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Journal of Air Transportation World Wide Vol. 5, No. 1 - 2000

FLYING LESSONS!
LEARNING FROM RYANAIR'S COST
REDUCTION CULTURE
Dr. Thomas C. Lawton
Royal Holloway University of London, UK

ABSTRACT
Through radically improving the value equation for airline customers. Ryanair bas served to
shake-up established norms and practices in European aviation. Underpinning its price leader-
ship and market success is a vigorous and relentless cost reduction ethos and resultant low break-
even load factor. Ryanair has lowered European airline cost structures considerably~ shattering
existing cost floors. Few competitors are able to follow, either because they do not know how or
they are unable due to social settlement obligations or service commitments. At the same time,
the company has maintained high average load factors on its flights. Taken in conjunction with
its low break-even load factor. this results in consistently high overall profit margins. On this
basis~ Ryanair is likely to t:emain a significant competitor and increase its market presence and
success across Europe.

INTRODUCTION
This paper examines the cost reduction techniques of one of Europe's
most successful low fare airlines, Ryanair, and advances an operational
model for other small and medium-sized carriers in Europe. Section one
examines the Southwest Airlines-Ryanair cost reduction model and
advances it as a prototype for low cost competition in Europe. The second
section comprises a critical assessment ofRyanair's cost reduction methods
and their success in terms of achieving a consistent decline in unit cost. Spe-
cifically, the following two questions are addressed: first, how authentic are
the cost reduction methods pursued by low fare airlines such as Ryanair and
are these techniques sustainable over time and in the face of vigorous compe-
tition? Second, what best practices can Europe's low fare airlines emulate
from the Southwest-Ryanair model? The main argument advanced is that
through refining the set of techniques of U.S.-based Southwest Airlines,

Thomas Lawton is a Lecturer in European Business and Corporate Strategy at the School of
Management. Royal Holloway University of London. He holds degrees from University CoUege
Cork and the London School of Economics and has a doctorate in international political econ-
omy from the European University Institute~ Florence.
@2000, Aviation Institute, University of Nebraska a£ Ornaha.
90 Journal ofAir Transportation World Wide

Ryanair pursues an authentic and successful cost reduction strategy. This

enables the company to redefine European airline cost structures and floors
and consistently provide the lowest prices and best value to its customers.
Through emulating Ryanair's best practices, European low fare and regional
airlines can strengthen their market position and remain a viable competitive
challenge to the larger, more established airlines.
Despite the cyclical nature of the airline industry, the European market
appears to be buoyant.' The U.S. experience indicates that the large number
oflow fare carriers that emerge in the wake of market deregnlation will dwin-
dle over time and only a handful will ultimately survive. Many are driven out
of business by insufficient access to landing slots or by predatory activity on
the part of larger airlines. Others simply cut prices further than they can
afford, effectively pricing themselves out of the market. This is likely to hap-
pen in Europe too, particularly with the 1998launch of British Airway's low
cost subsidiary. It is not yet clear which of the cheap carriers will triumph.
Ryanair would appear to be a front runner for survival and growth. What is
evident is that a place in the market will be assured for cost efficient and reli-
able low fare airlines. As Ames and Hlavecek argue, long-term market suc-
cess is mainly attributable to being a lower cost supplier than all others
providing equivalent products or services (1990, p.l40). When product dis-
tinction fades, as it will inevitably for Europe's low fare airlines, being the
low price leader will be one of the few means of achieving sustainable advan-
tage.
The next section will analyse the reasons for Ryanair's likely long-term
success and the lessons that might be provided for other low fare companies
attempting to create sustainable advantage. This analysis begins by examin-
ing the cost reduction model pioneered in Europe by Ryanair, based on that
developed by the U.S.-based Southwest Airlines in the 1970s.

THE RYANAffi-SOUTHWEST AIRLINES MODEL:

A PROTOTYPE FOR LOW COST COMPETmON

Southwest's Formula for Success

Commencing service in 1971 with three Boeing 737-200 aircraft and
flights to Houston, Dallas, and San Antonio, Texas, Southwest Airlines has
grown to become the fifth largest U.S. airline, flying over 50 million passen-
gers a year to fifty-two cities around the U.S. Year-end resnlts for 1998
marked Southwest's twenty-sixth consecutive year of profitability and its
seventh consecutive year of record profits.2 Southwest became a major player
in 1989 when it exceeded the billion-dollar revenue mark. The company was
the only major U.S. airline to make net and operating profits during the first
three years of the 1990s, when the U.S. airline industry experienced a major
 Lawton 91

downturn in growth and sales revenue. Southwest is the U.S.'s only major
short haul, low fare, high frequency, point-to-point carrier.
Southwest Airlines serves price and convenience sensitive travellers. The
essence of its strategy is in the activities--choosing to perform activities dif-
ferently or to perform different activities than rivals. For instance, Porter pro-
vides evidence that Southwest tailors all its activities to deliver low-cost,
convenient service on its particular type of route. Through fast turnarounds at
the gate of only fifteen minutes, Southwest is able to keep planes flying
longer hours than rivals and provide frequent departures with fewer aircraft
(1996, p.64). Southwest does not offer meals, assigned seats, interline bag-
gage checking, or premium class of service. Automated ticketing at the gate
is thought to encourage some customers to bypass travel agents, allowing
Southwest to avoid agent commissions. A standardised fleet of737 aircraft
boosts the efficiency of maintenance.
Southwest has staked out a unique and valuable strategic position based
on a tailored set of activities. On the routes served by Southwest, a full service
airline could never be as convenient or as low cost (Porter 1996, p.64). Col-
lins and Porras argue that genuinely successful companies understand the
difference between what should never change and what should be open for
change, between what is truly untouchable and what is not (1996, p.66).
Southwest is an example of such a company, regularly innovating and con-
stantly differentiating itself from the competition but resisting the urge to
tamper with the fundamental features of their strategy formula.
Southwest's rapid gate turnaround, which allows frequent departures and
greater use of aircraft, is essential to its high-convenience, low-cost position-
ing. This is achieved in part due to the company's well-paid gate and ground
crews, whose productivity in turnarounds is enhanced by flexible union rules.
The bigger part of the answer lies in how Southwest performs other activities.
With no meals, no seat assignment, and no interline baggage transfers, South-
west avoids having to perform activities that slow down other airlines. It
selects airports and routes to avoid congestion that introduce delays.
The Southwest model is not necessarily easily transferable. Continental
and United Airlines both attempted to copy the Southwest model for their
low-cost U.S. subsidiaries. They were able to duplicate the route structure
and other observable and quantifiable elements but they failed to emulate the
Southwest culture (or organisational capabilities)-the key to its success
(Couvert. 1996, p.61).

Ryanair: The Southwest of Europe

From its inception, Ryanair has purposefully and openly emulated the
Southwest formula-albeit in a form 'refined' for the European context. With
the advent of European airline liberalisation, many more low cost carriers
92 Journal of Air Transponation World Wide

have entered the market. Companies like Virgin Express, Debonair, and easy-
Jet also pursue a low fare, no frills service. They, like Ryanair, look for air-
ports with lower charges and shorter turnaround times, with little concern for
interline connections. However, as the UK Civil Aviation Authority point
out. the underlying approach of these companies seems generally more like
that of ValuJet in the U.S. than of Southwest. Most visibly, they place less
emphasis than Southwest or Ryanair on providing a high frequency of opera-
tion in all of the markets they serve (CAA 1995, p57). Most of the other start-
up airlines such as Jersey European Airways, Spanair, EuroBelgian, and Air
Southwest, also offer a limited service and operate on a small number of
routes. Therefore, it may be argued that Ryanair is the only true Southwest
clone operating in Europe (although easyJet is rapidly gaining ground). This
is sustained in a report conducted by U.S. equities research finn, the
Robinson-Humphrey Company, who conclude that:
Ryanair is the Southwest Airlines ofEurope ...in its current stage of development
in the European market. Ryanair~s market position is analogous to that of South-
west in 1978 when it operated within the state of Texas only. It has the remainder
of the United Kingdom~ Continental Europe, and Scandinavia in which to expand
(1997, p.l).

Like Southwest, Ryanair has a single fleet type, the Boeing 737 aircraft,
and is the lowest cost scheduled operator on all its routes. It has high annual-
ised load factors system-wide and unique low cost franchises (aircraft, sup-
pliers, staff). The company's effective use of outsourcing has numerous
benefits, serving to lower its long term capital investments, increase its flexi-
bility, and significantly leverage its key capabilities (Quinn and Hilmer 1995,
p.63).
Ryanair meets all of the criteria listed as requirements to be a European
Southwest (Figure 1), with the possible exception of not invoking vigorous
competition with a major carrier on its core routes. On the Dublin-London
route in particular. Ryanair has gone head-to-head with Aer Lingus in the
competition for air traffic. Whilst not initially flying to the same London air-
ports (Stansted versus Heathrow), Ryanair did pose a significant threat to Aer
Lingus's dominant position, prompting the state carrier to launch a low cost
competitor in the form of Aer Lingus Commuter. Ryanair management
argues that this offshoot carrier does not pose any significant challenge to
them and that they are in fact usually vying for different market segments. J
Commentators point to a number of infrastructure problems that make it
difficult to apply the Southwest model to the European air transport market.
These include the high costs of European air traffic control, and landing and
ground handling fees (Guild 1995, p.68). Ryanair has largely overcome such
competitive impediments through negotiating deals on fees with airport
authorities, particularly those seeking to increase their rate of air traffic. The
 Lawton 93

Figure 1

REQUIREMENTS FOR A 'EUROPEAN SOUTHWEST'

1:1 Must operate in market where substantial growth is possible

0 Needs to ope~ate from secondary airports, where it may be possible to negotiate
·deals • with the airport authority
0 Avoid attacking strong major carriers on their core routes-they will have to respond
Cl Costs, cosls, costs are THE focus
Cl Be innovative; there is not just one formula for low-cost carriers

Reproduced from Sara guild. 'Not so easy,' Airline Business, p. 71, 1995.

company has proven that the Southwest model can be applied in Europe, and,
like Southwest, it has operated in what may be termed a niche market for the
first few years, 'getting it right,' according to CEO O'Leary (Guild 1995,
p.73). Once this base was consolidated, it was only a matter of time before
Ryanair would embark on the next step ofthe Southwest strategy: expansion.
Ryanair is the European pioneer of low fares, no frills service and consis-
tently delivers the majority of growth in all markets in which it operates. A
Morgan Stanley report illustrates that typically passenger traffic on a route
grows at an enormous rate after Ryanair's entry, often doubling or even treb-
ling the existing traffic within a few years (1997, p.l5). The airline pursues
steady route network expansion: five Ireland-UK routes in 1992, which had
grown to eight by 1994 and twenty-seven by 1998. Ryanairhas certainly been
a causal factor in the growth of traffic on major routes such as Dublin-
London. In the decade prior to Ryanair's launch, passenger numbers on this
route grew at a minuscule rate, going from 800,000 to around 1 million peo-
ple per annum. Since 1985, this figure has soared, reaching the 4 million
mark by the late 1990s. Similar growth rates are evident on other routes such
as Dublin-Manchester and Dublin-Glasgow.
Ryanair has no formal association with Southwest but possesses many
informal links. The company believes that it is more low-cost and more
driven by low cost strategy than Southwest. Ryanair management acknowl-
edges though that this may be a time factor--Southwest is established longer
and not as eager as Ryanair is to expand and grow.
Southwest and Ryanair's aforementioned rapid gate turnaround, which
allows frequent departures and greater use of aircraft, is essential to their
high-convenience, low-cost positioning. The main factor behind this is the
way in which the companies perform other activities. With no meals, no seat
assignments, and no interline baggage transfers, they both avoid having to
94 Journal of Air Transportation World lVide

perform activities that slow down other airlines. They select airports and
routes to avoid congestion also, thus further decreasing the likelihood of
delays. Possessing a standardised fleet further contributes to this advantage.
Thus, Southwest and Ryanair's competitive advantage derive in large part
from the way their respective activities fit and reinforce one another. As Por-
ter ( 1996) argues, fit locks out imitators by creating a chain that is as strong as
its strongest link. Southwest/Ryanair's activities complement one another in
ways that create real economic value and achieve substantial cost reductions.
Southwest's sense of regional focus (on the southwestern United States)
and its development of its route network from that base, is also key to its com-
petitive advantage (Couvretl996, p.63). Similarly, Ryanair's regional focus
is the UK/Ireland market and although it has begun to branch out from there
to other parts of Europe, its focus on the home base remains clear and com-
mitted. As long as this continues, Ryanair will not be seriously threatened by
competitors seeking to emulate its success. A danger may be if Ryanair
expands too far, too quickly-losing sight of its regional base and entering
into an industry position where it may be in danger of being sandwiched
between the large, global carriers and the more focused regional carriers.
Southwest has developed well beyond its original focus of the southwestern
United States, offering services to other geographical locations such as
Baltimore-Washington and Florida. There is no reason why Ryanair cannot
do the same, provided its new routes are built on the solid base ofhorne terri-
tory.

A COST STRUCTURE ANALYSIS OF RYANAIR

The logical next step in this analysis is to examine Ryanair's cost structure
and clearly establish the authenticity of its cost reduction tactics. Are lower
operating costs achieved through a genuine strategy of lowering the cost of
fuel and ticketing or in-flight services and increasing productivity levels, or
through an artificial form of cost reduction based on, for example, salary
freezes or introducing more part-time positions? How sustainable is the
Ryanair model if lower costs are achieved through lower service standards
and lower wage rates? In addition, the author will explore the management of
airline cost drivers. Holloway (1997) describes this as, in large part, the inter-
play between improved asset utilisation and increased employee productiv-
ity:
Unit costs are influenced by the absolute level of input prices and by the produc-
tivity of inputs used. High productivity can go some way towards countering the
adverse impact of high input prices. but the ideal is clearly to combine in a single
production process both high productivity and low input costs (Holloway 1997.
p.l88).
 Lawton 95

Previous studies support the argument that factors such as the number of
aircraft types in a fleet, the range of markets served, remuneration packages,
the level of service, and traffic charges, all contribute to higher operating
costs for airlines (Seristo and Vepshlainen 1997, p.12). On the first of these
variables for instance, evidence derived from Seris£0 and Vepshlainen 's study
of forty of the world's largest airlines shows that airlines with the most uni-
form fleet (Southwest, Singapore, Cathay Pacific) also have shown some of
the best results in recent years. One reason for this is that:
the higher the number of aircraft per aircraft type. the smaller the number of flight
crew needed per one aircraft. This again would imply that the more uniform the
fleet of airline, the more efficiently the airline can utilise its pool of pilots (Serism
and Veps~liiinen 1997. p.l7).

In addition to lower overall maintenance costs, a uniform fleet leads to

savings in flight operations costs. Ryanair operates a single type aircraft fleet,
comprising only Boeing 737s. Consequently, its overall employee per air-
craft ratio is one quarter that of its traditional rival, Aer Lingus.4
Moreover, the company serves a limited number of markets, links
employee salaries to performance, provides a basic-no frills service, and
incurs the minimum in traffic charges. It therefore meets many of the criteria
deemed necessary to bring about an authentic reduction in its operating costs.
Since 1995, Ryanair has managed to reduce costs annually in all areas of
expenditure, with the exception of personnel and depreciation. 5 Increases in
depreciation reflect the increase in the number of aircraft operated by the
company (an average of 17 during 1997, compared to 11 during 1996 for
example).
It should be noted that in parallel with a rise in overall operating expenses,
Ryanair witnessed a significant increase in overall passenger numbers and in
the number of routes served. The route network more than tripled between
1995 and 1998. During the period 1995 to 1998, Ryanair's annual number of
passengers increased from 2.3 million to just over 4 million. Equating these
numbers with the comparable annual operating expenses• to get a rough aver-
age of expenses per passenger head, demonstrates that the airline has in fact
succeeded in successively lowering its operating expenses.

Checking for Consistency in Cost Reduction

Figure 2 lists the areas in which Ryanair has successfully pursued cost
reductions. Some, such as maximising aircraft utilisation, are not particularly
innovative and can be emulated relatively easily by competitors. Other tech-
niques, such as the no frills service or offering a through service with no bag-
gage interlining facilities, are more difficult to copy, particularly for larger
carriers with reputations for high quality service. ·
96 Journal of Air Transportation World Wide

Figure2

Ryanair's Cost Reduction Techniques

1. Secondary airports (lower charges and less congestion means airline can
increase punctuality rates and gate turnaround times).
2. Standardised fleet (lower training costs and cheaper parts and equipment sup-
plies).
3. Point-to-point services ( direc~ non-stop routes~ through-service with no waiting
on baggage transfers).
4. Maximise aircraft utilisation (fewer aircraft used to generate higher revenue~
leads to higher passenger capacity and greater staff productivity).
5. Cheaper product design (no assigned or multi-class seating; no free food or
drink).
6. No frequent flyer programme (costs money to manage and to implement).
7. Non-participation in alliances (code sharing and baggage transfer services low-
ers punctuality and aircraft utilisation rates and raises handling costs).
8. Minimise aircraft capital outlay (purchase used aircraft of a single type). 1
9. Minimise personnel costs (increase staff-passenger ratio; employee compensa-
tion linked to productivity-based pay incentives).
10. Customer service costs (outsource capital intensive activities. e.g. passenger
and aircraft handling; increase direct sales through telephone reservation system).
11. Lower travel agent fees (reduce associated travel agent commission - 9 to
7.5%).

This cost reduction technique is no Ionge~ valid in light of"Ryanair's 1998 order for 45 new air-
1

croft.

Ryanair configures its aircraft with 130 seats, with very little space dedi-
cated to anything else other than a bar and duty free service. By optimising
the space available for seating, the airline achieves about a 30 percent
increase in seating compared to Aer Lingus. The company now has a twenty-
five minute gate turnaround, compared with thirty minutes in 1996. This
increases aircraft utilisation and flight crew efficiency and productivity by
about 15 percent. This means for instance that on the Dublin-London route,
Ryanair can get ten flights a day, compared with seven for Aer Lingus. Most
companies show their fares to rise annually; Ryanair attempts to stay level or
even move down, believing that is where the future for their business
is-lower fares. more travel~ easier travel~ and more spontaneous decisions to
travel.
 Lawton 97

The British CAA argues that Ryanair's strategy seems to be working well,
particularly in terms of stimulation of new demand. They conclude that:
it remains to be seen whether this concept will be taken up successfully by other
airlines or will readily trans1ate to those other markets in Europe which do not
have the rather special characteristics of that between the UK and Ireland (CAA
1995, p.34).

The most solid evidence for the genuine success ofRyanair's cost reduc-
tion strategy is evident in the company's cost per available seat mile (ASM)
over the past number of years (Figure 3).
Estimating cost, or operating expenses, per ASM is an efficient ratio for
calculating an airline's unit cost outlay. The average cost for Ryanair com-
pares very favourably with the European industry norm and is substantially
lower than many of its immediate competitors on the routes it operates. Aer
Lingus, British Midland, and KLM UK all have unit operating costs of about
IR£0.15- roughly 50 percent more than those ofRyanair. Indeed, as a 1997
Morgan Stanley report argues, the other European carriers can produce unit
costs equivalent to or below Ryanair's only when the average stage length
(journey distance) is at least five times longer than Ryanair's. 7 This suggests
that their unit costs on the short-haul routes, which are Ryanair's mainstay,
will be substantially higher-a proposition which is borne out by the evi-
dence. Ryanair's unit operating costs are significantly higher than most U.S.
low fare carriers, most notably the low fare benchmark, Southwest Airlines
($0.14 versus $0.75). The difference is partly due to longer stage lengths in
Figure3
Ryanalr cost per available seat mile (ASM)
0.14

0.12

0.1

0.08
"'
5
0.06
0.04

0.02

0
1992 1993 1994 1995 1996 1997
Year
t 1:1 Cost per ASM j

Source: company data

98 Journal of Air Transportation World Wide

the U.S. (521 miles average for Southwest compared with a Ryanair average
of 251 miles). It is estimated that if Southwest had an average journey length
commensurate with Ryanair, its cost per ASM would be in the region of
$0.12. Another explanatory factor is the generally lower infrastructure costs
and fuel prices in the U.S. (Morgan Stanley 1997, p.33). Estimates put oper-
ating costs in Europe at some 55 per cent higher than in the U.S. (Robinson-
Humphrey 1997, p.l3). Given that carriers operating in Europe are all con-
strained by these factors, it is difficult to see how unit costs comparable with
Southwest could be achieved in the European industry. As such, Ryanair's
competitive advantage in unit operating costs would appear secure.
If we deconstruct the overall cost per ASM for Ryanair over a period of
time, we can establish whether or not the airline has achieved genuine and
successive reductions right across its cost base (Figure 4 ).
Some anomalies exist in this data, e.g. aircraft rentals increased as a frac-
tion of unit cost between 1996 and 1997. Such increases are generally outside
of the direct control ofRyanair in terms of cost control activities. Overall, the
figures illustrate that Ryanair in fact succeeds in progressively lowering most
of its costs, even in the context of a rapidly expanding route network and fleet
size and increased staff bonuses.

g
:r--·--------
s L
Figure4

Ryanalr"s operating expenses per ASM

& ~
~ 6
4

Expense categories
lc1ws •1996 01997 i

Source: company financial reports

 Lawton 99

FigureS
Ryanair operating expenses as a percent of operating revenues

1994-89.7% 1996-82.2%
1995- 83.4% 1997-82.4%

Costs have fallen faster than yields within Ryanair, allowing profits to rise
consistently. Expressed as a percentage of operating revenues (Figure 5),
operating expenses declined steadily between 1994 and 1996 and increased
only marginally in 1997, despite above average rises in personnel and main-
tenance costs.s
This evidently translates into steadily increasing operating profit margins
in the same period, going from 10.3 percent in 1994 to 17.6 percent in 1997.

Personnel Costs: Maximising the Return on Human Capital

Personnel costs account for the largest share ofRyanair's cost pie, as with
all airlines. These accounted for 24 percent of operating expenses in 1995,
23.4 percent in 1996, and 22.3 percent in 1997. Such a large fractional cost is
inevitably a prime target for reduction in outlay and has been gradually pared
back. In absolute terms, Ryanair's staff costs have increased each year due to
the release of accrued and unpaid staff bonuses and compounded by the
growth in Ryanairstafffrom 698 to 988 employees during the same period.
The airline is, of course, bound to have a lower staff cost compared to its
larger competitors because they have scaled down operations (their network
is not as extensive) and the company has implemented more performance-
related pay schemes. It has to be noted that personnel costs are an area where
Ryanair has focused particular attention on cost cutting. For example they
outsource their maintenance and customer service activities, other than cabin
and flight crews. This move alone has reduced their headcount considerably,
and provides an advantage over their competitors who bear the full cost of
their own customer service, although their competitors are offering a full-
service to their customers which may well mean having to carry out their own
customer service activities. Such outsourcing of customer services has draw-
backs also, with Ryanair passengers often are not receiving the same degree
of support service which customers on competitor airlines receive.
On employee productivity, Ryanair again fares well (Figure6). This is one
of the most significant differences between Ryanair and other airlines. The
graph clearly shows the astounding differences between the airlines.
These figures indicate overall that Ryanair generates more money per
employee than its competitors, in part by utilising their aircraft more effec-
100 Journal of Air Transportation World Wide

Figure 6

EMPLOYEE PRODUCTIVITY, 1996 versus 1997

Ryanair AerLingus Southwest
1996 1997 1997 1997
Employees per aircraft 55 52 201 88
Revenue per employee (IRU) 185 !86 116 87
Passengers per employee 3,967 4,377 666 2,247

Source: Ryanair internal company documenlS, 1997.

tively and therefore generating more revenue, which thereby means a greater
return is made for the initial asset cost. The company also employs the capital
initially invested so well that they receive more return on that investment by
increasing its value.
The main conclusion to be drawn following consideration of company
accounts and other financial information is that Ryanair has managed to hold
down their employee costs and maximise productivity, largely through
performance-related pay schemes. Considering that this particular cost is
their largest outlay, its control would probably have a significant impact on
the profit margins. Nonetheless, Ryanair is more efficient in its operations,
compared to many competitors, despite its scaled down operation.

Operational and Relational Cost Reductions

Intemal company sources• indicate that Ryanair is targeting all areas for
constant cost reduction but distribution is under particular scrutiny. This
includes computerisation systems, ticketing systems, travel agencies costs
and internal reservation costs. Maintenance is another area targeted for con-
stant cost reduction. A long-term strategic relationship exists with providers
such as Lufthansa and Airmotive Ireland. Giving them large volumes of extra
work, and on that basis, Ryanair expects to see significant reductions in their
unit costs.
The company is also unhappy with current airport and handling costs. The
management believes that there is always room for further cost reductions.
Many smaller, expanding airports (e.g. Boumemouth) offer much better
deals than do the likes of Stansted. These airports benefit by having a much
higher volume of traffic. Ryanair drives a hard bargain because they believe
that airports have relatively low cost margins and can provide a low tariff for
handling and landing costs. Airports can and should concentrate on earning
profits from the revenue generated by passenger traffic. For instance, it is
estimated that the average spent by Ryanair customers in Boumemouth Air-
 Lawton 101

port is over st£20. Airlines should get the cost base and airports get the reve-
nue base. The lesson to be learned is that airports should provide the lowest
possible tariffs to airlines and focus on the airlines' passengers for profit gen-
eration. A mutually beneficial sequence thus develops: airlines can reduce
airports costs and can therefore reduce ticket prices; passengers get cheaper
flights and can consequently spend more at airports and on in-flight gift
items; airports get higher revenue generated by the passengers.
Sinc_e Ryanair's drive to reduce travel agent commissions. relations with
this sector are described by Ryanair management as 'fraught if not bad'.
There ate some agents who won't sell seats on their flights but most of the
major agencies are earning significantly more revenue from Ryanair each
year and it is therefore in their interest to keep on good terms with the airline.
Thus, travel agents get less commission from Ryanair but are getting
increased capacity; therefore, they end up earning more from the company in
the long run.
Fundamentally, cost is of the essence for Ryanair. There is nothing unique
in an airline having such a corporate ethos. As Morrell argues, surveys of air-
line finance directors in Europe, North America, and Australasia illustrate
that control of costs is the most pressing financial issue ( 1997, p.l 0). There
ate nonetheless, a few 'holy grails' that the company does not touch-safety
for instance. Ryanair has a perfect safety record and regular aircraft mainte-
nance and safety checks. The Irish Aviation Authority closely audits its
safety and maintenance procedures.

Low Costs and High Profits

Ryanair performs well on standard determinants of revenue maximisa-
tion, defined by SeristO and Vepsall!.inen as passenger load factor, weight load
factor, passenger yield, cargo yield. and traffic composition (1997, p.l2).
Ryanair has shown continuous improvement in its figures since the early
1990s (Figure 7) and although its operating revenue is lower than route com-
petitors such as British Midland or Aer Lingus, its costs are also in propor-
tion, hence the airline's ability to maintain low price fares.
Ryanair has been consistently profitable since I 991. The carrier has aver-
age load factors of 72 percent 10 and is driving yields down. The load factor
measures the percentage of an airline's output that has been sold (Holloway
1997, p.437). In layman's parlance, it means basing an airline's financial
strategy on the average number of seats sold per flight. This is distinct from
yield management, which focuses on the average revenue generated per unit
of output (seat) sold. As Ryanair CEO Michael O'Leary states, 'we do not
manage yields, we manage the load factor ... our budgets are based on driving
costs down by x per cent next year' (Airline Business, June 1995, p.73). Man-
aging load factors is not enough to ensure profitability. As Holloway illus-
102 Journal of Air Transportation World Wide

Figure7
Ryanair operating revenues and profit margins*

Year ended 31 Mar. '95 31 Mar. '96 31 Mar. 97 31 Mar. 98

Operating revenues 86.lm l!O.lm !36.4m 182.6m
Adjusted net income' 14.0m 20.0m 23.0m 30.7m
Profit after tax* 12m 13.4m 21.4m 30.2m

Source: Ryanair annual financial results

*AU figures given are in Irish punts. The value of the punt to sterling was approximately 89p Irish to£1
sterling during 1998.
•Adjusted net income includes non-continuing management bonuses and other 1998 bonuses
'Adjusted for the staff flotation bonus in 1997, which amounted to IR£1.3 million, net of tax.

trates, in 1993 for instance, Aer Lingus achieved a load factor of70.4 percent
and failed to make a profit, whereas both British Airways and Cathay Pacific
had passenger load factors of 69.9 percent and 70.0 percent respectively and
both made a profit ( 1997, p.442). The issue is rather one of relating the aver-
age load factor to the break-even load factor. Improving this equation is the
objective of every airline. Selling seats on flights must be combined with
overall cost reductions if an airline is to be profitable. Figure 8 illustrates that
for Ryanair, the margin of difference between average load factor and break-
even load factor has been consistently positive during the mid- to late-l990s.
Furthermore, the gap between these two sets of figures has increased
annually, allowing the airline both further latitude in price-cutting and ensur-
ing continued increases in absolute profit figures. Although Ryanair may
periodically experience declining yields, it also secures falling costs, sup-
presses its break-even load factor, and therefore consistently turns a profit. To
date, costs have consistently fallen by more than sales, resnlting in overall net
profits. From the evidence, it is therefore apparent that Ryanair's cost reduc-
tion strategy is accomplished through authentic means and is clearly achiev-
ing real results in terms of sustaining the company's price leadership strategy
and ensuring profit maximisation.

FigureS
Passenger load factors (PLF) and break~even load factors (BELF) compared

1995 1996 1997

PLF 76% 73% 72%
BELF 72% 68% 64%
 Lawton 103

CONCLUSIONS
Low fare airlines have succeeded in revolutionising the European airline
industry's price norms and costs structures. The leading industry shaker has
been the independent Irish-based carrier, Ryanair. Through initially follow-
ing the example set by U.S.-based Southwest Airlines, Ryanair has pursued
an authentic and successful cost reduction strategy. This has enabled the
company to achieve low break-even load factors and high overall load fac-
tors. This consequently allows the airline to provide consistently low prices
to its customers, whilst simultaneously sustaining high profit margins.
Ryanair's main cost reduction techniques include first, operating a standard-
ised fleet; second, flying exclusively from or between secondary airports and
establishing a secondary route dominance; third, operating a point-to-point
service; fonrth, offering a cheaper, no frills product (no seat classes or free
food and drink); fifth, non-participation in restrictive alliances or expensive
frequent flyer programmes; sixth, productivity-based pay schemes; seventh,
an extreme focus on aircraft utilisation, leading to high load factors; eight,
reduced travel agent commission rates; and ninth~ reduced customer service
costs through outsourcing ground passenger and baggage handling for
instance. Through emulating Ryanair's cost reduction practices and achiev-
ing similar low break-even load factors, European low fare and regional air-
lines can strengthen their market position and remain a viable competitive
challenge to the larger, more established airlines.

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El'\'DNOTES
1 European air traffic grew by 11 per cent between 1996 and 1997 (Financial 1imes~ October
22nd 1997).
2 Southwest Airlines Fact Sheet. May 1998.
3 Financial Times. op cit.
4 These statistics are taken from a Ryanair internal company document, 1997.
5 Ryanair's company accounts illustrate this fact.
6 The annual operating expenses were IR.£71.9 million for year ended (FYE) 31 March 1995~
IR£90.86millionFYE31 March 1996,IR£112.4millionFYE 31 March 1997 andiR£149.5 mil-
lion FYE 31 March 1998.
7 Unit costs naturally reduce as the journey distance gets longer as taking off and landing are
relatively expensive compared with flying along at altitude. It is therefore important to take jour-
ney length into account when comparing unit costs.
8 Increased maintenance costs were caused by the acquisition of eight new aircraft during
1997/8.
106 Journal of Air Transportation World Wide

9 Interview with Ryanair's Director of Operations, Dublin~ September 1997.

10 This is considerably higher than the estimated European average load factor of 62 per
cent.

My thanks to Colin Haslam, Peter Uittenbogaart and Antoin DaltUn for their helpful com-
ments on earlier versions of this paper. Thank you also to Virginia Mogge for her research assis-
tance during the formative phase of this paper.