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Henry Wallop: Is the Ryanair business model broken?


 Michael O'Leary of Ryanair

Michael O'Leary of Ryanair

Michael O'Leary of Ryanair

Excess baggage charges, a 2pc credit card charge, a penalty for failing to print out your boarding pass, €3 for a small bottle of water – these are just some of the clever tricks that have made Ryanair one of the most profitable airlines in the world.

Some commentators worry that Ryanair's relentless pursuit of ancillary revenues risks losing the company customers. 

But last week, the airline shocked the stock market with a profit warning, its first in nearly a decade. There had been a "perceptible dip" in the number of people booking flights for this month and the rest of autumn, Michael O'Leary, its chief executive said. The company's share price nose-dived.

Could this be the start of a consumer backlash? Are the holidaymakers of Europe taking the advice of Mr O'Leary, who famously told his "stupid" customers they could "bugger off" if they objected to any of the extra fees that the company levies?

Philip Nolan, author of the book Ryanland, claims: "The novelty is starting to wear off."

The novelty, of course, being Ryanair's business model. The company offers very low headline prices – there are a number of flights available from the UK, one-way, to European destinations such as Limoges or Venice, for an astonishing £14.99.

But on top of the headline price, most customers have to pay several extra charges. Some are understandable, such as paying to check in a piece of luggage, although £70 to take a bag weighing 20kg on a return flight in high season is considerably more than rival easyJet's maximum of £38. Other Ryanair charges, however, are more irksome. There is a £7 charge to check in – not at the airport, but from your own computer at home. This is an each-way charge and impossible to avoid in most cases.

Rival airlines believe that this charge breaks Office of Fair Trading guidelines against "drip pricing". This is the practice whereby consumers do not find out the full cost of something until they have clicked through various web pages.

Then there are all the so-called "ancillary" fees: if you choose to pay for travel insurance, hire a car, splash out £3 for a cup of tea or £1.50 for a large Twix bar (the airline doesn't serve a standard size). Also included in the ancillary fees are excess baggage fees, and the £70 fee (per passenger) for forgetting to print off your boarding pass at home.

The company says that just 0.02pc of its passengers, which equates to 15,800 of its 79m, fall foul of this latter charge. But these ancillary payments are crucial to the company.

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Last year, the average customer spent €48.20 on their ticket, which includes the credit card fee and any checked-in baggage. But the cost to the airline was €52.56 per passenger. In other words, it lost money on flying nearly 80m passengers around the globe.

But it made a crucial €13.43 per passenger in ancillary fees – an increase of 35pc over three years. These were more than enough to push the company into profit.

Some commentators worry, however, that Ryanair's relentless pursuit of ancillary revenues risks losing the company customers.

"I travel with Ryanair pretty often, but I still have to tell their website every single time that I do not need their insurance. It is tedious," says one customer.

He also points out that despite the undoubtedly cheap seats available, many passengers do not find Ryanair very cheap. I travelled with my family to Carcassonne this summer, admittedly in high season and with three children (plus one who had to sit on our laps for the privilege of £60) and the return trip cost an eye-watering £1,753.10. Not a single penny of that was ancillary – it was flights, taxes, check-in fees, four small bags, and "administration" fees.

There was a simple reason why we were willing to pay: no other airline flew to that airport. Ryanair flies to 180 different airports and it should take credit for opening up whole swaths of rural Europe and north Africa to holidaymakers, who were unable easily to access these destinations less than a generation ago.

But one industry insider says: "A lot of local authorities subsidise Ryanair to fly to their tiny airstrips, because of all the tourists they bring. As austerity bites across Europe, will these areas be able to continue to fund Ryanair?"

The other concern is competition from a resurgent easyJet. The two airlines go head-to-head only on a very small number of routes. But easyJet has demonstrated the huge appetite for basic customer service among travellers. When it introduced allocated seating for all passengers a year ago, it attracted more customers but no extra costs.

It seems to be working. Last week, the day after Ryanair's profit warning, easyJet announced record monthly passenger numbers. The market liked it and the airline's shares jumped.

Douglas McNeil, investment director at Charles Stanley, says: "It is true that [Ryanair] is a brand that is regarded with respect rather than affection and Michael O'Leary is not everyone's cup of tea, but it has a lot going for it. It offers two things that many customers rate as very important: promptness and price."

It still ranks well on these two measures. But this year Ryanair, for the first time, came bottom in a survey of short-haul airlines by Which? Members of the consumer organisation said Ryanair was the airline they were least likely to recommend to friends, mostly because of the extra charges.

The profit warning is a matter of mild turbulence for Ryanair. It is still likely to make slightly more than the €560m in pre-tax profits it made last year.

But the era of price at all costs may be coming to an end. The age of customer service could be winging its way back.

Telegraph Media Group Limited [2021]

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