Cracks in Ryanair’s lowest cost model

By Bjorn Fehrm

September 27, 2016, ©. Leeham Co: Ryanair has canceled 2,000 flight over the last few weeks. The background is a lack of pilots, after a change of holiday accounting period.

The cancellations come against a backdrop of pilots leaving for other companies (notably Norwegian) and an EU ruling in favor of Ryanair’s flight crews.

Pilot trouble

The pilot shortage come about as too many of Ryanair’s 4,200 pilots have to take their company standard “four-weeks off-season holidays” at end of this calendar year instead of between September and April 2018.

European regulators forced this change of the personnel year on Ryanair for 2017. Using its fiscal year (April to March) also for personnel management was no longer accepted.

As the high season for Ryanair is April to August, pilots have taken four weeks holidays in the “winter months.” For the 2017 transition year, the “winter months” no longer include January to March 2018.

The result was a bunch up of due holidays from end September to end of year. It meant Ryanair could no longer serve its 2,200 daily flights with pilots from the end September.

Pilot contracts

The shortage has put focus on the Ryanair pilot situation. The company traditionally sees large defections to other airlines. Normally, around several hundred of its 4,200 pilots leave every year. Now it’s worse than ever.

Ryanair is seen as a good first step in a airline pilot’s career. You pay for your Boeing 737 transition course, organized by Ryanair, and you work long hours for meager pay. But you collect many flight hours in a short time. Then you can move on to better jobs. One such better job is flying long-haul for Norwegian Air Service (Norwegian).

Different from when Ryanair pilots left for the Gulf airlines, Norwegian’s Dublin bases means a pilot can go from flying London four times a day to flying to New York, rest for a day and fly back the following day. Now without moving.

More than 100 Ryanair pilots joined Norwegian in the last year.

Pilot unrest

Ryanair’s CEO, Michael O’Leary, said the company can cancel a week’s holiday for its pilots to help with the shortage. This and other statements caused pilots to respond in anger. But the pilot anger is no longer limited to squeezed holidays.

Decades of bad contract terms, widespread use of staffing companies rather than direct employment and forcing crews to pay even for meals and water during flights, has caused widespread crew unrest.

Now all sticky points surface. The right to direct employment, contracts in land of work (see below), satisfactory pay for worked time (pilots and crews are only paid for time in the air) and work contracts with standard working conditions are claims.

O’Leary admitted at the September shareholder’s meeting that the company has possibly held the pilots too short in recent times. Now management is forced to firefighting instead of orderly discussions.

Cabin crew dispute

As Ryanair has grown, it has based crews and aircraft on bases around Europe to avoid costs of crew layovers. Crews can return to their home bases after a day’s work.

Ryanair has long claimed that all employee contracts fall under Irish jurisdiction and that all labor disputes shall be settled in Irish courts.

Crews at foreign bases have disputed this and a Belgian crew won a European Court of Justice ruling on 14 September that they can pursue legal claims locally.

The ruling can be the beginning to the end for Ryanair’s strict anti-union and Irish personnel contracts policy.

Summary

Ryanair is Europe’s most profitable airline. It will not be economically in danger by recent setbacks in its employment policy. But the question, which has been lurking for many years, is surfacing:

How long can Ryanair keep its personnel costs at an unprecedented low level.

27 Comments on “Cracks in Ryanair’s lowest cost model

  1. Too cheap. And, you reap what you sow. And a whole load of other wise sayings.

    I’m looking in from the outside (and from some distance – I’m not even in the aviation industry), but even I can tell that forcing rubbish terms and conditions on employees is simply creating a vast pool of personnel ripe for the picking by a competitor. To set up any business you need people. Normally, people are hard to come by, it’s difficult to dislodge them from their comfy perches and come and work for you.

    It’s a whole load easier if the biggest player in your new market hasn’t been treating its staff properly. They’re not sat on a comfy perch, they’re half way to flying off already. Scatter a little gold here and there, and…

    For the pilots, there’s every advantage in leaving quickly. Norwegian’s pot of gold won’t be infinitely deep, and quitting whilst there’s the opportunity to go to Norwegian is advisable. You wouldn’t want to be left stuck in Ryanair, there to turn off the lights.

    Ryanair are very profitable, but the shareholders own interests are, right now, probably in the direction of becoming less profitable, paying the staff a whole lot better, and keeping market share. There’s load of people I know who are now not even considering booking on Ryanair – they’re understandably worried about cancellations.

    If Ryanair don’t stop the rot immediately, if that public mood persists, Ryanair will start finding it difficult to keep the aircraft flying full. Ryanair would then be in decline, and there’s no easy recovery from that.

    So either the shareholders take a hit now to nip this in the bud, or sell quick whilst the shares are still worth something. The former is going to be a difficult sell for MOL.

  2. Many people are saying that Ryanair is so extremely profitable, because they treat their employees badly and pay them very poorly. But that’s simply not true. Maybe they treat their staff badly but that’s not the main reason for their high profits and it#s not the main factor of their business model.

    Some facts:
    Revenues: 6648 million Euro
    Expenses: 5114 million Euro
    Operating income: 1534 Million Euro
    Operating margin: 23%

    Total staff cost: 633 million Euro (including pensions, Social welfare).
    Let’s assume they pay their staff 30% more – which would be a really massive payment increase.

    Total staff cost then: 823 million Euro.

    They would still reach more than 20% operating margin, which is miles ahead of their competitors like Eurowings (-4% operating margin), Vueling (8% operating margin), Easyjet (11% operating margin). And keep in mind: From all the competitors Ryanair has by far the lowest average fares.

    Ryanair is extremely efficient in all areas. The cancellation of 2000 flights is really bad for the public image of Ryanair. But their business model is not in danger. They can afford massive payment increments and they would still be by far the most profitable Low Cost Carrier.

    • Maybe paying 30% more is an answer. But if part of the problem is also hours worked, then fixing that is a whole lot more expensive.

      Say they needed 30% more pilots to reduce the workload; that’s a big change, because lots of other costs go up too, beyond a 30% wage bill increment.

      It will be interesting to see what they do. Their recruitment and training costs have already gone up…

        • Well, not quite. First, 220 means an extra FA. And second, but more significantly, adding a second aircraft type from a different manufacturer means a second set of spares and mechanics trained to serve them. Oh, and a simulator (or time rental on anothers) for transition and recurrent training.
          Third, Airbus has been having rather robust A321 sales, so one presumes the discounts to book are not quite as generous as with some other aircraft, and order positions may be far out.
          Ryanair has the MAX 200 coming (which I personally hope to never ride in, but that’s my consumer preference). That should be the sweet spot for them that gets what you suggest – the least additional outlay for lower average seatmile costs.

          • …..I know, just not happy with Boeing on the BBD case right now.

            Maybe good time for consolidation, focus on your best most profitable routes and make sure pax and staff are happy.

            Bigger is not always better if you don’t get it right.

          • 240 seat version pays for the extra FA, but agree Ryanair, esp Ryanair, are not going to get A321s cheap.

          • I can’t see how they could unload 240 people fast enough. I would very much like to know which flights are going to be max 200 so that I can avoid them. This well could be the point where they go too far with densifcation

          • Agree, nice to get between A & B for $30, but.

            At my age, as the kids will say, I am past my useful expiry date, you don’t feel like queuing for longer than your flight, and smile while you can’t fit into the seat.

            While the BBD story on the go here there could potentially be a financially viable “basic premium” market out there for shorter hauls (<2/3 hours).

            Quick check ins, no ca..ab with luggage payments, get in, take-off, comfortable seating, pay for on board drinks, tea,water, snacks on the house.

            Get off, quick luggage collection, move on. CS100 type aircraft, 34" pitch.

            Better than hanging around in the front and on the ground while they trying to get a 180+ seat plane going with some lost sheep drifting around.

          • I always thank heaven for rear stairs when airlines and airports have the sense to use them

    • Staff costs with an operation like this wouldnt necessarily be obvious from the company accounts. As is well known most of its ’employees’ are contracted through a few labour hire companies, even pilots. The cabin crew are much the same with only the supervisors directly employed by Ryanair.
      Just looking at the ‘total employee costs’ mentioned by Guido- €633 mill. With 4000 pilots that makes it a farcical €15,825 per pilot per year. No money for anyone else.
      Get a better calculator Guido !

      • Exactly. Get a better calculator:
        €633 million divided by 4000 is 158,250 and not 15,825.

        And of course the term “pilots” means captains AND first officers. You can’t assume that these pilots earn 200.000 Euro like a captain at Lufthansa with 30 years experience. For example: Young captains at Lufthansas LCC Eurowings start with a salary of 78.000 Euro. Young first officers start with 44.000 Euro. So the Ryanair-Number are plausible. They have a total staff of 13,000 (pilots, cabin crews, ground, administration) and 633 million translates to 48,000 Euro on average (of course including payment for social welfare).

  3. Your analysis of Ryanair is excellent Scott. My operator has hired several ex Ryanair pilots. One thing can be said for Ryanair, their training appears excellent. As a line trainer I have found every ex Ryanair pilot I have flown with very good. Which is why Norwegian hires them without any further evaluation.

  4. “our booking engine is full of people who said they would never fly with us again” They just need to adjust their pay policies to cope with supply and demand with the same efficiency of their their demand based booking system. This is not the first time Ryanair has pushed cost a bit too hard.

  5. As an occasional Ryanair user I feel that the negative aspects are often overblown. It is a successful operation that gets you from A to B, period. Re the efficiencies they are aggressive but as noted above they generally do the basics well.

    This cockup is most unlike them from an operational standpoint but of course aggressive tactics and rubbing all parties up the wrong way on an almost perpetual basis comes with downsides. They seem to actively enjoy not engendering goodwill. I hope the pilots manage to screw a little extra for their troubles out of this.

    You may not like the model but from a financial standpoint there are few airlines to come close to their performance. And this has been consistent for many years.

  6. Dear Scott,
    One thing that bothered me a lot in aviation is dealing with ruthless, arrogant aggressive people who show no basic courtesy towards fellow airman.

    We tend to excuse and hide this reprehensive behavior under the veil of “successful management”. I respectfully disagree. While on short term such behavior can be successful, most of this ruthlessness eventually ends up in chaos, aggravation and destroyed human lives.

    Low cost should not equivalate low respect. Was under the impression that aviation was an industry of smart, educated, civilized professionals that respect each other…

    Unfortunately Mr. O’Leary has proven to previously treat both passengers and employees with disrespect and disdain. Some of his recent mildly offensive public appearances have again sparked drastic responses from employees.

    We should spell out these facts and do not encourage the spreading of this culture of ruthless management, especially when the Human Factors become the weakest link in aviation safety.

    At the same time I wish Mr. O’Leary and the staff of Ryanair all the best luck in resolving their internal affairs in a civilised, courteous manner, without damaging each other’s reputation and with a minimum inconvenience to the flying public.

  7. Seems that all the major European LCC’s are looking for pilots and cabin crew. Is this the “perfect storm” for Ryanair that could snowball?

  8. Me being just a normal passenger – I am completely happy with Ryanair – they bring you well and CHEAP from A-B . If you compare their price with anybody – the difference is usually HUGE. Eurowings 4x that much. Vueling 2x……

    They did screw up a bit, however from the customer point of view they do overall a good job.

    Also look at their delays – they do better than LH or AF !

    Leary is simply him – he is doing good job but his mouth is often faster than his brain – but who is perfect ?

    • With all the European LCC’s looking for pilots and cabin crew this is not coming at a good time for Ryanair.

      There prices are sometimes ridiculously low. Maybe a time for consolidation, cut back flights/capacity with 5% but increase prices with 20%. If you pay $30 or $36 between A and B will it really make a difference? If you improve the travel experience the aircraft will be full.

      ..and they will still be the cheapest by a big margin.

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