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Ryanair's profit dip proves cheap-and-not-cheerful business model couldn't last

22nd May 2014
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Ryanair recently announced its first annual profit dip for five years, with a decline in post-tax profits of €46m, down 8% from €569m in 2013 to €523m in 2014.

Much has been made of the airline’s increased marketing spend and new customer experience focus, with its inscrutable CEO, Michael O’Leary, confirming that the dip was “disappointing”, but that, “marketing and advertising spend rises to approximately €35m, up from just €10m last year”, and that the company was in the process of trying to transform its previous price-at-all-costs image and become more customer-orientated.

And while these attempts to reform could be called a brave move by some, Shaun Smith, founder and author of Smith+Co Consultancy believes that it is merely a reaction to a deterioration that he predicted would hit in 2010, and a marketplace that could no longer tolerate the airline’s previous business model: 

“One of the reasons Ryanair did so well through the recession was because they were cheap as chips and you knew exactly what they stood for: absolute low-price over everything else. However, their model of growing and expanding through a lot of the secondary airports has got to the point where, they’ve almost reached saturation.

“What they now need to do to carry on growing is have a broader franchise of customers, however those types of customer want a better quality of service and a better experience. So they’ve reached a brick wall and are trying to change to accommodate. For me, this says more about Ryanair’s desperation than it does about customer experience.”

The Dublin-based airline announced Kenny Jacobs as their CMO at the start of the year, as the initial stages of its new focus were put in place. Since then, the company’s website has received an overhaul, reducing friction with the amount of clicks to make a booking down from 17 to five, and they have also released details of a TV campaign that confronts the brand's image head-on, as well as running regular social media Q+As to give a more transparent feel to the brand; albeit with mixed response.

On this, Shaun Smith suspects it may be a case of too little, too late for the airline: “Yes, they have a focus on social media, and a new transparency and quicker customer service response and that sort of thing, and over time it might make a difference but they’ve got a lot of movement to make to shift the perception that all they care about is profit.  

“They obviously saw a decline in business and recognised that they’re a brand that people don’t like or have affection for, and as a result they’ve been forced into trying to almost follow Easyjet through offering more flexibility, advanced seat reservations and that sort of thing. The problem is, because people have such low affection, I’m not sure they will be fooled by this. They’re essentially playing catch up, and given the choice, people will favour Easyjet, I imagine.”

One of the major issues for Ryanair now appears to be how it can set about completely changing its company culture from being focused on price to being focused on customer wellbeing. Smith suggests that the airline may need to start spending cash across all departments, not just marketing, if it wants to achieve this goal, long-term:

“This isn’t the kind of change that can be resolved with advertising cash, it’s something that spreads across customer service, operations, training; everything. The previous price ethos is ingrained in Ryanair.   

“The thing that’s interesting is that you can be low-cost, and still have a plan for looking after customers. You only have to look at Southwest in the US or AirAsia as examples. People have huge enthusiasm for these brands. I don’t think it’s necessary to be budget and miserable. What Ryanair and Michael O’Leary have done is basically court controversy and make it as miserable as possible, in order to get a lot of media attention. It’s worked, because they’ve spent virtually nothing on marketing in the past and they’ve had an awful lot of media attention, and a lot of the things they’ve done have really dramatised their low-price positioning, so it’s absolutely clear what they stand for.

“In a sense their success has sown the seeds of their downfall. People are happy with cheap and cheerful but miserable can only last so long. If you contrast them with Premier Inn, in the hospitality sector, for instance, that’s a brand that’s super-cheap but also creates a good experience for customers. It’s about attracting people on a budget but giving them a great stay, and they’ve done that very effectively. The brand stands for something other than profit, whereas with Ryanair, people don’t believe that the brand is anything other than making money for Michael O’Leary. It will be interesting to see whether they can ever stand for something other than that, in the eyes of the customer.”

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