Could Ryanair Be In For A Bumpy Landing? – ValueWalk Premium

Could Ryanair Be In For A Bumpy Landing?

Ryanair Holdings plc (NASDAQ:RYAAY)’s rise to the top has been nothing short of phenomenal. From a single route in 1984 ferrying passengers from Waterford in Ireland to London, it has grown to become Europe’s largest airline. But with a horrendous reputation for customer service and a growing array of add-on charges driving customers away, is the budget airline finally running out of runway?

Could Ryanair Be In For A Bumpy Landing?

Low cost air travel for everyone

There’s no doubt that Ryanair's low cost business model revolutionized the commercial aviation industry in Europe. Indeed, while it was responsible for making air travel more affordable for everyone, many of its competitors embraced those very same policies.

Yet the firm has always been criticized for its customer service, poor employee relations, complex fee structures, baggage restrictions and gung-ho marketing. At the helm, Michael O’Leary remains a charismatic and unbending individual, thriving on controversy and conflict. But, make no mistake, it was this one man’s vision that turned round the ailing company in the 80s when he took over from founder, Tony Ryan.

Low cost flights, high cost everything else

Ryanair built its reputation on being able to offer ‘no-frills’ flights for as little as 1c. However, that sort of revenue won’t pay the bills. Running costs have to come from somewhere, so Ryanair sources 20% of its revenue from ancillary services and fees. Passengers are charged £70 at the airport if they arrive without a pre-printed boarding card and another €100 if they don’t check in their luggage online. At the departure gates, a Ryanair Holdings plc (NASDAQ:RYAAY) employee makes sure the weight and dimensions of carry-on baggage is within strict guidelines. Those who flout the rules are fined on the spot.

In-flight prices for food, drink and other services are among the highest in the industry. To keep landing charges low, Ryanair negotiates preferential deals with regional airports, many of which are many miles from major cities, meaning extra costs and traveling times for passengers.

What price loyalty?

Up until now, this has been fine for most passengers who realise if you want to fly on the cheap, then you have to play by the rules. But, suggesting new policies that enrage its passengers, such as charging to use toilets, redesigning aircraft to allow standing passengers and charging extra for overweight passengers hasn’t helped customer relations. Just this week, O’Leary said that charges for carry-on baggage were ‘inevitable’.

When The Economist says, “Ryanair has a deserved reputation for nastiness” and that the airline “has become a byword for appalling customer service”, it’s hardly surprising that customers start to look elsewhere. Aer Lingus, in particular, is beginning to look more attractive, even at higher prices. The national airline has been cutting costs in every area order to compete with Ryanair and is seeing results. Passenger numbers and capacity are up across the board. Previously, these were Ryanair’s customers.

So it should come as no surprise that since 2006, O’Leary has been doing everything he can to get his hands on the national airline. Despite managing to accrue almost 30% of Aer Lingus’ stock, he’s been unsuccessful. Even the Irish government, desperate to offload their 25% stake in Aer Lingus, refused to sell to Ryanair, stating it would give the airline a monopoly on flights out of Ireland.

Last call for Ryanair

There’s very little left Ryanair Holdings plc (NASDAQ:RYAAY) can do to cut costs or boost revenues. Surely, any new money spinning schemes will put off more passengers. Rising fuel prices are taking their toll too, making up 47% of all costs. Ryanair’s capacity currently stands at 88% – very little improvement can be made here. Passenger numbers are up just 3% on last year, but there has been a 21% fall in after tax profits for the first fiscal quarter mainly due to higher fuel costs.

Ryanair Holdings plc (NASDAQ:RYAAY)’s share price which has risen rapidly from around €4 in mid-2012 leveled out in July fluctuating between €7 and €7.50. Realistically, if the airline wants to see further gains, then O’Leary may have to concede that it’s time to review how it treats its customers.

O’Leary may be banking on acquiring Aer Lingus, which he says will operate independently from Ryanair Holdings plc (NASDAQ:RYAAY). It’s a big gamble. And if he isn’t successful, there could be turbulence ahead for the airline.


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