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Case Study #4

BUILDING COST-SAVING CAPABILITIES
Ryanair is one of Europe’s largest low-cost carriers and one of the world’s most profit- able airlines. Founded in 1985 by Christy Ryan, Liam Lonergan, and Tony Ryan, the original airline offered service from Waterford in southeastern Ireland to Gatwick in London. In its first full year of operation under partial European Union (EU) deregulation, the small airline obtained permission to challenge the duopoly of Air Lingus and British Airways on the Dublin–London route. With two routes and two planes, this small Irish airline was off and running. By 1991, the airline had been running continuous losses; it abandoned its business-class product and discontinued its frequent flyer club.
To save the company from ruin and make the airline profitable, Michael O’Leary, the CEO, visited America to borrow ideas from Southwest Airlines, a well-established low- cost carrier. He returned with several key elements for a no-frills model, including the importance of quick turnaround times, no extras, and a single aircraft for operating efficiency. With an additional Ryan family investment of ð20 million, the firm emerged from restructuring as Europe’s first low-fare airline, making a profit for the first time. Deregulation of the European airline industry in 1992 gave carriers from any EU country the right to operate a schedule between other EU states, paving the way for Ryanair to begin launching new routes throughout Europe.
Today the airline serves more than 42 million passengers, with 2007 profits of ð401.4 million. A comparison of 2007 to 2006 performance shows profit growth of 33 percent, traffic growth of 22 percent, revenue growth of 32 percent, and yield increases of 7 per- cent. Ryanair’s passenger numbers have grown by up to 25 percent per year for most of the last decade. With plans to double traffic and profits by 2012, Ryanair continues to execute on its low-cost strategy by offering low fares that generate increased passenger traffic while maintaining a dedication to cost containment and operating efficiencies.
The key elements of Ryanair’s strategy are low fares to stimulate demand, and customer service in the form of punctuality, fewer lost bags, and fewer cancellations than its primary competitors had. To accomplish these activities, Ryanair stresses quick turn- around times for aircraft, and chooses point-to-point short-haul routes to secondary and regional airports versus hub-and-spoke service. Short-haul and point-to-point service allows for direct nonstop service and avoids the cost of service for connecting passengers, including baggage transfer and passenger assistance. These regional airports offer lower landing and handling charges, faster turnaround times, less congestion, and fewer terminal delays. Ryanair negotiates extremely aggressive contracts with its airports, demanding low fees as well as financial assistance with marketing and promotional campaigns. In subsequent contract renewal negotiations, the airline plays airports off against each other, threatening to withdraw services and deploy the aircraft elsewhere if the airport does not make further concessions.
Lower operating costs also come from aircraft equipment costs and personnel productivity. Operating a fleet of aircraft with a single model, the Boeing 737-800 series pro- vides operating efficiencies in maintenance and pilot scheduling. Taking advantage of the slump in airplane
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sales, the company ordered Boeing 737-800 series aircraft in 2001 at a substantial discount. Additional savings have come from more recent orders of aircraft without window shades, seat-back recline, or seat-back pockets. Reduced cleaning and repair costs for these planes have accompanied the savings of several hundred thousand dollars per aircraft when purchasing these bare-bones planes. Third parties are used at certain airports for passenger and aircraft handling, further lowering costs. Taking advantage of the Internet, direct selling to passengers through online bookings cuts out the cost of using travel agents, with the web site now handling 96 percent of all reservations. Ryanair does not employ an advertising agency, instead producing all of its advertising material in-house.
With a clear and focused strategy as a low-cost carrier, future plans include manageable growth, continuing efforts to appeal the EU commission decision to prevent acquisition of Aer Lingus, and the possibility of entering into the long-haul market with a transatlantic low-cost airline.

1. What are the major contributors to Ryanair’s profitability?
2. Would the acquisition of Aer Lingus complement Ryanair’s key capabilities?

pls Po​​​