Ryanair, the Dublin-based low cost carrier (LCC), celebrates its 30th birthday this year. Though some may scoff at the company’s claim to be “Europe’s favorite airline,” the numbers are hard to dispute. This year the airline will carry 105m customers between 200 airports across 31 countries and will overtake both IAG and Lufthansa in terms of passenger numbers.
The company’s business model is a ‘
copy and paste’ of the low cost carrier model first established by Herb Kelleher at Southwest Airlines – Michael O’Leary (Ryanair’s long-serving CEO) spent a number of weeks observing Southwest before taking over as CEO. What’s interesting is that Ryanair was not the only imitator of the Southwest model. EasyJet, Germanwings, Flybe, and countless others have attempted to follow the lost-cost and low-fare model in Europe. In fact, the abundance of low cost carriers has helped to consistently drive down the cost of air transport over the last number of decades.
Though many have tried to emulate the low cost model, Ryanair’s performance clearly stands out. It is estimated that Ryanair’s cost per passenger is approximately one third lower than that of EasyJet, the second largest LCC in Europe. Its success has been built on aligning all elements of its operating model with the company’s business model.
There are a number of elements to Ryanair’s operating model which are worthy of consideration:
Ryanair operates just one aircraft type
Ryanair only uses Boeing 737-800 aircraft helping to keep costs down in a number of ways. Firstly, it offers the airline full flexibility as aircraft can be deployed across all routes and crew can be staffed across all aircraft. Secondly, standardization helps Ryanair ‘work’ its planes harder than anyone else in the industry – the average time on the ground between flights is just 25 minutes. Thirdly, the scale of Ryanair’s relationship with Boeing has enabled the airline to negotiate low cost aircraft and to imposed detailed specifications (e.g., Ryanair achieves 189 seats per aircraft, compared with easyJet’s 156 on A319s and 174 on A320s).
Ryanair operates in low cost airports
Ryanair flies to very few major airports, choosing instead smaller and less congested terminals. Flying in and out of smaller airports has many advantages. It allows greater flexibility in choosing landing and take-off slots and greatly reduces the amount of time spent queuing for runways. And because Ryanair is willing to fly to smaller airports, it has been able to negotiate extremely advantageous rates. In fact, at one point, airports or local governments were paying Ryanair in order to bring passengers to their airport or region.
Ryanair sells direct-to-consumer
Ryanair has worked to disintermediate its sales channel refusing to deal with either travel agents or with GDS partners. All sales are made through Ryanair.com or through its dedicated booking line thereby eliminating the loss of value to intermediaries.
Ryanair has killed the ‘sacred cows’ of the airline industry
Once committed to the low cost model, Ryanair went about destructed many of the ‘sacred cows’ of the airline industry in order to radically simplify the operating model. It has dispensed of all free inflight hospitality and entertainment which reduces costs and frees cabin crew’s time for revenue generating activity. It offers only point to point flights thereby avoiding the need to transfer passengers or luggage. Finally, the airline went against conventional wisdom and scrapped its frequent flyer rewards system.
Ryanair Incentivizes its customers to play their part
The airline has taken many steps to ensure their customers do everything possible to reduce the airline’s costs. Passengers are charged punitively for printing a boarding pass or for checking in luggage. As a result, only a small portion of customers require these services thereby further streamlining Ryanair’s operation.
Results
Ryanair has delivered outstanding results as compared to peers. It is one of the only airlines in the world to consistently deliver economic profit (return on invested capital minus the weighted average cost of capital). If the airline can continue to closely align its business model and operating model, few would bet against Ryanair celebrating many more birthday’s as Europe’s most profitable airline, and maybe even its favorite.
References:
- Ryanair.com and Ryanair Investor Relations material
- Hua, “Airlines Middlemen Face More Than Lufthansa’s Headwind,” Wall Street Journal (2015). Available at: http://www.wsj.com/articles/airlines-middlemen-face-more-than-lufthansas-headwind-1434368784
- “Why airlines make such meagre profits,” The Economist Explains, (2014). Available at: http://www.economist.com/blogs/economist-explains/2014/02/economist-explains-5
- “Profitability and the air transport value chain An analysis of investor returns within the airline industry and its supply chain,” IATA Economics Briefing No. 10, (2013). Available at: https://www.iata.org/whatwedo/Documents/economics/profitability-and-the-air-transport-value%20chain.pdf
- Creaton, “Ryanair: How a Small Irish Airline Conquered Europe,” Aurum Press Ltd, (2004)
- Multiple websites including: www.statista.com, www.gurufocus.com, and www.centreforaviation.com
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