Will Ryanair's change of strategy pay dividends?

Ryanair's underperformance against targets in late 2013 led to a change of strategy to focus more on the customer. We review some of these initiatives and outline their potential to deliver results for the airline.

2013 was an annus horribilis for Europe’s largest airline. Ryanair had a near unblemished record of beating analysts' profit forecasts and the airline’s senior management, if unloved by some passengers, was generally highly admired by shareholders for delivering and often beating the forecasted financial results.

In 2013 however, Ryanair issued not just one but two profit warnings, (the first such warnings in over a decade). A profit warning in September was superseded by a second profit warning in November. In the second warning the Irish budget carrier cut its profit forecast further, for the year to March 2014, to around €510m ($688m) from €570m. The company indicated that its annual profit would fall for the first time in five years, as intense competition in Europe was pushing average fares down by around 10% over the 2013/14 winter period.

On the announcement of the second warning, Ryanair shares fell up to 11% in early trading, whilst shares in rival easyJet dropped 3%, and the Thomson Reuters EU Airlines Index was down 4%. From these movements in share prices it was apparent that the stock market believed that Ryanair’s disappointing profitability guidance indicated that the airline was experiencing a more difficult operating environment than several of its peers.

Despite the profit warnings Ryanair’s EBIT margin of 13.1% for the last reported financial year is still ahead of its rival EasyJet, which in its last financial year had an EBIT margin of 11.7%.

Change of strategy

The airline’s reaction came as a surprise to many. Ryanair announced a series of radical customer service improvements to win customers from rivals, an announcement that was also seen as an admission that the airline's 'abrupt culture' might have become a problem. Ryanair’s 100% focus on cost cutting, which had been applied with zealous passion, was now to change. Its new strategy was to attract premium passengers from low-cost rivals like easyJet, Vueling and Norwegian. Ryanair announced it would offer allocated seating on its planes, ending the often frenzied rush by passengers to secure the best seats.

Brand evolution and revolution

Aviation Economics attended a presentation at the Davy Stockbrokers Investor Day in London on June 25th, 2014, where Ryanair’s new Chief Marketing Officer (CMO), Kenny Jacobs, gave a paper entitled “Brand evolution in a low cost way”.

Some of the Ryanair mantra that the market has been used to remains the same:

  • Europe’s lowest fares airline and with the lowest unit costs
  • Europe’s largest carrier with 84.6m passengers with Ryanair being either the largest or second largest carrier in most markets
  • Europe’s number one carrier for coverage with 68 bases
  • Europe’s number one for customer service measured by on-time performance and by fewest lost bags and least flight cancellations

What was new was the announcement of the:

  • Always Getting Better Programme, and the
  • Digital plan rollout

Ryanair is continuing to grow, and it is apparent that its product offer needs to change in order to fill the new aircraft coming on-stream. The graph below, on the Ryanair investor website, shows that with its aircraft order rising to 180, a 40% plus increase in passengers is required (equivalent to over 30 million passengers) to reach 112 million passengers per annum by 2019.

The change in customer focus is reflected in a change in network strategy. In order to attract more business traffic, Ryanair needs to fly to more (expensive) primary airports, rather than its previous strategy of flying to (cheaper) secondary airports. Guidance at the presentation was that 50% of the capacity added up to 2019 will be at primary airports, and that Ryanair have excluded only four airports from their future plans: Amsterdam (AMS), Frankfurt Main (FRA), London Heathrow (LHR), and Paris Charles de Gaulle (CDG).

Inevitably costs will rise due to increased marketing spend and the change in airport mix, and the airline will remain focussed on costs. Ryanair shows its non-fuel unit costs to be 79% below those of easyJet, 114% below those of Norwegian and 269% below those of Air Berlin (see table below).

The CMO was at pains to tell investors that the strategy change would not lead to Ryanair’s cost advantage over its rival LCCs being eroded in any significant way. Jacobs stated the Sales and Marketing line might rise to €2.4 cents from the €2.0 cents shown in the chart above. He also cited a recent advert on YouTube outlining the airline’s new family friendly approach, which had cost only £500 to film (thanks to the use of employee’s children and Stansted allowing Ryanair to film free of charge at the airport).

Jacobs was keen to point out that while Ryanair had a poor reputation in some markets, he quoted the UK as being a particular problem, there were other markets such as Italy where Ryanair had a strong image (mostly as a result of not being Alitalia).

“Always Getting Better Programme”

So what has Ryanair changed and will it be enough to change its current image with its passengers? Some of Ryanair’s changes in its Always Getting Better Programme include:

  • An easier to use website which has reduced booking “clicks” from 17 to 5 clicks (Nov. 2013)
  • A 24 hour grace period to make booking changes (Nov. 2013)
  • The removal of the ‘RECAPTCHA’ function (Nov. 2013)
  • Reduced boarding card fees (Dec. 2013)
  • Cut in baggage fees (Jan. 2014)
  • Free second cabin bag (Jan. 2014)
  • Allocated seating (Feb. 2014)
  • Use of portable electronic devices (Feb. 2014)

As well as improving the on-board experience, Ryanair is beginning to focus on the digital experience, where it finds itself quite a long way behind competitors. To this effect Ryanair is now listed on the Google Flight Search website and has improved and upgraded its own website as of April 2014. Mobile boarding passes will be available from July 2014 as will a Ryanair app.

From March 2014, Ryanair allowed its fares to be sold through a Global Distribution System (GDS), and a second GDS platform will be added. With two-thirds of business travel bookings in Europe being made through GDSs Ryanair felt it was important to have this distribution chain available if it was to increase its share of business traffic. As part of this effort to increase business market share, Ryanair will do more winter flying offering more year-round frequency and will be able to offer passengers a Fast Track option at Stansted, Brussels Zaventem, Dublin and Bergamo.

The trick will be if Ryanair can pull-off improving its brand, product offer, image and customer experience and maintain its cost advantage over competitors. How quickly Ryanair can shift perception and gain traction in the business market remains to be seen. Jacobs admitted that easyJet had “done a good job with corporate travellers”.

Certainly easyJet has been very successful in attracting the later-booking higher yielding business traveller. In May 2014, easyJet announced that 12 million business travellers flew with the airline in the year to March 31 2014. The figure represented a 44% increase on the 8.4 million passengers travelling for business class that easyJet carried in 2010. The budget carrier attributed this increase to its new Inclusive Fare and free fast-track through security at the majority of its primary airports. As easyJet carried a total of 62 million passengers in the year to March 31, 2014, the 12 million business travellers represents almost 20% of its total passenger traffic.

Importantly easyJet has earned itself a level of retention. Carolyn McCall, easyJet's chief executive, has said: 'Ninety-five per cent of passengers travelling on business say they will fly with us again which shows that this focus by businesses on value is here to stay.”

The answer to the questions below will be vital in assessing whether Ryanair’s change in strategy has been successful.

  1. Will the revenue benefits of the move upmarket offset higher costs?
  2. How quickly will Ryanair be able to benefit from its brand repositioning? The company has commented that the new allocated seating is being well accepted by the market and that it was optimistic for ancillary trends in FY2014/15. As yet there is little detail on how it expects these revenues to offset lost revenues from the reduced last minute bag check and boarding card fees and reduced demand for priority boarding.
  3. Beyond the specific seat fees, how rapidly does Ryanair see a rebranding proposition working to support revenues?
  4. How quickly can perceptions change? Ryanair has addressed many of the customer’s bugbears of flying with the airline, but that doesn’t change the perception of travellers overnight. Also the friendliness of cabin crew on some of Ryanair’s competitors is for many well ahead of the surly experience some people describe as their experience of Ryanair crew. In Ryanair’s repositioning there has been no discussion of service training or human resources repositioning. The repositioning would appear to be focussed on digital, broader marketing, and changed policies and procedures.
  5. What will be the revenue benefits of the network changes? The new network growth at Stansted, Dublin, Rome Fiumicino, Brussels Zaventem and Athens should deliver unit revenues considerably above the network average.
  6. What is the costs of the move upmarket? In the 2013/14 Q3 conference call Ryanair downplayed the incremental costs of the repositioning. But for airports the balance of power has shifted to some small degree at least - why offer discounts to Ryanair when there is less belief that Ryanair will choose to serve the market from a secondary airport alternative? We recognise that Stansted growth is cheap, but would explore the cost impact of the other major airports, in terms of handling and airport fees.
  7. How much investment in IT and marketing expertise will be needed to deliver the remodelling of the website, the marketing and the travel experience?

By Tim Coombs Connect on LinkedIn

Tim Coombs