This E-note has been written by Roman from Air Observer


                       http://twitter.com/AirObserver

         ...
This  document summarizes a new approach in
analyzing Ryanair’s business model. It is based on one
year of research. This ...
Elements commonly admitted as basis for
Ryanair’s business success
Most Ryanair business model analyses focus on the
under...
The Truth Behind Ryanair Business Model
The element which has never been highlighted in
most Ryanair analysis I have read ...
Questionable Subsidies: Ryanair’s Backbone


In  France, French Regional Audit
Courts         have        conducted
invest...
Why Subsidies are so Important in Analysing Ryanair’s Business Model?

This is the crucial part of this note. To consider ...
Ryanair and Airports' Relationships




                                                                  Source: Air Obse...
A Model Partly Based on Public Subsidies is Questionable


 In the last year, I have read a lot on the low cost airline
 m...
Illegal Subsidies: Ryanair’s Achilles Heel?

Most     analyses don’t take this issue into account. However,
several courts...
Thank you for reading this note, if you
                                                            like what you read, sp...
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Ryanair business model_enote_airobserver

  1. 1. This E-note has been written by Roman from Air Observer http://twitter.com/AirObserver http://airobserver.wordpress.com/ Ryanair Business Model Under a New Light 1|Page
  2. 2. This document summarizes a new approach in analyzing Ryanair’s business model. It is based on one year of research. This is also based on my experience with the AirObserver blog, a platform where I have Ryanair Main Destinations discussed and analysed the low cost business model for over a year now. I would nonetheless like to thank specialists and aviation aficionados that have helped me to formalize this note. I’m aware that thousands of documents on Ryanair’s business model have already been published. Even more reports and notes have been written about the low cost airline business model. However, I believe no work is formulated as clearly as this one. Ryanair Key Figures Source: Air DB Ryanair Passenger Traffic Source: Ryanair Annual Report 2|Page
  3. 3. Elements commonly admitted as basis for Ryanair’s business success Most Ryanair business model analyses focus on the understanding of key historical characteristics of the Main Airports Deserved by Ryanair low cost airline business model. They often explain Ryanair’s success thanks to the facts listed below. Unique aircraft type with lower maintenance costs/crew training costs High density to increase profitability Every additional service is charged Online services only Small regional airports with direct access to planes/lower airport fees Routes through secondary and smaller airports Short turnaround and maximum utilization of aircrafts Continuous innovative measures to increase ancillary revenues Non-unionized labour force Source: Air DB I won’t develop on them further as I think that albeit they are important, they are not crucial to the understanding of Ryanair’s success. Moreover, you should be able to easily find them on the Internet. Ryanair Main Destinations Why Focus on Ryanair? Many analyses I have read describe Ryanair as the most successful airline in the last twenty years. Indeed, Ryanair is the fastest growing airline in Europe. Since 2004, the Irish low cost airline more than doubled its number of passengers, from 33M up to 73M, expected this year. However, what such analyses have failed to point out is just how the airline achieved such ongoing success. Journalists who work on Ryanair case usually only focused on few elements of its business, but they mainly fail to analyse entire Ryanair business model. Source: Air DB 3|Page
  4. 4. The Truth Behind Ryanair Business Model The element which has never been highlighted in most Ryanair analysis I have read is the importance of subsidies in Ryanair business model. Subsidies are a big part of Ryanair’s revenues. Indeed, while Ryanair declared €663M of ancillary revenues in its last annual report (around 22% of Ryanair’s . revenues) in 2009, Ryanair earned more than €664M in subsidies the same year. It means that subsidies are at least as important as ancillary revenues and represent around 22% of Ryanair’s revenues. However, it does not appear in its “Summary Operating and Financial Overview” where Ryanair only mentions two sources of revenue, “Scheduled Revenues” and “Ancillary Revenues”. Moreover, in its 2008 report, Ryanair also clearly assures that it does not receive any state aids. “ Ryanair claims that it does not receive any State Aid or any subsidies. Clearly, the Irish carrier plays on words here. Indeed, the French government did Source: Ryanair not give them subsidies, but local authorities did. Therefore, money received does not come from the State, but from Regions. The point remains the same: it comes from public money ” A Which Budget Airline Market Analyst Source: Les Echos 4|Page
  5. 5. Questionable Subsidies: Ryanair’s Backbone In France, French Regional Audit Courts have conducted investigations, which have allowed to measure the percentage of subsidies represented in Ryanair’s overall revenue. A total of 25 reports have pointed out the existence of unlawful agreements between Ryanair and Chambers of commerce and industriy. “ In France, Ryanair has received €35M in public money in 2008 ” “ Without public money, Ryanair would have declared losses between €179M and €165M in 2008 ” An “Industrialised” Process All Over Europe “ Ostende Airport, Belgium, gave €1,148M Ryanair not only receives subsidies from French public authorities. Ryanair receives public money from almost to Ryanair.” every airport across Europe it operates from, which accounts for millions of Euros in revenues. Even if such “ Reus Airport, Spain, data is hard to find, several cases have surfaced. To give more tangible evidence, I chose to highlight examples in gave €14M to which Ryanair received large amounts from airports. Ryanair.” In Italy for example, an article mentioned the interesting case of Alghero Airport. The European “ Girona Airport, Commission, in its introductive investigation, declares that between 2002 and 2006, Ryanair received 8 Spain, gave €13,94M millions Euros in public money to operate from Alghero to Ryanair ” Airport. Alghero is just one of hundreds of such cases. 5|Page
  6. 6. Why Subsidies are so Important in Analysing Ryanair’s Business Model? This is the crucial part of this note. To consider subsidies as a major source of revenue for Ryanair, will change the way you analyse its business model. Ryanair does not have the same business model than any other airline. Sure Ryanair needs to fill its planes, but it does not need to sell seats at a price that covers its costs. In other words, Ryanair can sell at a loss. Indeed, Ryanair can't sustain such cheap fares just by charging for Coke and nuts alone. What’s in it for Ryanair? When Ryanair settles a contract with public authorities of a given country, its main engagement is to assure a certain number of passengers. If Ryanair fails, it doesn’t receive public subsidies. Hence for Ryanair, the most important thing is to fill the planes, the price at which it can accomplish this is only secondary. Some French Regional Audit Courts reports reveal the truth about its economic model: bringing passengers into a given airport in order to receive a substantial amount of financial aid. “ García Lorca Granada-Jaén Airport, Spain, gave €1,345M to Ryanair ” “ Faro Airport, Portugal, gave €3M to Ryanair ” “ Malta Airport gave €1.2M to Ryanair ” “ Paris-Vatry Airport, France, gave €2M to Ryanair ” Why Do Airports Pay? Most of the time, airports see Ryanair as an easy way to attract passengers and to increase traffic. Airports that call on Ryanair are, for the most part, often struggling and view Ryanair as their last chance for survival. However, for those who have experienced Ryanair’s methods, desperation often comes at a price, a price that could rush them close to bankruptcy as Alghero airport in Italy. Angouleme Airport, Poitiers Airport, Cuidad Real airport, García Lorca Granada-Jaén airport and Shannon are some examples. Recently, according to Aérojournal, a French aviation web site, Ryanair will receive 2 million Euros worth of subsidies from Paris Vatry Airport. The agreement only covers three months of operations. In compensation, Ryanair will have to carry 15 000 passengers. 6|Page
  7. 7. Ryanair and Airports' Relationships Source: Air Observer “ What if 22% of Ryanair’s revenues were to disappear from one day to the Basics of Ryanair's next?” Business model Now, you know why Ryanair needs to offer such low fares. You know that airports are often victims of Ryanair ways, also due to short term management vision from small airport CEOs. At this stage, something even more important has to be highlighted. What if Ryanair’s subsidies were not legal? What if 22% of Ryanair revenues were based on illegal processes and undeclared public money? What would happen if politics discovered this? The answer is simple. Ryanair would be forced to find other sources of revenue than public funds. Ryanair’s future would therefore be up in the air. Source: Air Observer 7|Page
  8. 8. A Model Partly Based on Public Subsidies is Questionable In the last year, I have read a lot on the low cost airline market and its leader, Ryanair. I gradually gained valuable knowledge of how Ryanair works, communicates, and dominates its competitors. It’s the most fascinating case study I’ve ever looked at so closely. This page will show in detail why public money received by Ryanair does not comply with legislation and goes against lawful and fair competition. Why are Ryanair’s public subsidies illegal? To legally receive public money, three conditions must be met. Should only one of these conditions not be respected, the whole of the subsidies move into an illegal agreement that creates unfair competition. These three conditions are: The company must declare all public aids to the European Commission. It's a fact that Ryanair and its partners have never declared any of their grants. All regional chamber reports point this out. Subsidies have to be strictly limited to 3 years (5 years in special cases). Once more, Ryanair's practices are illegal. The first contract between the French regional airport of Beauvais and Ryanair was signed in the very late 90’s. Ryanair has been operating out of Beauvais since 1997, which means that Ryanair’s been “subsidized” for 13 years now! Lastly, subsidies have to be regressive, which means that each year, the amount has to be significantly lower than the previous one. Here again, is a rule that Ryanair and its “partners” have never respected. Should a private company base its business on public subsidies? Interesting question, but not the matter I wish to discuss. Indeed, some Ryanair "evangelists" will argue that Ryanair is not alone in receiving public money, national legacy airlines such as BA, Air France KLM or Lufthansa also do. Rather than giving into their criticisms and engaging in a sterile debate, I prefer to anticipate their arguments and counter them beforehand. My point here is not to discuss whether or not Ryanair’s aids are justified. This is an economical debate. Rather, I seek to underline in what ways these aids are illegal; that these aids constitute an important part of Ryanair's revenues, making its business legally unsustainable. Of course, legacy airlines as British Airways also receive subsidies, but in a legal framework. I agree with people who argue that some of the major European legacy airlines do not use them efficiently, but that’s a different matter. 8|Page
  9. 9. Illegal Subsidies: Ryanair’s Achilles Heel? Most analyses don’t take this issue into account. However, several courts have already brought up the matter of Ryanair’s subsidies, namely in Spain, France, Germany and Italy. Although several investigations, till now, Ryanair has always managed to slip through the cracks. This is due to irregularities because airports are failing to declare subsidies to the European Commission itself. Indeed, according to a French union, among the 25 airports out of which Ryanair operates, only one has declared the subsidies to the European Commission, so even the European Commission doesn’t know that Ryanair receives such amount of public money. Until now, subsidies have allowed Ryanair to dominate the “ 7 investigations low cost market and develop its are currently open own unique business model. It has allowed Ryanair to withhold a over Ryanair’s strategic advantage over other subsidies in Europe.” airlines. Airlines that have never been shy to voice out: Air France, Lufthansa, Spanair, Vueling and Air Berlin are companies that understood how difficult it is to compete with Ryanair’s public financial support. Airlines have expressed their concerns about this unfair advantage that Ryanair has managed to build up all over Europe. Some airlines, namely Air France KLM or Air Berlin, have formally complained to the European Commission. Others have simply expressed their disappointment and grief through the media. For most airlines, tackling Ryanair is a dangerous game that could easily end up turning against them. Indeed, Ryanair is a master communicator and avid PR stuntman that always gets the last word. This explains why some airlines prefer to be tactful when it comes to criticizing Ryanair. “ Opaque subsidies Ryanair received to operate in certain airports create only an artificial traffic ” Alvaro Middleman, Air Berlin Executive for Spain and Portugal Conclusion I found this quote on the Ryanair Business model, which I believe summarizes perfectly the issue discussed: “Ryanair has established the first efficient and industrialized public subsidies collector on a European scale. It’s interesting to notice that Ryanair is among those which beneficiated the most of deregulation of the market, but meantime among those which obtain the most of subsidies.” A Which Budget Airline Market Analyst 9|Page
  10. 10. Thank you for reading this note, if you like what you read, spread the word. If not, please, take the time to leave feedback! To contact me: http://airobserver.wordpress.com/ http://twitter.com/AirObserver roman.observer@gmail.com Articles mentioned in this note: Ryanair traffic is to surpass Air France's one Low-cost carriers: European Subsidies, Alghero Sources and documentation Airport Case Study Air-scoop Swot of Ryanair The best source is obviously my blog  but other French state should make Ryanair respect the law websites and articles are very interesting! says Union Ryanair to cancel Prague flights in fee dispute Articles from my blog used in this note: Ryanair's business model undermined by the French financial courts French MP wants an investigation over Ryanair’s Los pilotos de Vueling y Spanair piden que no se subsidies subvencione a Ryanair Ryanair’s French public aids La verdad de Ryanair: Ryanair "chantajea a las Ryanair incurs wrath of French political before instituciones y empresarios de Granada" major on-coming election Ryanair faces 'blackmail' protests over attempts to Ryanair and Barcelona: a story of unrequited love? increase fees A new case of Ryanair blackmail at Angouleme Rebelión aérea contra Ryanair Airport Ryanair's phoney war with Boeing just a lot of hot Another take on Ryanair’s financial performance air Ryanair signals new strategy by ending Boeing talks Reports: Ryanair to hold talks over ‘lax’ Italian ID row Air France accuses Ryanair of blackmail The Best Way to Deal with Low Cost Carriers Small European airports fed up with Ryanair? French Regional Audit Court report The subsidies that keep Ryanair profits airborne Ryanair flies high on subsidies Websites: Ryanair est redevenu la compagnie la plus rentable Air Scoop d'Europe Air Panorama Low cost Portugal Ryanair subsidies figures : Todo low cost Ostende AnnaAeoro Paris Vatry Plane Grazy Faro Airline Post Girona Which Budget Reus Simpliflying García Lorca Granada-Jaén Malta 10 | P a g e

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