How Ryanair became a formidable force in European aviation
Mergers and acquisitions
In 2003, the company agreed to acquire Buzz, a low-cost brand previously owned by KLM, a move which O’Leary described as “unusual and uncharacteristic.”
For a measly $22 million (€20.1 million) Ryanair acquired the airline and its assets, namely six Boeing 737s and four Bae 146 aircraft, which were all on lease. Most importantly, it acquired additional slots at London Stansted Airport (STN), as well as access to numerous European airports that are “ripe for growth over the coming years,” according to Ryanair’s report.
Its next attempt at an acquisition, unfortunately, did not pan out. In September 2006, the company started its acquisition of Aer Lingus shares, initially acquiring a 19% stake at the airline. With the 19% secured, Ryanair announced its intention to acquire the Irish full-service carrier fully. However, the European Commission (EC) had other ideas and blocked the merger of the two Ireland-based airlines, as the merger would have “significantly impeded effective competition in the common market.”
The company believed it was a political decision to “appease the narrow vested interest of the Irish government,” and appealed the EC’s conclusion.
“The strategy to acquire Aer Lingus was part of this trend which would, in turn, lead to the formation of one strong Irish airline Group able to compete with the mega carriers such as Lufthansa/Swiss and Air France/KLM,” reasoned the company in a statement.
The appeal was to no avail. Ryanair, despite two additional bids, never acquired Aer Lingus. Eventually, the Irish airline was acquired by the British Airways and Iberia-created group, International Airlines Group (IAG).
Despite the failure to acquire a 100% stake in Aer Lingus, Ryanair’s growth spur continued, even with a $442 million (€392 million) investment in Aer Lingus’ shares. The low-cost carrier acquired a 29.4% stake.
Ryanair grew from 15.7 million passengers and 54 aircraft in 2003 to 34.8 million and 103 in 2006. The management of the company successfully balanced growth with profitability. For example, an Analysis of the EU Air Transport Industry prepared by the European Union in 2005, highlighted that Ryanair had an average fare of $60. Its closest rivals in terms of fare were easyJet (approximately $80) and the now-bankrupt SkyEurope ($80). However, the Irish low-cost carrier managed to control its costs to achieve a break-even load factor of 60%, while its load factor was just shy of 80%. Its competitors, meanwhile, struggled to do so.
Fast-forwarding more than a decade, an example of an unsuccessful attempt of growth could be Norwegian, which expanded massively, yet has been a loss-making airline.
Nevertheless, the growth was not without any controversy.
Illegal airport support
In a yearly report filing with the United States’ Securities and Exchange Commission (SEC) dated September 2005, the company highlighted that it is subject to legal proceedings related to unlawful state aid from certain airports across Europe. There is no secret that one of the main ways to reduce airline costs is to operate to lesser-known, secondary airports. Possibly one of the prominent examples was Frankfurt: while full-service carriers chose Frankfurt Airport (FRA), low-cost carriers landed at Frankfurt-Hahn (HHN). Another example could be London-Southend (SEN), another airport dominated by LCCs. However, the tradeoff is that passengers have to travel much further to reach those airports.
On the other hand, airlines can market these airports as an extra gateway to a city and push the prices down as operational costs at the airports remain low, relative to the mega-hubs across the continent. For the airports, it means extra traffic which also brings in extra revenue from shops and flight activities.
But Ryanair and the government of Wallonia, a region of Belgium crossed the line, deemed the European Commission. In 2001, the two sides entered a 15-year agreement: in exchange for a substantial financial contribution, the airline would drive traffic at Brussels South Charleroi Airport (CRL) in Belgium.
Throughout the 15-year agreement, fees for a departing passenger for Ryanair ranged from $5.6 (€5) to $7.4 (€6.6). The landing fee, for example, was capped for the Irish company, while other airlines had to use a general system, whereupon the landing fee was calculated based on the aircraft’s tonnage. Further contributions, like direct cash aid for pilot recruitment or staff hospitality at the airport, were also made. In exchange, the company would base between two to four aircraft at the airport, with at least three rotations per aircraft per day.
“Ryanair is facing similar legal challenges by third parties with respect to agreements with certain other airports,” stated the SEC filing. Adverse rulings, according to the company, could cause it to rethink its strategy related to publicly or privately owned airports.
Nevertheless, other deals made throughout the three years helped to propel Ryanair into unparalleled heights. As the financial crisis of 2008 loomed around the corner, the airline was perfectly set up to handle it and even grow. Mainline carriers, on the other hand, struggled, giving way to their no-frills counterparts.
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