel;
- Low airport costs: Ryanair flies mainly from secondary airports which leads to less congestion, lower charges, and better bargaining power;
- Single aircraft fleet: Ryanair exclusively operates Boeign’s 737-800 which allows it to lower its maintenance costs, buy in bulk, have recent aircrafts, reduce training needs and have better safety records;
- High seat density and high occupancy: Ryanair’s planes are also specifically designed to have high seat density. For example, in 2014, Boeing designed a new 737 Max for Ryanair that can seat 197 passengers. As a comparison, regular aircrafts of similar size seat around 130 passengers. Ryanair is also focused on maximizing the occupancy of its aircrafts by leveraging pricing to make sure planes are full at all times;
- No frills: Both in its aircrafts and its customer service, Ryanair focuses on the bare minimum. For example, its planes have non-reclining seats, no seat-back pockets, safety cards on the back of the seats, and life jackets stowed overhead. This design helps to maximize turnaround time and seat density and to minimize maintenance costs.
- Selling tickets online: Ryanair sells its tickets directly to its customers which reduces marketing costs and eliminates costs related to travel agencies.
- Low personnel costs: Ryanair is also focused on reducing its personnel cost. Its average number of passengers per employee is more than 10 times the average of other airlines.
Having really inexpensive operations allows Ryanair to offer low fares to its customers. In addition to fares, Ryanair also captures value with ancillary revenues. Ryanair’s ancillary revenues were 25% of their revenue in 2014. It includes all extras that Ryanair charges for drinks, meals, carry-on luggage, etc. and in-flight advertising and purchases. These revenues also contribute to subsidizing Ryanair’s low fares and allow it to be one of the most profitable airlines in the world.
The meanest airline in the sky
Ryanair’s focus on cutting cost has allowed it to grow quickly (see figure 2). However, with the rising profits also came a reputation of the meanest airline in the sky. Indeed, Ryanair alignment of its operating and business models is so strong that it now has a reputation for being greedy, charging its customers for everything, and being really strict with its rules.
New focus on customer service
In 2014, Ryanair announced their “Always Getting Better” customer experience initiative to increase focus on customer service. Ryanair decided to relax its tight rules and punitive charges to turnaround its image. Some of the proposed changes include allocated seating, permitting a second carry-on bag, relaxing specific rules, flexible fares, and flights to primary airports to appeal to business travellers.
The cost of being nice
However, customer service comes at a cost and now creates a tension with its low-fare/low-cost objective. The bet seems to have paid off since they announced a 66% leap in profits to £867m in March. Ryanair also expects traffic to increase by a further 10% this year. However, even if Ryanair maintains that its fares are still falling, some analysts say its fares rose by 12% on average in 2014.
It will be interesting to see how Ryanair will keep transforming its operating model to focus on low fares, punctuality, and customer service at the same time.
Sources:
Ryanair’s corporate website: http://corporate.ryanair.com/
The Guardian coverage: http://www.theguardian.com/business/2015/may/30/ryanair-being-nice-fewer-rules-less-hassle-more-profit
The Economist coverage: http://www.economist.com/blogs/gulliver/2015/05/ryanair
BBC coverage: http://news.bbc.co.uk/2/hi/business/3489761.stm
Cheap airlines infographics: http://www.airliners.net/aviation-forums/general_aviation/read.main/4464421/1/
How hard do you think it is to turnaround your reputation as the “meanest airline in the sky”? Does it even matter? Our FIELD 2 team is working with LATAM Air (LAN) in Peru on a project around creating more loyal customers and in our survey work, the single most important thing that people cared about far and away – even when we weighed it next to customer service, perks (e.g., drink coupons, snack on-board, free WiFi) – was always ticket price. Are there any risks for other entrants or loss of market share if they just keep ops low-cost and keep giving value back to customers in the form of low ticket prices (and just keep everything else as-is)?
You raise a really valid point. Ryanair’s management still believe that the most important factor for an airline is price, followed by punctuality. One of the key success factors for this new “Always Getting Better” strategy will be to increase customer service without increasing fares. Ryanair still maintains that its fares were lower in 2014 than in the previous years.
The reason why they started this new customer service strategy is that their traffic numbers were stagnating (as you can see in figure 2). They’re trying to get a new segment of customers for whom price isn’t the only satisfaction factor: business travellers.
Now, as you pointed out, it will most likely be more costly for them to give better customer service so if they maintain the same fare level someone has to loose some value somewhere and this is likely to be Ryanair itself. I think Ryanair believes this strategy makes sense for 2 main reasons:
1. Some of the changes will probably also bring cost benefits to Ryanair. For example, pre-assigned seating reduces the chaos at the gate and usually increases turnaround which will allow Ryanair to operate more flights and increase its asset utilization.
2. Even if this strategy will likely be more costly, they will also have more customers by also appealing to business travellers. These customers will likely bring higher ancillary revenues as well as a higher asset utilization. Furthermore, one of Ryanair’s hypothesis is probably that business travellers are more profitable than regular travellers.
That being said, it’s not going to be easy to turnaround their image and there are definitely some competitors who are waiting for them to fail to start stealing their customers !
Great post about an interesting (and sometimes controversial) airline. As mentioned above, price tends to trump all other amenities in customers’ purchasing process. Will this trend last? Do you think Ryanair can continue to squeeze on amenities or will customers’ eventually develop an “enough is enough” mentality and switch to carriers with a more customer-centric mentality? Do you think Ryanair should more aggressively narrow its focus to the target demographics that are most likely to sacrifice amenities for low cost?
Yes, this is a really interesting dilemma. It seems that Ryanair has been loosing customers or, at least, not growing as fast as it used to. At the same time, its reputation is good publicity because everyone is talking about it. I even read an article about a guy who changed is name instead of correcting the name on its ticket because it was cheaper !
Now, Ryanair has mentioned that part of its new customer service centric strategy is to focus on business travellers, but the question you raise it a good one: will they be able to focus on business travellers and price sensitive travellers at the same time, knowing that their needs are totally different ?
I’m curious how RyanAir can continue to cut costs all while improving the customer experience in the next year or two. It would also be interesting to examine why, in the United States, we don’t have any low cost carriers that approach the level of cost which RyanAir and EasyJet achieve in the European markets. Are regulations so expensive in the US that it nearly double the average ticket price of low cost carriers? Geography is probably key in cutting costs, since for high utilization, you need to have pockets of demand located nearby each other. Do they have any plans to expand into other markets?
You’re right, the difference between US and European low-cost carrier is really interesting. As you mentionned, geography and population density plays a big role. If we take SouthWest vs. Ryanair as an example, the first big difference is that SouthWest has been focus on delivering great customer service where Ryanair had (until last year) been focus solely on cost (e.g. charging $115 to pint your boarding pass). Other factors come into play as well. Ryanair receives a lot of non-taxable sysbsidies from regional Governments to fly to secondary airports, but, in America, subsidies are regulated by the Essential Air Service (EAS). SouthWest employs more employees per customer than Ryanair, and they are unionized. It will be interesting to see how Ryanair’s new focus on customer service will come into play !
On your second question on expanding to other markets. Ryanair has announced on March of this year that they wanted to start doing transatlantic flights (http://www.economist.com/blogs/gulliver/2015/03/ryanair-0), but then denied this statement. Analysts think they will launch an transatlantic service but another a totally different brand. It will be interesting to see how it will disrupt the market if they, in fact, decide to launch this type of service.
Great post!
RyanAir brings out strong emotions / reactions from people who’ve flown with them!
I definitely agree that they’ve managed to built a significant cost advantage relative to other airlines, but I wonder if their reputation ultimately will hurt them in the segment that is just above the ‘very price sensitive’ consumers? I.e. is their operating model actually driving them to extremely low value consumers and preventing them (as a result of their reputation) in acquiring higher value consumers? Their profits, margins are healthy today but I wonder if all of this bodes well for them in the long run?
Another question I had was that a few years ago there was a very clear distinction between “low cost” and other airlines, but there is an emergence of segments in the middle (e.g. low cost airlines launched by national carriers) that are looking to ‘pull away’ consumers that may not be as price sensitive away from low cost carriers such as RyanAir. How significant do you think this threat is?
Enjoyed this post!
Those are 2 really great points and I think this is what Ryanair now realizing and is trying to address with their new “Always Getting Better” program. As you said, Ryanair’s operating model is currently serving it well because it operates under the assumption that the key criteria for a traveller is price followed by punctuality and that the rest doesn’t really matter. This assumption definitely holds true for a lot of customers, the “very price sensitive” as you called them, but it definitely prevents them to attract higher value travellers. On top of that, you are totally right that the new middle-cost carriers are also an additional threat to Ryanair.
Ryanair is currently reacting to these threats by trying to change their image, but will they really be able to do that ? Should they just continue to play in the very low cost market ? We should have a better idea when they will announce their 2015 and then 2016 results !
What a cool post and discussion. Is it better to be a highly consistent “mean spirited” cost cutter or is it better to p[ivot and change strategy in mid stream to remedy customer perceptions? I don’t know if a brand can really improve perception by working on the edge and fixing limited problems leading ot bad perceptions with an inconsistent solution (which may be perceived as such), as opposed to staying the course and driving consistency.
I agree, I think it’s going to be hard for them to move from this perfect alignment between business and operating models that led them to be the “meanest airline in the sky” to being somewhat focus on customer service. I’m really looking forward to see how they will approach this change and what will be the customers’ reaction.
Great post – it seems as though Ryanair has pushed their cost cutting to every single boundary. I’m wondering if you have a sense of how they might grow their business further? It doesn’t seem possible to fit more seats or turnaround their planes any faster. Do you see viable options other than improving the customer experience piece to continue to grow revenue?
Andy – such a great post! My understanding was that the reason they are able to keep labor costs so low is that they employ non-unionized workers. Is this sustainable? And are they subject to any sort of regulatory risk if they continue this employee policy? If not, why do other airlines not? It feels that as other airlines restructure they would move to a similar model in which case does Ryanair lose their competitive advantage?