Tom Gill

With soaring profits, share price and traffic, Europe's largest and longest established low-cost airline may yet achieve its ambition to be the Southwest of Europe.

But as it strives to continue its profitable growth path Ryanair can expect to cross swords with the new British Airways low cost subsidiary Go, which was due to launch its first services out of London/Stansted in May. And, as it meets that challenge at its growing UK hub, Dublin-based Ryanair will need to avoid the temptation to over-expand.

Ryanair expects to report a rise in profits to IR£28 million (US$39.35 million) for the year ending 31 March, up IR£15 million on 1997's record, and aims to 'double profits every three years.'

Rising profits are to be sustained by rapid expansion. Last year Ryanair flew 4 million passengers, overtaking Aer Lingus as the number one carrier on flights between the Republic of Ireland and the UK with a 37 per cent market share, and Ryanair predicts that it will carry 1 million more passengers in 1998.

The aim is to launch 25 new destinations over the next five years and the airline is in talks with 70 airports in France, Italy, Spain and Scandinavia.

This dynamic picture contrasts sharply with Ryanair's struggling no-frills rivals. The contrast is even starker with the Ryanair of the early 1990s, which was unable to exceed the 1 million passenger mark or turn a profit.

But Ryanair has made qualitative advances, showing its critics that its success in Ireland and the UK was not simply based on the large Irish population in the UK and the relative strength of the Irish economy, but is exportable. 'The biggest threshold we had to cross was the perception that we were an Irish ethnic airline. Now we can't get enough capacity,' says CEO Michael O'Leary.

Last year the carrier entered continental Europe with the launch of services to Paris/Beauvais and Brussels/ Charleroi from its Dublin base. And this May the airline unleashed a low cost storm in Europe with a major expansion out of London/Stansted. With Toulouse/Carcassonne, Lyon/St Etienne, Venice, Rimini, Pisa and Malmo/Kristianstad joining its Stansted flight schedule, 'this year 40 per cent of our passengers will not come out of Ireland,' says commercial director and chief financial officer, Michael Cawley.

'The typical profile on our new routes is that we generate net growth in traffic flows,' says Cawley. Ryanair has taken the lion's share of new traffic on the Dublin-London route, which has grown from 1.7 million passengers in 1991 to a massive 3.7 million passengers in 1997. Largely as a result of Ryanair's low cost presence Dublin-London is now the densest international route in Europe, surpassing even London-Paris. The company predicts that it will pick up nearly all of this year's projected 200,000 passenger increase in traffic between London and Pisa, a route dominated by British Airways and Alitalia.

Ryanair's Stansted services to Oslo and Stockholm, launched in November last year, are currently operating with 65 per cent load factors but the company is confident that 'football, shows and shopping' in Oslo and the fact that Stockholm is 1998's cultural city of Europe will ensure the destinations meet the carrier's 75 per cent average this year. Ryanair's average seat factor will, however, fall 'a little' as the new routes establish themselves.

With a targeted annual average increase of 25 to 30 per cent in seating capacity, Ryanair has ordered 25 new Boeing 737-800s plus 20 options. The $1.2 billion-worth of new equipment will be paid for out of internal funds and commercial debt, with five deliveries a year starting in March 1999.

Although the carrier is departing from its previous reliance on used 737-200s, which make up its entire 19-strong fleet, it argues that this does not imply higher costs. O'Leary claims 'the economics make sense' because efficiency gains can be achieved through the 45 per cent greater seating capacity. 'Second hand aircraft are very expensive at the moment,' he adds.

Ryanair has other good reasons to be confident of a quick return on investment. It claims to make money on every one of its routes 'from day one'. 'Two of the six new airports are paying us to use them,' says Cawley. 'We fly to any destination where we can find a good airport partner . . . but it must also be an airport that 'gives us the lowest cost deal, ' he says.

But what happens when the airports raise their costs? Ryanair's cut-price contracts with continental European airports are locked in for five years, says Cawley, but he adds that if after this time charges rise Ryanair will pack its bags. Any increases at Stansted would 'slow down' development there.

Airport changes would be made easier by the fact that, apart from Dublin, Ryanair employs few ground staff, preferring to contract out ticketing and passenger and aircraft handling. Even at Stansted, where the company is this year taking on 200 staff with up to an extra 200 in the near future, most will be pilots and cabin crew. The airline's total workforce will exceed 1,000 this year.

However, Ryanair is at pains to point out that low landing charges are only part of the picture. Avoiding congestion and slot problems are crucial to help achieve 30-minute turnaround times and punctuality. Gatwick and Manchester are the only two slot-controlled airports the airline uses, and Ryanair claims that even if Heathrow was giving away slots it wouldn't take them.

The absence of both business class and food on board and the lack of advance seat allocation help the airline achieve low costs of IR£0.10 per ASM and high efficiency and frequencies. Only cold drinks are available for purchase and there are no jetways or conveyer belt baggage loading systems.

Ryanair can also count on high staff productivity. This year's 5 million passengers will be achieved with 1,000 staff, compared to Aer Lingus which carries roughly the same volume with some 5,000 employees. Cawley claims Ryanair's pilots put in an average of 20 flying hours a week, compared to Aer Lingus' 6-7 hours. However Aer Lingus disputes this, saying its pilots work more than double that amount.

Despite the lean, mean service, and often less conveniently located airports, Ryanair claims that 40 per cent of its passengers are business travellers. 'Frequency and punctuality are attractive to business passengers,' says O'Leary.

Ryanair carries Irish members of the European parliament, who opted for Ryanair's budget service when they were forced to pay fares out of their own pockets, and has put in a bid to carry Irish civil servants to Brussels. It is offering an IR£1 million service compared to the IR£3 million it claims Aer Lingus is currently charging, although Irish government sources have recently been quoted as commenting that Ryanair's services are 'all right if you are a tourist with time on your hands.'

Ryanair low-cost competition 'is bringing prices down wherever it goes,' says Cawley. Passenger volumes at flag carriers such as Aer Lingus, British Airways and SAS have been 'unaffected' but yields have 'gone down,' he claims, adding that he 'expects the same to happen on the new routes.'

Up to now Ryanair has not been poaching passengers from competitors, nor has it had to face much head on competition. But when the Dublin-based airline announced its new Stansted routes in February, the move was widely seen as a preemptive strike against BA's new low cost carrier Go, which begins flying out Stansted to Rome and Milan in May and Copenhagen in June.

Ryanair denies any such link and, although conceding that BA intends to use Go to undermine independent low-cost no-frill operators, has 'disassociated' itself from EasyJet's high profile challenge in the UKHigh Court. O'Leary criticises EasyJet for giving Go 'free publicity' and believes it 'virtually impossible' to prove in the law courts that BA is unfairly cross-subsidising Go.

Instead O'Leary says that any new low-cost airline is good in that it 'makes more and more people aware of the low-cost sector'. 'Ultimately we will be head-to-head on some routes,' O'Leary says. But, expressing the conviction that 'destination is secondary', he argues that Go's Milan route will immediately compete with Ryanair's northern Italian destinations.

With a degree of confidence that some might deem reckless O'Leary adds, 'Go will not cause us any damage'. 'Ryanair will always undercut [its competitors]. We will continue to be the lowest fare airline because we are the lowest cost.'

He contrasts Ryanair's 16-17 per cent after tax margin with BA's 6 per cent margin, and claims BA makes 80 per cent of its operating profits from just 20-25 of its routes. 'BA is losing money in Europe, even charging those [high] fares.' 'BA is not willing to lose money [forever]. It is not in a hurry to get a bloody nose,' he adds.

Nor does Ryanair fear the fact that it will be facing a budget airline backed by a powerful brand. Brand is 'practically irrelevant' in the budget market, O'Leary argues, and he asks: 'What has BA's brand got to do with a company ostensibly different from BA? How will it prevent traffic moving from BA to Go?'

While O'Leary predicts that Go will be subsumed back into its parent company within a few years, he says this will not happen without causing a few casualties on the way. He perceives carriers such as EasyJet and Debonair as financially fragile and says 'consolidation' is in the air for the no-frills industry.

Like other no-frills carriers Ryanair sells tickets direct. Ryanair Direct, its Dublin-based telesales operation, increased its share of the carrier's sales from 25 per cent last year to 35 per cent this April. The carrier emphasises, however, that 'it wants to work with travel agents'.

Some may have thought otherwise. When Ryanair cut commissions in the UK and Ireland in May 1997 from 9 per cent to 7.5 per cent, the Irish Travel Agency Association (ITAA) called for a boycott of the carrier.

Although it had to withdraw its proposed boycott, under the threat of prosecution from the Irish Competition Authority, ITAA still claims that the combination of low fares and low commission mean it is hardly worth the travel agents issuing a Ryanair ticket. A number of travel agents have already stopped selling Ryanair tickets in an individual capacity.

One Irish travel industry source claims the unofficial boycott, popularly dubbed in Ireland 'Anybody But Ryanair', has cut Ryanair's market share on all its routes between the UK and Ireland.

'Business with travel agents is up compared to last year,' retorts Cawley, explaining that when Lunn Poly stopped selling Ryanair tickets, other major travel agents mopped up the capacity.

'We have no interlining flights. It's just simple point-to-point. We are not prepared to overpay,' states O'Leary, who adds that the 7.5 per cent commission is what travel agents elsewhere in Europe can expect.

This year Ryanair plans a listing on the London Stock Exchange, but Cawley will not give a firm date and says it is not clear at this stage whether fresh capital will be sought. In May 1997 Ryanair raised $157 million from an 18 times oversubscribed dual flotation of 45 per cent of the company's equity on the New York and Dublin exchanges.

The indecision over the UK listing may be linked to the uncertainty surrounding an unresolved industrial dispute with the company's baggage handlers. On the weekend of 7-8 March, 37 of Ryanair's 59 baggage handlers picketed Dublin airport to back up demands for improved pay and conditions and representation by the Siptu trade union. The refusal of some staff from other companies at the airport to cross the picket line wreaked havoc on flight operations.

The Ryanair baggage handlers went back to work following the Irish government's eleventh hour intervention and promise of an inquiry into the baggage handlers' demands or, as O'Leary puts it, into 'how the hell Dublin airport got closed down [that weekend]'.

But the dispute promises to drag on. The dismissal of three strikers has further soured relations with the unions, who describe recent events as 'round one'.

Conscience clauses

According to Siptu, if Ryanair does not hold talks the strikers are willing to take further industrial action. The union says staff will prepare themselves to refuse to cross their picket lines by demanding 'conscience' clauses from their employers to guarantee protection from disciplinary action.

Ryanair insists it favours direct negotiations with its employees - although Ireland's national pilots union, Ialpa, says it negotiates with the company - and that involving unions could raise costs.

O'Leary says the government inquiry, due to report its findings in May, has 'no power to make recommendations', and dismisses the affair as 'a fairly minor dispute'. But the dispute, simmering since January, has become a national drama in which the Irish press has cast the strikers as the goodies and Ryanair managers as the baddies.

Fortunately, brokers on the trading floor appear to agree with O'Leary's analysis that the show is a minor event. The carrier's share value increased some 6 per cent in Dublin and 45 per cent in New York in the first three months of the year and former flotation advisers CSFB and Morgan Stanley predict continued buoyancy in the short to medium term.

Ryanair's management has been shrewd enough to show that no-frills air travel can be a highly profitable enterprise in Europe. But as it steps up its expansion the airline will need to ensure that rapid growth does not jeopardise that recent track record.

Source: Airline Business