Ryanair

Ryanair - the low-fares airline Eleanor 0'Higgins tJS carrier, Southwest Airlines' Ryanair was the first budget airtine in Europe, modetted after the successfu/ of Ryanair against the backdrop of the The case offers students the opportunity to evaluate the strategy in the response fo the chaltenges facing the European airline industry and the burgeoning budget sector, offers the opportunity to evaluate Ryanair's bid industry as a whole, and Ryanair in pafticular. The case also Michael o'Leary' is an additional for fettow lrish carrier, Aer Lingus. The coloutlut personatity of Ryanair cEo, point of interest in the case. aoo $hock ffnd awe 'He never fails to surprise, that man - it's incredibie.' This was the reaction of a prominent Irish bookmaker to the shocking news that Ryanair' Europe's leading budget airline, led by its CEO Michael O'Leary, had launched a €1 48bn (91'02bn) bid for its Irish rival, Aer Lingus, just a week after the flotation of the legacy national carrier'' Ryanair revealed that it had already procured 19'Z per cent of the shares through its stockbroker, Darlz' and claimed. that its all-cash offer of €2'80 a share represented a 27 pet cent premium over the flotation price of €2.2O.II intended to retain the Aer Lingus brand and up-grade their dated long-haul product, and reduce their short-haul fares by 2.5 pet cent per year for a minimum of 4 years . . ' the combination of Aer Lingus and Ryanair into one strong Irish airline group wiII be rewarding for consumers and will enable both to \"igorously 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' 1 Among those surprised by the bid were many Ryanair investors, who were concerned that it could distract the carrier from its heretofore successful ruthless approach to cost cutting, by taking on an airline with long-haul routes' In the past it had made a successful acquisition, but it was of a small (2 million passengers) Dutch budget' shorthaul carrier, Buzz, which was easily absorbed' While perceived as a departure from its organrc growth model, that deal had nevertheless been greeted as a coup for Ryanair. Apart from the bargain purchase price, it was a golden opportunity io pick up a ready-made bundle of take-off and landing slots at London Stansted Airport' It had been quite an achievement by the Irish government finally to have floated Aer Lingus after many false starts and much agonising over a number of years. Once they recovered their collective breaths, Aer Lingus and its board firmly rejected the Ryanair approach. They said Ryanair 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 per cent of all flights between Ireland and other European countries' Aer Lingus Chief Executive Lingus" Companies UK, 'Ryanair sets its cap at local dval Aer Financial Times, 7 October (2006), p 21' 6 November 2006 'z Statement from Ryanair's haif-yearly results presentatton' Dermot Mannion said his company was fundamentally opposed to a merger with Ryanair' even if it raises its price' 'I cannot conceive of the circumstances where the Aer Lingus management and Ryanair would be able to work harmoniously @E|eanoro,Higgins,UniVerSityCo|IegeDub|in,Republicof|reland'|tisintendedasabasisofc|asS 2007 Noi to be reproduced or quoted withpractice. @ Eleanor o'Higgins, discussion and not as an illustration of good or bad out permission. RYANAIR - THE LOW-FARES AIRLINE 6 although it would not have a seat on the Aer Lingus board. In fact, Michael O'Leary had previously admitted defeat for the bid .a n O when he realised it would not receive the necessary support, declaring that'Aer b I E I o Lingus has no long-term future', and that if the bid did not go through, Ryanair would not increase its price, but would continue to be a minority shareholder and exercise what influence it could to encourage Aer Lingus to reduce costs and offer lower fares.' a L together', Mannion said in an interview. 'This is simply a reflection of the fact that these organisations have been competing head to head, without fear or favour, for 20 years. It would be like merging Manchester United and Liverpool football clubs. You just wouldn't do it.'r In fact, the bid was opposed by a loose alliance representing almost 47 pet cent of Aer T-ingus shares. This included the Irish government, which still retained a 25.4 per cent holding, two investment funds operated on behalf of Aer Lingus pilots accounting for about 4 per cent of shares, and Irish telecom tycoon Denis O'Brien, who bought 2.1' per cent of shares explicitly to complicate Ryanair's move. A critical 12.6 per cent of the shareholding was controlled by members of the Aer Lingus employee share ownership trust (ESOT), whose members rejected the Ryanair offer by a 97 per cent majority vote, dismissing Ryanair's claim that each ESOT member stood to receive an average of €60,000 from the transaction, saylng it would actually amount to only €32,000 after borrowing costs. The ESOT had the right to appoint two directors to the Aer Lingus board and a stake in future profits, under an agreement reached ahead of the flotation. Although Ryanair had built its stake to 25.2 per cent, in December 2006, it pulled the Aer Lingus bid, in the face of serious misgivings about competition and lack of choice for passengers expressed by the European authorities, which announced the start of an in-depth investigation into the offer. However, Ryanair declared that it intended to make a further offer in the event of the deal eventually being cleared by the European Commission. In the meantime, it would retain its blocking stake, 3 S. Pogatchnik, 'Aer Lingus rejects Ryanair takeover offer', Business Week oriline, 3 November 2006 Manchester United and Liverpool have a long-standing legendary rivalry in English football. Overview of Ryanair in L985 by the Ryan family, headed by Tony Ryan, to provide scheduled passenger airline services between Ireland and the UK, as an alternative to then state monopoly - carrier, Aer Lingus. Initially, Ryanair was a fullservice conventional airline, with two classes of seating, ieasing three different types of aircraft. Despite a growth in passenger volumes, by the end of 1990, the company had flown through a great deal of turbulence, disposing of five chief executives, and accumulating losses of IRE20m. Its fight to survive in the early 1990s saw the airline successfully restyle itself to become Europe's first Iow-fares, no-frills carrier, built on the model of Southwest Airlines, the highly successful Texasbased operator. A new management team, led by Michael O'Leary, then a reluctant recruit, was appointed by Tony Ryan. Ryanair, first floated on the Dublin Stock Exchange in t997, is quoted on the Dublin and London Stock Exchanges and on NASDAQ, where it was admitted to the NASDAQ1.00 in 2002. Ryanair was founded Ryanair in fullflight The world's most prolitable airline Up to Ryanair's announcement that it was bidding for Aer Lingus, it appeared to be business as usual for the company. It was continuing to outperform ground, but also globally. In August 2006, an Air T r ans p all other airlines, not only in its own European batlle- ort World magazine announced that Ryanair a E. Oliver, 'Ryanair's profits rise 38% as Aer Lingus bid falters', Irish Times, T November (2006)' p 2l JE) RYANATR - THE L.*-FARES AIRL'NE was the most profitable airline in the world, on the financial data is given in Exhibits La and 1b, and operating data is given in Exhibit Growth and expansion 1,c.) basis of its operating and net profit margins, on a per-airplane and per-passenger basis. In November 2006, the airline announced record half-year profits of €329m for the first half of fiscal 2007. Traff,c grew by 23 per cent to 22.1 million passengers; yields increased by 9 per cent as total revenues rose by 33 per cent to €t.256bn. Ancillary revenues grew by 27 per cent. Unit costs increased by 7.5 per cent. Despite 42 pet cent higher fuel costs of €337m, Ryanair's after-tax margin for the half-year rose by 1 point to 26 per cent. (Ryanair's At its 2006 Annual General Meeting on 21 September in Dublin and its Investor Briefing Day in New York on 26 September, Ryanair offered its investors good news. The airline had delivered a t2 per cent increase in net profit, despite a 74 pet cent increase in fuel costs. Traffic had grown 26 per cent from 27.6 rrilllion passengers in 2005 to @ Rvanair profit statement Half-year to 30 Sept. 2006 €000 Operating revenues Scheduled revenues Ancillary revenues Total operating revenues Operating expenses Full Year to Full year to 31 Mar.2006 31 Mar' 2005 €000 €000 1,433,377 259,153 1,692,530 (171,412) (124,405\ (462,466) (37,417) (13,912) - continuing operations 1,092,102 164,321 1,256,423 (113,844) (71,622) (337,042) (21,313) (11,608) (25,394) (98,384) 1,128,116 190,921 1,319,037 (141,673) (110,357) (265,276) (26,280) (19,622) (21,546) (135,672) (178,384) (79,489) Staff costs Depreciation Fuel and oil Maintenance, materials and repairs Marketing and distribution costs Aircraft rentals Route charges Airpord and handling charges Other Total operating expenses Operating profit (139,097) (52,312) (870,616) 385,807 (1,229) (47,376) (164,577) (216,301) (79,618) (1,317,484) 375,046 (1,234) 815 38,219 (73,e58) (978,299) 340,738 (2,302) 47 - continuing operations Other (expenses) / i ncome Foreign exchange (losses) Gain on disposal of property, plant and equipment Finance income Finance expense Total othe r (expen se s) / i n co m e 28,923 (41,311) 28,342 (57,62e) (31,542) (1s,617) 372,190 (43,063) (36,158) 338,888 (32,176) 306,712 40.00 39.74 39.32 39.07 Profit before taxation Tax on profit on ordinary activities Profit for the financial Year Earnings per ordinary share (in € cent) Basic Diluted Adjusted earnings per ordinary share (in € cent) Basic Diluted Weighted average number of ordinary shares (000) Basic Diluted Source: Ryanair Annual Report. 309,196 (29,1s3) 280,043 36.85 36.65 35.28 35.09 759,911 329,127 42.67 42.39 42.67 42.39 711,413 776,456 771,781 764,003 RYANATR - THE L0W-FARES AtRLtNE ( @ Ryanair batance sheet Full year to Full year to 31 Mar. 2006 31 Mar. 2005 €000 €000 2,532,988 46,841 Half-year to 30 Sept. 2006 €000 Non-currenf assefs Property, plant and equipment Intangible assets Derivative f inancial instruments Available for sale financial asset Total n o n - cu rrenf assefs Current asseis Inventories Other assets Trade receivables Derivative financial instruments Restricted cash Financial assets: cash > 3 months Cash and cash equivalents Total current assets 2,550,162 46,841 a qaa 185,363 2,786,254 3,627 48,842 24,207 502 2 117 Aa,l 46,841 763 2,580,592 3,422 2q qno 18,872 204,040 328,927 1,439,004 4,634,219 2,164,732 29,453 2,460 24,612 20,644 204,040 529,407 204,040 824,314 1,064,692 2,170,224 4,956,478 87,903 E1 O 872,258 1,653,421 2,053,627 Iotal assefs Current liabilities 3,818,153 92,118 418,653 120,997 17,534 649,302 Trade payables Accrued expenses and other liabilities Current maturities of long-term debt Derivative financial instruments Current tax Total current I iabi I ities Non -current I iabi I ities Provisions Derivative financial instruments Deferred income tax liability Other creditors 79,283 570,614 153,311 A?A '158,049 69,854 46,331 881,972 22,723 27,417 15,247 845,872 16,722 81,897 127,260 46,066 1,524,417 1,796,362 9,790 596,231 7,236 104,180 74,864 134,881 Long{erm debt Total n o n- 29,072 1,293,860 1,434,348 9,675 1,158,584 488 cu rre nt I i abi I itie s 1,476,874 1,777,738 9,807 602,664 Shareholders' equity lssued share capital Share premium account Retained earnings Other reserves 1,796,750 (112,453) 1,467,623 (81,65e) 1 001 oc4 Shareholders' equity Total liabilities and shareholders' Source: Ryanair Annual Reporl. 2,296,768 1,734,503 3,818,153 equif 4,956,478 4,634,219 in 2006, giving a 27 per cent increase in passenger revenues. Indeed, on the cover of its 2006 Annual Report, Ryanair designated itself as the 'World's Favourite Airline', on the basis that it predicted that it would be carrying 42 million passengers in 2007, surpassing even Lufthansa which carried over 39 million passengers on its 34.8 million gers in 2005, was not mentioned as a comparator.) Ryanair reported that it fiew out of 1"8 European bases with a fleet of over 1"00 new Boeing 737-800 aircraft and firm orders for a further 138 new aircraft to be delivered over the next six years. These additional aircraft would allow Ryanair to double in size to 80 million passengers per annum by 20L2. intra-European routes in 2005. (However, Southwest Airlines, which had carried over 77 million Dassen- More immediate growth plans included the delivery of 30 aircraft between September 2006 and RYANAIR _ THE LOW-FARES AIRLINE comments were that passengers do not wish to air fares or reward your people or invest in new airbe disturbed and 'Just another reason not to fly craft or take on the really big airlines like BA and Lufthansa.lo Ryanair.'7 However, Michael O'Leary declared 'If you want a quiet flight, use another airline. Ryanair Certainly, Ryanair had stuck closely to the lowis noisy, full and we are always trying to sell you cost/low-fares model. Ever-decreasing costs was something.'8 Not all ancillary service initiatives Ryanair's mantra, as it constantly adapted the were successful. In 2005, Ryanair pulled an in-flight model to the European arena and changing entertainment system. Passengers had resisted circumstances. pa]'rng €8 to rent a games and entertainment console, probably because they did not consider it a The Ryanair fleet worthwhile investment for short flishts. Investor perspectives to keep staff training and aircraft maintenance costs as low as possible, using Boeing737 planes. Ryanair continued its policy of fleet commonality Prior to its bid for Aer Lingus, Ryanair had come in for some criticism for sitting on a €2bn cash pile, instead of distributing it to investors, blaming uncertainty of demand in the second half of fiscal 2007 for its cautious approach.e However, announcing its excellent first half 2007 results in November 2006, the airline stated it was looking into a number of options for payouts to shareholders by the end of the 2007 calendar year, irrespective of the outcome of the Aer Lingus bid. The options included an annual dividend policy, share buyback and a one-off dividend. It also intended to seek shareholder approval for a 2-for-L stock split, intended to improve the marketability and liquidity of the stock. The shares rose by 3.6 per cent, to €9.28, a record high. The stock had gained 12 per cent during the year. Yet, despite its superior profit performance, historically, Ryanair was onlv midrange or below average in its P/E multiple relative to peers like easyJet, whose shares had risen by 46 per cent during the year. However, this offered an upside potential for capital gains, and a low risk of derating, according to Davy, the company's stockbrokers. Over the years, Ryanair replaced its fleet of old aircraft w'ith new, more environmentally-friendly aircraft, reducing the average age of its fleet to 2.4 years, the youngest fleet of any major airline in Europe. The larger seat capacity ofthe new aircraft did not need more crew. The newer aircraft produced 50 per cent less emissions, 45 per cent less fuel burn and 45 per cent lower noise emissions per seat. Also, a winglet modification programme on the fleet was providing better aircraft performance and a 2 per cent reduction in fleet fuel consumption, a saving which the company believed could be improved over the next year. Staff costs and productivity 2006, Ryanair's employee count rose by more than 700, to 3,500 people, comprising over 25 different nationalities. The new intake was almost entirely accounted for by flight and cabin crew to service the airline's expansion. Ryanair claimed in its 2006 Annual Report that its average pay, including commissions to cabin crew for on-board sales, was €49,612, a higher figure than any other major European airline. A-lso, by tailoring rosters, the In fiscal Ryanair's operations in 2006 To quote Michael O'I-eary: Any fool can seII 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 carrier maximised productivity and time off for crew members, complying with EU regulations which impose a ceiling on pilot flying hours to prevent dangerous fatigue. The airline adhered to the general rule of a maximum of 900 hours flying time per annum, averaging 18 hours per week. Passenger service costs In Financial Times,9 September (2006). p. 16. 1. 20O6, Ryanair introduced cost-cutting/yieldenhancing measures for passenger check-in and K. Done and T. Braithwaite, 'Ryanair to allow mobile phone calls next year', Financial Times, 31 August (2006), p. Lex,'Ryanair', FinancialTimes,2 August (2006), p. 14. 'u Ryanair Annuat Report, 2001 !!D RYANATR - THE Low-FARES AtRLtNE Iuggage handling. Estimates were that these tactics could save an average of more than €1 per passen- Taj Mahal at Stansted which we believe could be built for Elbn'. The airline was deeply concerned by continued under staffing of security at Stansted which has 1ed to repeated passenger ger. One such measure was web-based check-in from March 2006, and priority boarding, with over half of passengers availing of this, thus saving Ryanair costs on check-in staff and airport facilities, as well as time. Another was charging for check-in bags, which encouraged passengers to travel with fewer and, if possible, zero check-in bags, again saving on costs and enhancing speed' Other rivals were also introducing charges for hold luggage, including Aer Lingus and FIyBE' After ruling out a similar move in February 2006, easyJet succumbed in September of the same year, charging passengers for any more than one item of hold luggage. and flight delays . . . management of Stansted securlty is inept, and BAA has again proven that it is incapable of providing adequate or appropriate security ser"l'rces at Stansted. This shambles again highlights that BAA lt is an inefficient, incompetent airport monopoly Further, Ryanair continued: The tragedy at Dublin airport continues where the Dublin Airport Authority (DAA) monopoly recently obtained planning approval for a second terminal at a cost of €750 million, 4.5 times more than the €170 million cost rt announced just 11 months earlier in September 2005. Only a government owned monopoly would seek a cost increase of over 4 fold - with no Airport charges and route Policy Consistent with the budget airline model, Ryanair's routes continued to be point to point only' Ryanair reduced airport charges by avoiding congested lncrease rn passenger capacity. proposed an outrageous 60 per cent increase rn charges at Dublin Airport to recoup the inflated cost of this facility which Ryanair passengers will never use. Ryanair will continue to oppose this waste and has appealed the planning decision' ' DAA has recently main airports, choosing secondary and regional airport destinations, anxious to increase passenger throughput. Most of these airports are significantly further from the city centres they serve than the main airports. For example' Ryanair uses Frankfurt Hahn, 123 kilometres from Frankfurt; Torp' 100 kilometres from Oslo; and Charleroi, 60 kilometres from Brussels. In December 2003, the Advertising Standards Authority rebuked Ryanair and upheld a misieading 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 kilometres away' In 2006, airport and handling charges increased by 21. pet cent, slower than the growth in passenger numbers, reflecting a net reduction in costs from deals at new airports and bases' despite increased costs at certain existing airports' such as Stansted. Route charges also increased by 2L pet cent because of an increase in the number of sectors flown and an 8 per cent increase tn average sector length, as Ryanair ventured further afield into new EU member states, such as Po1and' Hungary and Slovakia' as well as ex-EU destinations. such as Marrakesh in Morocco Ryanair continued to protest at charges and conditions at some airports, especiatly Stansted and Dubtin, two of its main hubs' It vehemently opposed the British Airport Authority (BAA) airport monopoly plans to build a'94bn gold plated Risks and challenges Ryanair faced various challenges as it entered the second half of fiscal 2007' The airline itself predicted that its extra capacity building would create uncertainty about the success of new routes and locations and other difficulties' These were extra marketing and discounted fare costs incurred in launching new routes, as well as overcapacity leading to price cutting by rivals' Fuel prices Ryanair was especially vulnerable to rising fuel prices from 2005. Its iow-fares policy limited its ability to pass on increased fuel costs to passengers through increased fares. Coupled with a guarantee that it would not impose any fuel surcharges on its customers, this placed extra pressure on the carrier to find cost savings in other spheres of its operations. Its fuel costs represented 35 per cent ol operating costs in 2006, compared with 27 per cenl the year before. Since jet fuel cost fluctuations are subject to unpredictable and volatile world events Ryanair could neither predict nor control these costs. and was dependent on hedging' based or lL Ryanair 2007 half-yearly results RYANATR - THE L0W-FARES AtRLtNE ( the risk by introducing exchange rate exposure, also requiring hedging. Ryanair had not hedged early, so it was pa'rng 970 per barrel of oil up to October 2006, and $73 to $74 up to March 2007 while better hedged competitors such as Lufthansa, Air France-KLM and Iberia had the bulk of their fuel needs hedged at an average of $50 to $60 a barrel until the end of calendar year 2006. Meanwhile, the price of oil stood at about $55 a educated guessing. Moreover, the fact that jet fuel prices are denominated in US dollars compounds barrel in late January 2007. Compensation to passengers On 17 February 2005, a new EU regulation came into effect, intended to reduce the inconvenience caused to air passengers by delays, cancellations and denied boarding. The regulation provides for standardised and immediate assistance for air passengers at EU airports where these events occur. was expected that the compensation costs would It offered a refund or rerouting and free care and amount to a sector-w-ide bill of €200m annually. Passengers affected by cancellations must be - assistance while waiting for their rerouted flight specifically, meals, refreshments and hotel years after the new regulation, the EU had to recognise that it was being widely ignored. Terrorism and security Past terrorist attacks on airliners and in urban and holiday centres have inflicted added risks and costs payable for flight cancellation, unless the airline can prove that it was caused by unavoidable extraordinary circumstances. Examples of circum_ stances which may fall within this exception are political instability, weather conditions incompatible with the operation of the flight, security and safety risks, and strikes. For Ryanair, the b,?ical compensation cost would tikely fall into the €250 category, based on the average distance of its flights. Passengers subject to long d.elays would also be entitled to similar assistance, including meals and hotel accommodation. However, two accommodation where an overnight stay is neces_ sary. Financial compensation of up to €600 is also ing liquids and gels in their carry-on luggage. Airports serving London were especially affected. Ryanair had to cancel 279 flights in the days imme_ diately following the incident and refunde d, €2,7m in fares to approximately 40,000 passengers. In addition, Ryanair is estimated to have suffered a loss of€1.9m in reduced bookings. While the restrictions were relaxed somewhat in November, they still limited severely the contents of carry-on luggage and made it more likely that passengers would have to bring check_in bags, thus impeding the efficiency of the budget airlines which relied on quick check-in and aircraft turnarounds, with a minimum of hold luggage. There was also a threat that passengers would choose other forms of transport, such as trains, rather than face the inconvenience and expense of checking in luggage, as well as the extra time spent in airport security queues. In the past, Ryanair had recovered quickly from terrorist episodes and alerts, after initial dips in traffic, namely after the terrorist attacks on airliners in the USA on 9/I1., and the aftermath of attacks on London transport on 7 July 2005, and abortive attempts two weeks later on 21 July. This had affected flight bookings to London for some weeks. Michael O'Leary's verdict on the new August 2006 security measures was that they were 'farcical' and that terrorists 'must be rolling around in their caves in Pakistan laughing at us,.12 While various other airline executives protested too, Ryanair was on its own in launching two legal cases against the UK government. One was a claim for €4.6m to compensate the carrier for lost flights and bookings. In the other case, Ryanair was challenging the legality of the new security measures and sought to return to those in operation prior to August 2006. A lasting effect of the 9/tL attacks was significantly increased insurance costs for all commercial airlines. Ryanair has passed these costs on in its fares. Environmental concerns passengers, including short-haul ones, so they were to be body searched and banned from carry_ Environmental concerns about greenhouse gases to the airline industry worldwide. In August 2006, UK authorities imposed severe security measures at all airports in the face of an alleged immrnent terrorist plot to attack up to 10 aircraft on transatlantic routes. These measures applied to all from carbon emissions continue to climb up the public and political agenda worldwide, and especially in Europe, with an ever-greater focus on " FT Repoflers, 'Airlines in backlash over travel restrictions,, 1. Financial Times, 79/20 August (2006), p. [@) RYANATR - THE L'*-FARES A'RL,NE the impact of aviation. Aviation represents 2.6 per cent of carbon emissions in the EU, but an Oxford example, staff are banned from charging their own mobile phones at work to reduce the company's University study predicted that carbon from aviation would accelerate, so that adverse climate impacts would far outweigh the positive commercial effects of aviation.l3 Another report warned that failure to curtail greenhouse gases would lead to catastrophic human and economic consequences. Hence, the airline industry should pay environmental taxes for the contributions they make to global warming.la Heretofore, aviation fuel was exempt from taxation, but there was mounting pressure to tax aviation fuel, and some plan to do so within the EU area seemed probable by 2010. In addition, aviation was likely to become part of some form of emissions trading scheme that could cost up to €9 for a return ticket within Europe. Ryanair argued that aviation contributes only a small proportion of carbon emissions relative to the benefits of easily accessible cheap air travel. electricity bilt). Ryanair's appeal to the Irish Supreme Court over a previous ruling allowing collective bargaining by its pilots through the Irish Airline Pilots' Association (IALPA), the largest pilots' union in lreland, received a preliminary favourable ruling in February 2007, whereupon the company launched a claim for its legal expenses in the case. There is also pressure from the British Airline Pilots' Association to recruit Ryanair pilots based in the UK. In the absence of unions, Ryanair negotiates with all its employees through internally elected'Employee Representation Committees'. In July 2006. the Irish High Court found that costs of €15,000 for retraining on new aircraft Ryanair had bullied pilots to force them to agree to new contracts, where pilots would have to pay if Moreover, taxes have proven ineffective as a means of reducing road vehicle use. None the less, the carrier has pledged to behave responsibly by deploying more efficient aircraft that use less fuel and produce less pollution. Ryanair has urged that any environmental taxation scheme should be to the benefit of more efficient carriers, so airlines with low load factors that generate high fuel consumption and emissions per passenger' and airlines that offer connecting rather then pointto-point flights, should be penalised. Ian Pearson, the UK Minister for Climate Change, reacted to Ryanair's protestations by branding the airline 'the irresponsible face of capitalism'. In turn, Michael O'Leary said the Minister was 'foolish and ill-informed . . .like most politicians, Minister Pearson talks a lot but does little. Being criticised by him was like being savaged by a dead sheep.'15 lndustrial relations Ryanair's industrial relations with staff, especially they left the airline, or if the company was forced to negotiate with unions during the following five years. Moreover, some Ryanair managers were judged to have given false evidence in court. Meanwhile, Ryanair was contesting the claims of pilots comprising 3.5 per cent of the pilot workforce, for victimisation under the new contracts. It was conceded by the company that a ruling in favour of the pilots could incur damages of €100,000 per pilot. In another legal case, Ryanair was ordered to pay 'well in excess' of €1m in legal costs after a court refused the airline access to the names and addresses of pilots who posted critical comments about the company on a site hosted by the British and Irish pilots' unions. Ryanair, led by Michael O'Leary, had claimed anonymous pilots were using a website to intimidate and harass foreign-based pilots and dissuade them from working for the company. The pilots its pilots, are fraught. The company has come under fire for refusing to recognise unions and allegedly providing poor working conditions (for S. Cairns and C. Newson, Predict and decide: Aviation, climate change and IJK policy, ECI Research Repofi 33' Environmental Change Institute, University of Oxford, 2006. la Sir Nicholas Sterrr, Economics of ctimate change, Review for UK 13 government, 2006. 1t B. HaII and K. Done, 'Pearson brought to earth Financial Times, 6/7 January (2007), p.2. in airline row', involved used codenames such as 'ihateryanair' and 'cant-fly-wontfly' Ryanair declared that its pilots were recognised as the best-paid short-haul pilots in Europe. Remuneration packages included a share option scheme. The company claimed that Ryanair pilots enjoy a stable roster pattern, offering a facility to plan time off, apparently unique in aviation. No overnights mean pilots are home every night. However, in the autumn of 2006, pilots in Ryanair Iodged a pay claim with the Irish Labour Relations Commission on the basis that there were significant differences in take-home pay between Ryanair and Aer Lingus pilots. It also claimed that Ryanair training pilots were working for nothing. None the less, in effect, Ryanair appeared to have had BYANATR - THE LoW-FARES AtRLtNE ( no problems recruiting cabin staff, including pilots, to meet its needs. Sundry legal actions €4m, placed into an escrow account, p"rrairri an appeal in the European Court. The Walloon authorities were claiming back a further €2.3m in the Irish courts for their reimbursement to Ryanair of start-up costs at Charleroi. Sundry other legal challenges by competitors to Ryanair were also underway in 2006-2007. These were based on allegations of unfair discrimination favouring Ryanair over other airlines at various publicly owned airports, such as Lubeck and Frankfurt Hahn in Germany, and Shannon in lreland, constituting illegal state aid. On another front Ryanair was vigorously defending French government attempts to protect Air France-KLM by forcing easyJet and Ryanair to move the staff they employ on French soil from British employment contracts to more expensive French ones. In other disputes, Ryanair was in litigation with various airports over landing charges. A ruling in 2004 deemed that the carrier was in illegal receipt of state aid from publicly owned Charleroi Airport, its Brussels base. Ryanair was ordered to repav minister over an advertising campaign that used their pictures alongside the tagline 'Time to leave the country?' The company's Scandinavian sales manager quipped, 'This must be the first time that a Swedish politician has objected to his image being used in a newspaper.'16 Safety issues Safety is taken very seriously by Ryanair, with extensive safety training and protocols. A safety committee reports to the board at each board meet_ ing. The airline is aware of the permanent damage to the company that could follow a serious accident to one of its aircraft. Indeed, a serious accident to any budget airliner could have knock-on effects on all the other budget carriers, and some industry experts have questioned the safety of the low-cost model on the basis of 'human factors'. parage its safety record, with reports of various lncidents of 'near-miss' accidents, accusing the company of placing crew under such intensive pressurised work schedules that alertness levels are compromised. In February 2006, UK television Channel 4 broadcast a documentary 'Ryanair caught napping'. Two undercover reporters obtained jobs as Ryanair cabin crew based at London Stansted Airport, and secretly recorded Ryanair training and cabin crew procedures. The documentary criticised Ryanair's training policies, security procedures, aircraft hygiene, and highlighted poor staff morale. It filmed Ryanair cabin Ryanair's detractors have attempted to dis- Often, Ryanair took the initiative over illegal aid to rivals. For example, it filed a complaint with the European Commission accusing rival Air France-KLM of tryrng to block competition after the French airline filed a case, alleging that Marseille Airport was breaching the law by offering discount airlines cut-price fees at its second, crew sleeping on the job; using aftershave to cover no-frills terminal. Ryanair had planned to base two the smell of vomit in the aisle rather than cleamng planes at Marseille, serving L3 routes. The latest it up; ignoring warning alerts on the emergency complaint came a month after Ryanair called on slide; encouraging staff to falsify references for the Commission to investigate allegations that Air airport security passes; and asking staff not to France had received almost €1bn in illegal state recheck passengers' passports before boarding. aid, benefiting unfairly from up to 50 per cent disRyanair denied the allegations and published counted landing and passenger charges on flights its correspondence with Channel 4 on its website. within France, and should repay the cash. It claimed to have forwarded all 20 allegations to Adverse rulings on these airport cases could the UK and Irish aviation authorities, both of have the effect of curtailing Ryanair's growth, if it which agreed that there was no substance to them. was prevented from striking advantageous deals It also alleged that the programme was misleading with publicly owned airports and confined to the and that promotional materials, in particular a smaller number of privately owned airports across photograph of a stewardess sleeping, had been Europe. faked. Much of the subsequent coverage of the Other legal cases against Ryanair accused it of programme in the media considered that the misleading passengers on its website by exaggerating the prices of its competitors in making comparisons. The carrier was also being sued '" P. Munter, 'Swedish premier and ex,minister sue Ryanair over by Sweden's prime minister and a former foreign adverts with their pictures', Financial Times, T April (2006), p. 9. @ RYANAIR - THE Lo',u-FARES AIRLINE documentary was overblown and failed to substantive claims against the airline' with some going so far as to label the attempted expose as a make charges appear to be far higher than they actually incur. . . . Either this is poor cost management disguise.'1e on Ryanair's behalf or it's a fuel surcharge in Critics have accused Ryanair of poor treatment of customers whose flights have been cancelled' The airline formerly refused to provide accommodation or meal vouchers when flights were canin celled or delayed, until it became illegal to do so fees and 2005. Ryanair also refused to refund taxes passengers cancel their tickets' but revised when this practice by introducing an'administration' fee which of eZO per ticket for handling refunds' a fee the amount for which passengers often exceeds may be eligible. Norwegian consumer authorities have fined Ryanair €64'000 for this practice' However, it is not uncommon for airlines to charge an administration fee for changes or refunds' In response to various complaints' Ryanair has their declared that, in effect, customers vote with lt also feet by choosing Ryanair for its lowest fares claims to be number one for punctuality among European airlines, with the lowest level of complaints, fewest cancellations and fewest lost bags' in March 2006' Davy, Ryanair's stockbrokers' reported on a quarterly customer survey conducted irindication for Ryanair. Unfazed, Ryanair launched new services and a free flights offer following the documentary, Customer services and perceptions In which embraces a number of doctrines' mainly dealing with low fares, redress and punctuality' However, in a poll of 4,000 travellers around the 2003, Ryanair published a Passenger Charter' world by TripAdvisor in October 2006' Ryanalr was voted the world's least favourite airtine' with was easyJet coming second worst' Unfriendly staff part of the Ryanair experience' cited as the worst followed by delays and poor legroom' In fact' Ryanair scored badty in virtually all categories' urhich also included comfortable seats' safe/secure' never lose my luggage, best amenities (for example' snacks/food; TV/movies; magazines/newspapers)' However, it scored well on 'best fares" Ryanair's customers but very few fans''17 Southwest Airlines' 'ultra-frugal approach to flying wins millions of fifth Ryanair's role model, emerged as the world's the survey' most favourite airline in There have been suggestions that Ryanair's by nyanair in 2005, with responses from about 20,000 passengers, with 'huge' repeat business'20 'obsessive focus on the bottom line may have dented its public image. In one infamous incident' it charged a man with cerebral palsy 818 (€25) to use a wheelchair.'18 In response to protests over the charge, Ryanair imposed a 50 cent wheelchair Unlike external surveys, satisfaction with Ryanair cerwas overwhelmingly'excellent' or'good' and for airport check-in' boarding tainly above average creu and departure, cabin cleanliness and cabin space was regarded as largell service. Seating average as was on-board catering' Davy concludec for Ielry on every passenger ticket' Campaigners of profiteering from the disabled accused Ryanair its extra charges, declaring that the tevy should be no more than 3 cents - the company would still have collected €1,000,000' Ryanair defended its position, saying that it costs €37 per person to the transport disabled passengers at Stansted' and such passengers every airline carried 1'5 million year. Ryanair was the only major airline in the UK to impose such wheelchair charges' Fuittrer, the GuardiaL? newspaper alleged that the insurance fee which Ryanair charges each passenger is unreasonabty high' The insurance ,.rr.frurg" amounted to more than 1"0 per cent of Ryanair;s average fare' the newspaper estimated that the positive results were actually likely t< improve with the new aircraft coming on stream on Ttre only disappointing results pertained to no board sales which, although improving' were much above €L.30 Per Passenger' Competitors and comparators wa The potential of the budget sector in Europe ha underlined by its gror'r'th, as low-cost carriers flighl 18 per cent of the market for all European ended 30 September 200t in ifre three months with 15 per cent a year earlier' Dal Rival easyJet claimed that 'Ryanair's insurance compared hug saw the European market as healthy' with 1e t' D. Milmo, 'Ryanair - the world's least favourite airline" Guardian, 26 October (2006) rE Milmo, ibid. skv-hil A. C]ark, 'Ryanair . the ]ow-fare airiine with the insurance le.rry', Guardian, 8 May (2006)' See note 5. 'zo g= ;€ es-*! 5i*tH AHE*;IE$E SaaF; itsfi E$$gE# FEEi€EEfi* {f,s * :e *3,g 6 g.#€ t E Hq g EEEi- ro-'sF :a . E5' E E ; tf +E:; gs$EiEq€€ ;;FfiE ;e+;s o x* iao q,tr f.= *us E5gEE g Fsc E* F g s ;E st= i E; E e{(9 c!$cDc9 t Epr;g ggtg g g i ug H F E $ EF (\ (Y) f EF iigE F$ ci) ;i> YL !u .= <(/) o NO) ! o9 l6 ap do gEN' P :_g-E = =;_x € id t :€gs 2 S'gi ErrEs HF ; € ",S' E UJg !Eg_F i s E= E E -E. €F tE a5F !!| RYANATR - THE L.*-FARES AIRLINE potential, and only incremental gror'r'th, even if many of the competitors were losing money' Some carriers were withdrawing from routes where they clashed with Ryanair, for example MyTravellite from the Dubtin-Birmingham route, or avoiding such routes altogether. to make a difference' The newspaper described him as personifying 'the brash new Irish business elite' and possessing'a head for numbers' a shrewd marketing brain and a ruthless competitive streak'.23 In 2005, he was ranked 18th among the World's Most Respected Business Leaders in a Times/Pricew aterhouseCooper s p oll' Europe is signified by the large number of entrants The attractlveness of the budget sector in Financiql and rivals, although as many as 50 have gone bankrupt, been taken over, disappeared or never got off the ground (www.etn.nlllcostgra'htm Low-Cost Graveyard website)' Exhibit 2 gives an overwiew of the main budget carriers in Europe as of 2006.2t Present and former staff have praised O'Leary's Ieadership style. According to Tim Jeans, a former Sales and Marketing Director of Ryanair, currently CEO of a small low-cost rival, MyTravell-ite: Michael's genius is his abiliry to motivate and energise people. . . . There is an incredible energy in that place' People work incredibly hard and get a lot out of it' They operate a very lean operation for a company of its size. It is without Peer.)o Learding ftYanair into thq luture In November 2005, Michael O'Leary, aged 44' announced that he had set 2008 as his own departure date from Ryanair. At that stage he would have been with the airline fot 20 years He declared that he would sever all links with the air'I line, refusing to 'move upstairs' as Chairman' things you can do; You think it is one of the worst have to get out, otherwise you will be like Banquo's 'You ghost, hanging around the corridors" he said' hanging around don't need a doddery old bastard the place.'22 O'Leary bred horses at his Gigginstown Stud on a farm about 50 miles (80 kilometres) from Dublin' His horse, War of Attrition, won the Cheltenham Gold Cup, one of the most prestigious races rn steeplechasing, in 2006. In 2007, Michael O'Leary was Ryanair's largest shareholder u/ith 4.53 per cent of the share capital' Although he consistently praised his management team, Ryanair was inextricably identified with its dynamic Chief Executive. He was credited with single-handedly transforming European alr transport. The airline won various international awards' such as Best Managed'Airline' In 2001' O'I-eary was awarded the European Businessman of the Year Award by Fortune magazine in 2004' the Financial Times named Michaet O'Leary as one of 25 European 'business stars', who are expected O'Leary's publicity-seeking antics have earned him a high profile. These included his declaration of war on easyJet when, wearing an army uniform' he drove up in a tank to easyJet's headquarters in Luton Airport. In similar vein, he flew to Milan Bergamo when Ryanair opened its hub there aboard a jet bearing the slogan 'Arrividerci Alitalia'. He has also dressed up as St Patrick and as the Pope to promote ticket offers' It is O'Leary's outspokenness that has made him a figure of public debate. 'He is called everfihing from "arrogant pig" to "messiah"''25 He has certainly made investors very happy, and even detractors would credit Ryanair with opening up the era of inexpensive air travel' At the same time' he is a reviled figure among trade unionists' and he has antagonised Irish government circles with his continuous attacks on the state airport authority' He i: very personally involved in Ryanair's battles witt the EU, and some pundits believe that his abrasiv< style has only served to annoy the Commissioners Indeed, the Betgian Commissioner' Philippt Busquin, denounced Michael O'Leary as'irritatinl . . . and insists he is not the only Commissione who is allergic to the mere mention of the name o Ryanair's arrogant chief'.76 An lrish Times columnist, John McManus' ha suggested that 'maybe it's time for Ryanair t' 23 chart B. Groom, 'Leaders of the new Europe: business stars for the profits of the future', Financiat Times' 20 ApI course (2004). 21 Details and comparisons of Ryanair's competitors as well www.pearsoned.co uk/ecs. as points of comparison with selected other cariers are provided in the supplement on the Exploring Corporate Strategy websile " G. Bowley, 'How low can you go?', Financial Times Magaztn " D. oaiby, 'I'm going for good' o'Leary tells Ryanair" Sunddv Times,2O November (2005), News. no.9,21 June (2003) '?5 lbid. /ri: 26 S. Creaton, 'Turbulent times for Ryanair's high-flier" Times, 31.January (2004). p 3' RYANATR - THE LoW-FARES AIRLINE ( jettison O'Leary'.27 McManus claimed that O'Leary has become a caricature of himself, fulfilling all 15 warning signs of an executive about to fail. Professor Sydney Finklestein of the Tuck Business School at Dartmouth in the USA identified the 15 signs under five headings: ignoring change, the wrong vision, getting too close, arrogant attitudes and old formulae. After apparently demonstrating how well O'Leary fits the Finklestein criteria, McManus none the less concluded: 'So' is it time for Ryanair to dump Mr O'Leary? Depends whether you prefer the track record of one of the most successful businessmen in modern aviation, or the theories of a US academic from an Ivy League school.' chappie, running around Europe, thumbing your nose, but I am not Herb Ketleher (the legendary founder of the original budget airline, Southwest Airlines in the US). He was a genius and I am not.'28 In what could have been his darkest hour, O'Learywas irrepressible: 'This is the most fun you can have without taking your clothes off. It is much more fun when the world is falling apart than when things are boring and.going well', he declared on the day he announced a shock profits warning in January 2004.2e So, how do these comments (and the Aer Lingus bid) fit with Michael O'Leary's declaration to part company with Ryanair? Would he really go in 2008, Perhaps the last words should go to Michael O'Leary himself: 'We could make a mistake and I could get hung', he said. He reiterated a point he had often made before: 'It is okay doing the cheeky and, if so, what would happen to Ryanair and its ambitions? No one really knows the answer to these questions, but it would certainly lie in Michael O'Leary's propensity admirers and detractors alike . . . to surprise his 28 2e G. Bowley, 'How low can you go?', Financial Times Magaztne' " ;. McManus, 'Maybe it's time for Ryanair to jettison O'Leary' Irish Times,11 August (2003). S. Creaton, 'Turbulent times for Ryanair's high-flier' Times, 3IJanuary (2004). no.9,zlJune (2003) iifl ,rlllllL Hyanair - the low-fars$ airline Eleanor 0'Higgins Ryanair was the first budget airline in Europe, modetted after thesuccessfu/ uS car,:The case offers students the opporlunity to evaruate the strategy of Ryanair agairs: European airrine industry and the burgeoning budget sector, in the respo/?se to tf.: _-, industry as a whore, and Ryanair in pafticurai. The case arso offers the opportunity :c :. = for fellow lrish carrier, Aer Lingus. The corour-fut personarity of Ryanair cEo, Michaer C _:. point of interest in the case. 'lr lli di " , ,r,r]lilllf ,rllfl ooo $hock and awe 'He never fails to surprise, that man _ it,s rncred_ ible.' This was the reaction of a prominent Irish bookmaker to the shocking news that Ryanarr, Europe's leading budget airline, led by its CEO Among those surprised l,--,, :_. Ryanair investors, who tr.=_ . could distract the carrier :: : cessful ruthless approach { ljill"'l|| tfiti on an airline with long-ha:_ had made a successful acc_.,._: Michael O'Leary, had launched a €1.48bn (Et.02bn) small (2 miilion poSS€tge r: bid for its Irish rival, Aer Lingus, just a week after haul carrier, Buzz, whic:: , . the flotation of the legacy national carrier.l Ryanair While perceived as a dsp-1,1. revealed that it had already procured L9.2 per cent oj the shares through its stockbroker, Dar,Tr, and growth model, that deal :_... greeted as a coup for Ryan,.,: ._. claimed that its all-cash offer of €2.g0 a share rep_ gain purchase price, it ri-a- .. resented a 27 per cent premium over the flotation to pick up a ready-made :- -. price of €2.20.It intended to retain the Aer l_ingus landing slots at I-ondon Sia:,-;:brand and It had been quite dD d_r-,_: : up-grade their dated long_haul product, and government finally to har-e :-, :. , reduce their short-haul fares by 2.5 per cent per year for many false starts and muc__ a minimum of 4 years . . . the combination of Aer Lingus ber of years. Once thet- r and Ryanair into one strong Irish airiine group will be breaths, Aer Lingus and -:. : rewarding for consumers _ . i, ,: rlf il { "q ,LlujjlJf, ,,w{ rl( . , _ . the purchasing power of Ryanair and Aer Lingus, to sub_ stantially reduce its operating costs, increase efficien_ cies, and pass these sa\,lngs on in the form of lower fares to Aer J,ingus, consumers.2 Companies UK, 'Ryanair sets its cap at local dval Aer Lingus,, Financial Times,7 October (2006), p.2j.. 2 Statement from Ryanair,s half-yearly results presentation, 6 November 2006. 1 ously compete with the mega carriers in Europe there are significant opportunities, by combimng and will enable both to \,1gor.. . in 'a hostile, the Ryanair approach. The -.- .. , anticomper_:_-.. eliminate a rival at a dei-_> _ Ryanair-Aer Lingus ope:.-._ . , 80 per cent of all flights b::, . European countries. Aer. -..-.. Dermot Mannion sard l:., mentally opposed to a nt=:..: if it raises its price. 'I .a,-.:_ . , cumstances where the --=] and Ryanair would be a:_= - - - . This case was prepared by Eleanor o'Higgins, university college orotin, n.proti. or trutuncnot as an i,ustration of sood or bad practice. @ Eteanor o,Hisgins, 2007. Noi i: out permission :l:"::::::A: