It’s the oldest strategy in business, and by many measures the most successful. If a producer lowers its prices as much as it can, assuming a base standard of quality, more consumers will buy. It works for general merchandise retailers, and it works just as well for airlines. Sure, there will always be a flying clientele for whom budgets aren’t a concern. For them, there are Emirates and Cathay Pacific and other luxury airlines. Ryanair (RYAAY) goes in the opposite direction, serving 29 European nations (and Morocco and the Canary Islands) at prices so low as to seem implausible. As those prices decrease, ridership goes in the predictable opposite direction – the airline flew more international passengers last year than did any other on the planet.
Recentlty, however, the budget airline has started to show some signs of financial distress as other budget airlines such as Norwegian Airlines and Iceland's WOW Air have gone bust. Can Ryanair keep up its low-cost service?
- Ireland-based Ryanair is one of Europe's oldest and most popular budget airlines.
- The company is able to offer one-way tickets as low as $24 to certain destinations by offering no frills air travel.
- That means you'll likely be crammed in tight and have to pay extra for things like snacks, checked bags, and other additions.
Cheap Tickets, No Perks
Like any other burgeoning business, a successful airline grows organically. Ryanair started with a single route – London to Waterford, Ireland – and built from there. Today Ryanair operates among dozens of cities throughout Europe, with fares that often appear to be misprints. For example, you can fly from London to Edinburgh, a distance of 335 miles, for the equivalent of $24. The least expensive flight from New York to Pittsburgh, a 340-mile trip, is $314.
How is this possible? How can an airline sell tickets whose prices would seem to not even cover fuel, salaries, and aircraft depreciation? Ryanair made $654 million last year on revenues of $6.296 billion. At 81.7 million passengers in 2014, that’s a profit of $8 per passenger, and that wasn’t even a good year by Ryanair standards. The airline made 9% more money on 3% less revenue in 2013. Furthermore, Ryanair lays the blame for the diminished numbers entirely on a variable that’s out of the company’s hands: increased fuel prices, which ate up about 20% of the company’s profits.
Almost 30 years in, Ryanair’s growth has been remarkable. The airline operates in 170 cities throughout Europe, ranging from the standard destinations (e.g. Paris, Frankfurt) to such less-heralded and oddly spelled locales as Szczecin, Poland (a Baltic seaport) and Växjö, Sweden (a college town of 60,000).
As any successful airline or car salesman understands, you make your money with the add-ons. It might indeed cost a mere $29 to fly from Madrid to Paris, but reserving that seat will cost you another $16. Add a $9 administrative fee (unless you’ve purchased a company-branded prepaid currency card), and another $23 or so for a bag, and the prices become slightly less incredibly cheap. Ryanair infamously insists that travelers print their own boarding passes, or will happily do it for them at $94 a pop.
Chief executive officer Michael O’Leary admits to borrowing more than a few ideas from Southwest Airlines (LUV), the American low-cost carrier that democratized flight in the United States and has consistently turned profits while its larger and stodgier legacy counterparts have groveled for taxpayer handouts. For instance, Southwest realized that using just a single model of aircraft would save on maintenance and training costs. And that minimizing downtime at airports means more time in the sky, earning more revenue. Southwest also mastered the art of garnering attention for itself in ways that generic advertising just can’t do.
Much like Southwest’s legendary founder Herb Kelleher, O’Leary is as adept at promoting himself as his airline. He’s referred publicly to people who pay the boarding pass fee as “idiots”, and given its cost, it’s hard to disagree with his point. In 2009 O’Leary announced plans to eliminate all but one toilet on Ryanair planes, replacing the other toilets with more seats. After all, toilets don’t generate revenue unless of course you charge people for the privilege of excreting: another revenue stream that O’Leary threatened to implement. His proposal created buzz – wait, can that upstart Irish airline possibly be serious about this? O’Leary was sincere only to the extent that he was showing his commitment to Ryanair shareholders. As of this writing the airline’s toilets remain both free to use, and plural.
Ryanair’s also adopted business models that are traditionally used in other industries. Media, for instance. Radio listeners, TV viewers and website users accept advertising as an inescapable part of the bargain. Better than Anheuser-Busch (BUD) and Procter & Gamble (PG) pay to broadcast our sitcoms and football games, allowing consumers to enjoy them without (direct) charge. Ryanair does largely the same thing. If there’s a flat surface on board a Ryanair plane, chances are good it has an advertisement on it.
Ryanair isn’t beholden to any traditional way of doing things; not even its own. The one-plane-fits-all rule isn’t cast in stone. The airline recently finalized its purchase of Boeing’s (BA) new 737 Max 200 jetliners. Ryanair is Boeing’s first customer to take delivery of the new planes, which will increase the Ryanair fleet by 100 and allow even more revenue per flight.
The Bottom Line
In a ruthless marketplace, Ryanair is as aggressive as they come, constantly looking for new and inventive ways to make money. The numbers testify to this. Last year the airline’s “ancillary revenue” rose from 22% to 25% of the total. If that trend continues for another decade or so, the accountants will have to change the name of the category. In the interim, Ryanair remains one of the most innovative, dynamic, and (most importantly) profitable businesses in all of transportation.