Bas van Oosterhout’s Business Innovation Blog

Last week news spread that Ryanair’s profit could be halved due to ever risen fuel cost and a weaker UK pound. Last quarter 2007 net profit dropped with as much as 27%. This is not news that is typical for Ryanair. Applying the Southwest business model it is well know for being a “no frills airliner” generating sound financial figures. The business model is mainly focused on the price sensitivity of customers. On the one hand this is created by cutting costs out of the traditional airliner model; use Internet for reducing channel costs, no food served and additional charges for luggage, use of smaller airports and a single model aircraft. On the other hand the business model focuses on stimulating revenue streams by maximise utilisation of air crafts (as much air time as possible with heavy loads of passengers) and yield management pricing strategies (price discrimination or price targeting to maximize revenues from passengers) (source).

The ever rising fuel prices drive costs, but not in the parts of the business model Ryanair controls. And a weakening position of the Sterling has its negative effect on the utilisation of the air crafts, where possibly the cheaper seats will still sell out, but the more expensive ones will become harder to sell. The combined effect in addition to the downturn on the whole industry of these recent developments result in weakening profits and possibly what Ryanair’s CEO Michael O’Leary calls “a perfect storm.”

But is the business model defeated then? According to the financial analysts it is not. Yield maybe flat for next year, or even drop 5%. Budget carriers are most vulnerable to broad economic dips.
Low cost carriers are used by the most economically sensitive travelers, but probably Ryanair’s yields will survive the dip.
According to O’Leary Ryanair now considers hedging of its fuel if oil dips below $80 a barrel in order to be less vulnerable in case of very volatile oil prices. So hedging makes the business model survive in these turbulent times.