Case Study 3

IMD906 v. 23.10.2017

RYANAIR STRATEGIC POSITIONING (B): ALWAYS GETTING BETTER

Professor Seán Meehan prepared this case as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation. Some data are disguised.

We should try and eliminate things that unnecessarily piss people off.

Michael O’Leary, CEO Ryanair

Ryanair’s 2013 Annual General Meeting (AGM) took place in the context of record results and controversy. Clear but restrictive terms and conditions rigorously implemented was a trade-off understood and accepted by the majority of a public in search of the lowest fares. But Ryanair had a reputation for being “rough around the edges,” with detractors being highly vocal and widely reported. A high-profile tragedy the day before the AGM, however, inflamed shareholders. A passenger returning to the scene where his family had been murdered had to pay €188 to change his flight. Although Ryanair would, as it had done on many occasions, refund the fare, the check-in staff on the day were powerless to do so. At the meeting, shareholders accused O’Leary of being a bully and questioned whether the airline’s macho culture and strict service policies were deterring customers.

O’Leary’s uncharacteristically humble response took shareholders, analysts and journalists by surprise. He took personal responsibility for the “macho and overly abrupt culture.” He vowed to address customer- unfriendly policies and procedures and pledged improvements that would be evident shortly.

Observers wondered whether O’Leary was sincere and Ryanair really intended, after more than 20 years of rapid growth, to dramatically alter its approach, or whether this was just another one of his famous PR stunts. And, looking further forward, they asked what kind of strategy would prevail in the context of massive technological change, increasingly demanding and vocal connected consumers, and a competitive environment that was adapting to growth opportunities amid economic and regulatory volatility.

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Following Through

In early October 2013 O’Leary posted a request for feedback on Ryanair’s website:

…. we want to keep improving our services, which is where you can help me. Please send me your suggestions as to how Ryanair can further improve our industry leading customer service.

Customers’ responses confirmed management’s understanding of what needed to be changed. Ryanair embraced “quick wins,” and by the time it announced its half-year results in November 2013, it had already introduced a series of customer service initiatives, including scrapping the “Recaptcha” security feature, allowing a small second carry-on bag, introducing “quiet flights” before 8am and after 9pm, permitting passengers to correct minor booking errors within 24 hours at no cost, and significantly reducing the fees for boarding card reissues and standard hold luggage.

O’Leary realized he would need to bring on board an experienced chief marketing officer (CMO). He tapped tech-savvy Kenny Jacobs to drive sales and further service improvements, develop Ryanair’s digital go-to-market capabilities and enhance its brand. Jacobs’s experience as CMO of Moneysupermarket.com and brand director of Tesco UK made him the ideal candidate. During the interview process, Jacobs was persuaded of O’Leary’s commitment to deliver a much improved customer experience. He believed O’Leary’s decisiveness and willingness to experiment would be assets on the change journey. He also liked the informal culture, the tightness of the management team and their evident love of their industry as well as the impact they were making. He formed an immediate rapport with O’Leary and was convinced they could work together. Joining a motivated, well-resourced, winning team committed to change was an opportunity Jacobs could not resist. Like so much at Ryanair, the CMO search process was fast. Jacobs joined in January 2014.

Throughout 2014 the improvements came thick and fast: A simpler website homepage; an improved booking path that reduced (from 17 to 5) the clicks required to make a booking; a new “My Ryanair” member service that allowed customers to register their name, address and credit card details just once; boarding passes on mobiles; a “Share the Fare” option; a “Fare Finder” feature that enabled customers to find the dates and flights on which the lowest fares were available; a new mobile app for smartphones and tablets; and new bespoke language websites in all of Ryanair’s major EU markets, starting with Spain and Italy.

Of the early moves, perhaps most surprising was the introduction on February 1 of the option of selecting a seat. Passengers could, for a fee, reserve seats for which there was normally greater demand, such as the front row or over-wing seats, making the boarding process smoother and enabling families or other groups to sit together. Many observers saw unallocated seating as central to Ryanair’s operating model (facilitating speedy aircraft turnaround) and thought it would never be changed. However, O’Leary prioritized allocated seating because it was the source of frequent and passionately expressed customer complaints.

Always Getting Better

Throughout Jacobs’s short courtship with Ryanair, he played with ideas about how to address the crucial challenge: moving Ryanair’s image from villain to good guy. He was inspired by Aldi’s success in overcoming a similar repositioning challenge in the United Kingdom without ever losing or changing its clear point of difference and the root of its commercial success – being price leader. In a few short years Aldi went from being a brand that shoppers denied

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using to being the United Kingdom’s most-loved brand. Already through December 2013, Jacobs had developed the bones of what would become Ryanair’s new marketing strategy. On a flight to Dublin to meet his future colleagues, he prepared to convey to them how he saw the new Ryanair, engage them, and obtain their input. He believed most customers appreciated Ryanair for providing the lowest fares and bringing a range of European destinations within their reach. Yet, Ryanair had not earned their affection. It needed to become more likable as well as even more useful (refer to Figure 1 – Ryanair Positioning). To achieve this, he believed Ryanair should aim to be more like Aldi, which was known for its package of price, cost and quality, and also like Amazon, which was known for its simplicity, digital leadership and utilization of data to help its customers. Finally, it had to acknowledge that it may not get everything right first time but that it would continue to experiment and learn. He emphasized the need to maintain a fast pace in execution (refer to Fig. 2 – Ryanair Marketing Strategy).

Fig. 1 Ryanair positioning Fig. 2 Ryanair marketing strategy

The ideas resonated and the team brainstormed what, in concrete terms, the airline would need to do to achieve this aspiration. Before taking a few days off for Christmas, Jacobs synthesized all the ideas into the first draft of a change program he dubbed “Always Getting Better” (AGB), echoing the mantra that had driven Tesco’s success for many years, “Every Little Helps” (refer to Exhibit 1 – Always Getting Better). The program would comprise five pillars:

• Fix the things customers did not like

• Improve the travel experience

• Improve the digital experience

• Develop the offer

• Improve the brand and marketing.

The change program was fully developed in January and announced to the media in March. In opening the media launch event, O’Leary was at pains to point out that although the changes being announced were significant, it was equally significant that what made Ryanair successful would not change:

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….we will continue to offer the lowest fares, have the lowest costs, and cover more routes, more destinations and more bases than any other airline. Passengers can continue to expect that we will have an on-time flight, we won’t lose their bag and we won’t cancel their flight. We will continue to build and extend an outstanding 29 years industry leading safety record. … We want to build on all that and see the customer service proposition evolve by listening to our customers and changing some of the policies which I held dear over many years because that’s what our customers want us to do.

As he explained why Ryanair was launching AGB, O’Leary pointed out that the lowest-fare approach – “get in there first, pile it high, sell it cheap” – had worked like a dream for 25 years. But its success also explained industry developments that now required Ryanair to evolve the model further. Ryanair was committed to growth and had secured the fleet it required to achieve this. Low fares were forcing flag carrier retrenchment. Primary airports could no longer rely on the expansion of flag carriers to provide growth and were therefore open to negotiating deals that made them feasible destinations within the Ryanair operating model. For example, he announced that Ryanair would open new bases during the summer of 2014 at the primary airports of Athens, Lisbon, Rome Fiumicino and Brussels Zaventem. He foresaw many similar opportunities. In turn, this would allow the company to address segments that it had previously dismissed – business passengers, high frequency passengers, people who travel early morning or late evening, and people who travel in winter rather than summer. However, Ryanair would only be able to attract those passengers if it made significant service improvements.

As Jacobs introduced the plan, he described Ryanair’s brand ambition: To be famous for the lowest fares, great service, the best routes and great customer experience. This would be built on a solid foundation of operational efficiency at the lowest cost to enable the lowest fares. His point was that AGB was an evolution. Although Ryanair would continue to focus on offering the lowest fares, it now also sought to become as liked as it was useful. Its new strap- line would be “Low Fares. Made Simple.” Stressing that this was a very achievable ambition, he pointed to the likes of Aldi, H&M and Ikea, which were now all as liked as they were useful after their transformations. As he detailed AGB’s five-point plan (refer to Exhibit 2 – details of AGB rollout), he made a strong statement of intent:

We are and will always be a challenger brand, but going forward we will have a broader and more flexible brand conversation in the various markets that we operate in. Lowest fares will always be the center of gravity at Ryanair because that’s what’s made Ryanair absolutely great. Great service is something we are going to be improving and on top of that we’ll be harnessing the power of data, digital, customer relationship management and brand – that’s what’s going to make Ryanair amazing going forward.

Jacobs also showcased Ryanair’s first television advertising campaign1 (refer to Exhibit 3 – Ryanair television advertising aired in 2014) and its new website (refer to Exhibit 4 – Ryanair website evolution 1999–2014) and mobile app, all of which were evidence that the airline had truly upped its digital game. Jacobs explained that the guiding principles for its digital development were that irrespective of platform (desktop, laptop, tablet or mobile), the customer journey would be very intuitive and straightforward, the content would always be relevant and highly personalized, and all digital communications would be integrated. The

1 Ryanair had run television advertisements in 1985. From O’Leary’s reboot until 2013, its only paid advertising was in-house developed press adverts that focused on the airline’s competitive pricing. Television advertising had, until now, no place in Ryanair’s low cost model.

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team demonstrated live how the new mobile app enabled customers to book a Ryanair flight in less than a minute. This was a foretaste of a significant investment.

In early July 2014, the company announced it would establish Ryanair Labs under the auspices of AGB. A 200-person team of programmers, digital marketing experts, mobile developers, and web analytics specialists among others would “change the world of online travel.” A new chief technology officer was appointed to lead the team and cultivate a start-up culture.

Other AGB deliverables that year were a US website, a new customer charter, reductions in fees for hold luggage and sports equipment, new aircraft interiors, new crew uniforms, healthy inflight menus and the elimination of Ryanair’s infamous “on time” bugle. In year three of AGB, fares were lowered further and the airline’s digital platform was enhanced with the launch of Leisure Plus and Business Plus products, travel extras and a “one flick” payment feature in the app, an improved “My Ryanair” customer profile and a “Rate My Flight” feature. These enhancements were intended to make it easier for customers to find Ryanair’s low fares and obtain discounted ancillary services including hotels, car hire, reserved seating, airport security fast track and airport parking and transfers.

Ryanair Performance

Three years after launching AGB, Ryanair was transformed in terms of not only its marketing, customer service and digital capabilities but also its results.

By the end of 2016 Ryanair.com had become the world’s most visited airline website, with almost all (93%) of traffic coming directly. Its app had 15 million users and this number was growing rapidly (refer to Exhibit 5 – Ryanair Labs impact on acquisition, conversion and retention). Also, 65% of app customers made three or more trips a year (compared with 35% of all customers registering that frequency). My Ryanair had become a major marketing asset that allowed the airline to gather customer information and extract insights, which it could use to market more personalized and relevant offers. This, in turn, drove ancillary revenue growth. Smarter use of unique customer identification enabled it to eliminate spamming and instead deliver only highly targeted e-mails, earning it a “read-rate” of some 29%, which was well ahead of the travel industry standard of 15%. Business customers had been so responsive to personalized marketing that they now represented 24% of all customers. Website enhancements drove double-digit increases in the conversion rate (the percentage of website visitors making a booking). The year 2016 saw the proportion of customers visiting the website using mobile devices overtaking the proportion that did so from a desktop computer. The digital push had driven down customer acquisition costs significantly to €0.16 (compared to easyJet’s £0.91). Ryanair viewed its digital success as the start of a new phase, one that would see the company become the “Amazon of Travel” in Europe. O’Leary commented:

In time, we expect Ryanair.com will develop from being Europe’s largest travel website to being its leading digital platform for all products and services relating to travel and tourism.

With the operational model continuing to deliver profitable growth, Ryanair seemed well able to fund any revised ambition. Operating profit for the most recent financial year ending March 2016 was €1.4 billion on total revenue of €6.5 billion. This included ancillary revenue of over €1.5 billion (refer to Exhibit 6 – summary financial statements). In addition to ancillary revenue growth, the record load factor of 95% was a key element in driving profitable growth (refer to Exhibit 7 – load factor 2012–2016). The other critical element driving performance was the ability to continue to offer the lowest fares while driving down unit costs at a time

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when its competitors were seeing their unit costs rise (refer to Exhibits 8 and 9 – Ryanair fares compared with main competitors and Ryanair costs per passenger (ex. fuel) compared with main competitors). Ryanair’s performance was reflected in its share price (refer to Exhibit 10 – easyJet and Ryanair share price progression July 2013 to February 2017). Ryanair, with 383 aircraft in service, was flying an estimated 119 million passengers annually to over 200 airports in 33 countries from 85 bases. In terms of size of operations, this placed it even further ahead of rival easyJet in terms of passengers (refer to Exhibit 11 – Ryanair and easyJet passenger numbers, year ending September 30) and earned it a 15% share of total European short-haul traffic (refer to Exhibit 12 – Ryanair competitive position in main European markets). Since the launch of the customer service initiatives in late 2013, Ryanair’s market capitalization had doubled to reach almost €18 billion. As O’Leary reflected on the success that came from implementing AGB, he was prompted to remark:

If I’d known it would work so well, I’d have done it years ago.

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Exhibit 1 Always Getting Better

Source: Company documents

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Exhibit 2 Always Getting Better Rollout

Transcript of AGB Media Launch, March 2014

Fix the things Improve the Improve the Develop the Improve brand customers don’t travel digital Ryanair offer and marketing like experience experience Website – 17 to 5 Quiet flights My Ryanair – GDS distribution Owned, earned clicks to make a morning and register to make (March) and paid media booking (Nov) evening (Dec) future bookings work together

easier (Dec) 24 hour grace Free 2nd cabin Google flight Family product Develop one period to change a bag (Jan) search (Jan) (April) brand across booking (Nov) Europe Remove Allocated New improved Business product More consistent RECAPTCHA seating (Feb) website (April) (May) branding (Nov) Reduce boarding Portable Mobile boarding New routes, new A more local card fees (Dec) electronic device pass (May) bases brand (30

(Feb) markets) Cut baggage fees New app (June) Primary and Brand and trade (Jan) secondary airport marketing

growth 175 new aircraft Work with the

best agencies

Source: Company information

Exhibit 3 Ryanair TV Advertisements Aired in April 2014

Source: Ryanair YouTube website (https://www.youtube.com/watch?v=0vY0 HwFAu0A)

Source: Ryanair YouTube website (https://www.youtube.com/watch?v=v8 UNoc__v1M)

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Exhibit 4 Ryanair Website Evolution 1999–2014

Exhibit 5 Ryanair Labs Impact on Acquisition, Conversion and Retention

Source: Company presentation of FY 2017 H1 results to investors – November 2016

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Exhibit 6 Summary Financial Statements

Ryanair Consolidated Income Statement Y/e 31 March 2016

Year Ended Year Ended Mar 31, 2016 Mar 31, 2015

€M €M Scheduled revenues 4,967.2 4,260.5 Ancillary revenues 1568.6 1,393.7

Total operating revenues – continuing operations 6,535.8 5,654.0 Staff costs 585.4 502.9 Depreciation 427.3 377.7 Fuel and oil 2,071.4 1,992.1 Maintenance, materials and repairs 130.3 233.9 Aircraft rentals 115.1 109.4 Route charges 622.9 547.4 Airport and handling charges 830.6 712.8 Marketing, distribution & other 130.3 233.9

Total operating expenses 5,075.1 4,611.1 Operating profit – continuing operations 1,460.1 1,042.9

Other income / (expense) 261.8 (60.5) Tax on profit on ordinary activities (162.8) (115.7)

Profit for the period – 1,559.1 866.7 all attributable to equity holders of parent

Balance Sheet Data Y/e 31 March 2016

Year Ended Year Ended Mar 31, 2016 Mar 31, 2015

€M €M Non-current assets 6,396.8 6,443.4 Current assets 4,821.5 5,742.0

Total assets 11,218.3 12,185.4 Current liabilities 3,369.5 3,346.0 Non-current liabilities 4,252.0 4,804.3 Shareholder equity 3,596.8 4,035.1

Total liabilities and shareholder equity 11,218.3 12,185.4

Source: Company annual reports

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Exhibit 7 Ryanair Load Factor 2012–2016

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2012 71 76 71 81 81 84 88 88 84 82 80 81

2013 71 77 79 81 82 84 88 89 85 83 81 81

2014 71 78 80 84 85 88 91 93 90 89 88 88

2015 83 89 90 94 92 93 95 95 94 94 93 91

2016 88 93 94 93 94 94 96 96 95 95 94 90

Source: Company website

Exhibit 8 Ryanair Fares Compared with Main Competitors

Avg. Fare % > Ryanair

Ryanair €46

Wizz €57 +24%

Norwegian €80 +74%

easyJet €91 +98%

Air Berlin €123 +167%

Lufthansa €226 +391%

IAG €230 +400%

AF-KLM €249 +441%

Source: Ryanair Investor Presentation, FY 2017 Q3 results, February 2017

Exhibit 9 Ryanair Unit Costs per Passenger (Ex. Fuel) Compared with Main Competitors

Ryanair Wizz easyJet Norwegian Air Berlin

Staff €5 €5 €10 €15 €19

Airport & handling €8 €12 €22 €19 €28

Route charges €6 €6 €6 €8 €9

Ownership & maintenance €6 €14 €9 €25 €31

Sales, Marketing & other €3 €3 €8 €6 €29

Total €28 €40 €55 €73 €116

% > Ryanair +43% +96% +161% +314%

Source: Ryanair Investor Presentation FY 2017 Q3 Results, February 2017

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Exhibit 10 easyJet and Ryanair Share Price Progression July 2013 – February 2017

Source: Adapted from company website

Exhibit 11 Ryanair and easyJet Passenger Numbers (Year Ending Sept. 30)

Source: Company websites

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Exhibit 12 Ryanair Competitive Position in Main European Markets

Country European Ryanair No. 1 No. 2 No. 3 departure market capacity share (millions)

UK 134 18% easyJet Ryanair BA

Germany 125 7% Lufthansa Air Berlin Ryanair

Spain 122 18% Ryanair Vueling Iberia

CEE 93 15% Ryanair Wizz Aegean

Italy 91 27% Ryanair Alitalia easyJet

Greece 27 16% Aegean Ryanair easyJet

Portugal 25 19% TAP LOT Wizz

Poland 19 29% Ryanair LOT Wizz

Ireland 18 50% Ryanair Aer Lingus BA

Belgium 17 29% Ryanair Brussels Jetairfly

Source: Ryanair Investor Presentation February 2017

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