International -- European Business: IRELAND
CAN RYANAIR PLAY DEFENSE? (int'l edition)
The low-fare line is scoring, but rivals are closing in fast
In easy earshot of Dublin airport's din, Michael O'Leary's office is no more than a glass-walled cubicle with a couple of no-nonsense chairs. It's hardly the kind of place you'd expect to find a ceo, but it's perfect for the 37-year-old O'Leary, who runs Ryanair, Europe's largest low-cost airline. Ryanair flies chiefly on O'Leary's ability to keep costs low. "We're trying to drive fares down all over the place and annoy every flag carrier we can find," he says. "That's the fun of it."
O'Leary has been having lots of fun of late. He has expanded Ryanair's fleet from 13 planes to 20 in the past year. In May, he will add six destinations to the 22 his line now serves, and he expects to add four or five yearly after that. Profits last year bounced 20%, to $33.4 million, on revenues of $185.6 million. The stock has nearly tripled since May, when Ryanair started trading in Ireland and over the counter in New York.
The question is whether O'Leary can maintain altitude. Competition is growing--partly from upstarts and partly from big carriers invading the no-frills market. They will force Ryanair to keep screwing down costs--while holding up margins. Can O'Leary do that while sticking more pins in the route map?
He's no stranger to adversity. Started in 1985 (and named for its founders), Ryanair began by flying between Dublin and London. When O'Leary came on board in 1991, the airline was overextended--and $30 million in the hole. O'Leary, the iconoclastic son of an Irish farmer, started cutting. Along with unprofitable routes and inappropriate planes, out went assigned seats, meals, free drinks--even peanuts. Up went margins--to 18% last year, the highest in Europe--and down went labor costs and fares. Ryanair's costs per employee, according to one analyst's report, are now half British Airways'. It can offer a round trip from London to Pisa for $215, for instance, compared with ba's standard fare of $873.
O'Leary is confident. He has ordered 25 Boeing 737s--with an option for 20 more. By 2002, he hopes to carry 10 million passengers annually, up from 4 million today. The challenge now is Go, ba's new no-frills carrier. Rivals such as easyJet and Debonair are complaining in Brussels that ba is subsidizing it. But O'Leary is sanguine: "If they show up on our routes, we'll kick the daylights out of them."
Analysts figure Go will hold its own, but few believe it will blow Ryanair out of the sky. Low fares on scheduled flights tend to increase overall traffic, they point out--a big plus for no-frills carriers. Altogether, Europe's low-cost carriers took in $700 million last year, up 75%. By 2001, according to Andrew J. Light, an analyst at Salomon Smith Barney in London, their market will reach $2.2 billion. In those rich skies O'Leary will meet his toughest test yet.By Heidi Dawley in London and Carole Craig in Dublin