CASE STUDY Ryanair: the low-fares airline — future directions? Eleanor O'Higgins Ryanair, the first and largest budget airline in Europe, has enjoyed remarkable growth and success. However, are Ryanair’s strategic business model and its implementation robust enough to withstand the challenges it faces in its environment, notably economic recession and uncertainty about fuel prices? The case illustrates hhow to analyse and deploy internal resources and capabilities to add perceived value to customers, thereby delivering sustainable strategic advantage. It also explores the difficulties that hamper achieving and retaining such advantage. The reader is invited to devise and evaluate strategic options for Ryanair, including elements of corporate strategy in relation to its attempts to take over Aer Lingus, the Irish national carrier. “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a ‘durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a far~ sighted capitalist had been present at Kitty Hawk, he ‘would have done his suocessors a huge favour by shoot- ing Orville down.” Warren Bullet, annual letter to Berkshire Hathaway shareholders, Febeuary 2008 While the words of Warren Buffett were generally true, as airlines had seen no economic profit over 40-year period to 2012, there were exceptions. Most noteworthy was Ryanalt, the Irish budget airline, which had been consist- ently reporting earnings in excess of 20%. With 76 mallion passengersin 2012, Ryanair nominated self as the world's favourite alcline, since it carried more international passengers than any other airline. ‘The question was whether Ryanair could continue to defy industry trends that had caused so much distress to its competitors. In January 2010, CHO Michael O'Leary had ‘observed: “The environment i, from Ryanai's perspective, areal, because It Is awful. We're doing remarkably well because this isthe tine when the lowest-cost producer wins" ‘Would this stil continue to be the case? Overview of Ryanair As of Jaly 2012, Ryanair ran more than 1,500 flights per day fom 51 bases on 1,500 routes across 28 European i i |e H counties, connecting over 165 destinations, It operated a fleet of 294 new Boeing 737-800 aircrait with firm orders for 11 new airerat to be delivered aver the next year, Ryanair was founded in 1985 by the Ryan family to provide scheduled passenger services between Ireland and the UK, asan alternative to the then state monopoly airline, ‘Aer Lingus. Initially, Ryanair was a full-service career, with two classes of seating, leasing three different types of| aircrat. Despite growth in passenger volumes, by the end of 1990 the company had disposed of five chief executives land accumulated losses of [RE20 million.' Its Sight to survive in the early 1990s saw the alrline transformed to become Europe's frst low-fares, no-Fills carrier, but om the model of Southwest Airlines, the successfl US airline. Anew management team led by Michael O'Leary was appointed. Ryanair floated on the Dublin Stock Exchange in 1997 and is now quoted on the Dublin and London Stock Exchanges and on the NASDAQ-100. Tis case was prepared by Eleanor O'Higgins. It is intended as a basis for class discussion and not as an illustration of good or ‘ad practice. © Eleanor O'Higgins, Not tobe reproduced or quoted without permission.Table 1 Ryanair consolidated income statement (€m) RYANAIR: THE LOW-FARES AIRLINE 613 Year ended 31 march 2012 2011 2010 Operating revenues Scheduied revenues 3,504.0 2827.9 29245 Ancillary revenues 1336.2 801.6 663.6 Total operating revenues ~ continuing operations 4,390.2 3,629.5 2,988.1 Operating expenses Staff costs «aso, 76.) (335.0) Depreciation (309.2) arn (238.4) Fuel and oi (2,593.6) (1,227.0) (693.9) Maintenance, materials and repairs (104.0) (93.3) (85.0), Aircraft rentals (90.7) (97.2) (95.5) Route charges 450'5) (10.6) (336.3) ‘Atport and handling charges (554.0) (491.8) (259.1) Marketing, distribution and other costs (180.0) (154.6) (4a.3) Icelandic volcanic ash-elated cost, az4) Total operating expenses Guar) Operating profit ~ continuing operations “488.2 Other incomelfexpense) Finance income 443 202 Finance expense (208.2) (93.3) Foreign exchange gain{loss) 43 Loss on impairent of aailable-orsale financial asset Gain on disposal of property, plant and equipment Total other expenses Profit before tax Tax expense on profit on ordinary activities Profit for the year ~ all attributable to equity holders of parent Basic earnings per ordinary share (euro cents) Diluted earings per ordinary share (eura cents) [Number of ordinary shares (millions) ‘Number of ciuted shares (millions) oo) Source: Ryprar Annual Repo, 2012 After its makeover into a budget airline, Ryanaie never looked back, as it added new bases, routes and alrcratt. Despite the up-and-down cycles of the airline industry over the decades, Ryanair continued its upwards trajectory. being among the work's most profitable airlines and leaving almost all others behind.” Twenty years later In July 2012, some 20 years after its transformation, as other airlines struggled, Ryanait’s results were typleal for the company. Full-year profits had Increased 25% to a record £€503 million (£424m; $645m).” Revenue increased 19% t0€4325 million (£3647m; $544m) and average fares rose 16%, with a 5% increase in tralic to 76 millon passengers. Unit costs rose by 13% due to a 30% increase in fuel costs ‘and a 6% increase in sector length, Ancillary revenue outpaced trafic growth. rising by 11% 4 €886 million (£747m; $1136m) or 21% of total revenue, Ryanair's financial data are given in Tables 1; 2 and: Michaet O'Leary called the outcome a ‘commendable result, especially considering the higher fuel costs and 1 deep recession in Rarope. However, his positivity was tinged with concems over what lay ahead, Despite an ‘expected 5% trafic increase to 79 milion passengers, be warned that profits could fall by as much as 20% into the £€400 to €440 million range, due to further fuel price tises and other costs, recession, austerity, currency concerns and lower fares at new and growing bases in Hungary. Poland, provincial UK, and Spain. Ancillary revenues Ryanair provides various ancilary services, including in- Aight beverages, food and merchandise, console entertain- ment sales and internet-related services. It distributes accommodation, travel insurance and car rentals through its website. Delivering these services through the internet enables Ryanair to increase sales while reducing unit costs: Ancillary revenue Initiatives were constantly being614 RYANAIR: THE LOW-FARES AIRLINE ‘Table 2 Ryanair consolidated balance sheet (€m) Year ended 31 March 2012 2011 2010 Non curent assets Property, plant and equipment 4,925.2 4933.7 4142 Intangible assets 468 463 45.5 ‘Avallabe-for-sle financial assets 149.7 nso 1162 Derivative financial instrumeats 33 239 208 Total non-cumrent assets 5,125.0 54184 4,500.0 ‘Current assets Inventories 28 27 Other assets 64g 99.4 Curent tax 9.3 05 Trade receivables 515 506 Derivative financial instruments 2319 383.8 Restricted cash 35.1 429 Financial assets: cash > 3 months 772.2 868.4 Cash and cash equivalents 2,708.3 2,028.3 Total current assets 3,876.0 34776 Total assets 9,004.0 8,596.0 ‘Current abilies Trade payables 112 1508 154.0 Accrued expenses and other labiities 1,237.2 1,224.3 1,088.2 Current maturities of debt 368.4 336.7 268.5 Current tax = = 09 Derivative fi 282 1258.4 410 Total curent| 815.0 1,837.2 1549.6 ‘Non-curent lables Provisions Derivative financial instruments Deferred tax Other creditors Non-current maturities of debt Total non-current liabilities ‘Shareholders’ equity Issued share capital ‘Share premium account Capital redemption reserve Retained earnings Other reserves “otal shareholders’ equity “otal liabilities and shareholders’ equity Source: Ryanair Anual Report, 2012 Introduced to raise extra revenue, It was the first airline to charge for check-in luggage and in‘ight food and beverages. Virtually all budget airlines have followed suit, fs they have with other Ryanair initistives. It has con- tinued to find ways of charging passengers for services ‘once considered inclusive. Passengers are charged extra for checking in at the alrport rather than online (which also Incurs a charge). While avoiding pre-assigned seats, an extra charge procures ‘priority boarding’ purchased in advance for £10/€T0 per Might. an Initiative followed by many traditional carriers, such as British Airways, charg- Ing passengers to book seats online. Im the fiscal year 2012, Ryanair’s ancillary revenues per passenger rose from €11.12 in the 2011 fiscal year to €11.69. Revenues from non-fight scheduled operations, Including excess baggage charges, debit and credit card transactions, sales of rail and bus tickets, accommodation, travel insurance and car rental, increased 12.4% from €574.2 million to €645.6 million, while revenues from ‘Might safes Increased 6.4% trom €T00.7 mutton tn the