(R)evolution of Ryanair's Business Model (Part 1)

The following text is an article I wrote for Air Scoop, a European low-cost airline newsletter. It concerns the future growth plans of Ryanair, and how its business model must evolve to fit the new market realities in Europe and was published in their April newsletter. The second part of the article will be published in the May issue of Air Scoop, and when it is, I will post it on Airline Bulletin. Enjoy!

Ryanair has projected ambitious growth targets for the next five years. By 2012, the airline plans to carry 85 million passengers a year, up from 42.5 million in 2006. However, in order to meet this target, Ryanair will have to change its business model to meet the needs of more travelers. Some have speculated that Ryanair will offer long-haul flights, possibly in conjunction with its Aer Lingus bid, as well as flights to larger airports closer to city centers. While Ryanair will probably not fly transatlantic flights, it will need to target longer routes, as well as flights to larger airports closer to city centers if it wants to meet those growth targets.

Many observers believe that Ryanair’s bid for Aer Lingus is a maneuver to get the company into the long-haul aviation market. However, Ryanair CEO Michael O’Leary recently said in the German newspaper Sueddeutsche Zeitung that the bid is “rather unlikely” to succeed. Ryanair is unlikely to deviate from its no-frills business model in the coming years, because that enables the carrier to maintain the lowest costs of any airline in Europe. Expansion into long-haul markets complicates Ryanair’s simple business model, and it would almost certainly increase costs. Ryanair’s available seat mile costs would increase because it would have to add a new aircraft type to its fleet, it would likely have to increase seat pitch on long-haul planes, it might have to facilitate connections at bases such as London Stansted, and it would run into more competition, particularly if it opened routes already operated by charter carriers such as Monarch or First Choice.

But if Ryanair chose not to operate long-haul flights, and instead focus on medium-haul flights, between 4 and 6 hours in length, the airline could operate them with its 737-800 aircraft. While longer flights deviates from Ryanair’s established business model to operate quick 1-3 hour flights, operating medium-haul flights could allow Ryanair to increase its aircraft utilization. This could be accomplished if Ryanair operates many of the flights as red-eyes, provided the airline leaves enough time in the schedule to make up for any delays or maintenance. This model opens up many opportunities for Ryanair to serve markets that badly need competition. Ryanair succeeded beautifully in Poland where the airline significantly lowed fares and expanded service to many smaller markets that lacked nonstop service to Western Europe. If Ryanair expanded service in Western Russia, it would likely have a similar effect on many smaller airports in the country. Ryanair has already adopted some medium-haul routes. For example, Ryanair started service to Morocco last year, where it committed to serving up to 20 routes within five years. While flights between Marseille and Morocco weren’t successful, flights between the UK and Morocco have been. Ryanair also has medium-haul opportunities in North and West Africa, the Middle East, including Israel, and other former Russian non-EU states, such as Ukraine or Georgia.

But, while medium-haul flights would give Ryanair many opportunities to expand its services, it could also lead to problems. If Ryanair’s planes were flying fewer passengers per day, then ancillary revenues may decrease. On a ten-and-a-half-hour round-trip (approximately five hours each way with 25-30 minutes turnaround time), Ryanair only has a potential market of 378 customers for its ancillary products (up to 189 passengers each way), while Ryanair could fly more than two two-hour round-trips in the same amount of time, doubling the number of potential customers who could utilize ancillary revenue products. Consequently, this may decrease Ryanair’s revenues per available seat mile, because although longer segments could generate higher fares, they would decrease the importance one of Ryanair’s most profitable revenue source. Also, if Ryanair flew more medium-haul routes, Ryanair would be flying fewer segments and it would need more planes to increase its passenger loads to 85 million a year, than if it were just to focus on shorter segments. But another lingering difficulty that Ryanair may have in adopting a medium-haul strategy is regulatory issues. Ryanair has been able to expand quickly within EU states because it faces few regulatory hurdles when opening a new route. But Ryanair encountered much greater hurdles when entering Morocco, where it took the airline six months of negotiations to reach an agreement with the Moroccan government. If Ryanair expands further into non-EU states, then it could delay the opening of new routes while terms are negotiated. That could enable competitors to wield their influence with foreign governments to deny Ryanair’s application, or to at least stall Ryanair’s arrival, enabling foreign carriers to adapt to changing passenger needs.