easyJet and Ryanair What Went Right Presented by David Stewart

easyJet and Ryanair – What Went Right Presented by David Stewart Taking On The No Frills Low Cost Airlines October, 2003 London Ann Arbor, Michigan • Great Missenden, U.K. www.aerostrategy.net The Speech Synopsis Asked Three Main Questions • What are the critical success factors for low fare carriers? • What are the major challenges and pitfalls they face? • How do the Ryanair and easyJet business models differ? AeroStrategy AIC Low Cost Airlines Conference 2003 2 Contents Critical Success Factors Challenges & Pitfalls easyJet & Ryanair AeroStrategy AIC Low Cost Airlines Conference 2003 3 The Timing Has Been Ideal For easyJet And Ryanair TIMING Deregulation • Opening of European market • Pricing and capacity freedom Aviation Cycle • Coincident long period of aviation growth 1992-2000 First Mover Advantage • Limited room for >1 LFC at most hubs • No room for >1 LFC at tertiary (Ryanair) airports Internet Explosion • Lowering the cost of establishing mass distribution AeroStrategy AIC Low Cost Airlines Conference 2003 4 Dare To Be Different – Create A Business Model That Is Difficult For Competitors To Replicate TIMING BUSINESS MODEL REPLICABILITY Key LFC Features Examples • No interlining • No hot food Simplicity Utilisation • 10-12 hours per day in contrast to 6-9 hours maximum • GREEN FIELD OPPORTUNITY • Limited/no union presence – labour flexibility • Internet distribution • Outsourcing e.g., maintenance Cost Scaleability AeroStrategy AIC Low Cost Airlines Conference 2003 5 Low Costs Are Of Course Fundamental To Success TIMING BUSINESS MODEL REPLICABILITY European Airlines Unit Cost Comparison • BGO: blinding glimpse of the obvious • LFCs have to have a cost advantage – and they do COSTS Unit Cost per ASK European Majors Low Fare Carriers Charter Airlines Average Stage Length (km) Source: Annual reports, IATA, and UK CAA data calendarised AeroStrategy AIC Low Cost Airlines Conference 2003 6 Financial Strength Facilitates Growth, Attractive Financing Terms And Provides Protection TIMING BUSINESS MODEL REPLICABILITY COSTS ($b) Strong Balance Sheet “Rough It Out” • Increased ability to attract finance • New aircraft opportunity • Brand building not cheap • Ability to cover unforeseen events early in airline life British AW 11.9 2.3% 3.5 2.9 Ryanair 0.9 30% 7.5 1.3 FINANCIAL STRENGTH Revenue Op Margin Mkt. Cap. Cash AeroStrategy AIC Low Cost Airlines Conference 2003 Source: Multex 14 Oct 2003 7 The Fifth Success Factor – The Vision Thing: Ryanair And easyJet Are Clear And Consistent TIMING BUSINESS MODEL REPLICABILITY COSTS FINANCIAL STRENGTH THE VISION THING • “To be the biggest and most profitable low fares airline in Europe” • Low cost is a “management religion” • “Target growth, actively manage load factors and the cost base. We’re air fare passive” • Growth based on opening new airports • Low fare, high frequency between major European airports • Consumers willing to pay (a little) more for value-add proposition • Growth based on joining the dots and adding frequency AeroStrategy AIC Low Cost Airlines Conference 2003 8 Contents Critical Success Factors Challenges & Pitfalls easyJet & Ryanair AeroStrategy AIC Low Cost Airlines Conference 2003 9 Deregulation Has Been Beneficial But Some Market Irregularities Or Challenges Persist MARKET IRREGULARITIES Slots • Slot availability and regulations limiting access at major airports • Inability for LFCs to establish mass at hub airports e.g., distribution of Air Lib slots at Orly fragmenting airline supply and protecting Air France presence • Current challenges to Ryanair airport contracts Airport Charges Customer Compensation • New legislation on customer compensation for e.g., delays, cancellations and denied boarding • Compensation levels potentially as high as a typical LFC fare AeroStrategy AIC Low Cost Airlines Conference 2003 10 Delivery Challenges Are High MARKET CONSTRAINTS FOCUS & GROWTH MANAGEMENT Ryanair Pax. Growth easyJet Pax. Growth 20m 15m 10m 5m 1998 1999 2000 2001 2002 2003 • 32% CAGR 1998-2003 • 112 737-800s on order • 59% CAGR 1998-2003 (exacerbated by Go) • 120 A319s on order • Growth challenges e.g.,: cost control, operational stability, “maturing” the organisation • Market challenges e.g.,: network development / planning, financial market management Source: Company Websites AeroStrategy AIC Low Cost Airlines Conference 2003 11 Both Ryanair And easyJet Have Benefited From Strong Leadership – Who Next? MARKET CONSTRAINTS FOCUS & GROWTH MANAGEMENT Michael O’Leary SUCCESSION Ray Webster AeroStrategy AIC Low Cost Airlines Conference 2003 12 The Strong Flag Carriers Will Not Just Sit Still MARKET CONSTRAINTS FOCUS & GROWTH MANAGEMENT SUCCESSION COMPETITOR REACTION Revenue Focus Examples • • • • Fleet simplification Labour cost reduction Direct distribution Increased aircraft utilisation Cost Imperative • New pricing approaches (one-way, lowest fare web logic) • Simpler fare structure • Targeted, managed low fares AeroStrategy AIC Low Cost Airlines Conference 2003 13 Contents Critical Success Factors Challenges & Pitfalls easyJet & Ryanair AeroStrategy AIC Low Cost Airlines Conference 2003 14 easyJet’s Strategy Has Six Key Foundations Strong branding Network strategy Pricing and revenue management Employee culture Commitment to customer service Lower unit costs AeroStrategy AIC Low Cost Airlines Conference 2003 15 Ryanair Model Is Simpler, With More Focus On Cost And Less On Aspects Of Service And Culture Strong branding Network strategy A less complex business model Employee culture Commitment to customer service Lower unit costs Pricing and revenue management AeroStrategy AIC Low Cost Airlines Conference 2003 16 Branding Receives Greater Attention And Investment In easyJet BRANDING • • • • • Strong brand in key catchments Investment in PR and advertising Airline TV programme High profile PR campaigns Carry through to/from easy businesses • • • • Primary branding via website Simple adverts, lower spend Smaller target communities Leverage the battles AeroStrategy AIC Low Cost Airlines Conference 2003 17 easyJet Was An Innovator On Pricing BRANDING PRICING & YIELD MANAGEMENT • One-way, time dependent pricing from day one • Web reservations only >2 weeks prior to departure • Originally used more traditional pricing (constant one-way pricing, return fare conditions etc.) • Now adopted an approach more aligned with easyJet (as have some traditional carriers) • Web reservations only > 90 days before departure AeroStrategy AIC Low Cost Airlines Conference 2003 18 Airport Charges Are A Key Driver Of Cost Difference BRANDING PRICING & YIELD MANAGEMENT Key Cost Driver Differences - Examples UNIT COSTS Cost Airport Fleet Hedging Product /service easyJet Main airports Three types Limited Airport presence, advertising, brand Ryanair “Airports A Profit Centre” Two types Fuel: 15-18 months out Less focus/expenditure AeroStrategy AIC Low Cost Airlines Conference 2003 19 Network Strategy Is The Most Fundamental Difference BRANDING PRICING & YIELD MANAGEMENT UNIT COSTS NETWORK STRATEGY • Point-to-point • Focus on catchment areas and low prices to get traffic • Frequency • Growth focus: joining dots Airline easyJet Ryanair Southwest Aircraft 70 67 378 Routes 108 125 396 • Point-to-point • Focus on secondary airports and very low prices to get traffic • Lots of routes • Growth focus: adding airports Cities 36 80 58 Dep./City 13 6 45 Airc./City 1.9 0.8 6.5 20 AeroStrategy AIC Low Cost Airlines Conference 2003 Source: AeroStrategy analysis, Company reports In Conclusion…. • What are the critical success factors for low fare carriers? • • • • • • • • • Timing Dare to be different Low costs Financial strength Vision Market irregularities Focus and growth management Succession Competitor reaction • What are the major challenges and pitfalls they face? • How do the easyJet and Ryanair business models differ? • Significantly AeroStrategy AIC Low Cost Airlines Conference 2003 21 Thanks For Your Attention www.aerostrategy.net AeroStrategy 22 AIC Low Cost Airlines Conference 2003