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Ryanair’s O’Leary Seeks Short-Haul Mastery in Europe Endgame (2)

May 13, 2013

Ryanair CEO Michael O'Leary

“The problem with all the flag-carrier airlines is they’re ultimately doomed to failure,” said Michael O'Leary, chief executive officer of Ryanair Holdings Plc. “They are doomed to fail because they’re not really committed to low fares.” Photographer: Scott Eells/Bloomberg

Michael O’Leary, who built Ryanair Holdings Plc (RYA) into Europe’s biggest discount airline over two decades, pledged to stay another five years and render its dominance complete as competitors exit short-haul flying.

Dublin-based Ryanair will seize on the likely failure of major carriers such as Air France-KLM Group to earn profits on short routes and the withering of networks at Alitalia SpA in Italy, Iberia in Spain and SAS AB (SAS) in Scandinavia, the 52-year-old chief executive officer said in an interview in London.

O’Leary, who has regularly promised to quit Ryanair “in a couple of years,” will boost the fleet to more than 400 jets by 2018 and aims to double the company’s 8.65 billion-euro ($11 billion) market value over the same period. That could pave the way for a shift into low-cost trans-Atlantic flying as demand for wide-body planes eases, making them cheaper, he said.

“There’s going to be a push for the legacy carriers to walk away from the loss-making, short-haul business, handing over more and more market share,” O’Leary said. “The rate of change is going to speed up. The next five years look very interesting and exciting and therefore there is no reason for me to leave.”

Shares of Ryanair have posted a 114 percent price gain since May 2008 and closed at 6.12 euros in Dublin today. Air France-KLM (AF), Europe’s biggest airline, has slumped 63 percent over the past five years and Deutsche Lufthansa AG (LHA) of Germany, the No. 2, has declined 5.3 percent.

‘Doomed’ Experiment

Former national carriers including Air France, Lufthansa and British Airways parent International Consolidated Airlines Group SA (IAG) are part-way through the latest revamp of short-haul flights that are unprofitable and becoming less sustainable as low-cost airlines expand operations.

O’Leary said that the experiment -- which has seen IAG set up a discount unit, Iberia Express, in Spain and Lufthansa develop plans to transfer European flights outside its hubs to low-cost division Germanwings -- won’t succeed.

“The problem with all the flag-carrier airlines is they’re ultimately doomed to failure,” he said. “They are doomed to fail because they’re not really committed to low fares.”

‘Revolutionary’

Only a handful of short-haul routes feeding profitable long-haul services will survive even at the biggest operators, while the likes of SAS and LOT Polish Airlines SA may be forced into a deeper retrenchment or collapse, O’Leary said. Last year saw the failure of Barcelona-based Spanair SA and Hungary’s Malev Zrt., plus takeovers including IAG’s purchase of Lufthansa unit BMI, the second-biggest slot holder at London Heathrow.

Lufthansa spokesman Thomas Jachnow said the Cologne-based company is “convinced” that the expansion of Germanwings puts it in a good position within Europe, while IAG declined to comment and Air France-KLM didn’t respond to calls.

Under O’Leary, Ryanair’s strategy of offering bargain-basement fares rendered profitable through the use of secondary airports and a minimum level of customer service has propelled it from 1.7 million passengers in 1994 to 79 million last year, with the company targeting 100 million by March 2019.

“We’ve re-invented the European airline industry away from this failed ’50s and ’60s model where you had to be rich to fly,” he said in the interview. “And what we’re going to do in the next five years is going to be even more revolutionary.”

Max Talks

Ryanair ordered 175 Boeing Co. (BA:US) 737-800 single-aisle jets in March and has appointed a team to work on a follow-up deal to add a further 100 planes, most likely the U.S. company’s new 737 Max model, giving a total list price of more than $20 billion.

O’Leary said a purchase, which may also include further 737-800s, could be sealed by year’s end, with a decision hinging on pricing in view of the Max’s trade-off between economy and weight. While the re-engined jet will offer fuel savings of as much as 13 percent, modifications have made it heavier and liable for higher fees from infrastructure providers, he said.

The CEO said he’ll also press Boeing to develop a model with a dozen or so more seats, perhaps through the removal of bulkheads and one of three lavatories, in order to boost capacity to the optimum level. Profitability could also be driven by removing more airports from state control to encourage competitive prices and paring air-traffic-control fees, he said.

New Ethos

O’Leary said Ryanair may ultimately need to shift away from an idiosyncratic management style that’s seen him deployed as a marketing tool, courting negative publicity as well as positive through talk of standing zones and pay toilets on planes to project the brand at minimum cost. The carrier has an annual marketing budget of just 4 million pounds ($6 million), he said.

“There’s going to be a time over the next few years to ease me out and try to change the image of Ryanair away from being somewhat cavalier, that we don’t care,” he said. “I think we need to soften those sharper edges of my personality.”

O’Leary said he retains an interest in establishing a long-haul discount airline that would ferry passengers between five or so major European cities and about 10 in the U.S., spread evenly between the east and west coasts. The airline would operate under a different brand and feature a business class similar to that of Richard Branson’s Virgin Atlantic Airways Ltd., but with a less costly and more basic experience in coach.

Start-up costs could be as low as 50 million pounds, plus fleet expenses.

“We’re waiting for a downturn in long-haul aircraft values,” he said. “If you had ten-pound or ten-euro air fares in economy you’d be unbeatable. I’m amazed none of the trans-Atlantic carriers have really targeted that market.”

Aer Lingus Wrangle

Ryanair would have found itself with long-haul routes had its succeeded in its latest bid for control of Dublin-based Aer Lingus Group Plc (AERL), Ireland’s second-biggest carrier and a competitor in the short-haul market.

The offer, which valued Aer Lingus at 694 million euros, was blocked in February by European Union regulators who ruled it would increase fares and reduce choice. A separate inquiry by the U.K. Competition Commission is unlikely to drive Ryanair to sell its remaining 30 percent holding, O’Leary said.

“If we were forced to sell down our stake in Aer Lingus who would we sell it to?” he asked, adding that while the Ryanair board would consider a “reasonable or profitable” offer for the 30 percent holding, “nobody wants to buy it.”

Ryanair will report full-year results on May 20.

To contact the reporter on this story: Kari Lundgren in London at klundgren2@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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