Wal-Mart With Wings

Unlike other discount carriers, Ryanair has stayed profitable by charging for every little bit of service
by Kerry Capell

Ryanair Holdings PLC (RYAAY) CEO Michael O'Leary makes no apologies for his penny-pinching. Want to check luggage? You'll pay up to $9.50 per bag for the privilege. Free drinks and snacks? Forget about it. Even a bottle of water will set you back $3.40. It's not just passengers who have to cough it up. Flight crew buy their own uniforms, and staff at Ryanair's spartan Dublin Airport headquarters must supply their own pens. After a customer sued Ryanair for charging $34 for the use of a wheelchair, the company added a 63 cents "wheelchair levy" to every ticket. Says O'Leary: "You want luxury? Go somewhere else."

Southwest Airlines Co. (LUV) inspired O'Leary to bring the first discount carrier to Europe. Now as the best U.S. discounters have fallen on hard times, it's Ryanair that is emerging as the model for how to run a low-cost airline. Southwest, JetBlue Airways (JBLU), AirTran Airways (AAI), and others have seen fuel and expansion costs take a big bite out of profits. At the same time, the majors, after years of struggling, have finally gotten their costs under better control and are often matching or beating the discounters on price.

To compete, U.S. low-fare carriers have taken the opposite approach of Ryanair, adding perks such as leather seats, live television, and business class. "All the low-cost carriers' costs have gotten a little out of control," says Tim Sieber, general manager of The Boyd Group Inc., an Evergreen (Colo.) aviation consultant.

CELL-PHONE MODEL

Not so at Ryanair. The short-haul carrier is making fistfuls of money, even as it slashes fares. Despite a 42% hike in fuel prices, Ryanair's profits for the six months ended Sept. 30 soared 39%, to $422 million, on sales of $1.6 billion.

O'Leary's secret? He thinks like a retailer and charges for absolutely every little thing, except the seat itself. Imagine the seat as akin to a cell phone: It comes free, or nearly free, but its owner winds up spending on all sorts of services. Last year, Ryanair gave away 25% of its seats, a figure O'Leary thinks he can double within five years. In the not-too-distant future, he wants all seats to go for free.

What O'Leary loses in seat revenue, he figures he'll more than make up by turning both his planes and the Ryanair Web site into stores brimming with irresistible goodies, even as he charges for such "perks" as priority boarding and assigned seating.

Outrageous? You bet, but the strategy is working. Although its average fare is $53, compared with $92 for Southwest, Ryanair's net margins are, at 18%, more than double the 7% achieved by Southwest. "Ryanair is Wal-Mart (WMT) with wings," says Nick van den Brul, an aviation analyst at Exane BNP Paribas in London.

O'Leary has plenty of clever new ways to make money. He has turned his planes into giant billboards, displaying ads for such companies as Vodafone Group (VOD), Jaguar, and Hertz. Soon, ads will also stare each passenger in the eye when their seat back trays are up. Once in the air, flight attendants hawk everything from scratch-card games to perfume and digital cameras. Upon arrival at some out-of-the-way airport (you may think you're landing in Paris, but it is actually Beauvais, 43 miles north of the City of Light), Ryanair will sell you a bus or train ticket into town.

Ryanair uses its Web site, with 15 million unique visitors each month, to boost ancillary revenues. The company gets commissions from sales of Hertz rental cars, hotel rooms, ski packages, and travel insurance. For the year ended Mar.

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Capell is a senior writer in BusinessWeek's London bureau
With Dean Foust in Atlanta