Charting Ryanair’s strategy through the airport charges it pays

Airport and handling charges are Ryanair’s second biggest expense. The airline regularly features in the news alongside airport charges, whether it be closing a base because charges have risen, or opening new services thanks to some agreement with an airport or government or tourism organisation. Low charges are key to the success of Ryanair, which makes recent moves into European hubs more than just the usual round of annual network expansion.

Ryanair paid out a total of EUR 864 million in airport and handling charges in 2016/17, a modest 4% increase over the previous year despite passenger numbers growing by over 13%. This is evidently a significant sum, but it equates to just EUR 7.20 per passenger, which is a rate significantly below any of the airline’s rivals. How does it achieve this?

Average airport cost per passenger, EUR

Average airport cost per passenger, EUR

Source: RDC Apex, airline financial reports

In the early years, when Ryanair was predominantly operating in the UK and Ireland, airports frequently heard the negotiating position of ‘a pound a passenger’, though they weren’t sure whether Ryanair would be paying it to them, or they would be paying the pound to Ryanair. Whilst times have moved on, the focus on driving airport costs down to the absolute minimum has stayed with the airline.

Competition? What Competition?

Much of the cost advantage can be ascribed to one key feature of the Ryanair network; a lack of competition. From the outset, the airline chose secondary airports where possible, airports that had few (if any) routes but plenty of room to grow. By delivering passengers to sleepy sheds in the country, Ryanair was able to negotiate airport rates unheard of anywhere else, and by becoming a dominant player at many of these airports, was able to maintain aggressive deals thanks to a near monopoly position. Securing low-cost bases near key cities such as London, Paris, Rome, Frankfurt, Stockholm and Brussels ensured that the bulk of the airline’s traffic could access key markets with very low charges, developing those markets, in turn thanks to very low fares.

In 2016/17, around 70% of Ryanair’s routes still had no direct competitor. Partly by choice of airport, partly by chasing competitors away with low fares, around 55 of the airports served by Ryanair are reliant on the airline for more than 50% of their departures. That’s a strong negotiating position, and one that Ryanair exploits to the full.

This strong base of low charges, has enabled the airline to expand into airports it may not otherwise have served, airports that are not known for being cheap. Recent forays include the main hub airports at Brussels, Rome, Frankfurt, Copenhagen and Amsterdam, in some cases growing at the hub airport while their low cost neighbour saw growth stagnate. Indeed, worrying times for Ciampino, Charleroi and Hahn, as all three saw capacity stagnate whilst their neighbouring hubs, especially Fiumicino and Zavantem, saw capacity growth in excess of 30%.

From secondary to primary airports

The charges paid by Ryanair at Zavantem and Fiumicino can’t match those they pay at Charleroi and Ciampino, not by a long way. Busy hub airports, dense networks, based airlines, multiple competitors. Everything that Ryanair has eschewed as it has built its network, it now appears to be embracing, in a move into mainstream airports.

By dint of illegality or potential commercial suicide, airports don’t tend to offer a new entrant on an existing route a better airport charges deal than that offered to the incumbents; if the incumbent is paying published charges, then so will the new entrant. Taking BRU and FCO combined, around 75% of the routes offered at these airports by Ryanair have at least one competitor. In contrast, 90% of Ryanair’s services from CRL and CIA have no competition. Talk about a change of direction!

Such a change of direction certainly impacts the charges. The disparity in charges is most evident at Brussels; the published charges at CRL for a Ryanair departure amount to around EUR 3 per passenger, whilst at BRU, the published charges for a departure are almost EUR 30 per passenger, a small matter of ten times the price. There’s not a great deal of scope to discount the charges at Charleroi, but nor is there at Zavantem, where only three Ryanair routes (out of 19) have no competition. Even assuming a dramatic discount on those three routes, it’s likely that Ryanair will be paying of the order of EUR 25 per passenger at Zavantem, a similar level to its competitors. Yet the average fare at Zavantem is only EUR 4 more than the average fare at Charleroi. Not even Ryanair can make these economics work in Zavantem’s favour.  The picture is similar at Rome.

Estimated Ryanair profitability, EUR million               Estimated charge per passenger, EUR

Estimated Ryanair profitability & Estimated charge per passenger, EUR

Source: RDC Apex, airportcharges.com

We estimate that both Charleroi and Ciampino are very profitable bases for Ryanair operations, possibly even in the top ten most profitable. On the other hand, Zavantem and Fiumicino look to be among the airline’s few loss-making bases (although operations are still relatively recent), taking their places in the top ten least profitable. So why would you constrain growth at two of your best bases and instead add new capacity at the neighbouring airports where the economics don’t make sense?

The answer is probably strategic, that Ryanair is playing a long game when it comes to the next stage in its conquest of Europe. It has the lowest costs, it offers the cheapest fares, and it makes the highest profits. The airline could go after one or more of its low-cost competitors say easyJet at Bristol or Luton, Jet2 at Leeds-Bradford. The market for lower fares at UK regional airports is perhaps not so interesting; they have been stimulated with low fares already, government departure taxes are high, and Brexit offers some uncertainty as to the wisdom of further significant UK growth just now. It would also leave Ryanair as a bystander whilst potentially more exciting developments unfold on the European mainland.

Moving into airports like Zavantem and Fiumicino echoes some of the conditions seen at the birth of European LCCs. Well, one in particular – offering significantly lower fares than those already available, thereby creating a whole new market. The difference now is that markets like Brussels and Rome have already been stimulated via their out-of-town airports, and key LCC criteria such as very low airport charges and unlimited operational flexibility cannot be met. So something else is afoot.

Whereas the dawn of LCCs saw them create new markets from new airports, leaving the HCCs to their higher fares and protected hubs, Ryanair is now moving the goalposts to attack the HCCs in their fortress homes. It is looking to create a Brussels Airlines-sized hole at Zavantem and an Alitalia-sized hole at Fiumicino, although Alitalia itself is helping out, and a bevy of other LCCs are taking part in the Roman feeding frenzy. Let’s not forget also the difficulties being faced by airberlin, leading Ryanair to add significant capacity into Berlin in the past 12 months.

Something will have to give. It’s unlikely that Ryanair can make much of a profit with airport charges at somewhere near rack rates at hub airports. It’s also unlikely that carriers such as Brussels Airlines and Alitalia can survive with Ryanair as a direct competitor if it continues to grow its network at each hub. Ryanair has the advantage that with profitable operations at nearby secondary airports, it can afford an attritional campaign in a way that neither Brussels Airlines nor Alitalia can. If it succeeds in pushing out the hub operators, then what next for airport charges at those airports?

An unlikely ally

Perhaps surprisingly, one airport giving Ryanair a helping hand to undermine its hub operator is Frankfurt. Long time a base for Ryanair at nearby Hahn, the airline has just struck a deal with Frankfurt Airport itself, which could see up to ten Ryanair aircraft based at the airport.

Incentive scheme at Frankfurt Airport

Incentive scheme at Frankfurt Airport

Source: Fraport AG

In a risky strategy guaranteed to displease key operator Lufthansa, Fraport is effectively giving Ryanair a EUR 14 discount on every departing passenger, even on routes where the existing operator does not qualify for any incentive. As can be seen from the graphic, an incumbent with 40m passengers will find it hard to grow sufficiently to achieve any discount; whereas a new start airline can’t help but trigger the maximum discount (new start growth is calculated from a baseline of 10,000 passengers, so anything above 12,000 passengers attracts the maximum). All things considered, Ryanair will be paying around half the normal price.

As we have seen, it’s difficult for LCCs to make profits if they have to pay rack rate at hub airports. Add to this that Lufthansa has stagnated somewhat at Frankfurt, where departing seat capacity hasn’t grown since 2014. That’s not a combination that adds up to future growth for the airport operator; locked into a static legacy airline while you watch the LCC revolution happen all around you.

Ryanair’s requirement for lower airport charges has therefore, significantly altered the strategy at one of Europe’s key hub airports. In order to attract LCCs to Frankfurt (Lufthansa will likely respond by turning to its lower cost offshoot Eurowings, as it too will benefit from a similar incentive scheme to that offered to Ryanair), the airport is prepared to sacrifice the European operations of its long-time hub operator. Domestic operations don’t qualify for the incentive scheme, which suggests that the airport is trying to protect Lufthansa’s domestic feed onto its long-haul operations at Frankfurt. But thanks to Ryanair, the future of Frankfurt’s intra-Europe network looks to be going low cost.

In summary

Europe’s hubs are slowly warming to the charms of Ryanair, whether they want to or not. It’s unlikely that the airline will ever be paying EUR 7 per passenger at these airports, but it’s also unlikely that the airports will ever be earning EUR 30 per passenger from airlines like Ryanair for any length of time. But Europe’s hub airports are on notice – at least those with some spare capacity.

Ryanair has a business spread across Europe; it isn’t reliant upon one or two bases for the bulk of its business. It has the scale, the cost base and the profitability to take on most other airlines, especially where those airlines are ailing, or have a single, potentially vulnerable operating base. In Frankfurt, it has found a key hub airport that is willing to undermine one of Europe’s major airlines in the name of attracting LCC services, a remarkable development. That focus on driving down airport costs to the absolute minimum remains a key part of Ryanair’s DNA; a new set of airports is starting to feel just what that means.

We'll be running an AirportCharges webinar in July which will look at the issues surrounding airport charges; follow RDC on LinkedIn and Twitter to stay informed of webinar dates and for more articles and updates.

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By: Richard Leigh / Connect on LinkedInImage of Richard Leigh