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During a meeting between Ryanair CEO Michael O’Leary and Skift in Copenhagen on Tuesday, the outspoken low-cost carrier leader answered questions on what will come next as the airline pushes forward with growth in Europe, and what he believes will be necessary for all of Europe’s airlines to prosper.
The airline recently announced a new bases in Hamburg, Nuremberg, Stuttgart, and Cologne, which marks a direct incursion on Lufthansa’s turf, and competition against Lufthansa’s newly rebranded low-cost carrier Eurowings.
But O’Leary tells us he is not worried about a backlash from Lufthansa over Ryanair’s growth in Germany.
“If Eurowings want to compete with us they’ll have to lower their fares by 50%,” O’Leary told us.
“Eurowings shows no signs of being able to lower its fares and even if they do we are still making a margin of 15-20% after tax, with fares that are 50% lower than Eurowings. If Eurowings want to lower their fares the markets will grow even faster. In our experience thus far at the new German bases in Nuremberg, in Hamburg, in Stuttgart, and Cologne, is that we have high load factors — over 90% — very happy customers, and very happy airport partners who are seeing a return to significant growth after two to three years of airberlin cutbacks and Lufthansa restructuring,” he said.
In fact, O’Leary hopes to build partnerships in Europe which might, he suggests, eventually help flagship airlines better manage their operations and return to healthy profits.
O’Leary also confirmed that talks are ongoing with Bjørn Kjos, CEO of Norwegian Air Shuttle, about a possible partnership between the two which could extend Ryanair’s reach over the Atlantic, and help feed more short-haul customers’ to Norwegian’s network.
“They’re one of the candidates we have for somehow feeding a long-haul airline. We’re in talks about feeding into their long-haul operations at airports like Gatwick and in Barcelona as well. Now the talks have not been successfully completed yet, but we’re still working them,” he said. “I think it’s inevitable as we go forward the next five years, increasingly more and more of the low-fare airlines will be feeding into long-haul carriers. The example I use is will Vueling be feeding into BA at Gatwick, yeah, or at Heathrow, quite probably. Where easyJet and Ryanair could be feeding to Air France or Lufthansa somewhere in Germany or in France, and it’s quite likely.”
Despite O’Leary’s optimistic take, we questioned the likelihood given the sometimes antagonistic relationship between European low-cost carriers and European flagships and the ‘bad blood’ between them.
“I don’t think there is anymore. Yes there’s things that we disagree on but fundamentally if you look at the three big legacy carriers in Europe — BA, Air France, Lufthansa — they’ve all begun to realise that the old model, you know: ‘We make money on long-haul, we lose money on short-haul, but short-haul feeds long-haul,’ is now under threat.”
“Because now they’re increasingly facing competition and threats to the long-haul market from the Gulf carriers. They can now no longer support loss-making short-haul feeder services. So they’re looking around for new ways of lowering the cost of feeder services and the obvious way to do that is to take some feed from low-cost carriers at their hub airports,” he said.
“It’s an inevitable development because those legacies cannot continue to lose money at the scale or rate they do on their short-haul flights,” O’Leary added.
We again challenged O’Leary on the likelihood of such feeder partnerships, given the existing antagonism between labor and managment at flagship carriers. When those flagships launched their own low-cost operators, including Transavia with Air France KLM and Germanwings/Eurowings with Lufhtansa, it has lead to repeated disruptive strikes.
O’Leary replied that those labor challenges should encourage, not discourage, European flagships to consider partnering with independent European low-cost carriers as feeders, and he gave us an unexpected example to prove it.
O’Leary and Willie Walsh, CEO of IAG, formerly CEO of Aer Lingus have maintained an antagonistic relationship in the past. Both have a reputation as sharp thinking tough negotiators with biting wit. But O’Leary gave Walsh full credit for proving that low-cost carriers feeder partnerships are the best way to accomplish labor reform.
“That’s the way they get to transform those businesses. The only one who successfully delivered labor reform is Willy in IAG because he said, ‘look,’ to the unions Iberia and Iberia Express, ‘if you don’t like this I’ll do it with Vueling.’ The problem for Air France and Lufthansa is that they don’t have that kind of credible threat, because they need the unions permission to develop either Transavia or Eurowings. But what they should do is say, ‘look, if you don’t agree to these reforms, we’re going to give the following twenty routes to Ryanair or to easyJet. Take it or leave it.'”
“The problem is that, if they’re trying to always reform by agreement with unions, who will not concede reform, they don’t have a stick. The stick is either give me the reform, or I’ll do it with Wizz or Norwegian or with Ryanair or with easyJet. It doesn’t matter who it’s going to be. Not all of their short-haul business, but just start with the first twenty routes. Once you start with the first 20 routes, the unions get the message fairly quickly. And that’s why they’re failing to deliver on their reform agenda, whereas Willy is just driving it through.”