Costs Mean Ryanair’s Pounds 6 Fare to US Could Be a Fantasy Trip

By Rod Stone – Dowjones Newswires

“SOMEBODY at some stage is going to do a long-haul, low-cost airline. Will it be successful? I doubt it.”

Those words were uttered in late 2005, not by the boss of a big global carrier anxious to protect its business, but by Michael O’Leary, the outspoken chief executive of Ryanair, the Irish budget airline. The very same person who this week said he’s seriously looking at starting a budget airline offering cut-price fares as low as $12 (Pounds 6, e9) between Europe and the United States.

It is true that the recently agreed “open skies” pact between the European Union and US will open up transatlantic routes to new competitors from April next year. But O’Leary faces a tough time in making “Ryanair USA” fly. Put simply, the offshoot wouldn’t work as a pure low-cost carrier and would need to attract some higher- paying punters at the front of the plane.

Ryanair is Europe’s largest budget airline, carrying more than 42m passengers annually. Despite rising fuel costs, it has remained highly profitable in recent years, as it has expanded its empire across Europe. The airline saw its third-quarter net profit jump 30% to E47.7m and has forecast a similar rise for the year ended 31 March.

While it offers some of Europe’s lowest average airfares, Ryanair generates profits by keeping its non-fuel costs extremely low, maximising the utilisation of its fleet and selling more and more ancillary items such as food onboard and travel insurance. That means flying to cheaper airports sometimes 100km away from major cities and turning planes around at airports in just 25 minutes.

Any transatlantic sister operation would immediately face much higher cost pressures than Ryanair in Europe particularly when it comes to personnel. Safety rules means aircrews have to rest for around 12 hours after a long-haul flight, so the long-haul carrier would have to pay for hotels and transportation.

At present, staff costs represent some 13% of Ryanair’s total operating costs, much lower than at airlines with long-haul operations. It’s about 29% at British Airways and about 25% at Lufthansa.

What’s more, the larger airplanes required couldn’t be turned around within 90 minutes and would need far more fuel than the short- haul Boeing 737s that Ryanair now uses.

To help offset these higher costs while at the same time offering low fares, “Ryanair USA” will need a premium cabin. Presumably those seats will actually recline, unlike many on Ryanair’s current European operation. Filling these premium seats for the secondary US airports that are being targeted might be tough.

Upper-class seats are key profit generators for long-haul airlines and are typically filled by executives jetting between the world’s major financial centres. Few are likely to want to land in cheaper airports such as Baltimore, Providence in Rhode Island and Long Island Islip Macarthur, which O’Leary says he is eyeing.

“Ryanair USA” could undercut the business-class return fares offered by the likes of BA, which charges well over Pounds 3,000. But it will also face competition from new premium class only- airlines such as Silverjet and MAXjet, which offer some fares below Pounds 1,000. And these carriers fly to better-located New York’s JFK.

Rather than betting on a risky transatlantic venture, O’Leary’s time will probably be better spent on further expanding Ryanair’s presence in Europe and North Africa, either organically or through acquisitions. After all, the penetration of budget airlines in Europe is still some way behind where it is in the US.

(c) 2007 Sunday Business; London (UK). Provided by ProQuest Information and Learning. All rights Reserved.