Strategy & Operations » Ryanair: Financial damage of the ‘perfect storm’

Ryanair has endured a turbulent few months since September this year with a pilot crisis, cancelled flights and customer backlash all gracing the front pages of the national press.

It’s been a rocky ride for the airline industry as a whole, with the Monarch collapse at the beginning of October demonstrating the difficulties airlines have encountered in dealing with geopolitical challenges and market competitiveness in recent months.

Yet, Ryanair’s half-year results for financial year 2018 have showed that the airline is far from a brace landing. The company posted an 11% increase in profit to €1.29bn, compared to €1.17bn in 2016. Ryanair traffic also grew by 11% to 72.1m, up on 64.8m for the same period in 2016.

Traffic increases have been attributed to both a strong Easter period and a 5% reduction in airfares, which the airline said has resulted in customer savings of over €160m. A total of 80 new routes have been added, three new bases created and 35 new B737s delivered in the first half of 2017.

But, numbers aside, with strategy having looked so good for the company prior to September, how did the airline manage to turn their year from one of growth and success into one of public and chaotic failure?

Ryanair blames the debacle on a “material failure in the management of our pilot rostering function”. Dispelling rumours that the airline has lost hundreds of staff to competitors, the company said that it was not short of crews and has hired 900 new pilots this year. Hailing its success in operating the peak summer schedule “without incident”, it said “poor planning decisions” had created a “perfect storm” of pilot shortages.

Financial implications of the perfect storm

The airline has outlined a number of events that played a part in the September shortages, including over-allocated annual leave, blockages in base training of over 200 new staff members, and a lack of short-term pilot recruitment in the summer.

The company said that the decision to cancel flights was “painful”, but that it had enabled Ryanair to restore its schedule to 90% punctuality. The cost of the cancellation to the airline under EU refund obligations has been €25m, on top of an €80 travel voucher issued to all 700,000 customers.

In addition to the financial compensation to customers, Ryanair has reviewed its remuneration policy for its staff members. In particular, it has moved to address the issue of pilot pay and has said that it will change its policy from offering “competitive” salaries to pay that is over 20% higher than competitor airlines (22% more than Norwegian for Dublin captains, and 22% and 20% more than Jet2 and Norwegian respectively for Stansted captains). Alongside the financial rewards, it has committed to providing better career prospects, rosters and job security than other airlines.

These measures are expected by Ryanair to increase its crew costs by €45m in financial year 2018, rising to €100m in the full year, but it has said that the increase “will not significantly alter the substantial unit cost advantage we have over all other EU airline competitors”.

Outlook for H2

A significant financial impact of the pilot crisis will be felt by the airline in H2. Traffic is expected to slow to 4% and full-year traffic will drop from 131m customers to 129m. Ex-fuel unit costs are also expected to take a hit, with the €25m EU costs and €45m pilot costs expected to contribute to a fall in full-year unit costs by approximately 2%.

Yet, despite the fallout, Ryanair said that it its full-year profit after tax guidance remains between €1.4bn-1.45bn.

The long-term strategy

The airline’s objective is to establish itself as “Europe’s biggest scheduled passenger airline”. While offering low fares, Ryanair has said that its strategy is to “deliver the best customer service performance in its peer group” – something that it has failed to do in 2017.

Yet, the company has made efforts to improve its customer service in recent years. In its 2017 annual report, Ryanair said that it was investing in a new and easy-to-use website, a mobile app, reduced penalty fees, allocated seating and security fast track. It has a long-term agreement to purchase 210 new Boeing 737-200 aircraft by 2024 while becoming the launch customer for the new plane in 2020. Additionally, it has committed to prioritising airports that have competitive prices and has been able to negotiate favourable contracts by delivering a “consistently high volume of passenger traffic growth” to those airports.

What now?

Ryanair seems keen to put the September crisis down to a one-off event from which it will recover, both financially and in relation to company reputation. While customers are likely to return to the airline as they seek competitive pricing, the vast range of low-cost options now available means that airlines cannot afford to turn a one-off event into a frequent occurrence.

While the airline seems confident that customers will return, it appears less sure about its staff. Pay increases will likely keep pilots on board in the short-term, but how long before they take flight elsewhere?

If they do, and problems ensue like in September 2017, that may be one storm too many for Ryanair.

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