O'Leary's low-cost model still winning the war

Analysis: Despite much uncertainty in the airline sector, Ryanair appears to have managed to keep its business model firmly …

Analysis: Despite much uncertainty in the airline sector, Ryanair appears to have managed to keep its business model firmly intact, writes Siobhán Creaton.

Announcing figures yesterday some 8 per cent ahead of market expectations, Ryanair chief executive Mr Michael O'Leary said the airline was rigidly sticking to its highly profitable low-cost formula and saw no reason why it couldn't overtake British Airways and Lufthansa within five years.

"The business model continues to be very strong. The strength of our traffic and profit growth, as well as the exceptional margins, once again proves our doubters wrong," he said.

The doubters are those who are keeping a watchful eye on the European Commission and the impact of a negative outcome from its investigation into subsidies and other incentives given to Ryanair when it established a hub at Belgium's Charleroi airport in 2000. Mr O'Leary has frequently described this decision as Ryanair's "Waterloo".

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An adverse ruling could force the renegotiation of deals between Ryanair and other European state-owned airports.

Mr O'Leary signalled yesterday that the airline could live with a decision to shorten its deal at Charleroi from 15 years to five years and the publication of its terms at that airport.

But if the Commission was to order the repayment of any monies advanced under the deal, Ryanair would refer the matter to the courts. Mr O'Leary believes that the millions of euros Ryanair received in reduced landing fees, contributions towards staff accommodation, and training and marketing subsidies at Charleroi rightfully belong to Ryanair. "This is our money. We will never pay it back," he said.

He said the same deal it received had been offered to several other airlines and pointed out that, when Ryanair first started flying to Charleroi, the airport had no customers so the discounts were meaningless.

He also suggested that Charleroi airport, which is owned by the Walloon regional government and is now profitable, could ultimately be privatised.

If this happened, there would be no European Commission scrutiny of Ryanair's deals there.

"If the Commission finds against us at Charleroi, that decision would not end low-fare European travel forever. We will ultimately win it in a court somewhere."

Ryanair has pulled its service between Stansted and Strasbourg after an adverse ruling on the subsidies it received there and has moved to Baden Baden. This decision is being appealed but Mr O'Leary believes the Charleroi decision will overtake it and said it had already agreed with Strasbourg airport that it would put in place an agreement that meets with the Brussels ruling there and re-open its route.

The airline is reviewing six routes, three in Scandinavia, and one each in France, the Netherlands and Belgium, where load factors are below target and it may discontinue these routes. But it is in talks with up to 50 airports across Europe and expects to establish another European base in mid-2004.

More than 20 per cent of Ryanair's profitability is underpinned by routes out of Ireland. Mr O'Leary played down any threat to the profitability of these routes from Aer Lingus, which has lowered fares, opened new routes and is working to achieve Ryanair's 25-minute airport turnarounds.

"Aer Lingus will still be left with six million passengers and 2,000 staff while we will have 24 million passengers and 2,000 staff," he said.

Mr O'Leary ruled out the possibility of Ryanair taking over Aer Lingus in the future and believes the national airline will ultimately become part of British Airways."Aer Lingus has nothing we want and we don't need problems," he said.

Ryanair chairman Mr David Bonderman's Texas Pacific Group has been mentioned as a possible investor in Aer Lingus.

Mr O'Leary said he would not have any problem with Texas taking a stake in its domestic rival.