Tuesday 24 April 2018

Ryanair faces into the problems of its own phenomenal success

Michael O'Leary insists he faces a temporary problem over pilot leave, but others see it as a major systemic challenge, writes Fearghal O'Connor

Ryanair’s CEO Michael O'Leary pictured during a press conference where he addressed the recent Ryanair flight cancellations at Ryanair’s HQ in Dublin. Photo: Frank McGrath
Ryanair’s CEO Michael O'Leary pictured during a press conference where he addressed the recent Ryanair flight cancellations at Ryanair’s HQ in Dublin. Photo: Frank McGrath

Fearghal O'Connor

'Next slide," spat Michael O'Leary at the Ryanair staff member unfortunate enough to have been tasked with operating his Powerpoint presentation at the airline's AGM last Thursday. O'Leary was venomously rattling through a list of the airline's achievements over the past year, firing out facts and figures like bullets.

Europe's favourite airline. Lowest cost. Lowest fares. 10pc growth. 131 million passengers in 2017. 87 bases. 200 airports.

"Next slide."

Number one on time. 240 aircraft on order. Always Getting Better. One billion passengers carried. €41 average fare. Down 13pc.

"Next." Profit to grow 6pc. "Next."

But, as the slides rolled by, so too did the uncharacteristic apologies for the dreadful mess that the airline now finds itself in. Little wonder, then, that there was a flash of wistfulness as he brought the AGM at the airline's Swords, Co Dublin headquarters to a close with a final apology to shareholders: "This should have been a day of celebration."

A once-off mess?

There are two plausible views of Ryanair's difficulties. The first is the one put forward by O'Leary himself: it is a "significant management failure in our rostering department" which created a temporary choke point on crews. The big error, under this analysis, was the miscommunication of cancellations needed.

A change to a calendar year for annual-leave purposes (meaning this year's annual-leave allocation had to be taken in just nine months), a spike in the number of pilots quitting to take up long-haul jobs at Norwegian, coupled with ATC delays and weather disruption have all combined, meaning Ryanair does not have enough pilots to cover all its flights for the next six weeks.

This problem, O'Leary has insisted, would be quickly fixed by cancelling "less than 2pc" of flights over the period.

"It was the right operational decision, but when we announced it last Friday, we only communicated with those passengers whose flights would be disrupted on Saturday, Sunday, Monday, Tuesday and Wednesday," he told the AGM.

The airline, he said, had not thought about the other 18 million booked passengers who would be worried at the knowledge that their flight over the next six weeks could also be cancelled.

"For that, I apologise. We mismanaged the rostering function and we mismanaged the communication of this issue to our customers," said O'Leary.

The airline was moving to take back one week of the four weeks of allocated leave that pilots had agreed to take this autumn and this, he said, would fix the problem. A few disgruntled pilots, encouraged by unions and "excitable media", would take the temporary opportunity to kick up but, in the main, Ryanair pilots were happy with their lot.

That, at least, is Ryanair's theory.

An alternate view

But, of course, there is another version of events. A number of well-placed senior industry and company sources spoken to by this newspaper believe that the chaos over rostering is symptomatic of an airline that, for now, has bitten off more than it can chew operationally.

They argue that the pace of growth and the added complexity in Ryanair's model, as it has necessarily become more customer-focused, has brought it to a point where the operational side of the business is struggling to keep pace. Indeed, for a number of years, Ryanair was growing substantially faster than its own predictions. When asked by this newspaper, O'Leary rejected the notion that the firm could no longer deal with its own phenomenal growth.

But an analysis of its own predictions for capacity growth suggest that Ryanair will be under huge pressure to hire pilots to fill new aircraft in the coming years. It says that aircraft numbers will rise from 400 today to 520 in 2024, effectively a 4pc increase in aircraft capacity each year until then. But up to 5pc of the airline's pilots leave each year, so to replace these staff and to crew the new aircraft, Ryanair will need to hire more than 3,300 pilots between now and 2024 - or close to 500 pilots every year. O'Leary has pledged that the airline will hire 600 pilots between now and next May, but that in itself is likely to be a challenge.

Industry sources also argue that the crisis over staffing has opened up an opportunity for a long-disgruntled workforce to finally get the upper hand, and the consequences of a messy industrial relations war in a company with no history of trade-union-style industrial-relations management could be hugely disruptive, particularly for a management team not practised in the art of diplomacy with its own staff.

"It is important for Ryanair that this issue is portrayed as a once-off, but that does not make sense," said one expert with experience of rostering and flight planning. It looks to me like there is a systemic flaw in the model as it grows and grows. The focus has always been on the ability to steadily introduce new aircraft to match growth, but capacity is not just about the number of planes. You need the crew to fly these planes."

This version of the current issue is one which O'Leary and some other analysts are quick to dismiss. But an analysis of the figures available suggests that the airline does indeed face significant difficulties. Reports last week suggested that 700 pilots have left the business since January, something Ryanair has denied, saying its pilot turnover remains below 5pc. But sources in the company continue to insist that this year, 140 pilots have gone to Norwegian, with similar numbers also going to EasyJet, BA, or carriers in the Middle East and China.

Ryanair's success at spreading out its summer peak beyond June, July and August is also making the problem more difficult. It now carries more than 11 million passengers in each of April, May, September and October, the very time it asks pilots to take 30 days of annual leave. The other 10 days of leave also must be taken. The airline is now having to reallocate leave, meaning that pilots will have to take some of this year's leave next year. One source with experience of rostering suggests that "this will merely kick the problem down the road".

Training backlogs

Solving the issue will not be easy over the winter, not least because the low season is now short - with December seeing some of the busiest weeks of the year.

Indeed, the rostering crisis is itself getting in the way of a solution. The airline has 100 new pilots at the end of their training. But to complete it and join the Ryanair roster, they must sit in with a training captain and complete six touchdowns. The problem is the roster is so tight that there has been no room to fit in these training runs.

Generally, people with ambitions to become a pilot with Ryanair will pay about €100,000 for their own 18-month training course at a private flight school. They will then pay a further €30,000 to Ryanair, who will train them for a Boeing 737 rating. There is speculation that such is the seriousness of the rostering issue, Ryanair is now willing to forgo this €30,000 fee, this newspaper understands.

The airline has moved to put in place an immediate fix to the issue by increasing its crewing ratio from 5.2 (meaning five crews with a first officer and a captain) to 5.5 per aircraft, to allow for greater contingency in the event of illness and delays that put crew out of their flying hours.

But this in itself illustrates just how tight things are at Ryanair, with the number of reserve pilots falling from 150 to as low as 30.

With 5.2 crews allocated to each of the airline's 400 aircraft, that means it needs 2,080 captains and 2,080 first officers, more or less exactly what it currently has. But, of course, that does not allow for the fact that the airline promised crew that they could take three quarters of their holidays as a block this autumn, meaning 500 of them are off every day over the next two months. That, of course, explains the cancellations but, if anything, the situation is only likely to get worse in the short term as the crew ratio is upped to 5.5, according to aviation industry sources.

"5.5 captains and first officers per aircraft will take the pressure off long term," said one well-placed company source. But, said the source, this would be impossible to achieve without improved crew retention and recruitment, and training capacity is at its limits.

"All our flight simulators are full 20 hours a day just to keep up," said the source, who added that there was a lack of backroom staff and that the rostering department and crew control in particular was massively under-resourced, with just two or three crew controllers on shift for the entire airline.

"The cabin crew, pilots and office staff all do a fantastic job given the circumstances. It's the management that messed up. We used to be the new kid on the block that everybody started copying. It was two fingers up to BA and Aer Lingus, etc, but management has turned a big problem into a PR and reputational disaster."

Looking to the future

So, where to now for the airline? There is, of course, a much wider context to all of this. German aviation expert Heinrich Grossbongardt believes the sector in Europe is in the midst of a major restructuring, brought on by the failure of both Air Berlin and Alitalia. Ryanair has expressed interest in at least picking up some the routes to be vacated.

"That drives change right across the wider industry. I do not believe Ryanair are really interested in Air Berlin, because it would not fit with their fleet profile or with their cost structure. It is the old game of O'Leary presenting himself as the underdog who fights the European establishment. This is all about Ryanair's branding."

In Germany, there have already been reports in Handelsblatt and other newspapers, citing other named aviation experts, that the Ryanair cancellations are being used by the Irish airline to free up crew capacity so that it is in a position to take over Air Berlin routes should the opportunity arise over the coming weeks. Grossbongardt dismisses the theory, but says it highlights the Europe-wide impact the difficulties are having on Ryanair.

"In terms of the money it is costing and the damage to Ryanair's customer loyalty, it makes no sense that they would do this to pick up maybe eight or nine slots at German airports. It would have been easier to bid directly for Air Berlin."

He believes that Ryanair simply messed up its scheduling and that it could well be a case that the airline's growth has outstripped its own operation's ability to keep pace.

"The rules governing crew and flight hours in Europe are so complex that it is like playing 4D chess, and so it is easy to mess them up. You may have used up all of the flexibility available to you under the crew duty rules and they could really be at the limit of that," he said.

Another Irish aviation industry expert agrees: "This is a fuck-up by the management of the pilot side of the business. They have been well advised about this for a long period and have been repeatedly told about it. My suspicion is that they have been running it very tight and thought they would get the transition through by just flexing it here and there, but they have got themselves caught."

But he also strongly believes that the current issues are only temporary.

"The big thing I would take out of this is that the gloves are off with Norwegian. Whatever about the tit for tat that goes on normally between airlines, I think the fact that these guys opened a base in Dublin and directly began to take Ryanair pilots and caused this amount of mayhem… they are making a nightmare for themselves."

When Easyjet and Wizz Air previously encroached on Ryanair's Irish patch, "they were bombed out of it in terms of competition".

"If Norwegian - which needs to control costs and shore up its balance sheet to weather fierce competition - for one reason or another fails over the next 12 months or two years, the prize is enormous, because first of all, you have a whole load of airports that will need an airline to fill in the gaps. Who do you think that would be? And you would have all the pilots having to crawl back on their knees looking for jobs. So I think Norwegian has woken up something that it may regret over time. If that happened, Ryanair's share price would probably go up 10pc straight away and with another competitor in the European market gone, it would be free to deploy aircraft left, right and centre."

But another senior Irish aviation source said he believed that while Ryanair would recover and go on to surpass its 200 million passenger target, the current debacle illustrated stresses and strains that needed serious attention.

"It is a highly optimised business model, so when one thing starts to misfire, then the whole thing starts to slow down very quickly," said the source.

An evolving business has to manage the risk that resources will not come online quickly enough to meet growth, he said.

"Ryanair's margins of contingency were obviously inadequate. I would imagine they are now looking back saying, 'Jesus, we should have done something about this six weeks ago'."

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