Within 20 minutes two planes touched down at Malta International Airport, one arriving from Pisa, the other from London’s Luton airport. They were greeted with unusual joy. A band played, folk dancers performed and the passengers were given red carnations and honey rings.
On this September 17, now 12 years ago, Ryanair arrived in Malta. Like everywhere else in Europe it has since changed tourism as much as the way we travel. It has made travel affordable – and arduous.
When Michael O’Leary, tax adviser of Tony Ryan’s small regional airline, took over as CEO in 1991, the journey was almost over. What had started with the help of Margaret Thatcher’s deregulation – allowing the small upstart to compete with the Air Lingus and British Airways on flights from Ireland to the UK – led soon to mounting losses.
O’Leary went on a fact-finding mission to Dallas, headquarters of the most successful US low-cost carrier of all times, and allegedly drank so much bourbon that night with CEO Gary Kelly that he had a hard time remembering what they had actually talked about.
Nevertheless, Southwest Airlines’ concept of cheapest fares, no frills and a single type of aeroplane became now O’Leary’s recipe to revive Ryan’s ailing airline. When the EU deregulated the air industry a year later, in 1992, allowing airlines to operate from any airport in Europe, it was when Ryanair finally took off.
Instead of begging for landing slots on metropolitan airports which flag-carriers were defending tooth and nail, O’Leary decided to pick sleepy regional hubs, military airports and private aviation landing strips all over Europe for chicken feed. In typical boastful manner they were advertised as “Munich”, “Frankfurt”, “Paris”, “Vienna” and “Barcelona”, although passengers were in truth often off-loaded more than 100km away from their expected destination, sometimes even in another country.
Regions, thirsting for tourists, were willing to let Ryanair land for nearly zero fees, at times even subsidising the route with money from tourist boards and regional development funds. Under the radar from unsuspecting competitors, a network of destinations evolved which is today a monopoly in its own right: who else is flying directly from London to Carcassonne, Treviso, Wroclaw or Plovdiv?
Ryanair, powered by the cheapest fares Europe had ever seen, created a demand for travel where it had not existed before. People who had never seen a plane from inside took now to places they had hardly ever heard of. Flying came to the people. Not used to complimentary champagne or sumptuous meals, they were willing to put up with seats which did not recline and offered no legroom, and they thought nothing of buying a cuppa for a couple of bucks. The airline was the equivalent of subsidised bus tours selling heating blankets and bingo tickets.
Soon the array of extra charges would add up to princely totals: luggage fees, legroom fees, seat allocation fees, credit card fees, cancellation insurance, handling charges, airport taxes, online fees, check-in fees, not-checked-in fees, boarding card printing fees, you name it. It added up and soon became not much cheaper, sometimes even more expensive, than the all-inclusive fares of flag carriers. I once saved €300 on a skiing trip to Austria flying with one of the old, boring, hapless and expensive national airlines
Yet math was never the strongest capacity of gullible customers. And people were willing to except all kinds of limitations as long as flights seemed cheap. They brought their own food, carried their own bags and learned how to issue their own boarding passes.
From 2000 onwards, Ryanair sold exclusively to customers, bypassing travel agents and ticket brokers. Ideas to squeeze more money out of hoodwinked customers went overboard: pay-as-you-poo toilets, ‘vertical’ seats, surcharges for overweight passengers, or fees charged for adhering to obligatory EU compensation rules in case of delays.
Many of these ideas ended in court and had to be amended. Yet most survived. Sadly because all other airlines soon followed suit. The miraculous growth of Ryanair, today the biggest airline in Europe by passenger numbers, forced prices down for all and antics too. National airlines, once boastfully proud of the impeccable quality of their food and beverages, now serve not much more than token snacks and freeze-dried coffee if anything at all. And as every company is now almost equally shoddy, prices started to rise again for all of them.
And as every company is now almost equally shoddy, prices started to rise again for all of them.
Only Ryanair, with the newest fleet and the lowest pension obligations, has cost advantages others can only dream about
Only Ryanair, with the newest fleet and the lowest pension obligations, has cost advantages others can only dream about. And it has the power of size. Airports which do not play along and refuse to pay up are cut off and even aircraft manufacturer Boeing has to agree to discounts no other airline would ever be offered. If they bristle, O’Leary threatens to buy from Airbus, or China’s COMAC.
Ryanair, the biggest profiteer from Europe’s eastern extension, with hubs in all new Member States and cheap employees from all over Eastern Europe, is today bigger than British Airways or Air France. It profited again handsomely from the collapse of Alitalia. Today it flies 130 million passengers per year with revenues of €7.15 billion (2017) and €1.14 billion in net profits. It flies 444 planes and has 150 more under order.
If flights are not profitable enough, they are grounded, with passengers often informed about cancellations shortly before departure. “The customer is always right?” O’Leary once asked rhetorically. “You know what – they are not!” And, to add insult to injury: “You are not getting a refund, so f… off!”
Ryanair does not even provide complaint forms on their website. And if you post your luggage tags, boarding card and passport copy to make a claim it will always stay unanswered. I know by bitter experience. If you dare to call, you will be charged premium rates while you wait for nobody to answer. The consumer publication Which? branded Ryanair the worst airline on earth. Business news channel Bloomberg, reflecting on service, timeliness and claims response, placed it in 67th position out of 67.
Yet the airline goes from strength to strength. It flies 62 direct routes to 18 countries out of Malta alone. And it unloads millions of budget tourists on our ever more crowded shores. Air Malta, which is proud to be part of Ryanair’s booking system now, has in the meantime accumulated losses of €239 million (2017) plus €158 million in liabilities. It has negative capital (i.e. bust) to the tune of €64.6 million, which is astonishing when you fly only nine planes. (The 2017 losses of €13.1 million were “due to substantially lower fuel prices” according to its CEO. Now this is a rare achievement when one considers that in a normal world HIGHER fuel costs have usually the most negative impact on airlines’ profitability!)
Ryanair’s share price has suffered quite a battering lately though. Massive strikes in July and August had 125,000 passengers stranded and hundreds of flights cancelled each day. For September 28, pilots in Italy – Ryanair’s biggest market – as well as Portugal, Belgium, Spain, the Netherlands and Germany have threatened yet more strike action.
Losses start to add up and the share price will come under further pressure. The airline has lost more than 20 per cent over the summer. Today the shares stand at €13.5, down from €18.6 in August last year (shares stood at €0.96 in 1998, and I didn’t have the good sense to buy them then).
O’Leary’s philosophy of screwing the customer and staff in equal measure has come back to hound him. The fast growth of the airline was not matched by an equally fast supply of qualified pilots, hence their newly found bargaining power.
My guess is that Ryanair will eventually cave in and pay up. Considering that some of O’Leary’s pilots already earn €190,000 per year, I can see he’s fuming. But bearing in mind that all other airlines will have to follow suit I do not believe that union agreements will damage his long-term business model. With margins of more than 20 per cent he can afford it.
Others cannot. If one wishes to invest in one of the most fickle businesses, that of airlines (“never invest in airlines”), Ryanair, with a market value (€15.4 billion) of two times’ sales and three times book value, is now quite a bargain.
As a retail investor I would not hesitate to fly with Ryanair (“Become a millionaire with Ryanair”). As a passenger I will always prefer Air Malta though. Fingers crossed that it doesn’t go under before my next flight.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.