The Irish no-frills carrier's low fares helped it carry more international passengers than any other airline in the world last year. It's on course to keep growing and post strong profits again this year, as more traditional rivals struggle with weak traffic and discounted airfares, despite early signs of a pickup.
In a Boss Talk interview with The Wall Street Journal, Ryanair's Michael O'Leary discusses growth in a recession, transparency with passengers, and the fast-changing airline industry.
Barely a decade ago, Ryanair's brash chief executive, Michael O'Leary, brought Southwest Airlines Co.'s model of simplicity and frugality to Europe. He put the business plan on steroids by squeezing costs and slashing ticket prices. The Nasdaq-listed Ryanair has been one of the world's most consistently profitable airlines this decade.
Here are some highlights from Michaels's interview with O'Leary:
WSJ: Your costs are already low. Do you reach a point where it's hard to keep cutting?
Mr. O'Leary: You do reach a point, but we're probably 20 years from that. What you have to do is be more revolutionary.
This year, thanks to a weaker dollar, we'll have lower aircraft costs and lower maintenance costs. We're lowering airport costs and we're lowering staff costs with pay freezes.
We now have to be more inventive in the way we lower costs, which is why we're looking at things that seem revolutionary to other people.
Like, paying for checked-in bags: It wasn't about getting revenue. It was about persuading people to change their travel behavior—to travel with carry-on luggage only. But that's enabled us to move to 100% Web check-in. So we now don't need check-in desks. We don't need check-in staff. Passengers love it because they'll never again get stuck in a Ryanair check-in queue. That helps us significantly lower airport and handling costs.
Now we're looking at charging for toilets on board—not because we want revenue from toilet fees. We'd happily give the money away to some incontinent charity. What it means is, if by charging for toilets on board, more people would use the toilets in the terminals before or after flights, I could take out maybe two of the three toilets on board, add six extra seats and reduce fares across the aircraft by another three or four percent.
So, there's always new ways of lowering costs, but you have to come at it with some imagination and some passion.
WSJ: What hasn't worked well for you in the past year?
Mr. O'Leary: Our campaign to break up the Dublin airport monopoly clearly hasn't yet worked.
Our offer to acquire Aer Lingus and grow it quickly hasn't worked, which is why Aer Lingus are now reporting record losses and have announced another 800 job cuts.
The fact the Irish government [which owns 24% of Aer Lingus] has turned us down twice just shows how stupid the Irish government is. We could have been nicer to the Irish government. But I think since they're so heavily in bed with the trade union movement in Aer Lingus, our offers were doomed to failure from the start. So I think it's highly unlikely we'll make a third offer.
WSJ: Some of your savings—such as charging for food and checked bags—once seemed shocking, but are now standard. How hard has it been to get people to change their expectations about what they are paying for?
Mr. O'Leary: I think it's remarkably easy if you're open and fair with the passengers. We're open about our policies: You're not getting free food. We don't want your check-in bags. We're not going to put you up in hotels because your grammy died.
But they understand the trade-off is we are going to guarantee you the lowest airfares in Europe, by a distance. And we are going to guarantee you the fewest delays, fewest cancellations and fewest lost bags.
And that's what people really want—affordable, safe air transport from A to B. It's a commodity. It's not some life-changing sexual experience, which is what the other high-fare airlines have tried to convince you that it is.
WSJ: You've been very public about your frustration with the pace of yearlong negotiations with Boeing Co. for a big order. Where does it stand?
Mr. O'Leary: We have effectively reached agreement on pricing for 200 aircraft. But the discussions have now broken down because Boeing wants to go back and change the delivery conditions. It's things like warranties and performance guarantees. But we're not accepting inferior delivery conditions than on our current orders.
Our final board meeting of the year is next Thursday in Dublin. I don't see any way of putting the deal back together again in the next week. The deal is now highly unlikely to happen.
WSJ: What's your fallback plan?
Mr. O'Leary: We just don't order any more planes from 2013. We still have almost 100 aircraft coming through 2012. Then we either go back to Airbus or go back to Boeing in the next downturn. Or we stop growing from 2013 and we start returning cash to shareholders. [A Boeing spokesman declined to comment on the negotiations.]
O'Leary's statement on the Boeing negotiations is perhaps the most eye-opening piece of the interview. There's the common perception that airlines essentially have two major manufacturers to choose from for large planes -- Boeing and Airbus. The duopolistic nature of the suppliers suggests that the aircraft makers hold most of the cards when it comes to negotiating deal terms. This may be even more so in Ryanair's case because the company has standardized on Boeing jets, making Ryanair "hostage" to Boeing in some respects. And yet, O'Leary manages to find a way to try to pressure Boeing into submission: Ryanair simply won't grow if it can't get the terms it wants. What growth company CEO would put "no growth" on the table in this way? By saying that Ryanair could simply stop growing and start buying back stock or paying dividends, O'Leary will probably get exactly what he wants: A major concession from Boeing.Read a profile of Ryanair in a recent issue of Portfolio Manager's Review, the acclaimed monthly idea-oriented research publication of The Manual of Ideas.
Disclosure: No positions