Airline Magic

“Ryanair will be the main beneficiary of the painfully slow restructuring of Europe’s flag carriers.”

Even with the famously creative accounting that some airlines have used over the years, many are having a difficult time telling a compelling story about their financial performance. Air France-KLM, Europe’s second-largest “flag-carrier” by revenue, says its results will deteriorate in 2012 following a loss of €353 million for the past year. This is just the last in a series of horror stories from an industry that is out of step with the times and just hasn’t changed fast enough.

Before the deregulation of the European airline industry, in 1992, and introduction of the Open Skies policy concept, which reduced the privileged status of “flag carriers” and their descendents, there were significant barriers to entry to this market. A lot has changed since then, but the control of landing slots at major airports is one of the remaining barriers left. Astonishingly, the recent sale of BMI’s slots at Heathrow to British Airways valued six daily slots at somewhere between €100m and €150m.

Ryanair saw rightly that deregulation was an opportunity. It identified not only a large and suppressed “low cost” demand but also the need for a different low cost approach to compete effectively. Side-stepping the slot barrier and eschewing major hubs, it opened up other destinations where it could get a good deal and made sure its flights were full. This strategy worked rather well. While the flags of many of Europe’s “old money” airlines are fluttering rather limply these days, Ryanair’s is flying well and it is now a leading European airline with revenues of €3013m and €339m of profits in 2010.

Without the numerous legacy issues of the established airlines to slow it down, Ryanair has been able to build its service offering and airline on a new model. It is arguably the cost and price leader in the European airline industry today and is even leading the way in punctuality. Ryanair boss, Michael O’Leary is demonstrably talented in making this happen but also in carving out a personal and brand territory that is often antithetical to the competition. Like Lionel Messi on the football pitch, he’s a bit of an airline magician.

Genuine cost leadership is rare but incredibly valuable. The bigger you get the more valuable it becomes. Many would be satisfied with what Ryanair has achieved over the last decade but not O’Leary. The company has plans to nearly double in size over the next decade to make it one of the biggest airlines in the world. When you look at the parlous state of the industry, that lacks serious competitors with a similar business model and O’Leary’s success to date, not many people would bet against him.

In 10 years time, the airline industry will be unrecognisable and Ryanair will be a dominating force on the world stage.

Mark

 

 

 

 

 

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