Ryanair’s Alitalia bid part of wider long-haul tie-in
Irish giant has set sights on digital dominance by filling planes for other airlines,
RYANAIR could sell longhaul flights from Italy on its website if its recent non-binding offer for Italian carrier Alitalia is successful, according to chief marketing officer Kenny Jacobs.
The ideal outcome for Ryanair is “a hybrid deal”, with a long-haul carrier taking over Alitalia’s long-haul operation and Ryanair operating many of the short-haul routes to feed transatlantic and other flights, he indicated. Such a move would fit well with Ryanair’s wider long-term strategy of selling flights for many airlines including Aer Lingus, Norwegian, BA, Lufthansa and Qantas through its website, he said.
“We think we can play a role in a solution,” said Jacobs. “We’re not going to take over the bad parts of Alitalia, be that certain agreements with unions on pay or pensions. But we want to keep growing in the Italian market, and we think this is the best thing for the Italian consumer and Italian tourism,” he said, pointing out Ryanair already has a 30pc share of the Italian market.
“Hypothetically speaking, if a long-haul airline comes in and buys the long-haul part of Alitalia with Ryanair feeding it short haul and all of that playing out on the Ryanair website, that works in our book.”
RYANAIR chief marketing officer Kenny Jacobs pulls a sheet of paper from his desk and holds it up. He points to a series of simple boxes that he drew roughly in pen over the bank holiday weekend: “That’s an idea I’m working on for our website homepage in 2019.”
This, he says, was a far more productive way to spend his bank holiday then worrying about the explosion of outrage that ensued after his boss Michael O’Leary’s recent tempestuous conversation with RTE’s Joe Duffy on Liveline that seemed to conjure up the ghost of a more ruthless Ryanair oft criticised in the past. Not so, says Kenny.
“Michael went on Liveline to just kind of put the record straight. Now, Michael on Liveline with Joe was always going to end up where it did. It was two Trinity graduates who love the sound of their own voices, battling it out. That is what it ended up sounding like.”
But, says Jacobs, all eyes at Ryanair headquarters are firmly fixed on what the airline believes will be huge and transformative digital developments for it between now and 2024 as part of the next phase of its ‘Always Getting Better’ programme. The airline, he says, will maintain its rigid focus on operational costs as it grows to 200 million passengers per annum by 2024, giving it about 21pc of the European market, up from 15pc currently.
But it will tangentially implement an ambitious strategy that he believes will see it become the biggest travel website in the world, selling seats to and from many destinations around the world.
“By 2024 I’d be amazed if we’re not selling Lufthansa seats, BA seats, Qantas seats,” he says. “Are we up for it? Absolutely. Now other airlines might talk to you and say, ‘but we’re not’. But why would they not do it?”
Pride, he says, is no reason for other airlines not to save themselves money and fill their aircraft more cheaply by putting their inventory for sale on the Ryanair website.
The plan, he says, is all part of the major transformation which has already begun for the European aviation sector. This will see legacy carriers focusing on their long-haul markets, while giving up more and more ground to low-cost carriers such as Ryanair on short haul. Indeed, Aer Lingus has recently revealed in documents to the Workplace Relations Commission that it is feeling the pain from this intense competitive pressure from Ryanair.
“We’re not specifically going after them [Aer Lingus],” says Jacobs. “We’re expanding where the right place is for us and where we make money. You don’t see boards around here with Aer Lingus’s short-haul network in Europe and we’re not picking them off one by one.”
But, he says, over the past three years Aer Lingus has not expanded its short-haul network around Europe. “It’s all about the long-haul growth to the US and that’s the right thing to do because they do have a very good long-haul product, and that’s also where they make more money,” he says.
And it’s not just Aer Lingus. The same phenomenon is evident right around Europe, says Jacobs.
“For example, Lufthansa is adding long-haul capacity and they’re cutting back on short-haul capacity. You then see ourselves and other low cost carriers go in and do it at a better margin because we’ve got a low-cost model and we can make it work profitably in a way that they couldn’t do.”
This, says Jacobs, is fundamentally changing the shape of the industry in Europe and creating a scenario, as is the case in the US, where low- cost carriers are feeding passengers into long haul hubs. That is what is driving plans for cooperation between Ryanair and long haul carriers.
Already Ryanair has reached a commercial agreement in principle with Aer Lingus to feed in passengers to the latter’s growing transatlantic network. The plan has been held up by difficulties with IT integration, but Jacobs is hopeful that it will kick off next year and talks are ongoing between the two. A similar deal is in the works with Norwegian at Gatwick and Ryanair is already selling seats on Air Europa flights to South America out of Madrid.
“Some people ask me why is Air Europa doing this?,” says Jacobs. “Air Europa is doing this because using Ryanair is a cheaper way for it to fill its planes and to market its product than using Google or any other type of marketing. I hope by next year that on our app you can come and book travel outside of Europe with other airlines that involve a flight connecting with Ryanair.”
Once the system is up and running efficiently with Aer Lingus and Norwegian, Ryanair will “look to roll it out with every other airline”. Indeed, the airline’s recent interest in Alitalia may also fit into this strategy. Jacobs agrees “hypothetically” a sensible outcome at the struggling Italian carrier would be for a long haul operator to take its long-haul routes and for low-cost carriers such as Ryanair to feed passengers to these routes.
Overall, the plan to link in with long-haul carriers is “strategic and it’s the industry moving in the right direction”.
“With a load factor of 96pc we’re not doing this because we’ve got so many empty seats, this just moves the whole industry along the right trajectory from our point of view, which is that low cost does all the short-haul flying and feeds the long-haul operations. They make their money and we fill their planes cheaper than they can fill them themselves using their own marketing.”
Jacobs estimates that legacy carriers could, for example, spend €25 of marketing cost on a €750 long-haul booking, which, he says, could be saved were the same booking to come through the Ryanair platform.
“Ryanair becomes the Amazon of travel, just allowing you to book more types of products, including the products of historically competitive airlines,” he says.
And therein lies a major benefit to Ryanair. If it can capture a growing percentage of not just its own bookings on its digital platform, but also of all flights by other airlines in Europe, it creates an incredible selling opportunity.
When Jacobs talks of becoming the Amazon of travel what he is really talking about is having as many consumers throughout Europe signed up to the Ryanair platform with Amazon style profiles that includes their credit card details and which makes it easy and convenient for a consumer to make a purchase. This ultimately could create a massive selling opportunity for all manner of products, from hotels to car hire to Ryanair flights and to the flights of many other airlines.
“We’ll still only stay flying within Europe, but we’ll sell more products outside of Europe and we’ll sell other people’s travel products and services in and outside of Europe,” he says.
Even without the added custom that selling bookings on other airlines would bring, that shift is already under way. Ancillary revenue for in-flight sales, car hire, seats, priority boarding, hotels, and holiday packages is growing rapidly. Last November, Ryanair said that ancillary revenues — which are often pure profit — would go from 20pc of its revenue to 30pc within five years but it has already hit 27pc, says Jacobs.
It perhaps explains to some extent why O’Leary was so unyielding in his defence of the airline’s ability to create innovative digital products such as seat-allocation charges that drive these revenues ever further, a suggestion dismissed by Jacobs. But what it certainly does is create a virtuous circle for Ryanair that allows it to continually chip away at its fares, further increasing pressure on competitors. And, Kenny predicts, macro economics is only going to pile that pressure even higher.
“You’ve now had a sustained period of low fuel, but over a 10-year time frame fuel is going to go up at some point and when it hits something like $70 a barrel, airlines will go out of business,” he says, citing Air Berlin and Alitalia as examples of airlines that can’t keep up even while fuel is cheap.
“So, when fuel picks up you will see more airlines go out of business, you will see a period of consolidation. What you will end up with is the five big airlines — Ryanair, Lufthansa Group, IAG Group, Air France, KLM and EasyJet — moving from somewhere less than 60pc market share to something like 85pc market share and you’ll have less airlines in Europe, just as is the case in the US.
Ryanair believes that a pattern evident in Europe over the past two years of double-digit capacity growth by low-cost carriers and negative capacity growth by legacy carriers on short-haul is going to continue.
“Will some of them go out of business? Yes, they will. And will some of them end up with a new version of their business model where they are 75pc long haul, 25pc short haul and they’re working with low-cost carriers such as ourselves? Absolutely that will be the case — 2017 is the first year where low-cost carriers have over 50pc market share for short-haul flying in Europe. The question is when does that become 75pc?”
Soon, is the clear implication of Ryanair’s ever-ambitious vision.