Mark Smith, Senior Manager in Scrutton Bland’s Corporate Finance department considers Ryanair’s recent fall in profits
When the no-frills budget airlines first launched, the temptation of getting a flight to a European destination for the same price as a round of drinks was just too good to resist for many. If you were willing to take on the veritable rugby scrum of finding a seat and prepared to put up with the almost non-existent customer service, then parting with £20 for a flight was a bargain.
Ryanair was at the vanguard of these airline industry disruptors, although many considered that their low prices were only possible due to a stripped-down approach in other areas, such as customer service. Despite Ryanair’s very public dismissal of passenger complaints, at least once a month the tabloids would run a story bemoaning the airline’s customer service. But the people kept on paying and the planes kept on flying.
So how is it that Ryanair have just announced a loss for the last three months of 2018? After all, CEO Michael O’Leary and his infamous abrasive style had been gradually stepping back from the business for some time and the additional charges were becoming more in line with other budget airlines.
Could it be that the age of the millennial and their concerns about environmental impact of flying are finally having an effect? Or is it more to do with the fact that Ryanair’s prices began to increase, and routes were being opened up to more far flung destinations and that, in accounting terms, Ryanair began to chase the top line.
This quarterly loss, the first since March 2014, comes despite an increase in passenger numbers. Indeed, revenues are reportedly up by 9%, but it’s the operating costs where the problem lies. Operating costs rose by a whopping 20% by the end of 2018, a significant part of this being the increase in wages to avoid the threat of industrial action by pilots last year who very publicly claimed to have had been significantly underpaid for some time. Was this when the budget bubble started to burst?
According to Ryanair, the fall in its profits can be put down to “excess winter capacity in Europe”. Without a forensic analysis of the numbers, I would suspect that whilst there was an increase in passenger numbers, that this wasn’t quite as high as the number of available seats left empty. The old adage that ‘turnover is vanity, bottom line is sanity’ springs to mind.
In the drive to increase revenue, Ryanair has started to open up more routes, but at a time when margins are being squeezed, to an accountant’s mind, it is hard to see the rationale behind this. In the normal commercial world in which our clients operate there is a costed decision before deciding to enter new markets with a view to increasing revenue.
If I had the courage I would happily sit down with Mr O’Leary and talk him through product development and costing models. I suspect I would get an earful but at least I would have tried. I wouldn’t be expecting any free refreshments during our meeting of course, but then that might be symbolic of the problem.
Ryanair was once at the vanguard of disruptor airlines. They tore up the rule book on traditional air travel with their ‘you pay your money and take your choice’ attitude toward customer service. But, in 2019 if you google ‘Ryanair customer service’ you will find a different story. Customer satisfaction in a competitive market place is once again becoming important and over the next few years, as O’Leary withdraws from the airline, it will be interesting to watch how this once ultra-low-cost player will adapt to the changing demands of its customers.