SuperTutor
$15/per page/Negotiable
“There is only one thing in the world worse than being talked about, and
that is not being talked about," declared Lord Charles in Oscar Wilde's
novel, The Picture of Dorian Gray. This could have been the mantra of
budget airline Ryanair, Europe's largest carrier by passenger numbers
and market capitalization in 2010. The airline was given to making
controversial news, whether it was annoying the Queen of Spain by using
her picture without permission in marketing material or announcing
plans to charge passengers to use toilets on its flights or engaging in
high-profile battles with the European Commission. Ryanair also made
news with its achievements, such as winning international awards, like
Best Managed Airline, or receiving a 2009 Ff-ArcelorMittal Boldness in
Business Award in the Drivers of Change category. This award
announcement said that Ryanair had "changed the airline business
outside North America---driving the way the industry operates through
its pricing, the destinations it flies to and the passenger numbers it
carries.” Ryanair had been the budget airline pioneer in Europe,
rigorously following a low-cost strategy. It had enjoyed remarkable
growth and in the five years to 2009, was the most profitable airline in
the world, according to Air Transport magazine.
Despite this apparent success, Ryanair faced issues. The most pressing,
shared by all airlines, was an industry that was "structurally sick" and "in
intensive care” with plunging demand in the global economic recession
and uncertainty about oil prices. What strategy should Ryanair use to
weather this storm? Would the crisis produce a long-term change in
industry structure? Could Ryanair take advantage of the situation as it
had in the past by growing when others were cutting back? A
predicament of its own making was Ryanair 's 29.8 percent shareholding
in Aer Lingua, the Irish national carrier, following an abortive takeover
attempt. Aer Lingus's flagging share price had necessitated drastic writedowns, which had dragged Ryanalr's results into losses in 2009, the first
since its flotation 12 years earlier.
In 2010, Ryanair had 44 bases and 1,200-plus routes across 27 countries,
connecting 160 destinations. It operated a fleet of 256 new Boeing 737800 aircraft with firm orders for a further 64 aircraft to be delivered over
the following two years. It employed 8,100-plus people and had carried
almost 67 million passengers in 2010, expecting to carry approximately
73.5 million passengers for fiscal 2011.
Ryanair was founded in 1985 by the Tony Ryan family to provide
scheduled passenger services between Ireland and the United Kingdom,
as an alternative to then state monopoly airline Aer Lingus. Initially,
Ryanair was a full-service conventional airline, with two classes of
seating, leasing three different types of aircraft. Despite growth in
passenger volumes, by the end of 1990, the company had flown through
much turbulence, disposing of five chief executives and accumulating
losses of IR£20 million. Its fight to survive in the early 1990s saw the airline transform itself to become Europe's first low-fare, no-frills carrier,
built on the model of Southwest Airlines, the successful Texas based
operator. A new management team, led by Michael O'Leary, then a
reluctant recruit, was appointed. Ryanair, floated on the Dublin Stock
Exchange in 1997, is quoted on the Dublin and London Stock exchanges
and on NASDAQ, where it was admitted to the NASDAQ-IOO in 2002.
Ryanair designated itself as the "World's Favorite Airline" on the basis
that, in 2010, IATA ranked it as the world's largest international airline
by passenger numbers despite the fact that it had already been calling
itself the world's favorite airline for a number of years. It was now the
eighth-largest airline in the world (when the large U.S. carriers' domestic
traffic is included). Over the following five years, Ryanair intended to
grow to become the second largest airline in the world, ranked only
behind its mentor Southwest.
Releasing Ryanair's 2010 results in June 2010, O'Leary announced, "We
can be proud of delivering a 200 percent increase in profits and traffic
growth during a global recession when many of our competitors have
announced losses or cutbacks, while more have gone bankrupt."
Revenues had risen 2 percent to €2,988 million, as fares fell 13 percent
to €34.95. Unit costs fell 19 percent due to lower fuel costs and rigorous
cost control. Fuel costs declined 29 percent as oil prices fell from $104 to
$62 per barrel. Fuel hedging was extended to 90 percent for full year
2011,50 percent for quarter 1 and 20 percent of quarter 2 of 2012.
Airport and handling costs declined by 9 percent, despite price increases
at Dublin and Stansted, two of Ryanair's busiest bases. Ancillary sales
grew 11 percent to €664 million, slightly lower than traffic growth and
constituting 22 percent of total revenues. The balance sheet had
strengthened with a cash rise of €535 million to €2.8 billion. According to
the airline, currency hedging had locked in the cost of aircraft purchases
in 2010-2011.
The full-year 2010 improvement in profit had followed a particularly
miserable 2009, when Ryanair plunged to a €180 million loss, as its €l44
million operating profit was eradicated by a €222 million write-down of
its Aer Lingus shares and an accelerated €51.6 million depreciation
charge. Excluding these exceptional charges. Underlying profits fell 78
percent from €480.9 million to €l05 million. Th.is was due largely to a
surge in fuel prices in the first half of fiscal 2009, as Ryanair failed to
hedge when oil prices rose to $147 a barrel in July 2008. Then, bowing to
shareholder pressure to cover against rocketing prices, it locked in fuel
costs at $124 a barrel for 80 percent of its consumption during the third
quarter-just as oil prices crashed to a low of $33 a barrel during that
period. Passenger numbers rose 15 percent from 50.9 million to 58.5
million. Average fares fell 8 percent to €40. Ryanair provides services connected with its airline service, including inflight beverage, food, and merchandise sales and Internet-related
services. Ryanair also distributes accommodation, travel insurance, and
car rentals through its Web site. Providing these services through the
Internet enables Ryanair to increase sales while reducing unit costs. In
2010, Ryanair's Web site ranked 12th by number of visits for e-tailers in
the United Kingdom (behind Easyjet, which ranked 10th). Ancillary
services accounted for 22 percent of Ryanair's total operating revenues,
compared with 20.3 percent in 2009. However, it might be that ancillary
revenue generation could have its Limits, as they had, in fact, dropped
from €10.20 in 2009 to €9.98 per passenger in 2010.
Ancillary revenue initiatives were constantly being introduced by
Ryanair, such as onboard and online gambling and a trial in-flight mobile
phone service in 2009. A poll of Financial Times' readers had produced a
72 percent negative response to the question, "Should mobile phones be
allowed on aircraft?" Among the comments was "Just another reason not
to fly Ryanair.t''' However, O'Leary declared, "If you want a quiet flight,
use another airline Ryanair is noisy, full. And we are always trying to sell
you something'' In March 2010, despite a promising trial on 50 aircraft.
Ryanair announced the suspension of its onboard telephone service due
to a failure to reach an agreement with the Swiss provider, OnAir, on a
plan to roll out the service to Ryanair's entire fleet.
Ryanair was the first airline to introduce charges for check-in luggage.
Virtually all budget airlines have followed suit, as they have with other
Ryanair initiatives It has continued to find ways of charging passengers
for services once considered intrinsic to an airline ticket Passengers
were charged extra for checking in at the airport rather than online
(which also incurs a charge), although those with hold luggage did not
have the option of checking in online. While avoiding pre-assigned seats,
an extra charge procures "priority boarding." Interestingly, Aer Lingus
took up a similar idea by enabling passengers to book seats online for a
charge of €5.
Some of Ryanair's revenue-generating ideas have provoked controversyand publicity. One of the most talked about was its intention to charge
passengers a £1 charge to use the lavatory by installing a coin slot on its
aircraft. While it has not implemented this concept, (it may contravene
security rules), the idea generated much publicity. Another idea mooted
by Ryanair was a "fat tax" for overweight passengers. (In fact, several
U.S. airlines already require obese passengers who spill over into
neighboring seats to buy a second seat.) In an online poll of more than
30,000respondents, the fat tax idea was approved by one in three.
However, the airline later announced that it would not implement the
surcharge because it could not collect it without disrupting its 25-minute
turnarounds and online check-in process. The same online poll,
supposedly to generate ideas for additional revenue, also gained 25 percent approval for a €1 levy to use onboard toilet paper with O'Leary's
face on it.
Since its flotation in 1996, Ryanair had never declared or paid dividends
on its shares. Instead, Ryanair retained its earnings to fund its business
operations, including the acquisition of additional aircraft required for
entry into new markets, expansion of its existing services, and routine
replacements of its fleet. However, thanks to a healthy balance sheet and
the suspension of its aircraft-buying program when negotiations with
Boeing broke down, the no-dividend policy changed in 2010. The
company declared a special €500 million dividend with the possibility of
a further similar dividend in 2013. Previously, its healthy cash position
had caused the company to seek alternative ways of improving the
liquidity and marketability of its stock through a series of share buybacks of the equivalent of about 1.2 percent of the issued share capital
between 2006 and 2009. Ryanair shares reached a high of €6.30 in April
2007 and plummeted to €1.97 in October 2008 as global equity markets
were reeling. By mid-2009, the shares were trading in the €3.20 to €3.40
range, with an expected medium term target of €4.20, based on expected
earnings and a PE ratio of 13. In mid-2009, its rival EasyJet shares had a
PE ratio of 29. Ryanair had often underperformed other budget airline
peers on its PE ratio. However, this offered an upside potential for capital
gains, according to Davy, the company's stockbrokers.
O'Leary said, "Any fool can sell low airfares and lose money. The difficult
bit is to sell the lowest airfares and make profits. If you don't make
profits, you can't lower your airfares or reward your people or invest in
new aircraft or take on the really big airlines like BA (British Airways)
and Lufthansa” Certainly, Ryanair had stuck closely to the low-cost/Towfares model. Ever-decreasing costs was its theme, as it constantly
adapted its model to the European arena and changing conditions. In this
respect, Ryanair differed in its application of the Southwest Airlines
budget airline prototype and its main European rival, EasyJet, as they
were not as frill-cutting. One observer described the difference between
EasyJet and Ryanair: "EasyJet, you understand is classy cheap, rather
than just plain cheap."
Ryanair continued its fleet commonality policy, using Boeing 737 planes,
to maintain staff training and aircraft maintenance costs as low as
possible. Over the years, it purchased new, more environmentally
friendly aircraft, reducing the average age of its aircraft to 3.3 years,
among the youngest fleets in Europe. The newer aircraft produced 50
percent less emissions, 45 percent less fuel bum, and 45 percent lower
noise emissions per seat. Winglet modification provided better
performance and a 2 percent reduction in fleet fuel consumption, saving
the company believed could be improved. Despite larger seat capacity,
new aircraft did not require more crew. In 2009, in aircraft buying mode,
Ryanair sought to repeat its 2002 coup when it placed aircraft orders at the bottom of the market. However, in late 2009, talks with Boeing for
the purchase of 200 aircraft between 2013 and 2015 broke down.
Notwithstanding strict adherence to Boeing 737 planes, in an attempt to
extract ever greater discounts from Boeing, Ryanair invited Airbus, the
European aircraft manufacturer, to enter into preliminary bidding for a
multimillion-dollar order for 200-plus short-haul aircraft. However,
Airbus rebuffed the Ryanair invitation, declaring this sales campaign
would be too expensive and time consuming. Yet Ryanair hinted that it
had an interest in Airbus's new generation of fuel-efficient aircraft and,
moreover, that it had the economies of scale to run a mixed fleet between
Boeing and Airbus models.
Ryanair refuses to recognize trade unions and negotiates with Employee
Representative Committees (ERCs). Its 2010 employee count of 7,032
people, composed of more than 25 different nationalities, had doubled
over the previous three years. This was accounted for almost entirely by
flight and cabin crew to service expansion. Ryanair's employees earned
productivity-based incentive payments, consisting of 39 percent and 37
percent of total pay for cabin crew and pilots respectively. By tailoring
rosters, the carrier maximized productivity and time off for crew
members, complying with EU regulations that impose a ceiling on pilot
flying hours to prevent dangerous fatigue. Its passenger per- employee
ratio of 9,457 was the highest in the industry. After a series of pay
increases for cabin staff and pilots, in late 2009, staff agreed to a oneyear pay freeze.
Ryanair pioneered cost-cutting/yield-enhancing measures for passenger
check-in and luggage handling. One was priority boarding and Webbased check-in. More than half of its passengers availed of this, thus
saving on check-in staff, airport facilities, and time. Charging for check-in
bags encouraged passengers to travel with fewer and, if possible, zero
check-in luggage, thus saving on costs and enhancing speed. Before
Ryanair began to charge for checked-in bags, 80 percent of passengers
were traveling with checked-in luggage; two years later this had fallen to
30 percent of passengers. From October 2009, it adopted a 100 percent
Web check-in policy, enabling a reduction in staff numbers, calculated to
save €50 million per year. Ryanair claims "passengers love Web checkin". Never again will they have to arrive early at an airport to waste time
in a useless check-in queue. As more passengers travel with carry-on
luggage only, they are delighted to discover that they will never again
waste valuable time at arrival baggage carousels either. These measures
allow Ryanair to save our passengers valuable time”. A natural next step
announced by Ryanair was a move to 100 percent carry-on luggage.
Additional bags would be brought by passengers to the boarding gate,
where they would be placed it in the hold and returned as passengers
deplane on arrival. These efficiencies would allow more efficient airport
terminals to be developed without expensive check-in desks, baggage
halls, or computerized baggage systems "and enable Ryanair to make flying even cheaper, easier and much more fun again," claimed the
company.'' The feasibility of the proposals to require passengers to carry
hold baggage through security to the aircraft was yet to be tested.
Consistent with the budget airline model, Ryanair's routes were point-topoint only. This reduced airport charges by avoiding congested main
airports, choosing secondary and regional destinations, eager to increase
passenger throughput. Usually these airports were significantly further
from the city centers they served than the main airports, "from nowhere
to nowhere" in the words of Sir Stelios Haji-Icanncu, founder of EasyJet,
Ryanair's biggest competitor. Ryanair uses Frankfurt Hahn, 123
kilometers from Frankfurt; Torp, 100 kilometers from Oslo; and
Charleroi, 60 kilometers from Brussels. In December 2003, the
Advertising Standards Authority rebuked Ryanair and upheld a
misleading advertising complaint against it for attaching "Lyon" to its
advertisements for flights to St. Etienne. A passenger had turned up at
Lyon Airport, only to discover that her flight was leaving from St Etienne
75 kilometers away.
Ryanair continued to protest at charges and conditions at some airports,
especially Stansted and Dublin, two of its main hubs. The airline was
"deeply concerned by continued understaffing of security at Stansted
which led to repeated passenger and flight delays ... management of
Stansted security is inept, and BAA has again proven that it is incapable
of providing adequate or appropriate security services at Stansted. This
shambles again highlights that BAA is an inefficient, incompetent airport
monopoly."12 When BAA appealed its break-up, ordered by the UK
Competition Commission in 2009, Ryanair secured the right to intervene
in the appeal in support of the Commission and later applauded the loss
of the appeal by BAA. Meanwhile, Ryanair bemoaned a €10 tourist tax
being levied in Ireland, along with a 40 percent price increase at Dublin
Airport, largely to pay for a second terminal costing €1.2 billion, initially
commissioned in the heyday of the Irish Celtic Tiger and derided by
Ryanair as a white elephant. Ryanair acted against Dublin and various
UK airports by cutting its capacity and shifting its aircraft to countries,
such as Spain, with cheaper airports and lower or nonexistent passenger
taxes.
Following the introduction of its Internet-based reservations and
ticketing service, enabling passengers to make reservations and
purchase tickets directly through the website, Ryanair's reliance on
travel agents had been eliminated. It had promoted its Web site heavily
through newspaper, radio, and television advertising. As a result,
Internet bookings accounted for 99 percent of all reservations.
Ryanair minimized its marketing and advertising costs, relying on free
publicity, by its own admission, "through controversial and topical
advertising, press conferences and publicity stunts." Other marketing activities include distribution of advertising and promotional material
and cooperative advertising campaigns with other travel-related entities
and local tourist boards.
As referred to earlier, one of Ryanair 's publicity stunts was its
unauthorized use of a photograph of Spanish Queen Sofia after she took
a £13 flight from Santander Northern Spain to London. When it incurred
the Queen's displeasure, Ryanair apologized and promised to donate
€5000 to a charity of her choice. In another instance of controversy over
using pictures of the rich and famous, in 2008, Ryanair was forced to pay
a fine of €60,000 to President Sarkozy of France and his Italian bride,
Carla Bruni, for using their images with the slogan, "With Ryanair, all my
family can come to my wedding." It also used the face of Spanish Prime
Minister Zapatero in an advertisement depicting him supposedly musing
over its offers.
According to a commentator in the Financial Times, "Ryanair 's bid for
Aer Lingua was a folie de grandeur." Even O'Leary admitted it was "a
stupid investment. At the time, it was the right strategy to go for one
combined airline but it has now proven to be a disaster." During 2007, in
a shock bid, Ryanair had acquired a 25.2 percent stake in Aer Lingus,
only a week after the flotation of the national carrier. It subsequently
increased its interest to 29.8 percent, at a total aggregate cost of €407.2
million. By July 2009, the investment had been written down to €79.7
million. At the time of the initial bid, Ryanair declared its intention to
retain the Aer Lingus brand and "up-grade their dated long-haul product,
and reduce their short-haul fares by 2.5 percent per year for a minimum
of 4 years ... one strong Irish airline group will be rewarding for
consumers and will enable both to vigorously compete with the mega
carriers in Europe ... there are significant opportunities, by combining
the purchasing power of Ryanair and Aer Lingus, to substantially reduce
its operating costs, increase efficiencies, and pass these savings on in the
form of lower fares to Aer Lingus' consumers”.
It had been an achievement for the Irish government finally to have
floated Aer Lingus after several false starts over a number of years. Once
they recovered their collective breaths, Aer Lingus and its board firmly
rejected the Ryanair approach, stating that it had acted in "a hostile,
anticompetitive manner designed to eliminate a rival at a derisory price."
A combined Ryanair-Aer Lingus operation would account for 80 percent
of all flights between Ireland and other European countries. Affirming
that his company was fundamentally opposed to a merger with Ryanair,
even if it raised its price, then-Aer Lingua Chief Executive Dermot
Mannion stated, "I cannot conceive of the circumstances where the Aer
Lingus management and Ryanair would be able to work harmoniously
together ... this is simply a reflection of the fact that these organizations
have been competing head to head, without fear or favor, for 20 years. It
would be like merging Manchester United and Liverpool football clubs”. In fact, the bid was opposed by a loose alliance representing almost 47
percent of Aer Lingus shares. This included the Irish government, which
still retained a 25.4 percent holding, two investment funds operated on
behalf of Aer Lingus pilots accounting for about 4 percent of shares, and
Irish telecom tycoon Denis O'Brien, who bought 2.1 percent of shares
explicitly to complicate Ryanair's move. A critical 12.6 percent of the
shareholding was controlled by the Aer Lingus employee share
ownership trust (ESOT), which had the right to appoint two directors and
a stake in future profits. Its members rejected the Ryanair offer by a 97
percent majority vote, dismissing Ryanair's claim that each ESOT
member stood to receive an average of €60,000 from the transaction.
They asserted that its members would receive only €32,OOOafter
borrowing costs.
Having abandoned this bid due to the shareholder opposition and a
blocking decision by the European Commission on competition grounds,
Ryanair came back in December 2008 with an offer of €1.40 per share, a
premium of approximately 25 percent over the closing price. It proposed
to keep Aer Lingus as a separate company, maintaining the Aer Lingus
brand, to double Aer Lingus' short-haul fleet from 33 to 66 aircraft, and
to create 1,000 associated new jobs over a five-year period. It claimed
that if the offer was accepted, the Irish government would receive more
than €180 million and the ESOT members and other employees who
owned 18 percent of Aer Lingua would receive more than €137 million in
cash. However, in January 2009, when the offer was rejected by Aer
Lingus management and by the ESOT and other parties, Ryanair decided
to withdraw it.
Aer Lingus' fortunes continued to deteriorate, with the company
announcing losses for 2008 and projecting even worse for 2009. In July of
that year, its shares were trading at less than €0.50. In April, its CEO,
Dermot Mannion, resigned after controversy over a potential secret
payoff deal in the event of a hostile takeover. While Ryanair did not have
a seat on the board, it continued to denigrate Aer Lingus, forecasting "a
bleak future as a loss making, subscale, regional airline, which has a high
cost base and declining traffic numbers.n17 Meanwhile, the two airlines
continued to compete vigorously, especially within the Irish market.
In July 2009, Aer Lingus appointed a CEO to replace Dermot Mannion.
This was Christoph Mueller, known as "axe man," former CEO of Sabena
Airlines before it went bust in 2001. Mueller had already crossed swords
with Ryanair when it compared its own fares to those of Sabena in
advertisements that were alleged to be misleading, offensive, and
defamatory. When Ryanair lost a court case over the matter and was
ordered to publish an apology in Belgian newspapers and on its Web site,
it used the apology to continue its publicity about its relatively lower
fares. In July 2010, the European General Court upheld the European
Commission's decision, as well as a verdict in a case brought by Aer
Lingus, to block the takeover of Aer Lingus by Ryanair. However, it did
not go as far as forcing Ryanair to sell its stake in Aer Lingos, an action
that Aer Lingus wanted the Court to impose. Upon hearing the Court
decision, O'Leary declared that he had not ruled out making a third bid
for Aer Lingus at...