Consumer

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

It feels good to mock Ryanair Holdings Plc. The budget airline lures customers with the dream of a sun-drenched getaway for the price of a restaurant meal but leaves them with the reality of 27 types of extra fee, pricey snacks and competitive boarding worthy of the Hunger Games.

That's if the plane even takes off: Ryanair has announced a wave of cancellations over the coming weeks, leaving about 400,000 passengers in the lurch and the company's bottom line some 25 million euros ($30 million) lighter.

Grounded
Ryanair's shares have fallen 5 percent, underperforming the sector, amid mass cancellations
Source: Bloomberg data

Michael O'Leary, the chief executive who's never lost for words, conceded that "we f---ed up here". But the reputation hit will probably be short-lived. This is an industry rife with consumer horror stories, cancelled flights and compensation payouts. British Airways suffered a power outage this year that grounded flights for more than 75,000 passengers, costing it 65 million euros, while Air France-KLM has struggled with profit-sapping strikes for years.

The stubbornly high cost base of national carriers has led to bankruptcies at Alitalia Spa and Air Berlin. The airline industry is getting more competitive and more aggressive, but Ryanair leads the way with increasing passenger numbers and profit. This embarrassment won't stop that.

Obviously, 25 million euros in extra costs is nothing to sniff at. But Ryanair's error looks like a fixable screw-up rather than a structural failure. Executives say they "messed up" in allocating employee vacation, leading to a bunching of annual leave.

Cancellation Costs
Compensation costs in 2018 will likely be followed by higher operating expenses in 2019
Source: Credit Suisse estimates

True, Ryanair's promise to increase its staff in response suggests it has been spreading itself too thin. But hiring more people is the right thing to do anyway. Credit Suisse expects staff costs to rise by 4 percent from 2019, adding 32 million euros to operating expenses. Ryanair's industry-beating profit margins can absorb it.

Meanwhile, rivals have their own problems. Cheaper fuel has been offset by an all-out price war in leisure travel, bearing down on those airlines that are yet to fix their high overheads. Germany's Deutsche Lufthansa AG is grappling with staff costs. Even if it cuts spending at its Eurowings division, Ryanair would still be far thriftier, according to Bloomberg News. Air France-KLM is only now launching a discount brand as part of a turnaround.

Long Haul
Ryanair delivers higher returns and lower leverage than peer group, Bloomberg data suggests
Source: Bloomberg data

Ryanair faces a new threat in budget long-haul specialists such as Norwegian Air Shuttle ASA, but the shine has come off that company recently. Cherry-picking staff from beleaguered or bankrupt rivals might be another opportunity.

Before the little unpleasantness over the holiday schedule, Ryanair was trying to become more liked. It launched an "Always Getting Better" plan in 2014 to improve its brand, and whether you buy into that or not it's been expanding passenger numbers at a double-digit clip. 

Managers have apologized to the 400,000 unfortunates, agreed to pay the cost and said they will make sure it doesn't happen again. That should limit the fallout. As should the fact that if you want to fly from A to B, there's a limited choice and the cheapest fare will usually win.

The bigger worry for O'Leary is the risk of a cyclical downturn. But who has the most comfortable cushion to sit that out? You guessed it. Maybe Ryanair should try handing them out to customers too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net