What is the greatest threat facing Ryanair?
Revista de Prensa/Press Review: Flightglobal
For chief executive Michael O'Leary, it's not the risk of creeping protectionism across Europe post-Brexit, or overcapacity in the short-haul market, or the challenge posed by disintermediators. Rather, it lies closer to home, he suggests – in characteristically robust language.
"The biggest danger is we will f*** it up," he told FlightGlobal in an interview in Brussels on 8 February. "We will do something stupid: mergers and acquisitions, start taking honorary doctorates, knighthoods, s*** like that. We will start being f****** members of the community.
"If we don't keep challenging ourselves, and we don't keep challenging them [rival airlines], and we don't commit to keeping driving down prices, then we will become fat, numb and stupid like the rest of the industry."
By most indicators, O'Leary appears to have little to fear. The Dublin-headquartered airline continues to cement its dominance across the continent, becoming the largest carrier in Europe - even than rivals at a group level - for the first time in 2016 in terms of passenger numbers. It carried 117 million passengers, on an earned seat basis, in the 2016 calendar year.
Despite its latest quarterly results revealing a dip in profits, O'Leary says Ryanair is "on track" to make a €1.3 billion ($1.37 billion) profit for the full financial year and will double in size over the next eight years to carry 220 million people by 2024.
The business model has, however, changed dramatically over recent years.
Historically, Ryanair operated to Europe's secondary airports, and revelled in being the outsider reviled by competitor and customer alike. Now, with Frankfurt Main set to join its network next month, Ryanair has a presence at just about every primary airport on the continent, barring London Heathrow.
The "Always Getting Better" campaign, via which the carrier has sought to become more customer-friendly, has been a "revelatory process for both for me and for Ryanair", O'Leary acknowledges, and has led to a rethink of the entire passenger-processing procedure and onboard operation. O'Leary summarises the new approach as one of being "nice to passengers".
In Dublin, an IT centre called "Ryanair Labs" has been opened, while in Wroclaw the airline now has a "Travel Labs" site. These have given Ryanair the infrastructure to revamp its website and a mobile app.
As its seeks to boost ancillary revenues and offer more travel-related products through its website, O'Leary predicts that in years to come Ryanair will be "a very large airline, with a brilliant website [and] mobile app attached". At that point, he adds, "the website and app will be producing as much revenue for us as the airline – it could be that big".
The most recent example of the changing face of Ryanair has been the talks it has held with airlines such as Aer Lingus and Norwegian toward agreements under which the Irish carrier would feed its rivals' long-haul routes.
O'Leary says a deal with one or other of these two carriers will be in place by the summer. Meanwhile, talks have also been conducted with Alitalia about a similar arrangement, O'Leary reveals, adding he is waiting for a definite decision by the Italian flag carrier.
"Alitalia is an obvious case: Alitalia is in turmoil financially, I mean they are just blowing every gasket they have. The only way forward for Alitalia is to do more long-haul flying and do less short-haul flying," argues O'Leary.
He sees the shift toward low-cost carriers working with legacy carriers as "inevitable" rather than any "revolutionary change" to the European aviation landscape.
Ryanair, he says, will seek to avoid the "complexity" of formal interline or prorate arrangements. Instead, the crux of the proposition is that Ryanair will simply offer rivals cheaper short-haul seats than they themselves can provide. "We offer them far more routes, a lower feed cost – €50 as against €100 – and we would help them to lower the cost of their feed,” he says.
He cautions that such co-operation would be limited. For example, Ryanair could potentially feed Lufthansa's "20 least-profitable routes" without taking over the entire short-haul network.
"I think it is [an] inevitable development, but they will never give up the top 20 trunk short-haul routes: Madrid-Frankfurt, Frankfurt-Rome, Frankfurt-London... But Porto-Frankfurt could well be done by a low-cost carrier – us, EasyJet or something like that – because we can do it cheaper for them," says O'Leary.
So how will these agreements work in practice? O'Leary says Ryanair will only take the revenue for the short-haul leg of the journey, but it's the other partner that carries the can because they "keep all the long-haul revenue". Ryanair will deliver the passenger's baggage "at the designated point" at a hub airport, but that is where the airline's responsibility ends, he indicates.
"There will be issues when the customer connections fail," O'Leary admits. "I don't mind putting them on the next Ryanair flight, but if there's a difficulty there: you have all the long-haul revenue, he's your passenger, you look after him."
Despite his admission that Ryanair is working with Boeing on a 757 successor - the so-called middle of the market (MOM) aircraft - O'Leary denies that he has become what he would term an aerosexual.
"No, I couldn't care less," he says of the "technical side" of aviation. "All I want to know is the cost per seat."
O'Leary says Ryanair is working with Boeing "on a whole range of possible aircraft types", including the "MOM". While he does not see himself as the driving force behind this co-operation, he believes that "ultimately" the US manufacturer needs an aircraft "that is pitched at around 300 seats, with long range".
For O'Leary, "the tragedy was they ever stopped making the 757 – it became the kind of aircraft of choice".
On the well-worn subject of whether and when Ryanair might start long-haul operations itself, O'Leary reiterates a familiar caveat as he notes the lack of production slots for suitable aircraft.
"If there is availability of a 787 in reasonable numbers at a reasonable price, we will take the 787. If there is a replacement aircraft for the 757 that can reach the West Coast [of the USA], we will take that."
He adds: "What we need to be able to have is the availability of 40 or 50 units at a low price. And because the orderbooks are stuffed to the gills, there's no low price, long-haul aircraft out there."
So could Ryanair simply buy one of its rivals such as Norwegian to secure the aircraft? No, says O'Leary.
"Then I'm overpaying. I'm not looking for a quick way into long-haul. I want a long-haul, low-cost aircraft to order," he says. "I'm very happy to wait until the market turns, the Gulf carriers blow themselves up. Something will happen."
Appropriate widebodies might be not be available, but Ryanair does have orders for a hundred 737 Max narrowbodies and options for another 100. Could the Irish carrier replicate what Norwegian is planning to do by putting them on transatlantic routes? Again, O'Leary is dismissive.
"No, the idea you can use the Max for long-haul... The Max can only get you from, say, Ireland or the UK to Boston and New York – that's not a transatlantic operation," he says.
"If you are going to do transatlantic, you need to have an operation that can fly from Poland to the West Coast [of the US] and everywhere in between. Otherwise, you don't have the scale."
But he has nothing but praise for the new narrowbody, which will be delivered to Ryanair from August 2019, and which he describes as a "game changer" for the airline's business.
"It has 4% more seats – 197 as against 189 – and it has a 16% lower fuel consumption, guaranteed. Its probably going to be more like 20%," he says. "It transforms the business."
This brings O'Leary on to a fundamental point about the Ryanair business model.
"You see some airlines who can never make money. They do ASKs [available seat-kilometres] and CASKs [cost per available seat-kilometre]: it's all bollocks. It's your cost per seat [that matters], because the seat is what you sell."
Emphasising his point, O'Leary says he will order Airbus aircraft "any time that their cost per seat is 5% below Boeing's".
Flight Fleets Analyzer shows that Ryanair's all-737 fleet currently includes 370 in-service -800s, and that it has another 92 of those on order.
O'Leary emerged as one of the staunchest supporters of the "Remain" campaign in the build-up to the UK's referendum on EU membership last year, and has been an outspoken critic of the "Leave" side both before and after the vote.
He concedes that Brexit will have an impact on his airline. Not only will Ryanair cut its growth plans for the UK this summer, it might also be forced to create a new operating entity and gain a UK air operator's certificate in order to continue to operate its domestic routes in the country.
But O'Leary says the impact on Ryanair will be much less than it will be for UK-based airlines such as IAG and EasyJet.
He sees no inherent threat of the Brexit vote powering a tide of protectionism across Europe, and believes the UK will struggle to show others keen to separate from the EU that it can make separation a success.
"The great challenge for the Brexiteers is going to be what happens when all of a sudden low-cost air travel to and from the UK begins to be threatened by the UK leaving open-skies. Then there's going to be a big f****** backlash," he says.
"The UK has been talking to itself for the last four months. They haven't been talking to the Europeans. I think they are going to get quite a shock when they start talking to the Europeans about just how bad Brexit is going to be. I fundamentally believe the UK will change course in two years when they realise they are going to walk off a f****** cliff."
Though he sees European aviation suffering from a bout of "too much capacity", O'Leary says Ryanair will continue to expand across multiple markets this year.
In addition to serving Naples and Frankfurt Main for the first time this year, the airline will add multiple new routes from Poland, Bulgaria, Germany and Israel.
"We can expand in every market: we are expanding in Wizz's markets, in EasyJet's markets, in IAG's markets," he says. "We are profitable in all these markets. I think the challenge is how are these other airlines that are ordering aircraft going to compete with Ryanair when we enter their markets, and the reality is they can't."
O'Leary meanwhile continues to keep "disintermediators" in his sights. "We want to steal the market back from TripAdvisor, or Booking.com – all these people who exist on the back of the airlines. If we can take all of those services, those disintermediated services, and put them back on an airline website or a mobile app, then they don't exist. Those are the business models we want to disintermediate."
What keeps him awake at night? "Safety, management discipline. Safety and execution, risk – those are the two things I worry about."
O'Leary is proud that safety levels remain "excellent" at Ryanair, noting the airline's "industry-leading" 30-year record. "But we have to keep building on that," he says. "We have to keep investing in new aircraft, in simulators, in pilot training, and we continue to invest very heavily in that."
He adds: "We recently announced an order for 14 fixed-base simulators, which will take us up to 20 simulators across the network. So we are continuously doing controlling and doing all of our own training."
TIME TO LEAVE?
O'Leary has now been at the helm at Ryanair for 23 years, in which time has made an extraordinary impact, turning a tiny Irish regional outfit into Europe's largest carrier by passenger numbers and its foremost low-cost.
By his own admission, he now does things that he would have found unthinkable years before, such as attending aviation conferences and last year joining with Europe's legacy airlines to form a new lobbying group – Airlines for Europe (A4E) – with Air France-KLM, Lufthansa, Norwegian, EasyJet and IAG.
"I have to slap myself very roughly before I go into these A4E meetings [in order] not to get contaminated, and then I get fumigated on the way out of the door," he quips. "But we continue to fight the good fight...
"Seriously, there are areas where we do need to work with the other airlines. We are now the biggest airline in Europe, and we have much more voice if we – with Lufthansa, Air France, IAG – sing from the same hymn-sheet."
So with all the changes that have been made at the airline, is it time for the 55-year-old to stand down?
"Jesus, no," he says. "We are going to make €1.3 billion this year, we're about to double in size over the next eight years. We are doing incredibly exciting things with the website, the mobile app; the whole Ryanair Labs has transformed the business. What I've said is: look, when we stop growing rapidly, doing exciting things, then I'll be the wrong guy to run the place.
"When it becomes a dull, boring, f****** growing-at-two-to-three-percent-a-year [airline], dealing with f****** unions and strikes and all that kind of s***, I'll be gone. But we are not there yet."
• 16 February, 2017
• SOURCE: Flightglobal Pro
• BY: Oliver Clark