„Lower price beats higher price every time” – this simple motto led Micheal O’Leary to create Europe’s most popular low-fares airline. How was it possible to build a company that is transporting 88 million passengers, more than Lutfthansa or British Airways? All that in the age of high fuel prices and growing competition.
The company started in 1985 with one plane flying from Waterford in Ireland to London. Even after adding additional planes, the airline was not profitable, until it started to implement low-cost business model, which was first used in Southwest Airlines. Ryanair used their experience and later took this model to the next level. In 2015, Ryanair has 5.6B euro Revenues and almost 1B euro profit.
Nowadays, Ryanair is by far cheapest airline in Europe, beating other low cost carriers by 70% in terms of avg. fare price (2013), while normal airlines are 3-5 times more expensive on same routes. Basing on low-cost operating model, Ryanair is now considering entering transatlantic market, starting from $10 price for a flight from London to New York. Seems impossible? Maybe. But 15 years ago paying $10 for a flight between London and Berlin seemed even less likely.
Achieving this success would not be possible with building an operating model that is focused on Ryanair’s main business objective – bringing the cost as low as possible. To obtain that following principles were introduced:
- Using single type of a plane
Using single type of aircrafts not only allows to get great deals from manufacturers, but it also simplifies and decreases maintenance cost. Ryanair is focusing also on having relatively new fleet what decreases cost per passenger
- Increasing aircraft utilization
Ryanair’s main goal is to have its aircrafts flying as much as possible. Ryanair has introduced following actions to achieve that goal e.g.:
– Inconvenient flights times (e.g. 5am or 23.30pm) to increase utilization through planes flying almost 20 hours a day, what results in decreased ticket price
–Less/paid hold luggage to decrease loading/unloading time (not to mention decreasing fuel cost as planes will be lighter)
- Keeping Low overhead cost
All groups of overhead costs are kept on the low level e.g.:
-customers can only book tickets online via its website (savings on travel agents commisions, no airport check desks etc.)
–very limited spend on marketing – Ryanair uses guerilla marketing through its charismatic CEO whose every conference gets into media, or through ads that become viral e.g. when Ryanair illegally used marriage of France President Nicolas Sarkozy and supermodel Carla Bruni picture with a caption “’With Ryanair, my whole family can come to my wedding’ to promote their new ticket promotion. All European media wrote about it, while Ryanair was ordered to pay only $60,000 in damages to France’s President
–decreasing personnel cost – Michel O’Leary treats his staff “not as a biggest asset, but as a biggest cost”. Not only he decreases cost by increasing utilization and making people working really hard (especially pilots, within regulatory limits), but also he introduce payments for things which used to be free for employees like uniforms, trainings or food on the aircrafts
–not using city’s main airport – thanks to using smaller airports, Ryanair can decrease airport fees and improve its efficiency, as frequently Ryanair is the sole/main user of those airports, what gives them huge bargaining power
- Revenue model: dynamic pricing model, additional charges and subsidies
Ryanair is aiming for full utilization of aircraft seat capacity through offering tickets in promotional prices starting from $1 if booked few months ahead of the flight. The ticket price increases the closer it is to the flight and the more tickets for selected flight is sold (dynamic pricing), but initial low price gives a perception of low-cost airline (and we know from marketing, that “perception is everything”).
The key to profitability are additional charges. On top of base fee (e.g. $10), you need to add $6 admin fee (if you are not a member of Ryanair club), $10 for reserved seating, $10 for priority check-in/boarding, $15 to chck-in luggage and suddenly the price jumps to $50. Not to mention additional charges for infants, sports equipment, food on board of the aircraft printing a boarding pass, travel insurance, car hire and hotel booking upselling etc.
Furthermore, if Ryanair decides to fly to a small city (e.g. Bydgoszcz-London), he requires that those flights should be subsidized by local authorities, as they will get those money back through increased tourist and business spend.
Studies shown, that Ryanair price for the flight is similar as British Airways if all the extras are included. Ryanair’s success is tied to “mix and match” system in which you only pay for the extras you need – it’s a win-win situation for both parties, because Ryanair is providing only those extra services which add value to the particular customer.