Michael O’Leary, quoted in Management Today, describes the situation facing Ryanair towards the end of last year. He highlighted the threats from the EU recession and higher oil prices, but typically O’Leary found the opportunities more compelling: the “unfolding failure of the package tour operator model, significant competitor fare increases and capacity cuts, created enormous growth opportunities for Ryanair, as large and smaller airports across Europe compete aggressively to win Ryanair’s growth” he said.
Never one to step back from aggressive competition, Ryanair’s response led them to make net profits of nearly 15m euros in the last quarter of 2011, compared with a loss of 10.3m euros in the final quarter of 2010. There was a significant external influence in 2010 which even Ryanair could not overcome, when there were cancellations due to snow and refunds had to be paid to passengers; the better weather in 2011 has helped. However shrewd decisions have helped the company to turn a 2% fall in passenger numbers into a 13% increase in revenue.
As ever, their clear focus has remained on minimising costs. They cut capacity by grounding 80 of their 270 planes; this reduction in capacity enabled them to ensure that the remaining planes were easier to fill. With all competing airlines raising fares, and no doubt with consumers understanding that fuel prices were rising so expecting to pay a little more for their travel, Ryanair have succeeded in raising their fares by an average of 17% - partly in response to their increased costs but also to the reduced supply of seats available. They must have correctly anticipated the price elasticity of demand for their service, as this 17% increase in price resulted in only a 2% fall in passengers, so that they have been able to increase their total revenue.
Easyjet, meanwhile, reported last week that they had enjoyed an 8.1% increase in passengers over the same period and an increase of 8% revenue per passenger. This report to their investors gives some interesting data for measuring their operating performance - but falls short of reporting profitability over the period. It seems that they did not cut capacity towards the end of last year. It will be fascinating to see whether they have also achieved a similar increase in profits, later in the year.
Get your copies of the superb teaching & learning resources provided to delegates at recent tutor2u CPD courses for A Level Business teachers.