Last week, Ryanair released its results for the first and second quarters of 2009. Its profits surged by 80% to 387 million Euros thanks to a 42% fall in fuel costs. Despite these good results, Ryanair is careful for 2010, expecting a loss for the third and fourth quarters. We believe that Ryanair, along with other low-cost carriers, is at a turning point in its strategy and its business model. In fact, the same successful business model of Ryanair now appears to narrow its room for maneuver.

Narrow room for maneuver for Ryanair

Let's take the reasoning from the beginning. Due the economic downturn, Ryanair faces a fall in its traffic of passengers. But because of its business model, Ryanair must keep growing at all costs, as it is the way to reduce its unit costs. Volume of routes and volumes of passengers are the strategy of Ryanair, which is different from easyJet for instance, like Stelios Hadji-Ioannou reminded it at the last World Low Cost Airlines Congress. Ryanair also needs passengers for two other reasons: first to reach quotas set with airports and to receive subsidies from them, and second to maintain revenues from ancillary revenues which account for 20% of the carrier's revenues. Indeed, fewer passengers mean less ancillary revenues generated.

Therefore the strategy of Ryanair is to maintain its load factor at all costs. To do so, the carrier cut prices of its tickets, but then has seen its yield falling by 17%. Therefore, the carrier must find new sources of revenues to balance this drop of revenues. Ryanair only has 4 options to explore and to combine in order to gain some revenues and to maintain the model:

Option 1: To increase passengers taxes

Throughout 2009, Ryanair has constantly added new taxes to its passengers. For instance, passengers must now register online, print their boarding pass and even pay for it (£5), or pay 100 € if they forget to print their boarding pass (this fee increased recently from 40 € till now); they pay to check their luggage (£35 by the Internet, and £70 at the airport, each way)…

Ryanair has been criticized by its competitors and industry experts for these new "punitive ancillaries" and "hidden charges", because of the bad impact they have on passengers' perceptions, and of the possible regulation that could occur resulting from these excess. Mike Rutter, Flybe's CCO, especially worried about regulation, implored at World Low-Cost Airlines Congress 2009: "I would ask the industry to heed this call for self-control". "There is a limit to how far you can go before you tee off customers too much" added Julian Carr, Bmibaby's commercial director.

However, Ryanair has no choice but to find new ideas to maintain revenues from ancillary, and to gain more money from its passengers. Innovation is the key to this kind of revenues, so that's why Ryanair launched a contest on how the airline can make more money off its customers. The best idea won the first price: 1000 €. However, these ancillary revenues are not indefinitely extendable, as the carrier already has the highest charges for in-flight food and drink than any other British or Irish airlines. Passengers will not accept to pay more and more forever.

Option 2: To get more from airports and regions

As we have seen, passengers won't provide enough revenues to Ryanair. Let's check another source of revenues: from airports and regions! One way to get money is to get more subsidies from them, but due to European Commission's regulations, these practices are often denounced as unfair. According to Stavla, the Spanish Union Crew of Flight Attendants Airlines: "It is these subsidies and fee exemptions for Ryanair which allows the airline to "blow its competitors" which has a perverse effect on jobs in the aviation sector which are substituted by other most precarious (without creating new ones), which report only direct taxes to other states".

The other solution is to get high cost reductions from airports. Many airports recently faced the ultimatum from Ryanair. It appears that the only acceptable deal for Ryanair is an almost no-charges deal. It has been the case at Shannon Airport. When a reporter asked Martin Moroney, airport chief, if Ryanair were looking to use the airport for free, he answered: "Well it's not far off that, in fact". In addition, the original agreement of two million passengers was not fulfilled. "They never delivered this. This year they have delivered 1.2 million, which is the equivalent of three aircraft" said Martin Moroney.

Another example comes from Bratislava Airport. Henrike Schmidt, Ryanair's marketing manager for Slovakia, declared: "70-percent is acceptable, however, 100-percent is ideal. Ryanair will not go further in negotiations below 70 percent". This declaration confirms Shannon Airports' ultimatum, and so Ryanair's practices. Airports in such conditions can't accept these terms. The Slovak Ministry of Transport considers such conduct unfair: "The airport deserves money for its services. The fees should at least cover the costs". Indeed, these fees must cover airports costs, which would no longer be the case. That's no surprise airports one by one are not considering Ryanair's conditions.

Option 3: To freeze staff pay

Ryanair knows it will barely reduce its current costs with airports. So what are its other options? Getting a cheap fuel with a good hedging? Yes, of course, but fuel price is so volatile that this can't be a strategy, but just a risky bet. A more secure way to maintain costs is to freeze staff pay for three years. This is not the first time that Ryanair makes such announcements. In March 2009, Ryanair pilots already agreed to a 12-month pay freeze. These repetitive freezes will limit costs increases, but won't reduce them.

Option 4: To buy new aircrafts at low price

Finally, Ryanair turns its strategy to the last option available: its fleet renewal. The carrier needs to get new aircrafts for two reasons: first to keep growing as we previously explained, and second to operate new aircrafts. Operating a young fleet allows to reduce maintenance costs, to optimize fuel consumption, and to sell planes at good price. In 2001, after the 9/11 events, air framers were in great difficulties as the whole aviation market went down. During this period, Ryanair bought many aircrafts at good price, which has been a key element to its current success.

As its business model is running out of steam, Ryanair aims to reproduce the same shot it did in 2001. That's the point of current ongoing talks with Boeing. As a pure low-cost player, Ryanair must maintain a homogeneous fleet from Boeing (all-Boeing 737-800), and therefore can't seriously negotiate with any other air framers. With aircrafts from different manufacturers, maintenance and training costs will go up; so this is not an option. Now, Ryanair must get a very good deal with Boeing in order to maintain its model running. The airline is officially in talks with Boeing about an order of 200 planes to be delivered between 2013 and 2016. However, this large order in this time period is no longer realist as Michael Cawley already announced 15 of 48 planes due for delivery in 2010 could be cancelled or postponed. All means are used to put pressure on Boeing: Allusions to competitors, such as Embraer or Bombardier, are pure public relations strategy, and not real opportunities. "If we can't spend our cash buying cheap aircraft, we may as well give it back to shareholders … I think they'd be delighted" said Michael O'Leary. The carrier still has 100 more on firm order, plus options.

In fact, Boeing is not ready to sell its aircrafts at all costs. It is said, without any confirmation, that a 50% price reduction has been asked by Ryanair. As Ryanair uses its aircrafts a bit less than 3 years in general, it can sell its ‘old' aircrafts (almost) the same price it bought them at first place. That's a core element of the carrier's success. If Ryanair doesn't sign this deal, like it seems to be the case, it has to change its success strategy to another one more uncertain. But if it doesn't buy new planes, its fleet will cost more money every month, which will deeply impact its revenues…

As we have seen, even if it still has some good days ahead, Ryanair appears to be in a strategic dead-end: a dead-end to increase revenues as well as to reduce costs. Furthermore, rumors are particularly active about Michael O'Leary's departure. It is said he is the man who made Ryanair, and if he leaves now, his company is among world's leader airlines. But could his legacy survive long after?

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Matthias, WhichBudget Airline Market Analyst

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