Ryanair is facing turbulence right now with pilots unions around Europe demanding better working conditions. The optics are bad for an airline which has been on an aggressive growth path for decades.
But Ryanair’s low-cost model, borrowed from Southwest Airlines, has had decades to adapt. If the airline has shown anything over the years, is that this dynamic democratization of air travel is relatively shock-proof.
While Ryanair has put its own spin on the low-cost, low-complexity business model that Southwest perfected, it’s useful to recall that Southwest Airlines has long had strong and engaged pilots and flight attendant unions—around 83% of all Southwest staff are unionized. The U.S. low-cost leader has managed to address the needs of its employees while maintaining a lean operation.
Ryanair is not Southwest. For one thing, it is only recently that the airline’s CEO, Michael O’Leary, publicly acknowledged that it pays to be friendly. Southwest has known that all along.
Ryanair has built up some animus over decades and has only been working to soften its tone over the past four years with its
Always Getting Better initiatives. It takes more time than that for the friendlier image to stick. Meanwhile, as the airline is pitted against multiple unions, the animus the airline has fostered fuels some schadenfreude.
The factors at play in Europe are perhaps more complex than the union negotiations U.S. airlines face. There’s national pride behind each negotiation, maintaining the labor standards that support the quality of life that each country’s unions fight for. But Europe’s unions are not pitted against Ryanair alone. Competitors across the transport sector in Europe can face and have faced labor actions. As Ryanair’s CMO Kenny Jacob’s recently
quipped, “German consumers are used to strikes.” This was a dig at rival Lufthansa, which has had its share of labor disruptions, but there is some truth to it that applies beyond Germany.
No one likes having their holidays disrupted but, year after year, there are various transport strikes at inconvenient times—in the air and on the ground—and Europeans will still travel.
While current labor action in Germany, Sweden, Ireland and Belgium has prompted Ryanair to
cancel 17% of its scheduled flights for Friday, these disruptions are foreseeable and the airline has had time to advise customers and make adjustments to its schedule.
Ryanair has taken a firm stance that it will not sacrifice the success of its low-cost operating model, but discussions continue. The airline’s COO, Peter Bellew, noted that
demands by German pilots were detailed which should help move the conversation along without requiring mediation.
Ryanair, as a brand, may have nurtured a rebellious image, but it is, at heart, a conservative company. It is bold, but not foolhardy in its approach to risks. It is also transparent about turbulence ahead.
In its most recent
SEC filing, at the end of July, the airline addressed the risks of ongoing collective bargaining with pilots and crew.
“Over 95% of Ryanair pilots have already accepted an updated pay deal but there is still the potential for claims from unions to increase pay over and above what has already been agreed. There may be a push for legacy type working conditions which if acceded to could decrease the productivity of pilots, increase costs and have an adverse effect on profitability. Ryanair intends to retain its low fare high people productivity model; however, there may be periods of labor unrest as unions challenge the existing high productivity model which may have an adverse effect on customer sentiment and profitability,” the airline states.
Ryanair crew with the exception of those based in the UK operate on Irish contracts of employment. That model has been challenged in the past by individuals and may continue to be challenged by trade unions who often favor local employment contracts. If local contracts were imposed it could impact on costs, productivity and complexity of the business. Any subsequent decision to switch capacity to lower cost locations could result in redundancies and a consequent deterioration in labor relations. Following the European Court of Justice (the “ECJ”) decision in the ‘Mons’ case in September 2017, the case has been referred to the Belgian Labour Court in Mons, and with a hearing date set for November 2018 and a decision expected in early 2019. An unfavorable decision could mean the introduction of local Belgian contracts however, this decision may be appealed to the Supreme Court. Ryanair could face legal challenge from trade unions arising from unrealistic demands and expectations that do not align with the Company’s high productivity business model.
As in the case of Southwest, that high productivity business model is a significant buffer in bad times. Ryanair saw a 20% drop in profitability during Q1 of its 2019 financial year caused by
lower fares and higher fuel and labor costs, but that still resulted in €319m ($370m) in profits for the quarter.
“As previously guided, Q1 PAT fell by 20% to €319m due to lower fares, the absence of half of Easter in the quarter, higher oil prices and pilot costs. Traffic grew 7% to 37.6 m, despite over 2,500 flight cancellations caused by ATC staff shortages and ATC strikes. Ryanair’s lower fares delivered an industry leading 96% load factor,” Michael O’Leary said of the results.
Ryanair reported break-even load factor for 2017 and 2018 of 73%. This leaves a comfortable buffer between the number of passengers the airline needs and the number of passengers that want to fly with Ryanair.
Even with the drop in profitability, the airline maintained a 15% net margin for the quarter. Compare that to the
global industry average of 4.1% that the International Air Transport Association (IATA) projected for 2018. Compare that also to the
12.8% net margin that Southwest reported for the Second Quarter at the end of July.
The low-cost model perfected by Southwest and Ryanair is to air travel what Ford’s industrial assembly methodology was to manufacturing. Each airline has found its own way to package it, but lean principles and the standardization of product, procedure and maintenance gives these airlines an edge that legacy competitors still cannot match.
The
global pilot shortage is a factor at play, but Ryanair is also a significant employer in Europe. The airline has a
marked footprint in the market and no one wins if Ryanair were to vanish from the skies; not pilots and crew, and not consumers. Anyway, this scenario is unlikely.
While it might make some of Ryanair’s competitors and detractors in Europe gleeful to see the airline confront the same labor issues they have been plagued by for decades, Ryanair will be as methodical and determined in dealing with this complication as it is with everything else.
But there is a point, somewhere in the middle, between what the airline’s staff needs to be content and what the airline needs to keep flying strong. That point can be found in LUV.
I worked in aviation from 1994-2010 before turning my experience to writing about airlines and airports for leading industry and consumer publications in 2013. I’ve spent months in the hangars of airlines and aircraft manufacturers, dressed aircraft seats by hand, and worked...
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