Can the Ryanair success story last? Siobhan Creaton reports on a crunch year for the soaring airline as its rivals plummet in turbulent times
Ryanair chief executive Michael O'Leary has donned full battle gear and is preparing to blast the other European airlines out of the skies. This week he pledged to "destroy the airline business as we know it", with British Airways, Lufthansa and its low fare rival, Easyjet, in his sights. Within three years, he says, Ryanair will be the biggest European airline and by 2010 it will be the largest scheduled carrier in the world.
Ryanair is feeling supremely confident after reporting a 60 per cent rise in profits to €239 million for the 12 months to the end of March. It's a noisy airline that loves to pick a fight. This is the year when it expects a major battle as it begins to up the ante with its competitors when they are particularly vulnerable. As British Airways, Lufthansa and Air France are slashing their schedules and shutting down unprofitable routes, Ryanair is hell-bent on expansion. The Irish upstart is adding new aircraft to its fleet and making another three million seats available on its existing and new routes across Europe.
It's a gamble that has spooked some investors, but O'Leary is unfazed.
"This is going to be the year when the going gets tough and the tough will be left standing," he suggests. "This is the time when our competitors are continuing to lose money. This might be the year for a shake-out."
This week's results reflect a stunning performance while airlines across the globe are struggling to contain their financial losses and in some cases stave off bankruptcy.
Its immediate low-fares rival, Easyjet, incurred losses of £24 million (€34 million) in the six months to the end of March when Ryanair was raking in huge profits. Lufthansa had notched up losses of more than €400 million in the first three months of this year while British Airways's losses climbed to more than €160 million. In the US, the airline sector is also struggling with the likes of United Airlines parent UAL Corp and US Airways facing bankruptcy.
The airline to have best weathered the storm across the Atlantic was the Texas-based Southwest Airlines. In the first three months of this year it posted a 14 per cent increase in profits to $24 million, continuing its long tradition of always making money, in good times and bad.
Southwest Airlines is the low-cost, no frills airline that Ryanair, Easyjet and many other carriers model themselves on. But Ryanair is acknowledged as the airline that is most closely modelled on Southwest. Both brand themselves as The Low Fares Airline. They both ruthlessly pursue all means to keep costs low, including flying to less-congested airports often many miles from the main hubs.
O'Leary recently drove a second World War tank to Easyjet's base at Luton Airport on a mission to "liberate the public" from its rival's low fares. With a loud hailer he led his 'troops' to a rendition of a platoon march song: "I've been told and it's no lie. Easyjet's fares are way too high!". Many years earlier, Southwest Airlines crew came out in full battle gear to attack a rival in a similar manner.
On St Patrick's Day, O'Leary dressed up as Ireland's patron saint to announce a seat sale. Twenty-five years earlier Southwest Airlines founder, Herb Kelleher, donned the same garb.
There is nothing original about what Ryanair is doing; it is simply imitating Southwest Airlines, the most resilient and profitable airline in the US. If the formula continues to work, there is no reason why it can't achieve its ambitions.
Today, Ryanair has 125 routes, 50 of which were opened in the past 12 months, and it is in discussion with another 40 airports. It has 67 aircraft and has ordered another 89 new Boeing 737s to be delivered over the next eight years.
Its costs are so low that it needs only to sell about half of the seats on each flight to break even. British Airways must fill over 60 per cent of the plane to achieve a similar outcome, while Easyjet must fill 74 per cent. Ryanair generally fills more than 80 per cent of its flights and so manages to squeeze more profit out of each passenger than its rivals.
This year Ryanair says it will carry 24 million passengers. It is fully geared up for expansion and sees no reason to scale back its plans, dismissing the tough conditions as nothing more than turbulence. O'Leary is telling investors he knows what he is doing and they should trust him.
The confrontational airline chief has warned that its performance this year was exceptional and that now it will feel the impact of even lower fares, fewer people travelling and the weaker value of sterling against the euro. He has already started to cut fares even more aggressively than before to encourage more people to fly. Each year Ryanair pledges to slash fares by about 5 per cent but it is now aiming at 10 per cent discounts. On Wednesday it announced the release of one million low-fare seats during the peak summer months.
For all O'Leary's bravado this is a sign of the tough conditions in the market. Ryanair has a war chest of about €1 billion in cash, which will absorb a fair amount of collateral damage caused by a fares war. Ryanair believes it is better to try to fill its planes by promoting lower fares now than to wait for things to pick up. It also intends to mop up any passengers who would have travelled on routes cancelled by its competitors.
Analysts who closely follow the company are worried that Ryanair could be taking a step too far but understand its opportunistic inclination to destroy the competition.
Dominic Edridge, an analyst at Commerzbank Securities in London is sceptical. "There are some worrying signs. Some people are feeling whether a good thing can last forever. There is probably a limit to how far you can push the business model."
The seat sales are a clever way to get people to log onto the Ryanair website. Just like shopping, the key thing is to get the customer to come in for a look in the hope that they might buy something. The site offers car hire, hotel rooms, travel insurance and other services that generate commissions for the airline.
Another dark cloud on the horizon is the European Commission's investigation into the deals offered to Ryanair by Charleroi Airport south of Brussels - and it may even be widened. The airline has been assiduously courted by airports and is believed to have received very attractive incentives, such as low or free landing charges from many. As this also helps to underpin lower costs, if the European Commission were to conclude that it got unfair subsidies at Charleroi, it could be forced to reimburse the airport and face other penalties.
Its biggest achievement this year may be to succeed in building its low fares brand across Europe, emphasising that when people are looking for cheap flights they should check out Ryanair first. O'Leary is trying to persuade investors that Ryanair is in full control of its destiny. They can only hope he doesn't fly too close to the sun.