A Grid in the Sky, Part I: The Apple of European travel
Ryanair disguises its makeup cost-cutting as strategy, but turbulence is in the horizon
After noticing that APIs aren’t strategic to airlines, I started writing on the competitive advantage of airlines in a post-GDS world and realized how strategical this topic is for the airlines, the airports on which they operate, the metasearch engines that compile their flight information, all the way to the end customers.
For the sake of keeping this email short and to the point, I decided to divide this topic, which I called A Grid in the Sky, into a series. Read on for Part I, and, if this topic is of interest, you can continue reading part II and III.
British Airways, Air France, Lufthansa, Iberia. Every country in Europe has a flagship airline. In fact, most of them were once, and sometimes still are, state-owned. Nowadays, none of these flag carriers, nor any other European airline, flies more people than Ryanair.
The Irish airline was founded by Tony Ryan, who had previously made a fortune creating the first aircraft leasing company, and is so tightly associated with their ruthless cost-cutting that many consider it the core of its business model.
However, such a strategy is inconsistent with its current dominant position. Cost-cutting cannot be sustainable precisely because it’s so obvious and straightforward.
If it were a matter of cutting costs, unlimited pockets would have already created a copycat, and Ryanair would be under. Yet, the few low-cost carriers left in Europe are scrambling, doing more of what people see in Ryanair as strategical, only to fail miserably.
Take, for instance, its fleet. Last month, Ryanair announced a huge order of 300 Boeing’s 737-Max-10s for $40 billion, and no one was surprised that Ryanair’s CEO Michael O’Leary praised the aircraft because they “carry about 20% more passengers” and “burn 20% less fuel”.
What’s puzzling is that this very same strategy had already been adopted by two money-losing airlines: Norwegian, which bought 50 Boeing’s 737-Max last year, and Air Asia, closing a deal to get 253 new Airbus’ A321neo on 2019, even though these airlines have failed to have a profitable year.
Paradoxically, the consensus on what makes Ryanair the most profitable airline in Europe has been shamelessly copied in and out, and yet most copycats aren’t as successful as the Irish carrier.
The effect appears to be similar to companies trying to copy the aesthetics of Apple. What really makes the tech company successful isn’t the minimalist design, but the experience that an Apple user gets from using the Mac, the iPhone and the Watch as a super-device that just works seamlessly, empowered by Apple’s coherent design.
Ryanair, like Apple, is using its brand as a form of delusion; its competitors are imitating the wrong thing.
Disrupting Airline Routes
A simple comparative data analysis hints at the core of Ryanair’s true competitive advantage. Out of fourteen measurable characteristics that may impact the profitability of airlines, only three seem to consistently correlate with profitability, in order of importance:
An increased number of hubs.
A reduced number of competitors per route
A reduced number of flights per week per route:
That is, where and when the airline flights is more important to profitability than the age of the fleet, the number of passengers per flight or the aircraft fuel efficiency, what Ryanair’s CEO was praising from Boeing’s latest order.
Buying an efficient fleet moves the needle once the appropriate routes have been chosen. And while purchasing aircrafts is visible and very dependent on the skills of the executive team, choosing routes is done without fanfare and by trial and error.
Norwegian has an average fleet age is 8.6 Years, which is younger than Ryanair’s 10.8 Years, but loses money anyway. It operates mostly from Oslo, offering 104 routes to many popular destinations in Europe, most of them also operated by its competitors.
Because of the competition, they need to be price competitive. But so is everyone else on the popular routes! Growth means opening more popular routes in order to capture more passengers and make it up in volume. But it doesn’t work, and so Norwegian is burning money.
Ryanair does none of that. The airline has hub operations in 84 airports in 33 countries—it is absurd to map them out—and many of these routes are free from competition. Interestingly enough, Ryanair does not operate on any of the most popular routes in Europe—Madrid-Barcelona, London-Paris, Frankfurt-Berlin, or Oslo-Stockholm. Instead, they dominate similar, but competition-free routes, and expect their customers to “make ends meet” with train or public transport. Try flying to Malaga, Spain on anything but Ryanair, and you’ll learn that what this strategy is all about.
That’s, in a nutshell, Ryanair’s secret source: they focus on the effectiveness of their flights, and only then think about milking it.
Rather than choosing already popular routes, Ryanair looks precisely those that have been abandoned by incumbents based on historical data. Where incumbents conclude that “not enough people would fly this route”, Ryanair asks “at what price would people start flying this route?”.
Cost-cutting serves this strategy, not the other way around: by streamlining their operations, their pool of potentially profitable routes increases. Low-cost airlines that spin-offs from incumbents seem especially oblivious to this point, as most of them operate their parents company’s same routes for the sake of efficiencies and synergies, cannibalizing on their profits in the process.
Software turbulence ahead
A consequence of their increased number of hubs is the extra stress the airline puts on coordinating flights. When a company flies every flight from their hub, it is easy to adapt in the event of a delay; absent that, only a tight-nit control of all of the planes’ and crew’s position in the map at any given time can prevent a scheduling catastrophe.
Over time, this control has been delegated to software, with mixed results: Southwest winter meltdown show that the relationship between airlines and their tech is not turbulent-free. As Ryanair’s competitors start to catch up with the importance of network design, a strategical makeover of their IT would need to be assigned priority. Is the new airline industry disruption found in software?