Source: the Observer. Written by: Dan Milmo, September 12, 2010
Ryanair must move away from low fares, says O'Leary
Budget airline chief says 'unsustainable' model must change - and so must the leadership.
Ryanair boss Michael O'Leary has warned of an end to bargain-basement fares as the no-frills carrier plans a shift away from its "pile it high and sell it cheap" approach.
O'Leary also said the Dublin-based airline will need a new chief executive as growth slows, admitting that his controversial management style would be out of place in a more mature business.
Ryanair has shot from a small regional player to the continent's largest shorthaul carrier during O'Leary's 16-year tenure and now carries 73.5 million passengers a year on 250 aeroplanes, chiefly landing at secondary airports.
The airline has built its appeal on rock-bottom prices, but O'Leary indicated that an average fare of €40 (£33) is unsustainable. The airline is facing pressure on costs as it moves into major airports closer to city centres in a quest for more passengers and will also be under pressure to improve levels of service. "We have to move away over the next number of years from being obsessed with having the lowest fares in the market," O'Leary said.
He added that Ryanair will have to become a more sophisticated operation as the business reaches maturity: "Growth rates start to slow down significantly and it becomes more about the brand game, telling all the lies that you need to tell to get the fares up."
In a departure from his usual business philosophy, O'Leary said Ryanair would need to trumpet attributes other than cheap fares – such as its young aircraft fleet and "terrific" in-flight service. Comparing Ryanair with retail giants Tesco and Lidl, O'Leary said the Dublin-based carrier would have to move beyond the "cheap and naff" labels that were attached to Tesco before it overtook Sainsbury's in the 1990s. "At the moment we just pile it high and sell it cheap. Lidl started off cheap and cheerful but now it is very sophisticated – it is no longer perceived to be cheap and cheerful."
Asked when he expects to step down as Ryanair chief executive, the 49-year-old said he will stay at the helm until the carrier nearly doubles in size. "When we are twice the size we are now, at around 400 aircraft, then the growth rate slows down to 2% or 3% per year. The shareholders will want a return. You will need a different management then. We won't need my dog and pony show, which is about generating publicity. Every company has to move from being the high-growth Robin Hood."
John Strickland, a consultant and former executive at no-frills carrier Buzz, said the Tesco trajectory could see Ryanair move out of the "bargain basement" bracket. "It could become something slicker but still with a price advantage, even if it is not the free-fare business it is today." Ryanair has already started running major operations from large airports such as Edinburgh and Barcelona El Prat, which will attract passengers seeking a more upmarket trip. Ryanair will have to go into a rather different product style," said Strickland.
Industry consultant Chris Tarry said former underdogs such as Ryanair and easyJet will compete against each other for passengers as they chase customers who generate higher yields, or average fares. "For Ryanair it may be that going into the principal airports costs more in terms of landing fees but the underlying yields are also higher too, because passengers will be willing to pay more – producing better margins. But this will also bring the low-cost carriers into head-to-head competition," said Tarry.
O'Leary's quips and publicity stunts include calling the prime minister of Ireland a "gobshite" and threatening to charge passengers for using the toilet, but analysts have praised Ryanair for adhering to a simple, cost-driven business model. One of the few airline executives praised by O'Leary is Herb Kelleher, the founder of Dallas-based Southwest Airlines and godfather of the budget carrier phenomenon. Kelleher ran the airline on four principles: fly one type of plane to cut engineering costs; keep overheads down; turn aircraft around quickly; and abandon air miles schemes.