Commercial awareness hot topic: rerouting Ryanair

Will Hodges looks at how the low-cost airline's business strategy is changing

In an interview for any business-related job or internship, or at a more informal recruitment or networking event, there's a good chance you'll have to show your commercial awareness by discussing a hot topic in business.

You might be asked for your opinion on an issue or series of events, or given an opportunity to talk about something you're interested in.

So while you don't need to memorise the current share price of each FTSE company every day, it's a good idea to make sure you're always familiar with some key current stories and ongoing issues in the business world - and have some thoughts of your own about them.

Current hot topic: Ryanair

The Dublin-based budget air carrier is in the midst of major changes to its strategy, including its "no-frills" pricing policy.

Up until now, this policy has been the basis of its business model, and its financial success.

Change in the airline industry

The airline sector has been one of the most volatile industries over the past few years.

Huge fluctuations in the price of fuel and an increasing number of players have meant companies have had to think up new ways of attracting business and turning a profit.

Many have failed to adapt to changing market conditions and have suffered huge financial losses as a result.

The main casualties of the past few years have been older European carriers like British Airways and Italy's Alitalia, which found themselves priced out of the market by the sudden emergence of low-cost airlines, most notably EasyJet and Ryanair, in the early 2000s.

Alitalia narrowly avoided bankruptcy in 2008 after receiving a rescue package of over £400 million from investors, including rivals Air France-KLM.

To counteract the threat, most airlines have had to play the budget carriers at their own game, slashing ticket prices and stripping down customer service on the majority of routes.

In the meantime, a new generation of low-cost carriers - the likes of Norwegian, Vueling and Aer Lingus - has emerged, putting increasing financial pressure on original budget flyers like Ryanair.

Cabin pressure

Having helped pioneer and dominated the "no-frills" air travel realm, Ryanair chief executive Michael O'Leary now finds himself pressured into a change of tack.

The airline's original business model was based on being able to offset the low cost of some passenger fares though charging customers for additional services such as hold luggage and pre-booked seats. The 15 per cent of passengers who choose to pay for these extras have subsidised the low revenues generated from the remaining 85 per cent of flyers.

These ancillary charges contribute 22 per cent of the airline's total revenues, equivalent to £836 million last financial year, or £10 per passenger per flight.

This strategy has been the basis of the company's impressive financial performance in recent years: non-fare revenues contributed £836 million last year compared with just £512 million in 2009, representing an increase of around 60 per cent.

But as the economic gloom lifts around Europe, a large proportion of Ryanair customers have begun to lose patience with the company's self-confessed brash approach to customer care.

With a greater selection of low-cost airlines to choose from, many passengers have started to migrate to carriers, such as Aer Lingus, that offer a more pleasant, customer-friendly service.

The prospect of fewer passengers (and reduced profits) has shaken the company's shareholders.

A profit warning - the first issued by the airline in ten years - saw the company's share price fall by 11 per cent on a single day of trading in November 2013. The company is estimating net profits of between £423 and £440 million for the year ending 31 April, down from £483 million in 2012-13.

From low-cost to long distance

As part of his strategy for turning around the airline's fortunes, O'Leary has sought to change the public perception of a company renowned for its poor customer care.

The chief executive has scrapped some of the carrier's much-maligned policies, including strict limitations on hand-luggage size and up to £70 "penalties" for passengers who forget to print their boarding pass at home, in an attempt to alleviate some of negative press surrounding the business.

A more ambitious move is Ryanair's proposed foray into the long-haul travel market. The Dublin-based company has announced plans to run no-frills flights between Europe and the US.

The move will see the airline take on existing long-distance carriers such as British Airways and Virgin by offering huge reductions on standard fares between the two continents.

Speaking in February, O'Leary said the company planned to launch the service with fares from as low as €10 (one-way) on select transatlantic flights.

Though he's revealed relatively little about the financial strategy behind the move, O'Leary hinted that the low cost of some economy class seats will be offset by charging more expensive fares to business passengers.

"Not every seat will be €10 of course," he said. "There will also need to be a very high number of business or premium seats."

The flight path ahead

Ryanair's transatlantic service is several years away from fruition (the airline needs to secure a fleet of 30-50 long-haul aircraft before flights get off the ground) and has been seen by industry insiders as a hugely risky project, though one with the potential to reap considerable rewards for Ryanair.

Shonil Chande, an aviation analyst at research firm Business Monitor, views the move by the company as an "intriguing proposition".

"Applying the Ryanair business model to what are extremely competitive routes between key cities on the east coast of the US and Europe might well prove to be profitable," he says.

"Ryanair's no-nonsense cost structure suggests that it's as well placed as any European budget airline to take on the challenge of taking its business model into uncharted transatlantic territory."

What do you think?

Do you think Ryanair will continue to outperform the rest of the passenger airline sector, or will its latest gamble prove a step too far?

There are plenty of factors to consider. Will rising fuel prices make low-cost long haul flights unprofitable? Will trade between Europe and the US falter due to emerging market pressures?

Or perhaps existing long-haul carriers will follow suit and crowd Ryanair out of the budget long-haul market?