Ryanair: The lowest cost airline in Europe.

Launched 30 years ago, the Irish low-cost carrier Ryanair disrupted the European airline industry and started the low-cost revolution in Europe. Ryanair is now Europe’s largest airline with more than 90 million passengers per year and shows record profits of 875 million euros [1].  Behind the success of Ryanair is the very effective alignment of its customer value proposition with its low-cost operating model.

The Business Model 

Ryanair’s low-cost model was initially copied from the U.S-based airline Southwest. The company’s business model is straightforward: To offer cheap air transportation to fare-conscious customers. Ryanair targets customers who might otherwise choose alternative modes of transportation or not travel at all [1].  The company focuses mostly on inter-European, short-haul flights.

The Operating Model 

With an aggressive approach of “innovation by substraction” [3], the company simplified the operating model further and ‘outSouthwested’ Southwest. Ryanair’s operating model disrupted many common industry practices and allowed the company to outperform all of its competitors on costs per seat and per passenger [4] (Ryanair’s closest competitor, EasyJet, has a cost per passenger 67% higher [9])

One can analyze Ryanair’s operating model through two different components: Structural and Executional. The structural component is related to the operations strategy or “doing the right things”, while the executional component is more about the efficiency of “doing things right”.

Operating Model: Structure:

  • Airports: Ryanair flies to small secondary airports, which are sometimes located further away from the city centers. This not only helps reduce airport taxes, but also allows Ryanair to secure subsidies from local city councils who want to attract Ryanair’s tourists! [5] These airports also allow a quick turnaround time, which means that the company can achieve a high fleet utilization.
  • Point-to-Point Routes: As opposed to a hub-and-spoke model used by national airlines, Ryanair’s model is a point-to-point model, which reduces customer transfer costs.
  • Distribution: In order to improve its margins without increasing end-customer prices, Ryanair opted for online direct to customer sale and bypassed the expensive intermediary that travel agencies are.

Operating Model: Execution

  • Labor Costs: Ryanair has the lowest labor costs in the industry (6€ per passenger – vs  9€ and 17€  for competitors EasyJet and AirBerlin [5]). To achieve these results, Ryanair has used three levers:
    • Labor Utilization: A large majority of Ryanair’s pilots are actually not salaried employees but third party contractors [5]. With these type of contracts, Ryanair only pays pilots when they are effectively flying and fully utilized.
    • Professional Fees: Employees compensation is set-up to include any potential professional fees. This incentivizes the employees to use low cost hotels and transports. (e.g. Crews have been reported to be staying at a low cost camping resorts in the south of France ! [5])
    • Salaries: By using Irish labor contracts with its employees, the company avoids the rules on wages and social benefits that are required by some European countries [6].
  • Standard Fleet: Ryanair uses a single type of jet (Boeing 737) for its entire fleet. This enables Ryanair to reduce its Maintenance, Repair and Overhaul costs, reduce its staff training, and increase flexibility in staff allocation.

The Virtuous Cycle of Business and Operating Model Alignment

Ryanair’s business and operating model’s alignment create virtuous cycles through which the business model enables the operating model, which in turn strengthens the value proposition and the competitive advantage of the company [2].

For example, the company’s business model is about offering low prices, these low prices generate high volumes, which strengthen the company’s operating model: The high volumes enable the company to gain a strong bargaining power with suppliers and secure high fleet utilization, both of which lead to even lower costs, lower prices and increased competitiveness.

Similarly, because the business model is centered on low prices, the value proposition means that customers have lower quality expectations, which in turn allows the company to not offer free checked-in luggage or meals, something that leads to even lower costs and prices [2]. According to Ryanair’s CEO, the business decision to stop offering free checked-in luggage was not expected to create a revenue stream. It was a way to shift customer behavior into carrying less luggage and simplify Ryanair’s operations (e.g by shutting down the ‘lost bags operation’). This allowed the company to significantly reduce their costs.

The way forward

Ryanair is currently undergoing a shift in its strategy: It is now aiming to improve its customer service and target business travelers [5]. It will be interesting to see if and how the operating model is going to be adjusted to match the new business model, in order to create new virtuous cycles.

Sources :

[1] https://investor.ryanair.com/wp-content/uploads/2015/07/Annual-Report-2015.pdf

[2] https://hbr.org/2011/01/how-to-design-a-winning-business-model

[3] http://www.innovationmanagement.se/imtool-articles/innovation-by-subtraction/

[4] http://centreforaviation.com/analysis/ryanair-swot-low-costs-remain-the-key-strength-even-as-customer-service-enhancements-take-root-186145

[5] http://www.challenges.fr/entreprise/transports/20150902.CHA8941/ryanair-la-machine-a-cash-contrainte-au-virage-force.html

[6] http://www.bloomberg.com/news/articles/2015-06-22/ryanair-clashes-with-denmark-over-labor-laws

[7] http://www.telegraph.co.uk/finance/newsbysector/transport/10996171/Why-do-you-pay-to-check-in-baggage-with-Ryanair.html

[9] http://centreforaviation.com/analysis/ryanair-swot-analysis–michael-olearys-maniacal-focus-on-being-the-lowest-cost-producer-96465

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6 thoughts on “Ryanair: The lowest cost airline in Europe.

  1. This is really interesting. The alignment between the company’s operating model and it’s low cost value proposition are done up to the smallest detail. I wasn’t aware of this. I wonder, however, if the contract-based payment of employees – especially of pilots could raise any safety concern. Even the smallest incident could ruin the reputation of the airline – so is Ryanair doing enough for this?

  2. This was a really interesting take on an airline that I have used many times! RyanAir has revolutionized air travel for the “cost-conscious” traveler who travels within Europe; however, I wonder about RyanAir’s potential to maintain that efficiency while expanding to serve more customers and different routes. Will business travelers be willing to use RyanAir for their business trips? Will the poor experience and the need to fly into secondary airports be a concern for those customers. Secondly, can they expand their routes to include long-haul routes. The 737 has a limited range, and I would be concerned about RyanAir’s ability to maintain their low MRO costs when their fleet expands to multiple airplane models.

    1. Ryanair will likely not engage in long haul routes for the near future, there is enough runway for growth in Europe taking share from flag carriers ceding routes and the economics are just really not as good as short haul (you might the same price for an aeroplane on long haul but earn much less than you do on short haul constantly churning passengers on and off). For this reason it’s also unlikely they will shift from the 737, especially since they have an order book for hundreds more craft lasting them at least to 2024. See this article for a taste on long haul low cost carriers (summary, it doesn’t really work). http://www.bloomberg.com/gadfly/articles/2015-11-25/discount-airfares-don-t-make-sense-for-airasia-x

  3. Interesting take Akram! I am curious about the distribution strategy adopted by Ryanair. While direct to customer sale definitely saves costs, I wonder if it’s the right channel to gain large volumes. Given that Ryanair wants to be a low cost airline, capacity utilization must be really important to them. I am curious if they’ll eventually need to move to travel websites/ to attract enough volumes.

  4. Great post, Akram. You may find it interesting to read a similar post on an Indian airline called, Indigo. It is also based on the Southwest model and has been tremendously successful in India. What I would be interested to hear more about is what you think the future of their pricing strategy will be. Do you expect low cost airlines to move to a subscription based model and see people using it as a form of commuting to work multiple days a week?

  5. Interesting article, Akram!
    Airlines are a notoriously difficult business to be in, and this makes Ryanair’s profits that much more impressive. I do agree that their business and operating models are well-aligned, and that they execute well on an explicitly clear value proposition (pay less, expect less).

    I don’t think there will be a shortage of cost-conscious travelers. What I do wonder, however, is for how long they will able to keep their costs so low. As Iulia mentioned above, I wonder if any corners are being cut with respect to safety; any incident could be very damaging to their brand if consumers start to link “low-cost” to “less safe”. Non-unionized staff could band together to form a union, Ireland could change its labor laws, or new aviation regulations could be introduced around use of third party contractors – if I were an investor, I would stay abreast of some of these risks.

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