Giants of low-cost | Michael Cawley

What’s the secret to Ryanair’s growth? Well, it takes a certain ruthless approach to aviation and tourism in general to dispense with the whimsical delights of seat allocation, in-flight meals, airport buses and of course business and first class. But once air travel got deconstructed and laid bare for consumers to purchase bit by bit under pain of additional charges and hefty penalties, it seemed there was no end to the capriciousness of cheap travel. Every single European armpit was there to be discovered on a €10 seat.

Of course, no airline can make money on a €10 seat. That cheap seat means someone else is paying a higher price, especially on additional charges. For most of its success, Ryanair is still the recipient of much hate-mail in proportion to its load factor: the so-called hidden, or additional charges that make up the Ryanair experience, or the rudeness of its non-unionised staff. But the extra charges are part and parcel of the no-frills experience.

When Ryanair started flying from Malta in 2007 you paid €5 as a processing fee for a credit card payment and the charge did not exist on a Visa Electron. No plastic is spared now from the €20 fee. Say you check-in online (very convenient if you travel light), you will pay a €40 penalty for forgetting your boarding pass – which you printed on recycled paper at home – and have it reprinted (mandatorily) by Ryanair.

Name changes at €150 are expensive if you misspell your name. If you notice the error before you get to the airport the charge is €100. Excess luggage comes at €20 per kilo: so if you’ve already reached your checked-baggage allowance of 15kg and are forced to check in your 10kg hand luggage (because it doesn’t fit the Ryanair baggage dimensions) you’ll have to pay €200.

“I can only speak for Ryanair but Ryanair offers fares as low as €1 because many of our passengers buy ancillary revenue including booking a hotel, renting a car or buying a cup of coffee onboard,” Michael Cawley, the 56-year-old deputy chief executive of Ryanair, explains of the ridiculous price-slashing regime of low-cost aviation. This year the airline will grow by 5 million passengers, making it the 20th largest airline in Europe.

“All these optional extras contribute towards the revenue which we receive from each passenger and help to create an environment in which we can offer such low fares.”

This week Cawley rubbished reports of the Ernst&Young programme for the restructuring of the national airline (he called it “rubbish” and said it’s not worth the money). But even when Air Malta gets surgically operated upon, it will still have to face up to the constant growth of Ryanair and other low-cost airlines whose massive economies of scale – for example, making large orders of aircraft at slashed prices – will always allow it to push down its prices.

Cawley disputes this kind of reasoning.

“The cost advantage Ryanair has over Air Malta has nothing to do with economies of scale. Aer Lingus, which competes with Ryanair on far more of its network than Air Malta does and used to carry only 5 million passengers, has cut its cost base significantly under competition from Ryanair, lowered its fares and increased its passenger traffic by over 80% and is profitable.

“Economies of scale have nothing to do with the inefficiencies which exist in Air Malta,” Cawley says of the national airline, which is now expected to turn a profit in a few years’ time if it is to satisfy European Commission demands.

“The first thing Air Malta should do in order to grow and increase its profitability is to reduce its fares, increase it passenger traffic and reduce its costs. That general principle has been applied by a number of airlines and it has always succeeded,” Cawley says.

But surely, Ryanair has also managed to make inroads in the Maltese tourism industry not just thanks to its no-frills model, but because it can be sustained through the EC’s ‘route-support scheme’: a tax-funded subsidy for airport charges to airlines that fly from regional airports and underserved routes. This year the Malta Tourism Authority will pay at least €4.5 million in route development.

“The route support scheme is available to every airline but it appears that only Ryanair to a major extent and one or two other smaller airlines have taken advantage of it,” Cawley says.

“It’s available to Air Malta but they have chosen not to fly on the routes which are covered by this scheme,” he says, although officials at Air Malta say the airline’s business model does not enjoy the same economies of scale Ryanair has (large orders for Boeing come at largely reduced prices...) and even so, Air Malta’s fares would be nowhere near as cheap as Ryanair.

“All the traffic generated by this scheme is incremental – based on an average expenditure of €500 by each of the tourists when they arrive in Malta, the payback is a multiple of over 30 times the investment,” Cawleys says of the value-added Ryanair brings to the island.

“The route support scheme is only necessary because the costs at Malta International Airport are high. They are the highest among the airports to which we fly in Europe and among the highest of all airports in Europe [Cawley says they charge €25 per passenger]. If their costs were competitive there would be no need for the route development scheme and Ryanair would happily fly these routes without such assistance from the government.”

But MIA has disputed this claim. It says that charges at Athens, for example, are higher by some 25% and that charges also vary on airliners depending on their weight. And why should Ryanair complain of high airport charges if they get ‘subsidised’ by the route support scheme?

“MIA can deny being the highest airport charges in Europe but in this instance they have no credibility. I buy access to 160 airports around Europe so, as the customer of all these airports, I know exactly what we pay and MIA has no idea what we or other airlines actually pay at these airports.

“What they are quoting are list prices but of course everyone, except MIA, offers discounts. The reality, as published in our annual accounts, is that our average airport charge is just over €6 while we pay over €25 per passenger at MIA.”

But there is no denying that Air Malta, and the country itself, has found itself locked in a double-pincer by the allure of low-cost and the business it brings; and by the strict rules of the EC on state aid. The government has to justify a €50 million state aid package, but in 10 years it will have dispensed the same amount for low-cost through the route-support scheme. The EU doesn’t allow state aid, but it allows the route-support scheme and the airlines making use of it is not Air Malta, but Ryanair.

So is this really a level playing field? Would it be anathema to the EC’s free-market spirit to allow national airlines with a public service obligation, cheaper charges in their own airports? What would Ryanair think of a special concession to Air Malta?

“Ryanair favours lower airports charges for every airline, including Air Malta, but we are against discriminatory schemes which are exclusive to only one airline. As with the route development scheme, any reduction in airport charges should be available to every airline and it is their option whether to accept it or not.”

Air Malta’s former chief executive Joe Cappello, whose long career at the national airline was abruptly halted this year during talks on restructuring the airline, had claimed that Air Malta and LCCs were never on a level playing field – from 2005 to 2009, total passengers at MIA increased by 165,092, while Air Malta’s passengers increased by 82,073. The two major LCCs (Ryanair and EasyJet) increased by 627,348. Other airlines dropped by 544,329. Isn’t this clear that Air Malta was suffering passenger displacement to LCC routes?

“Of course Air Malta and Ryanair are on a level playing pitch: any scheme Ryanair is taking advantage of is open to Air Malta also, unless he is suggesting that Air Malta has some advantage in terms of airport charges of which we’re not aware.

“The fact that other airlines reduced their traffic is entirely irrelevant. Ryanair has massively increased its traffic and has a proposal with the government to increase it by a further 50%,” Cawley says about a prospective 17 new routes for Malta. “The other airlines presumably have reduced primarily because their fares were too high and passengers are not prepared to pay when they can’t see that they are receiving value.

“There is no validity in a claim that Air Malta is suffering passenger displacement as their numbers have increased by 82,000 during the period in which we’ve competed with them.”

Ryanair’s success also brings with it the prospect of a creating an industry entirely dependant upon mass tourism influx, and with that Ryanair’s demands on their host cities. An example would be the suspension of service at Marseille this year Ryanair’s employment rules. Would Malta’s tourism industry have to bow to their every demand in future, lest they fly off at the drop of hat?

“There is no truth in the assertion that Ryanair would leave Malta at the sheer drop of a hat. Our cost base is of critical importance and if that changed in contravention of our agreements with the government and the Maltese Tourist Authority, we would obviously withdraw services.

“In the absence of that there is no precedent for Ryanair withdrawing from a market other than where circumstances have been changed, such as the employment laws in France, where discriminatory employment laws in favour of Air France were introduced; or where an airport reneges on its commercial agreement by increasing costs. Neither of these will be tolerated, but otherwise there are no circumstances that I can think of that we would pull out of the Maltese market.”

But Ryanair also has a bad reputation when it comes to employment conditions. This week a London employment tribunal awarded pilot Ryan Anderson, a former Ryanair pilot, £40,000 compensation for having been sacked from the airline for handing a union membership form to a stewardess. Surely such employment practices are the stuff of the dark ages... is this the way Ryanair saves on extra costs? Why is the airline described as having an “extremely aggressive” record towards unions by Unite’s Brendan Gold?

“I don’t wish to comment on this individual case other than to say that the captain was inappropriately distributing leaflets onboard an aircraft to staff using his position of authority to influence junior staff members. This was totally inappropriate and in contravention of his terms and conditions.

“As for Mr Gold’s comment that Ryanair has an extremely aggressive attitude towards unions, I’m hardly surprised by that as he depends for his salary on increasing union membership. His record and the record of other pilot union leaders has been lamentable, as evidenced by the recent comparison between the pay and conditions of Ryanair pilots and those of unionised Air Malta pilots published in the Times article earlier this week.”

Ryanair also charges superficial penalties that are legally contestable in the EU: such as the €40 penalty for passengers who arrive without a boarding card and are printed a new one, something deemed illegal by a Spanish court recently. If such incidents continue to happen across various countries Ryanair serve, will this make it difficult for the airline to conduct business and fly from such countries?

“Ryanair is seeking to encourage its passengers to print out their boarding passes before they arrive at the airport. The maintenance of a ticket desk at airports is very expensive as we pay rental charges, sometimes amounting to thousands of euros per month, to the airports. This service has a huge cost to Ryanair and until passengers modify their behaviour and print out these boarding passes at their computer, we will continue to levy the cost of providing these services while they are still needed.

“Consequently the attraction of our low fares and our superior passenger service is obviously more attractive to our real passengers than any contrived objections which the media might put forward as a basis for passengers not wanting to travel with us in the first place.”