November 11, 2013
Credit: Keith Gaskell
Ryanair has an amazing growth record—in passenger numbers, fleet, network and profitability. But now, Europe's largest and the world's second-largest low-cost carrier (LCC) is slowing down: It is not taking any new aircraft this year, anticipates an increase in passengers of just 2% and expects to post lower profits as average yields and fares contiue to fall across its network. At the same time, it is upping its service standards.
So is Ryanair, known for its cut-throat approach to costs and strict no-frills strategy, moving toward a hybrid model?
If it were up to CEO Michael O'Leary, he would not change a thing because, he says, “We couldn't be any more customer-friendly; we have 81 million people who think we're wonderfully more customer friendly than any other airline. That is why they fly with us.” But, he admits, “there are irritants out there. We are consciously going to eliminate those. The website does not function properly; it is too complicated.”
Customer-service initiatives include fully reserved seating across its network beginning Feb. 1, 2014. This return to reserved seating is in response to customer feedback via the airline's “Tell MOL [Michael O'Leary]” page on its website. About 60% of passengers called for allocated seating, which the CEO confessed, surprised him “personally.” Ryanair will also soften its rigorous carry-on policy and allow a “small” second carry-on bag, which is part of the new 10-year agreement with London Stansted Airport to facilitate airport shopping. The new hand-luggage policy will be rolled out across the network Dec. 1.
The reserved seating has revenue potential as passengers can preselect their seat for a €5 ($6.75) fee, and this will offset minor losses in ancillary revenue in airport-related fees, such as baggage, check-in and boarding card-reissue tolls. Overall, Ryanair expects ancillary revenues to trend downward toward about 20% of revenues in the midterm. Ancillary revenues grew strongly by 22% in the first half and helped offset the falling fares revenue.
Average fares, including checked-baggage fees, fell 2% year-on-year to €52 in the first fiscal half. Ryanair expects fares and yields will continue to fall in the reminder of its fiscal year—9% in the third quarter and by 10% in the fourth quarter ending March 31, 2014—due to a combination of increased competition and softer economic conditions across Europe. The airline has revised its full-year net profit guidance to between €500 million ($675 million) and €520 million.
This marks the second time this year Ryanair has adjusted its full-year profit outlook. To be clear: The airline is not sliding in the red and a net profit of between €500 million ($675 million) and €520 million is still very good—certainly for a European airline. In its latest financial forecast, issued in September, the International Air Transport Association expects European airlines to post a $1.7 billion (€1.3 billion) net profit in 2013. This means Ryanair would contribute almost 40% of the total net profits generated jointly by Europe's more than 300 airlines.