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CASE STUDY
Ryanair: the low fares airline – future destinations?Eleanor
O’Higgins
The case focuses on the analysis of the airline industry
environment, the internal resources/capabilities of Ryanairand the
concept of sustainable competitive advantage. The case illustrates
how a strategy that is grounded in theefficient deployment of
assets/resources/competencies, whilst adding perceived value to
customers, delivers asustainable strategic advantage. The case also
illustrates the difficulties and obstacles that stand in the way
ofachieving and retaining such advantage through changing
circumstances.
● ● ●
five years to 2009 was the most profitable airline in theworld,
according to Air Transport magazine.
Despite this apparent success, Ryanair faced issues. The most
pressing, shared by all airlines, was an industrythat was
‘structurally sick’ and ‘in intensive care’,ii withplunging demand
in the global economic recession anduncertainty about oil prices.
What strategy should Ryanairuse to weather this storm? Would the
crisis produce a longterm change in industry structure? Could
Ryanair takeadvantage of the situation as it had in the past, by
growingwhen others were cutting back? A predicament of its
ownmaking was Ryanair’s 29.8 per cent shareholding in AerLingus,
the Irish national carrier, following an abortivetakeover attempt.
Aer Lingus’ flagging share price hadnecessitated drastic
write-downs, which had draggedRyanair into its first ever losses in
2009.
Overview of Ryanair
In 2009, Ryanair had 33 bases and over 850 routes across26
countries, connecting 147 destinations. It operated afleet of 199
new Boeing 737–800 aircraft with firm ordersfor a further 112. It
employed over 7000 people and wasexpected to carry approximately 67
million passengers in2010.
Ryanair was founded in 1985 by the Tony Ryan familyto provide
scheduled passenger services between Irelandand the UK, as an
alternative to the state monopoly airline,Aer Lingus. Initially,
Ryanair was a full service conventionalairline, with two classes of
seating, leasing three differenttypes of aircraft. Despite growth
in passenger volumes, bythe end of 1990 the company had faced many
problems,disposing of five chief executives, and accumulating
losses
There is only one thing in the world worse than being
talkedabout, and that is not being talked about.
This is a quote from a novel by Oscar Wilde but it could be the
mantra of budget airline Ryanair, Europe’s largestcarrier by
passenger numbers and market capitalisation in2009. The airline is
often controversial, whether it was byannoying the Queen of Spain
by using her picture withoutpermission, or announcing plans to
charge passengers touse toilets on its flights, or engaging in
high-profile battleswith the European Commission. Ryanair also made
newswith its achievements, winning international awards, likeBest
Managed Airline, or receiving a 2009 FT-ArcelorMittalBoldness in
Business Award. This Award announcementsaid that Ryanair had
‘changed the airline business outsideNorth America – driving the
way the industry operatesthrough its pricing, the destinations it
flies to and the passenger numbers it carries’.i Ryanair had been
the budgetairline pioneer in Europe, rigorously following a
low-coststrategy. It had enjoyed remarkable growth, and in the
This case was prepared by Eleanor O’Higgins, University College
Dublin. It is intended as a basis for class discussion and not asan
illustration of good or bad practice. © Eleanor O’Higgins, 2010.
Not to be reproduced or quoted without permission.
Source: Reuters/Yves Herman.
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RYANAIR – THE LOW FARES AIRLINE 619
of IR£20 million. Its fight to survive in the early 1990s sawthe
airline transform itself to become Europe’s first low fares,no
frills carrier, built on the model of Southwest Airlines,the
successful Texas-based operator. A new managementteam, led by
Michael O’Leary, at first a reluctant recruit,was appointed.
Ryanair was floated on the Dublin StockExchange in 1997 and is
quoted on the Dublin and LondonStock exchanges and also on the
NASDAQ since 2002.
Mixed fortunes
Mixed resultsRyanair designated itself as the ‘World’s Favourite
Airline’on the basis that in 2009, IATA ranked it as the
world’slargest international airline by passenger numbers. It
wasnow the sixth largest airline in the world (when the largeUS
carriers’ domestic traffic is included). Over the next five years,
Ryanair intended to grow to become the secondlargest airline in the
world, ranked only behind its rolemodel Southwest.
Releasing Ryanair’s Q3 2009 results in January 2010,Michael
O’Leary observed, ‘The environment is, fromRyanair’s perspective,
great, because it is awful. We’redoing remarkably well because this
is the time when thelowest cost producer wins.’iii For the quarter,
the com-pany reported a much smaller net loss than expected ofx10.9
million (£9.9m or $15m), instead of an earlier fore-cast loss of
x35 million, with better than expected yields,falling 12 per cent
rather than the forecast 20 per cent.Profits guidance for the full
year improved to x275 millionrather than the original x200 million
forecast.
The airline had cut lossmaking routes in the UK andIreland,
replacing them with more profitable ones inFrance, Germany and
Spain. Operating costs per passengerwere cut by 4 per cent, despite
a 3 per cent increase in average flight distance. Ryanair planned
to open 146 newroutes in 2010 and to increase market share thanks
to the demise of several carriers.iv
These results and expectations for 2010 followed on full-year
2009 results (see Table 1), when Ryanair plungedto a x180 million
loss, as its x144 million operating profitwas eradicated by a x222
million write-down of its AerLingus shares and an accelerated x51.6
million depreciationcharge. Excluding these exceptional charges,
underlyingprofits fell 78 per cent from x480.9 million to x105
million.This was due largely to a surge in fuel prices as
Ryanairfailed to hedge when oil prices rose to $147 a barrel in
July 2008. Then, bowing to shareholder pressure to coveragainst
rocketing prices, it locked in fuel costs at $124 abarrel for 80
per cent of its consumption during the thirdquarter – just as oil
prices crashed to a low of $33 a barrelduring that period.
Passenger numbers rose 15 per centfrom 50.9 million to 58.5
million. Average fares fell 8 per
cent to x40 and were forecast to decline steeply by a further15
to 20 per cent to about x32 in fiscal 2010. (Ryanair’sfinancial
data are given in Tables 1a and 1b, and operatingdata are given in
Table 1c.)
The airline contended that it could offer the lowest faresby
cutting costs to levels that rivals could not achieve. Itwas
planning to recruit 1200 new employees to service itsnew aircraft,
but the number of passengers per employeewas still expected to rise
thanks to economies of scale fromnew routes and a decline in
airport charges by directingtraffic toward airports offering
bargain deals. Having beencaught short in its fuel hedging for
2008/09, Ryanair tookadvantage of the low oil price to hedge 90 per
cent of its fuel costs during 2009/10, locking in a full year fuel
costsaving of about x460 million.
Ancillary revenuesRyanair provides various ancillary services
connected with its airline service, including in-flight beverage,
foodand merchandise sales. It also distributes accommodation,travel
insurance and car rentals through its website. Thisenables Ryanair
to increase sales, while reducing unit costs.In 2009, Ryanair’s
website ranked 12th by number of visitsfor e-tailers in the UK
(after EasyJet, which ranked 11th).Ancillary services accounted for
20.3 per cent of Ryanair’stotal operating revenues in 2009,
compared to 18.0 percent in 2008. In fact, ancillary revenues had
climbed by 22 per cent, considerably faster than passenger revenues
at 5 per cent, generating x10.20 per passenger and withhigher
margins.
Other ancillary revenue initiatives were introduced, suchas
onboard and online gambling, and a trial in-flight mobilephone
service in 2009. A poll of Financial Times readers hadproduced a 72
per cent negative response to the question,‘Should mobile phones be
allowed on aircraft?’v However,Michael O’Leary declared ‘If you
want a quiet flight, useanother airline. Ryanair is noisy, full and
we are alwaystrying to sell you something.’vi Not all ancillary
service initiatives were successful. In 2005, Ryanair pulled an
in-flight entertainment system when passengers had resistedpaying
x8 to rent a games and entertainment console.
Ryanair was the first airline to introduce charges forcheck-in
luggage. Virtually all budget airlines have followedsuit, as they
have with other Ryanair initiatives. It has continued to find ways
of charging passengers for servicesonce considered intrinsic to an
airline ticket. Passengerswere charged extra for checking in at the
airport ratherthan online (which also incurs a charge), although
thosewith hold luggage did not have the option of checking
inonline. While avoiding pre-assigned seats, an extra
chargeprocures ‘priority boarding’. Interestingly, Aer Lingus andBA
have taken up a similar idea by enabling passengers topre-book
seats online for an extra charge.
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620 RYANAIR – THE LOW FARES AIRLINE
Some of Ryanair’s revenue-generating ideas have provoked
controversy – and publicity. One of the mosttalked about was its
intention to charge passengers £1 to use the lavatory onboard, by
installing a coin slot on its aircraft. While it has not
implemented this concept (itmay contravene security rules), the
idea generated muchpublicity. Another idea mooted by Ryanair was a
‘fat tax’for overweight passengers. In an online poll of over
30,000respondents, the fat tax idea was approved by one in
three.However, the airline later announced that it would
notimplement the surcharge because it could not collect itwithout
disrupting its 25-minute turnarounds and onlinecheck-in process.
The same online poll, supposedly to generate ideas for additional
revenue, also gained 25 percent approval for a x1 levy to use
onboard toilet paper with Michael O’Leary’s face on it.
Investor perspectivesSince its flotation in 1996, Ryanair has
never declared or paid dividends on its shares. For the foreseeable
future,Ryanair planned to retain any earnings to fund the busi-ness
operations, including the acquisition of additional aircraft
required for its planned entry into new markets,expansion of its
existing services, and for routine replace-ments of its current
fleet. The no-dividend policy, combinedwith its healthy cash
position, has caused the company to seek alternative ways of
improving the liquidity andmarketability of its stock, through a
series of share buy-backs of the equivalent of about 1.2 per cent
of the issuedshare capital between 2006 and 2009. When a deal
toplace an aircraft order with Boeing foundered, Ryanairannounced
that it would probably substitute the capital it would have spent
to undertake a mixture of share
Table 1a Ryanair consolidated income statement
Year end Year end Year end31 March 2009 31 March 2008 31 March
2007
(e 000) (e 000) (e 000)
Operating revenuesScheduled revenues 2,343,868 2,225,692
1,874,791Ancillary revenues 598,097 488,130 362,104
Total operating revenues – continuing operations 2,941,965
2,713,822 2,236,895
Operating expensesStaff costs (309,296) (285,343)
(226,580)Depreciation (256,117) (175,949) (143,503)Fuel and oil
(1,257,062) (791,327) (693,331)Maintenance, materials and repairs
(66,811) (56,709) (42,046)Marketing and distribution costs (12,753)
(17,168) (23,795)Aircraft rentals (78,209) (72,670) (58,183)Route
charges (286,559) (259,280) (199,240)Airport and handling charges
(443,387) (396,326) (273,613)Other (139,140) (121,970)
(104,859)
Total operating expenses (2,849,334) (2,176,742) (1,765,150)
Operating profit – continuing operations 92,631 537,080
471,745
Other income/(expenses)
Finance income 75,522 83,957 62,983Finance expense (130,544)
(97,088) (82,876)Foreign exchange gain/(losses) 4,441 (5,606)
(906)Loss on impairment of available-for-sale financial asset
(222,537) (91,569) –Gain on disposal of property, plant and
equipment – 12,153 91
Total other income/(expenses) (273,118) (98,153) (20,708)
(Loss)/profit before tax (180,487) 438,927 451,037
Tax on (loss)/profit on ordinary activities 11,314 (48,219)
(15,437)
(Loss)/profit for the year – all attributable to equity holders
of parent (169,173) 390,708 435,600
Basic earnings per ordinary share (Euro cents) (11.44) 25.84
28.20Diluted earnings per ordinary share (Euro cents) (11.44) 25.62
27.97Number of ordinary shares (in 000s) 1,478,472 1,512,012
1,544,457Number of diluted shares (in 000s) 1,478,472 1,524,935
1,557,503
Source: Ryanair Annual Report 2009.
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buybacks and special dividends to shareholders after
2012,causing a 7.5 per cent rise in its share price.
Ryanair shares reached a high of x6.30 in April 2007and
plummeted to x1.97 in October 2008, as global equitymarkets reeled.
In early 2010, the shares were trading in the x3.30 to x3.60 range,
with an expected mediumterm target of x4.20, based on expected
earnings and a PE ratio of 13. In mid-2009, its rival easyJet
shares had a PE ratio of 29. Ryanair had often underperformed
otherbudget airline peers on its PE ratio.
Ryanair’s operations
Michael O’Leary said;
Any fool can sell low air fares and lose money. Thedifficult bit
is to sell the lowest airfares and make profits.If you don’t make
profits, you can’t lower your air faresor reward your people or
invest in new aircraft or takeon the really big airlines like BA
(British Airways) andLufthansa.’vii
RYANAIR – THE LOW FARES AIRLINE 621
Table 1b Ryanair consolidated balance sheet
31 March 2009 31 March 2008
Non-current assetsProperty, plant and equipment 3,644,824
3,582,126Intangible assets 46,841 46,841Available-for-sale
financial assets 93,150 311,462Derivative financial instruments
59,970 –
Total non-current assets 3,844,785 3,940,429
Current assetsInventories 2,075 1,997Other assets 91,053
169,580Current tax – 1,585Trade receivables 41,791 34,178Derivative
financial instruments 129,962 10,228Restricted cash 291,601
292,431Financial assets: cash > 3 months 403,401 406,274Cash and
cash equivalents 1,583,194 1,470,849
Total current assets 2,543,077 2,387,122
Total assets 6,387,862 6,327,551
Current liabilitiesTrade payables 132,671 129,289Accrued
expenses and other liabilities 905,715 919,349Current maturities of
debt 202,941 366,801Current tax 425 –Derivative financial
instruments 137,439 141,711
Total current liabilities 1,379,191 1,557,150
Non-current liabilitiesProvisions 71,964 44,810Derivative
financial instruments 54,074 75,685Deferred tax 155,524
148,088Other creditors 106,549 99,930Non-current maturities of debt
2,195,499 1,899,694
Total non-current liabilities 2,583,610 2,268,207
Shareholders’ equityIssued share capital 9,354 9,465Share
premium account 617,426 615,815Capital redemption reserve 493
378Retained earnings 1,777,727 2,000,422Other reserves 20,061
(123,886)
Shareholders’ equity 2,425,061 2,502,194
Total liabilities and shareholders’ equity 6,387,862
6,327,551
Source: Ryanair Annual Report 2009.
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Certainly, Ryanair has stuck closely to the low-cost/low-fares
model. Ever decreasing costs is its theme, as itconstantly adapts
its model to the European arena andchanging conditions. In this
respect, Ryanair differs in itsapplication of the Southwest
Airlines budget airline pro-totype, and its main European rival,
easyJet, as the lattertwo are not as frill-cutting. One observer
described the difference between easyJet and Ryanair as: ‘easyJet,
youunderstand is classy cheap, rather than just plain
cheap.’viii
The Ryanair fleetRyanair continued its fleet commonality policy,
usingBoeing 737 planes to keep staff training and aircraft
main-tenance costs as low as possible, with an expected fleet of
over 300 by 2012. Over the years, it has purchasednewer, more
environmentally friendly aircraft, reducingthe average age of its
aircraft to 2.4 years, the youngestfleet in Europe. The newer
aircraft produce 50 per cent lessemissions, 45 per cent less fuel
burn and 45 per cent lowernoise emissions per seat. Winglet
modification providedbetter performance and a 2 per cent reduction
in fuel consumption, a saving which the company believed couldbe
even further improved. Despite larger seat capacity, new aircraft
do not require more crew. In 2009, in aircraft buying mode, Ryanair
sought to repeat its 2002 coupwhen it placed aircraft orders at the
bottom of the market.
However, in December 2009 a plan to purchase 200 jetsfrom Boeing
was cancelled when negotiations over pricecollapsed: ‘Eventually
you lose interest dealing with a bunchof idiots who can’t make a
decision’, declared MichaelO’Leary when the deal fell
through.ix
Notwithstanding strict adherence to Boeing 737 planes,in an
attempt to extract ever greater discounts from Boeing,Ryanair
invited Airbus, the European aircraft manufacturer,to enter into
preliminary bidding for a multimillion-dollarorder for 200-plus
short-haul aircraft. However, Airbusrebuffed the Ryanair
invitation, declaring this sales cam-paign would be too expensive
and time-consuming.
Staff costs and productivityRyanair’s 2009 employee count of
6369 people, compris-ing over 25 different nationalities, had
almost doubled overthe previous three years. This was accounted for
almostentirely by flight and cabin crew to service
expansion.Ryanair’s 2009 Annual Report claimed that its average
pay,including commissions to cabin crew for on-board sales,was
x45,333, higher than almost all other major Europeanairlines. Most
of the company’s pilots concluded negotiationswith Ryanair to move
them to new roster patterns withsubstantial pay increases of up to
x10,000 per captain.Cabin crew also negotiated a new five-year pay
agreementwith the company, earning them significant pay
increases,
622 RYANAIR – THE LOW FARES AIRLINE
Table 1c Ryanair selected operating data
2009 2008 2007 2006
Average yield per revenue passenger mile (‘RPM’) (a) 0.060 0.065
0.070 0.070Average yield per available seat miles (‘ASM’) (a) 0.050
0.054 0.059 0.058Average fuel cost per US gallon (a) 2.351 1.674
1.826 1.479Cost per ASM (CASM) (a) 0.058 0.051 0.054
0.052Break-even load factor 98% 79% 77% 75%Operating margin 5% 20%
21% 22%Total break-even load factor(a) 79% 67% 66% 65%Average
booked passenger fare (a) 40.02 43.70 44.10 41.23Ancillary revenue
per booked passenger (a) 10.21 9.58 8.52 7.45
Other data:
2009 2008 2007 2006
Revenue passengers booked 58,565,663 50,931,723 42,509,112
34,768,813Revenue passenger miles 39,202 m 34,452 m 26,943 m 20,342
mAvailable seat miles 47,102 m 41,342 m 32,043 m 24,282 mBooked
passenger load factor 81% 82% 82% 83%Average length of passenger
haul (miles) 654 662 621 585Sectors flown 380,915 330,598 272,889
227,316Number of airports served 143 147 123 111Average daily
flight hour utilisation (hours) 9.59 9.87 9.77 9.60Employees at
period end 6,616 5,920 4,462 3,453Employees per aircraft 36 36 34
35Booked passengers per employee 8,852 8,603 9,527 10,069(a) Total
break-even load factor is calculated on the basis of total costs
and revenues, including the costs and revenues from all ancillary
services.
Source: Ryanair Annual Report 2009.
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RYANAIR – THE LOW FARES AIRLINE 623
claimed Ryanair. By tailoring rosters, the carrier
maximisedproductivity and time off for crew members, complying
withEU regulations which impose a ceiling on pilot flying hoursto
prevent dangerous fatigue. Its passenger-per-employeeratio of 9195
was the highest in the industry.
Passenger service costsRyanair pioneered
cost-cutting/yield-enhancing measuresfor passenger check-in and
luggage handling. One was priority boarding and web-based check-in.
Over half of itspassengers use this, thus saving on check-in staff,
airportfacilities and time. Charging for check-in bags
encouragedpassengers to travel with fewer bags or even zero
check-inluggage, thus saving on costs and enhancing speed.
BeforeRyanair began to charge for checked-in bags, 80 per cent of
passengers were travelling with checked-in luggage; two years later
this had fallen to 30 per cent. From October2009, it adopted a 100
per cent web check-in policy,enabling a reduction in staff numbers,
calculated to savex50 million per year. Ryanair claims that:
passengers love web check-in. Never again will they haveto
arrive early at an airport to waste time in a uselesscheck-in
queue. As more passengers travel with carry-on luggage only, they
are delighted to discover that theywill never again waste valuable
time at arrival baggagecarousels either. These measures allow
Ryanair to saveour passengers valuable time, as well as lots of
money.x
A natural next step announced by Ryanair was a move to 100 per
cent carry-on luggage. Additional bags would be brought by
passengers to the boarding gate, where they would be placed in the
hold, and returned to them as they deplane on arrival. These
efficiencies would allowmore efficient airport terminals to be
developed withoutexpensive check-in desks, baggage halls, or
computerisedbaggage systems, ‘and enable Ryanair to make flying
even cheaper, easier and much more fun again’, claimedthe
company.xi The feasibility of the proposals to requirepassengers to
carry hold baggage through security to theaircraft was yet to be
tested.
Airport charges and route policyConsistent with the budget
airline model, Ryanair’s routeswere point-to-point only. It reduced
airport charges byavoiding congested main airports, choosing
secondary andregional destinations, eager to increase passenger
through-put. Usually these airports are significantly further from
the city centres they serve than the main airports, ‘fromnowhere to
nowhere’ in the words of Sir Stelios Haji-Ioannou, founder of
easyJet, Ryanair’s biggest competitor.xii
It uses Frankfurt Hahn, 123 kilometres from Frankfurt; Torp,100
kilometres from Oslo; and Charleroi, 60 kilometresfrom Brussels. In
December 2003, the Advertising Standards 1 BAA is owned by Spanish
company Ferrovial.
Authority rebuked Ryanair, and upheld a misleadingadvertising
complaint against it for attaching ‘Lyon’ to itsadvertisements for
flights to St Etienne. A passenger hadturned up at Lyon Airport,
only to discover that her flightwas leaving from St Etienne, 75
kilometres away.
Ryanair continued to protest at charges and conditionsat some
airports, especially Stansted and Dublin, two of its main hubs. It
opposed vehemently the British AirportAuthority (BAA)1 monopoly
plans to build a ‘£4bn goldplated Taj Mahal at Stansted which we
believe could bebuilt for £1bn’. The airline was:
deeply concerned by continued understaffing of security at
Stansted which led to repeated passenger andflight delays . . .
management of Stansted security isinept, and BAA has again proven
that it is incapable of providing adequate or appropriate security
services atStansted. This shambles again highlights that BAA is an
inefficient, incompetent airport monopoly.xiii
When BAA appealed its break-up, ordered by the UK Com-petition
Commission in 2009, Ryanair secured the right tointervene in the
appeal in support of the Commission.
In July 2009, Michael O’Leary made a high-profileannouncement
that Ryanair would cut winter capacity atStansted by 40 per cent,
because of Stansted’s rejection of Ryanair’s demand for cuts in
airport charges and the UK government’s plan to raise departure
duty from £10 to£11 per passenger. In protest at rising charges at
DublinAirport from January 2010 and a x10 per passengertourist tax
in Ireland, Ryanair was also intending to reduce its Dublin traffic
by 20 per cent.
However, both BAA and some observers deridedRyanair’s threats to
cut traffic by 40 per cent at Stansted.‘Michael O’Leary’s ability
to spin a tale has reached a new level this week. Along with the
gullibility of parts of the media in accepting it. Hook, line and
sinker.’xiv This was based on the contention that the airline
should have compared its projected winter capacity of 24 aircraft
atStansted, not with its summer capacity of 40, but with
itsprevious winter capacity of 28. Thus, the reduction wouldbe only
14 per cent, not 40 per cent.
Marketing strategyFollowing the introduction of its
internet-based reservationsand ticketing service, enabling
passengers to make reserva-tions and purchase tickets directly
through the website,Ryanair’s reliance on travel agents has been
eliminated. Ithas promoted its website heavily through newspaper,
radioand television advertising. As a result, internet
bookingsaccount for 99 per cent of all reservations.
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624 RYANAIR – THE LOW FARES AIRLINE
Ryanair minimises its marketing and advertising costs,relying on
free publicity, by its own admission, ‘throughcontroversial and
topical advertising, press conferencesand publicity stunts’. Other
marketing activities includedistribution of advertising and
promotional material andcooperative advertising campaigns with
other travel-related entities, and local tourist boards.
As referred to earlier, one of Ryanair’s publicity stuntswas its
unauthorised use of a photograph of Spanish Queen Sofia after she
took a £13 flight from Santander inNorthern Spain to London. When
it incurred the Queen’sdispleasure, Ryanair apologised and promised
to donatex5000 to a charity of her choice. In another instance
ofcontroversy over using pictures of the rich and famous, in 2008
Ryanair was forced to pay a fine of x60,000 toPresident Sarkozy of
France and his Italian bride Carla Brunifor using their images with
the slogan, ‘With Ryanair, allmy family can come to my
wedding’.
So, what about Aer Lingus?
According to a commentator in the Financial Times‘Ryanair’s bid
for Aer Lingus was a folie de grandeur’.xv EvenMichael O’Leary
admitted ‘it was a stupid investment. Atthe time, it was the right
strategy to go for one combinedairline but it has now proven to be
a disaster.’xvi
During 2007, in a shock bid, Ryanair had acquired a25.2 per cent
stake in Aer Lingus, only a week after theflotation of the national
carrier. It subsequently increasedits interest to 29.8 per cent, at
a total aggregate cost ofx407.2 million. By July 2009, the
investment had beenwritten down to x79.7 million. At the time of
the initial bid Ryanair declared its intention to retain the Aer
Lingusbrand and:
up-grade their dated long-haul product, and reducetheir
short-haul fares by 2.5 per cent per year for a minimum of 4 years
. . . one strong Irish airline groupwill be rewarding for consumers
and will enable both to vigorously compete with the mega carriers
in Europe. . . there are significant opportunities, by combining
thepurchasing power of Ryanair and Aer Lingus, to sub-stantially
reduce its operating costs, increase efficiencies,and pass these
savings on in the form of lower fares toAer Lingus
consumers.xvii
It had been an achievement for the Irish government finallyto
have floated Aer Lingus after several false starts over anumber of
years. Aer Lingus and its board firmly rejectedthe Ryanair
approach, stating that it had acted in ‘a hostile,anticompetitive
manner designed to eliminate a rival at aderisory price’. A
combined Ryanair–Aer Lingus operationwould account for 80 per cent
of all flights between Irelandand other European countries.
Affirming that his company
2 Manchester United and Liverpool have a longstanding
legendaryrivalry in English football.
was fundamentally opposed to a merger with Ryanair,even if it
raised its price, then Aer Lingus Chief ExecutiveDermot Mannion
stated:
I cannot conceive of the circumstances where the AerLingus
management and Ryanair would be able to workharmoniously together .
. . this is simply a reflection ofthe fact that these organisations
have been competinghead to head, without fear or favour, for 20
years. Itwould be like merging Manchester United and
Liverpoolfootball clubs.xviii,2
In fact, the bid was opposed by a loose alliance represent-ing
almost 47 per cent of Aer Lingus shares. This includedthe Irish
government, which still retained a 25.4 per centholding, two
investment funds operated on behalf of AerLingus pilots accounting
for about 4 per cent of shares, andIrish telecom tycoon Denis
O’Brien, who bought 2.1 percent of shares deliberately to
complicate Ryanair’s move. Acritical 12.6 per cent of the
shareholding was controlled by the Aer Lingus employee share
ownership trust (ESOT),which had the right to appoint two
directors, and has astake in future profits. Its members rejected
the Ryanairoffer by a 97 per cent majority vote.
Having abandoned this bid due to the shareholder opposition and
a blocking decision by the EuropeanCommission on competition
grounds, Ryanair renewed itsbid in December 2008, with an offer of
x1.40 per share, a premium of approximately 25 per cent over the
closingprice. It proposed to keep Aer Lingus as a separate
companymaintaining the Aer Lingus brand, to double Aer
Lingus’short-haul fleet from 33 to 66 aircraft and to create
1000associated new jobs over a five-year period. It claimed that if
the offer was accepted, the Irish government wouldreceive over x180
million and the ESOT members andother employees who owned 18 per
cent of Aer Linguswould receive over x137 million in cash. However,
inJanuary 2009, when the offer was rejected by Aer Lingusmanagement
and by the ESOT and other parties, Ryanairdecided to withdraw
it.
Aer Lingus’ fortunes continued to deteriorate, announc-ing
losses for 2008 and projecting even worse for 2009. In July of that
year its shares were trading at less thanx0.50. In April, its CEO
Dermot Mannion resigned aftercontroversy over a potential secret
pay-off deal in the eventof a hostile takeover. While Ryanair did
not have a seat onthe board, it continued to denigrate Aer Lingus,
forecasting‘a bleak future as a loss-making, subscale, regional
airline,which has a high cost base and declining traffic
numbers’.xix
Meanwhile, the two airlines continued to compete vigor-ously,
especially within the Irish market.
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In July 2009, Aer Lingus appointed a CEO to replaceDermot
Mannion. This was Christoph Mueller, known asan ‘axe man’, former
CEO of Sabena Airlines before it wentbust in 2001. Mr Mueller had
already crossed swords withRyanair when it compared its fares to
those of Sabena in advertisements that were alleged to be
misleading, offensive and defamatory. When Ryanair lost a court
caseover the matter, and was ordered to publish an apology
inBelgian newspapers and on its website, it used the apologyto
continue its publicity about its relatively lower fares.
Risks and challenges
In addition to the fallout from its foray into Aer
Lingus,Ryanair faced various challenges in 2009, some specifc
toitself and some general to the aviation industry.
Sharp economic downturnThe recession of 2008/09 created
unfavourable economicconditions such as high unemployment rates and
restrictedcredit markets, with reduced spending by leisure and
busi-ness passengers alike. This constrained Ryanair’s scope
toraise fares, putting downward pressure on yields.
Continuedrecession could restrict the company’s planned
passengervolume growth.
Growth and reducing yieldsGrowth plans by Ryanair entailed
investment in new air-craft and routes. If growth in passenger
traffic did not keeppace with its planned fleet expansion,
overcapacity couldresult. Related pressures were additional
marketing costsand reduced yields from lower fares to promote
additionalroutes, especially to airports new to the Ryanair system.
In its drive for growth, Ryanair was likely to encounterincreased
competition, putting even more downward pressure on yields, as
airlines struggled to fill vacant seatsto cover fixed costs.
Industrial relationsIn the light of the recession and financial
losses, Ryanair negotiated with all employee groups and secured a
payfreeze for 2008/09 and 2009/10. It also planned to make250
people redundant at Dublin Airport.
Ryanair came under fire for refusing to recognise unionsand
allegedly providing poor working conditions (for example, to reduce
the company’s electricity bill, staff arebanned from charging their
own mobile phones at work). Itconducts collective bargaining with
employees on pay, workpractices and conditions of employment
through internalelected Employee Representation Committees.
However, therewas pressure from the British Airline Pilots
Association(BALPA) to enlist Ryanair pilots based in Britain.
In July 2006, the Irish High Court ruled that Ryanairhad bullied
pilots to accept new contracts, where pilots
would have to pay x15,000 for re-training on new aircraftif they
left the airline, or if the company were forced tonegotiate with
unions during the following five years. SomeRyanair managers were
judged to have given false evidencein court. Meanwhile, Ryanair was
contesting the claims ofsome pilots for victimisation under the new
contracts. By2009, only 11 of the 64 pilots who had lodged the
claimremained with the company and still had claims.
Ryanair was ordered to pay ‘well in excess’ of x1 millionin
legal costs after a court refused the airline access to thenames
and addresses of pilots who posted critical commentsabout the
company on a site hosted by the British and Irishpilots’ unions.
Michael O’Leary claimed anonymous pilotswere using a website to
intimidate and harass foreign-basedpilots to dissuade them from
working for the company.Nonetheless, Ryanair appeared to have no
problems recruit-ing crew, including pilots, to meet its needs.
Input costs
FuelPerhaps the greatest concern is fuel prices. Jet fuel
pricesare subject to wide fluctuations, increases in demand
anddisruptions in supply-factors which Ryanair can neitherpredict
nor control. In such unpredictable circumstances,even hedging is a
risk. The situation is compounded byexchange rate uncertainties,
although a decline of the USdollar against the euro and sterling
worked in Ryanair’sfavour, as fuel prices are denominated in
dollars. Conversely,a weak euro against the dollar works against
Ryanair.Ryanair’s declaration of ‘no fuel surcharges ever’ and
itsreliance on low fares limit its capacity to pass on
increasedfuel costs.
Airport charges and government taxesRyanair is especially
sensitive to airports which raise charges,like Stansted and Dublin.
Indirectly, it is also vulnerable to extra taxes and charges, such
as the x10 tourist taximposed by the Irish government.
Passenger compensationOn 17 February 2005, a new EU regulation
came intoeffect, providing for standardised and immediate
assistancefor air passengers at EU airports for delays,
cancellations anddenied boarding. It was expected that the
compensationcosts would amount to a sector-wide bill of x200
millionannually.
Passengers affected by cancellations must be offered a refund or
rerouting and free care and assistance whilewaiting for their
rerouted flight – specifically, meals,refreshments, and hotel
accommodation where an over-night stay is necessary. Financial
compensation is payable,unless the airline can prove unavoidable
exceptional
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circumstances, like political instability, weather
conditions,security and safety risks, or strikes. For Ryanair, the
typicalcompensation cost would fall into the x250 category, basedon
the average distance of its flights. Passengers subject tolong
delays would also be entitled to similar assistance.However, four
years after its introduction the new regula-tion was largely
ignored and had no material impact onRyanair, despite the emergence
of online ‘advisors’ to helppassengers make claims when their
flights have been cancelled or delayed.
Environmental concernsAviation fuel has been exempt from carbon
taxes, but the EU has established an Emissions Trading Scheme
toencompass the aviation industry commencing in 2012.Ryanair was
predicted to be the fourth most adverselyaffected airline in the
world with a shortfall of 2.8 tonnes inCO2 allowances, equivalent
to x40 million in extra costs.This is despite its young fleet of
fuel-efficient, minimal pollution aircraft. Ryanair has contended
that any environ-mental taxation scheme should be to the benefit of
moreefficient carriers. Airlines with low load factors that
generatehigh fuel consumption and emissions per passenger, andthose
offering connecting rather than point-to-point flights,should be
penalised.
Sundry legal actionsRyanair has been in litigation with the EU
about allegedreceipt of state aid at certain airports. An EU ruling
in 2004held that Ryanair had received illegal state aid from
publicly owned Charleroi Airport, its Brussels base.Ryanair was
ordered to repay x4 million. The Belgianauthorities were claiming
back a further x2.3 million in theIrish courts for its
reimbursement to Ryanair of start-upcosts at Charleroi. On appeal,
the original EU decision wasoverturned in December 2008, Ryanair
was refunded itsx4 million and the Belgian authorities withdrew
their claim.Nonetheless, the EU launched further investigations
intoallegations of illegal aid, subsidising Ryanair at
publiclyowned airports, such as Lubeck and Frankfurt Hahn
inGermany, and Shannon in Ireland. Other legal challengeswere
launched against Ryanair by competitors. On anotherfront Ryanair
was vigorously opposing French governmentattempts to protect Air
France–KLM by forcing easyJet andRyanair to move their French-based
staff from Britishemployment contracts to more expensive French
ones.
Often, Ryanair took the initiative on alleged illegal aid to
rivals. For example, it filed a complaint with the EUCommission
accusing Air France–KLM of attempting toblock competition after the
French airline filed a case alleg-ing that Marseille was acting
illegally by offering Ryanairdiscount airlines cut-price fees at
its second, no-frills termi-nal. That complaint came a month after
Ryanair called on
the Commission to investigate allegations that Air Francehad
received almost x1 billion in illegal state aid, benefitingunfairly
from up to 50 per cent discounted landing and passenger charges on
flights within France. Adverse rulingson these airport cases could
curtail Ryanair’s growth, if it was prevented from striking
advantageous deals withpublicly owned airports and was confined to
the fewer privately owned airports across Europe.
On another front, Ryanair was being sued by BAA for its refusal
to pay increased landing charges at Stansted. Inother legal cases
Ryanair has been accused of misleadingpassengers on its website by
exaggerating price differentialswith its competitors.xx
Customer services and perceptionsIn 2003, Ryanair published a
Passenger Charter, whichincludes doctrines on low fares, customer
redress and punctuality. Its annual report offers figures claiming
superiority over competitors with respect to punctuality,completed
flights and fewest bags lost per 1000 passengers.
However, its Skytrax 2 star rating is among the worst for budget
airlines. In Europe, only bmibaby and Wizzairachieve as low a
rating. There have been suggestions that Ryanair’s ‘obsessive focus
on the bottom line mayhave dented its public image. In an infamous
incident, itcharged a disabled man £18 (x25) to use a
wheelchair’.xxi
In response to protests over the charge, Ryanair imposed a
50-cent wheelchair levy on every passenger ticket.Campaigners for
the disabled accused Ryanair of pro-fiteering, declaring that the
levy should be no more than 3 cents. It was the only major airline
in Europe to imposesuch charges.
There was growing attention to extra charges continu-ally being
imposed by Ryanair on passengers, many onunavoidable services, such
as check-in. In some instances,these extra charges make Ryanair
more expensive thanBA.xxii Examples were a family of four
travelling to Ibizafrom London with three bags for a two-week
holiday cost-ing £1157 with Ryanair compared to £913 with BA
and£634 with easyJet. A single passenger travelling to Venicefrom
London for a week at Christmas with one bag wouldpay a total £139
on Ryanair compared to £89 on BA and£121 on easyJet.
Ryanair features on many consumer complaint inter-active
websites, and some blogs have been establishedspecifically to
disparage the airline. In a blog entitled ‘20reasons never to fly
Ryanair’, extra charges for bookingfees, baggage overweight and low
weight limits, premiumrate helplines, and the fact that ‘you are
always beingflogged stuff ’ were enumerated?xxiii When the Irish
Times putRyanair customers’ gripes to its head of
communications,Stephen McNamara, his response was to dismiss them
as‘ “subjective and inaccurate rubbish” and even implied
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they had been made up to further some anti-Ryanairagenda’.xxiv
Among the complaints were:
Customers want to be treated like a human being, to get to their
desired destination (not 50/60 miles away). . . to be allowed to
bring luggage without persecution. . . a complete and utter lack of
communication whenflights run late . . . I’m sick of that miserable
bookingcharge/service charge/admin charge system.
So, why are so many people willing to put up with an airline
that, in the words of The Economist, ‘has become a byword for
appalling customer service, misleading advertising claims and
jeering rudeness’?xxv Ryanair hasresponded to such comments,
declaring that, in effect, customers vote with their feet by
choosing Ryanair for itsfour tenets of customer service – low
fares, a good on-timerecord, few cancellations and few lost bags.
‘If you wantanything more – go away’, warns Michael O’Leary.xxvi
TheFinancial Times aerospace correspondent observed thatRyanair
still offered relative value compared to rail altern-atives, at
least on a journey from London to Scotland, even when Ryanair
extras are factored in.
Other risks and challengesAs listed in its own report, Ryanair
faced other risks – pricesand availability of new aircraft, threats
of terrorist attacks,dependence on key personnel (especially
Michael O’Leary)and on external service providers and its internet
websiteand the continued acceptance of budget carriers withrespect
to safety. Tied in with the latter are potential rises ininsurance
costs.
Ryanair’s competitive space
Globally, the airline industry lost $11 billion in 2009, on top
of $8.5 billion in 2008, with European airlines contributing $1
billion of that loss. Of the large Europeancarriers, only Lufthansa
was expecting to make a profit.BA, Air France–KLM and Scandinavian
Air Systems (SAS) experienced severe losses, due to declining
trafficfrom long-haul business class passengers. The woes of
theselegacy carriers were compounded by huge pension
funddeficits.
Some industry analysts considered the economic reces-sion of
2009 could offer an opportunity for budget carriers,as passengers
who continued to travel were expected totrade down. By mid-2009,
budget airlines accounted forover 35 per cent of scheduled
intra-European traffic.Ryanair was the clear market share leader,
with easyJetanother dominant force (Table 2). The two were often
compared and contrasted, since both operated mainly outof the UK
and served the same markets. One issue waswhether easyJet’s use of
primary airports would be better
than Ryanair at capturing the traffic trading down fromnetwork
carriers.
Other budget carriers, of diverse size and growth ambi-tions,
trajectories and regional emphases varied in differentlevels of
services to passengers and use of main versus secondary airports.
The comparison with the US budgetairline market in Table 2
indicates that penetration inEurope is less than in the US, which
suggests scope forgrowth in the sector in Europe. It also raises
the question asto whether the extent of dominance enjoyed by
Southwestoffers a model for Ryanair to assert itself further.
Anotherpossible development trajectory for Ryanair was to followup
on its announcement in 2007 to offer x10 transatlanticflights, an
idea which had not taken flight and appeared to have been shelved
as of 2009.
Leading Ryanair into the future
‘It is good to have someone like Michael O’Leary around.He
scares people to death.’ This praise of Ryanair’s CEO camefrom none
other than his fellow Irishman, Willie Walsh, CEOof BA.xxvii He has
been described as ‘at turns, arrogant andrude, then charming,
affable and humorous, has terrorisedrivals and regulators for more
than a decade. And so far, theyhave waited in vain for him to trip
up or his enthusiasm to wane.’xxviii In fact, Michael O’Leary has
been pronounc-ing his intention to depart from the airline ‘in two
years’time’. He has declared that he would sever all links with the
airline, refusing to ‘move upstairs’ as chairman. ‘ “Youdon’t need
a doddery oldie hanging around the place”, heproclaimed.’xxix
O’Leary stays in budget hotels, always flies Ryanair,startling
fellow passengers by taking their boarding passesat the gate and by
boarding the plane last where he invari-ably gets a middle seat. He
does not sit in an executivelounge, has no BlackBerry and does not
use email.
In 2009, Michael O’Leary held 4.06 per cent of Ryanair’sshare
capital, having sold 5 million shares at x3.75. AlthoughO’Leary
consistently praised his management team, Ryanairwas inextricably
identified with him. He was credited withsingle-handedly
transforming European air transport. In2001, O’Leary received the
European Businessman of theYear Award from Fortune magazine; in
2004, the FinancialTimes named him as one of 25 European ‘business
stars’who have made a difference. The newspaper described himas
personifying ‘the brash new Irish business elite’ and possessing ‘a
head for numbers, a shrewd marketing brainand a ruthless
competitive streak’.xxx
Present and former staff have praised O’Leary’s leader-ship
style. ‘Michael’s genius is his ability to motivate andenergise
people. There is an incredible energy in that place.People work
incredibly hard and get a lot out of it. Theyoperate a very lean
operation. It is without peer’ said Tim
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Jeans, a former sales and marketing director of
Ryanair,currently CEO of a small low-cost rival,
MyTravelLite.xxxi
O’Leary’s publicity seeking antics are legendary. These included
his ‘declaration of war’ on easyJet when,wearing an army uniform,
he drove a tank to easyJet’sheadquarters at Luton Airport. In
another stunt, whenRyanair opened its hub at Milan Bergamo he flew
thereaboard a jet bearing the slogan ‘Arrividerci Alitalia’. He
hasalso dressed up as St Patrick and as the Pope to promoteticket
offers.
O’Leary’s outspokenness has made him a figure of public debate.
‘He is called everything from “arrogant pig”to “messiah” ’.xxxii
His avowed enemies include tradeunions, politicians who impose
airport taxes (he called UK Prime Minister Gordon Brown a ‘twit’
and a ‘Scottishmiser’xxxiii), environmentalists, bloggers who rant
aboutpoor service, travel agents, reporters who expect free
seats,
regulators and the EU Commission, and airport owners likeBAA,
whom he once called ‘overcharging rapists’.xxxiv AnEU Commissioner,
Philippe Busquin, denounced MichaelO’Leary as ‘irritating . . . and
insists he is not the onlyCommissioner who is allergic to the mere
mention of thename of Ryanair’s arrogant chief ’.xxxv
An Irish Times columnist, John McManus, suggested that‘maybe
it’s time for Ryanair to jettison O’Leary’, assertingthat O’Leary
has become a caricature of himself. Perhapsthe last words should go
to Michael O’Leary himself: ‘Wecould make a mistake and I could get
hung’, he said. Hereiterated a point he had often made before:
It is okay doing the cheeky chappie, running aroundEurope,
thumbing your nose, but I am not Herb Kelleher(the legendary
founder of the original budget airline,Southwest Airlines). He was
a genius and I am not.xxxvi
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Table 2 Budget airlines sundry data – Europe and US
(2008/09)
European market position US market position
Airline Pax (m)1 Rating3 Airports4 Airline Pax (m)2
Aigle Azur 1.46 26 AirTran 24.6Air Berlin 28.6 4 126 Allegiant
Air 3.9Belle Air 0.46 24 American Trans Air (ATA) 0.4Bmibaby 3.87 2
32 Frontier Airlines 10.1Brussels Airlines 5.4 3 62 GoJet Airlines
1.5Clickair5 6.3 3 40 Horizon Airlines (Alaska Air) 6.5easyJet 44.6
3 110 Island Air Hawaii 0.5FlyBe 7.5 3 65 JetBlue Airways
20.5Germanwings 7.6 3 70 Midwest Airline Inc. 3.0Jet2.com 3.5 3 51
Shuttle America Corp. 3.5Meridiana 1.9 3 30 Southwest Airlines
101.9Monarch Airlines 3.9 21 Spirit Airlines 5.5Myair.com5 1.5 27
Sun County Airlines 1.3Niki Airline 2.1 3 33 USA 3000 Airlines
0.8Norwegian 9.1 3 85 Virgin America 2.5Ryanair 57.7 2 140Sky
Europe5 3.6 3 30Sterling5 3.8 39Sverigeflyg 0.5 15transavia.com 5.5
3 88TUIfly 10.5 75Vueling Airlines 5.9 3 45Windjet 2.7 28Wizz Air
5.9 3 581 Sources: European Low Fares Airlines Association (ELFAA),
Company reports.2 Sources: CIA, Bureau of Transportation
Statistics.3 Skytrax star rating from 1 to 5 – not all airlines
rated.4 Number of airports served; Sources: European Low Fares
Airlines Association (ELFAA), Company reports.5 These airlines have
ceased operations.
Total passengers (pax)European budget airlines 223.9 Total pax
US budget airlines 186.4Ryanair as % of Total – 26% Southwest as %
of Total – 55%
Key Population Data Key Population DataPopulation EU 27 (m) 500
Population US (m) 307
Key Population Ratios Key Population RatiosBudget ratio to EU 27
population 0.45 Budget ratio to US population 0.61
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So, how do these comments (and the Aer Lingus bid) fitwith
Michael O’Leary’s declaration to part company withRyanair? Would he
really go, and if so, what would happento Ryanair and its
ambitions? No one really knows theanswer to these questions, but it
is O’Leary’s propensity tosurprise his admirers and detractors
alike.
References:i ‘The FT ArcelorMittal Boldness in Business Awards’,
Financial Times
supplement, 20 March 2009, p. 25.ii K. Done, ‘Airline industry
in intensive care’, Financial Times,
25 March 2009, p. 22.iii P. Clark, ‘Upbeat Ryanair rides out the
storm’, Financial Times,
2 February 2009, p. 20.iv K. Done, ‘Ryanair sees opportunities
in rivals’ distress’, Financial
Times, 28 July 2009, p. 15.v Financial Times, 9 September 2006,
p. 16.vi K. Done and T. Braithwaite, ‘Ryanair to allow mobile phone
calls
next year’, Financial Times, 31 August 2006, p. 1.vii Ryanair
Annual Report, 2001.viii J. Guthrie, ‘Sir Stelios beknighted as
suits prove bolder risk takers’,
Financial Times, 30 July 2009, p. 16.ix P. Clark, ‘O’Leary in
attack on Boeing’, Financial Times, 19 December
2009, p. 1.x Ryanair Annual Report 2009.xi Ibid.xii S. Lyall,
‘No apologies from the boss of a no-frills airline’, The New
York Times, 1 August 2009 (The Saturday Profile).xiii Ryanair
2007 half yearly results.xiv B. Groom, ‘Hot air from Ryanair’,
Financial Times, 23 July 2009, p. 16.xv LEX, Ryanair, Financial
Times, 3 June 2009, p. 16.
xvi L. Noonan, ‘O’Leary admits stake in Aer Lingus was stupid
disaster’,Irish Independent, 6 March 2009.
xvii Statement from Ryanair’s half yearly results presentation,
6 November 2006.
xviii S. Pogatchnik, ‘Aer Lingus rejects Ryanair takeover
offer’, Business Week online, 3 November 2006.
xix Ryanair Full Year Results 2009.xx Ryanair press release, 29
May 2009.xxi D. Milmo, ‘Ryanair – the world’s least favourite
airline’,
Guardian, 26 October 2006.xxii R. Waite and S. Swinford,
‘Ryanair more expensive than BA on some
flights’, Sunday Times, 9 August 2009.xxiii Money Central –
Times Online – ‘WBLG: Twenty reasons never to fly
Ryanair’, 20 March 2009.xxiv C. Pope, ‘Pricewatch Daily’, Irish
Times, 14 August 2009, p. 11.xxv Lyall, ‘No apologies from the boss
of a no-frills airline’.xxvi Ibid.xxvii K. Done, ‘O’Leary shows it
is not yet the end for budget air travel’.
Financial Times, 2 August 2008, p. 11.xxviiii ‘The FT
ArcelorMittal Boldness in Business Awards’, Financial
Times supplement, 20 March 2009, p. 21.xxix D. Dalby, ‘I’m going
for good, O’Leary tells Ryanair’, Sunday Times,
20 November 2005, News, p. 3.xxx B. Groom, ‘Leaders of the new
Europe: Business stars chart a
course for the profits of the future’, Financial Times, 20 April
2004.xxxi G. Bowley, ‘How low can you go?’ Financial Times
Magazine,
No. 9, 21 June 2003.xxxii Ibid.xxxiii Lyall, ‘No apologies from
the boss of a no-frills airline’.xxxiv Ibid.xxxv S. Creaton,
‘Turbulent times for Ryanair’s high-flier’, Irish Times,
31 January 2004.xxxvi Bowley, ‘How low can you go?’
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