Strategic Shifts - Monday, February 4, 2008 23:40 - Comments

Ryanair/Easyjet: bad DNA/good DNA

From the FT today:

Ryanair profit warning sends shares tumbling

Ryanair, the leading European low cost airline, warned on Monday there was a “significant chance” its profits would decline next year and could fall by as much as 50 per cent under the impact of rising oil prices and falling fare levels.

The Ryanair share price fell by 12 per cent to €3.18 in early trading. Rival EasyJet fell 27½p or nearly 6 per cent to 439¼p.

The decline in Ryanair profit can be traced back directly to Ryanair’s DNA—to use Umair Haque’s phrase.

Ryanair is notorious for charging its customers excessive amounts for anything but the fare. Its handling of incidents has also been disastrous, leaving passengers stranded and without assistance at all. Lastly, a glance at pilots and crews bulletin boards (PPrUne for example) confirms the media reports of a rigid and brutal personnel management.

Easyjet for its part started with the same pricing strategy: selecting additional items (such as travel insurance) by default, charging excessive amounts every possible time, etc. Personnel management wasn’t as bad as Ryanair’s one, but clearly the investment wasn’t significant.

In the then less competitive of 2001-2003, Ryanair continued to grew quickly, by slashing prices and reinforcing its grip on costs. Easyjet for its part was promising but fell short of implementation. It competes too closely with Ryanair without succeeding at keeping its costs as low. The 2001-2003 stock prices are graphed below: Easyjet wasn’t successful because of its DNA. To succeed in Ryanair’s business model, your DNA has too be the one of a ruthless company, competing virtually only on costs and routes, but sacrificing its culture and its relationships with customers.

So Easyjet chose, smartly, to compete in an entirely new space: middle-cost, without superfluous service, focused on increasing the value it provides to its customers without additional costs. And then, Easyjet’s DNA was in full motion. Consider now the travel experience with Easyjet:

• When booking online, they don’t try to sell you travel insurance. Ryanair adds a very expensive one.
• They do make sure you buy luggage fees (GBP 3.99 per flight for a 20 kilos bag) online and don’t try to charge you an increased fee for paying at the airport. Ryanair charges GBP 18.50 for a 15 kilos bag and try to charge it at the airport (for GBP 30 of course).
• Ryanair of course charges for a long list of items, including GBP 3 when you check in at the airport. Most people discovers these fees at the airport of course.

So Easyjet compares well to Ryanair in terms of fees ? Not only, they innovate as well by building strong relationships with their customers. Here’s some extracts from their “Why fly Easyjet” section:

• No worries if you miss your flight We understand how frustrating it is to miss a flight. That’s why you can catch the next available flight for a flat charge of just £35 if you turn up at the airport within two hours of your original flight’s scheduled departure time.
• Arrived at the airport early? No problem! Your time is important to you, so if you get to the airport early you can hop onto an earlier flight home free of charge – provided we’ve got a seat available. What’s more: if your outbound flight was from London you can now fly home to any of our London airports (Gatwick, Luton, or Stansted) for extreme flexibility if you travel on public transport!

Amazing how powerful DNA is.