Ryanair needs transatlantic option as it chases growth

Central to its ambitions will be the ability to buy the right planes at the right price

St Patrick’s Day in New York. Ryanair aims to be flying to the city in four or five years time.

St Patrick’s Day in New York. Ryanair aims to be flying to the city in four or five years time.

 

Ryanair boss Michael O’Leary has suggested more than once that the airline might expand into a transatlantic service. In the last few months the hints have grown stronger and now the formal approval of the airline’s board for this strategy moves it to a different level. However there are still major questions about how the whole enterprise would be structured, given the significant level of investment and risk involved.

The board approval presumably means that this is now something which Ryanair will actively plan to do, even if its execution will be reliant on it being happy that the whole thing can stack up financially. Buying the right planes at the right price will be central to this. This would require the raising of significant capital – one question is whether this would be done directly via the existing company, or whether a new company might be formed for the trans-Atlantic venture.

In part, this move is a reflection of the airline’s size. It has now grown to 82 million passengers. It will seek to drive further growth around Europe and has said it hopes for 50 per cent passenger growth by 2019, ordering 380 new Boeing planes to service this. Recent changes have been clearly aimed at increasing business traffic.

However in the medium term, the bigger it gets, the harder it is to achieve significant annual increases in business levels. So transatlantic offers a new source of growth beyond the next five years. But it also requires massive investment. Even for a bulk order, each trans-Atlantic jet would be likely to cost over $100 million.

Ryanair’s existing size gives it a chance of making the whole thing viable. Its large passenger base and presence in the market gives it potential customers in a lot of places across Europe, while its existing network can feed passengers in to a few bases, from which transatlantic flights would depart. That said, this would be a change from its existing point to point business model.

The initial indications are that Ryanair would operate from 12-14 European cities – probably including Dublin, as well as Stansted in London and airports in Germany, Spain and Italy, servicing roughly the same number of US destinations. It would

This would put it in direct competition with the big players, such as British Airways, American Airlines, Delta and Lufthansa, who dominate the transatlantic market via three major alliances groupings and make healthy profits out of it. A key motivation for the IAG bid for Aer Lingus is to increase transatlantic traffic via Dublin, also using its alliance link with American Airlines.

Interestingly, Ryanair is suggesting that the service would be marketed under a different brand, though customers would be clear that it was a “Ryanair” product. Presumably this is designed in part to allow the sale of higher priced premium tickets and to differentiate passengers in a way which it does not do on its European network. The initial headlines talk is of one-way flights costing as little as £10, but in reality the average price will be much higher. It could also suggest that Ryanair might not necessarily undertake the venture on its own existing balance sheet – an option would be to establish a separate vehicle with clear Ryanair backing which could give the existing investors some of the upside but not all of the risk.

The crunch will be its ability to get hold of aircraft at the right price. A key part of Ryanair’s success has been its use of Boeing 737 aircraft, but flying transatlantic requires larger aircraft, such as the Boeing Dreamliner or the Airbus A-350. It is unclear how quickly Ryanair might be able to get hold of enough aircraft – probably at least 20-30 initially – but it is hard to see the service operating before 2019-20, at the earliest. The major airline manufacturers have heavy order books, so Ryanair might be hoping to benefit from some cancellations.

The economics of it all would depend crucially on passengers volumes, as lower price tickets would offer a smaller average margin. This is why Ryanair plans to start the service on a large scale, rather than the more gradual approach being undertaken now by Norwegian Air Shuttle, which started flying transatlantic from Oslo and has now opened up routes from London Gatwick to New York, Florida and Los Angeles.

First, however, Ryanair has to find the appropriate aircraft fleet and find a way to finance and structure the whole thing. Only then will we find out exactly when this may all start.