What Can We Learn From Ryanair’s Change Of Heart?

Maz, I think Ryanair’s heart is exactly the same, focused on making as much money as possible.

As you say yourself, it is financial fortunes and not customer needs that are driving some changes. I’m skeptical that, with the same CEO at the helm, Ryanair management will do much more than tinker around the edges of their business model that treats customers as a source of revenue, and nothing more.

My view is that real change will result when the Ryanair board fires O’Leary for poor performance. And the board will do it without any change in heart, either. The reason will be a change in financial fortunes, not any real concern about customers.

Hello Bob,

I find myself to be in perfect agreement with you when you say that Ryanair’s heart is exactly the same: focused on making as money as possible.

Ryanair’s management is doing what it is doing because its growth and profit making strategy shows the first signs of coming off the rails. Its main competitor, Easyjest, has acquired a reputation of being ‘nice’ towards its customers whilst still operating a no frills airline model.

As for your cure, a change of CEO and management team, I am less convinced. It occurs to me that there is a certain logic to a situation which dictates itself. The logic of the financial markets is beating the financial expectations: revenues, profits, earnings, share price. The logic of the top management team is to make investment decisions which deliver the highest ROI for the management team: underinvest, sweat the assets, come up with marketing gimmicks, increase revenues….. walk away with a pot of gold. Strike a great deal for the next role. Repeat. Then wait for your replacement to pay the price of your actions.

When I notice organisations which show up for me as organised to really serve customers, I notice people like Bezos. Even recently, Bezos and Amazon got hammered for not generating revenues – for putting the long term (and the customer) ahead of the quarterly profits. I also notice that Bezos has struck to his strategy and how long has he been leading the company?

All the best to you Bob, I hope all is great.

Maz

The airline industry has quite a different set of dynamics than e-commerce, and yet there is a Bezos-style leader that has succeeded in a industry that has more CEOs like O’Leary.

That person is Kellerher, whose leadership set Southwest Airlines on a course to 4 decades of profitable growth. Now that Kellerher has retired, the culture has continued because it was so engrained in the operation. People are hired, trained and rewarded for focusing on friendly customer service.

Getting back to Ryanair, my point is that to change the “heart” of the company, one has to change to leader. But given how engrained the money-first culture is at Ryanair, it will take a special leader who can lead the organization to develop new habits, and some patience from the board in making that change.

I, too, am skeptical that Ryanair can do this, but my point remains that the only chance it has is to replace the leader with someone with a different idealogy.

I don’t agree that the same marketplace system (the airline industry) inevitably leads to the same management system (approach to making money from that market). Clearly Kellerer has proven that isn’t true in airlines.

Ryanair and Southwest are great examples that two very different approaches can both make money. Southwest has proven the customer-friendly model can work over a long period, whereas Ryanair’s approach is showing signs of weakness. I speculated in my article about Ryanair:

But if a Southwest-style airline were to offer Ryanair some real competition on price, and also friendly service, the customers that Ryanair thinks are loyal will defect.

Perhaps that competitor will be Easyjet.

Hello Bob,

It occurs to me that in the life of man, as it is today, only one event is inevitable: death. Which means that in the arena of life man finds himself in certain set of circumstances – the givens. And given these givens, man is confronted with his freedom, with his responsibility. Specifically, to choose what course of action he will take …

Getting back to the business world, this means that if you are the CEO of a publicly listed company the circumstances are the circumstances and the rules of the game are the rules of the game. And given these circumstances and rules, you the CEO, are free to choose to play by the rules or not. Almost all CEOs play by the rules especially the CEOs are professional managers. And especially if these professional manager CEOs have a lot to lose and little to gain from going against the rules of the game.

Then there are people like Jeff Bezos, Herk Kellerher, Tony Hsieh, John Timpson, Richard Branson, Steve Jobs. They are the exceptions. They are playing a different game and they show up as owners of the companies they lead rather than just professional managers who have parachuted into the CEO role. Interestingly, they often are also the people who literally own the company or are the majority shareholders.

Maz

Agreed, “man” and “world” shape each other. Also agree that the industry leaders that you listed (Bezos et al) are currently exceptions.

I sense a note of resignation in your posts of late. As though it’s inevitable that the “professional” managers will continue to play by the “rules.” Rules that encourage making money first and customer second.

Rules can and do change. And with them, managers who lack the inspired leadership skills will also change. Slowly but surely managers are learning that customer-centricity is a path to success. I see evidence building all around, in the focus on CX, in the shop owners of businesses where I live, and in the media.

Although, having said all that, I don’t have much hope for O’Leary at Ryanair. On the other hand, maybe he will go through a transformation like Tony Hsieh at Zappos. Did you you know that Hsieh was not always the champion of customer delight, at Zappos or earlier. He changed, and others leaders can, too. Read his book Delivering Happiness: A Path to Profits, Passion, and Purpose. Some key points of his personal journey are discussed here.

So, my friend Maz, please keep the faith! If we are to be leaders, too, it’s important to focus on what does work, share stories, explain winning practices and it will help show managers the way to succeed.

Hi Maz, Bob

I do a lot of restructuring work in the low-cost airline industry in Europe. Ryanair is invariably one of the biggest, meanest and toughest competitors to take into account during any restructuring.

Ryanair is very successful for one core reason; it is ridiculously cheap for customers. Ryanair’s average fare in 2012 was Euro 45, against Euro 71 for Easyjet (which isn’t much nicer to customers) and Euro 250 for Lufthansa, British Airways and Air France (which are). Ryanair’s ultra-low prices have almost single-handedly expanded the market for low-cost air travel within the European market. That serves Ryanair, the airports it flies to and their mutual customers.

The customer may not be king at Ryanair, but he has voted en masse with his feet making Ryanair Europe’s biggest international airline by quite a margin. Why should Ryanair change what is obviously a successful formula? Just so it can paint a faux ‘we’re a customer-oriented airline’ logo on its tail? I don’t think so.

Graham Hill
@grahamhill

Hello Graham

To paraphrase an existentialist insight, ‘the Value Proposition precedes the Customer Experience’. If you do not have a compelling Value Proposition that attracts a segment of the market then any -all investment is stupid.

In my consulting work I always start with the customer segment/s, the Value Proposition and how the company generates revenues. Once those pieces are in place then I can help my clients figure out what types of customer relationships are necessary and what the implications are for the Customer Experience. Put differently, the Customer Experience has to fit into this jigsaw puzzle not descend from heaven through the mouth of some ideologue.

In the case of Ryanair, it is the Value Proposition that speaks compellingly and attracts a specific travel segment: those who value cheap fares above all else and are willing to do what it takes to take advantage of that cheap air fare. I know people who fly (with Ryanair) instead of taking the coach – which is what they used to do before the likes of Ryanair went into business.

Talking about customer voting it occurs to me given the latest profit warning (second profit warning) that less customers are voting with their feet to choose and fly on Ryanair. Which is why Ryanair is doing what it is doing.

To sum up, I say that any degree of ‘customer-centricity’ by any company is always determined by customer behaviour. To the extent that only customers can really ‘force’ companies to treat them (customers) better. In some case, regulators can do the same yet in practice most regulators are neither set-up to do the job nor allowed to get on with the job. One can count on managers to do only that which aligns with their interests. Which is why I say that all this talk about customer focus, customer experience, customer-centricity, customer obsession is mere ideology. It seems like you agree.

I wish you the very best, value your considered views on customer stuff, and look forward to meeting you face-to-face one day.

Maz

Maz,

I agree with much of what you say and share your personal sentiments about Ryanair. Graham is also correct in saying that Ryanair’s strategy has been very successful for them. I guess it comes down to what is a sustainable business model longer term? In a value focused economy the low cost model works well and can expand the market considerably. In a recovering economy where people have a little more to spend, they are more likely to favour those brands with whom they identify and make them feel good. Now of course, one does need not be the enemy of the other – witness Southwest airlines- although it is fairly rare to be able to offer a great customer experience and be a low cost provider because the operating models and cultures are so different. It is for this reason I fear that this avenue will be denied to Ryanair despite O’Leary saying that he wants to stop ‘pissing people off’. He recognises that he needs help to do it which is why Ryanair are appointing a marketing director for the first time. Now that will be a job requiring big balls.

You may find this article of interest.
http://www.smithcoconsultancy.com/blog/the-power-of-social-media?linkColor=green

Shaun Smith

I admire Ryanair for its single-minded focus on cost, which has enabled people to fly that might otherwise have taken a bus. My son is one example, during a trip to Europe last year.

After that experience, he said “never again” because it found out that the cheap flight came with a lot of hidden costs — including landing at airports that were a long way to the city, and required more money than he realized.

The US airlines are playing a similar game. Price tickets to compete on price, but add on fees for bags that used to be free. Passengers have to figure this out for themselves that prices are not “apples to apples” when comparing even two customer-friendly airlines like Virgin America and Southwest (checked bags are included).

So, I find an element of deception in Ryanair’s approach. Fares are ultra low only if you avoid the traps set for unwary customers. And if you complain, you’ll face a “bugger off” attitude from the CEO.

My view is that this approach will eventually fail because customers will learn that the prices really aren’t that low, considering all the “fine print.” And, with even a few more dollars in their pocket, they’ll take another low-cost airline like EasyJet.

What I don’t understand is why O’Leary has taken such an abusive attitude towards customers. Does it really cost more to just be nice? Or is it part of his marketing scheme to get free media coverage?

Hello Bob,

Yes, there is an element of deception in Ryanair’s approach. Yes, there are all kinds of traps set for the unwary customer and this is done on purpose. I have seen the same approach used by other players like car rental and insurance companies. What is happening here? I call it the predator-prey system at play.

Many customers search for products (airfares, cars, insurance…) on price. And they use price comparison engines to do the searching. The predators (the companies selling these products) are forced to advertise low prices to end up at the top of the search results. And thus drive traffic to their websites. When the customer gets there the real game starts: all the gimmicks, special conditions, clauses, extra costs etc. For every adaptation by the prey (customer) you can expect an adaptation by the prey. And so the cycle continues.

Your assertion around customers getting wise may be coming true as Ryanair has issued a second profit alert.

As for Michael O’Leary I suspect 50% is his character and 50% is pure marketing. He refers to his PR stunt around charging customers for using toilets as the ‘gift that keeps giving’.

All the best
Maz

Hello Shaun
First, many thanks for making the time to share your perspective and providing a link to your article. I have just finished reading it. It occurs to me that you and I are in agreement.

To some extent, Ryanair (as a brand) reminds me of BSkyB in its earlier days. BSkyB as an organisation was great and was doing great. And the customer surveys indicated that customers bought from BSkyB because of its dominant position. Yet, they did not like BSkyB as a brand. Thinking back there was something ‘not nice’ associated, in the customer mind, with both of these brands.

Yes, as a business you have to shape customer behaviour to make the business model work. Every business has to shape customer behaviour. Even luxury brands shape customer behaviour so as to attract only the luxury market segment and put off all the rest. No, you do not have to do it in a way that unnecessarily annoys customers.

Where I find myself in disagreement with you is on the whole social thing. It occurs to me that operators like Michael O’Leary are not troubled by what customers are saying on social media. It occurs to me that the change in stance by O’Leary, shareholders, and thus Ryanair is all to do with the financials. The financials have turned, demand is tapering off, competitors are improving their customer service image and so there is a need to do something.

It occurs to me that a lot is talked about social media and it mostly shows up as nonsense for me. The most famous example is United Breaks Guitars. Despite the publicity, United is still in business. It occurs to me that most customers just continues using United. And United just continued doing what it was doing. It occurs to me the companies have much more power than we, in the Customer community, give them credit for. And I have been known to be wrong – often.

All the best
Maz

Hi Maz, Bob, Shaun

The structure of the airline industry in Europe is not quite the same as that in the USA; which makes direct comparisons between European low-cost carriers (LCCs) and US LCCs difficult. It is of little use comparing US LCCs like Southwest or Jet Blue with EU LCCs like Ryanair or Easyjet. They are US apples versus European pears. However, comparisons between European LCCs and with European full-service carriers (FSCs) are much more instructive.

European short-haul operations are currently in turmoil. All of the European FSCs: Lufthansa, Air France/KLM and IAG (British Airways & Iberia) are losing money hand over fist on their short-haul operations. In response, they are transferring short-haul operations (aircraft, infrastructure and staff) to their own LCC partners. Lufthansa is transferring its short-haul operations to Germanwings, Air France/KLM to Hop/Transavia and IAG to Iberia Express and perhaps later, to Vueling. Tomorrow's short-haul British Airways will by necessity look a lot more like today's Easyjet than it does currently.

European LCCs come in two distinct flavours. There are a few ultra LCCs like Ryanair and Wizz Air that have squeezed costs out until the pips squeak, and there are the 'piggy-in-the-middle' LCCs like Easyjet (and most of the rest). The ultra LCCs compete through their pricing power and in Ryanair's case, through its large airport network, its large unitary fleet and its highly efficient airline operations. The piggy-in-the-middle LCCs, as the name suggests, are stuck between a rock and a hard place. On the one hand they can't reduce their costs enough to compete with the power pricing of Ryanair. On the other hand they can't improve their services enough to compete with those provided by the FSCs without breaking the bank. To make matter worse, the ultra LCCs are increasing their service levels whilst keeping prices ultra-low and the FSCs are reducing their prices (and are having to reduce the quality of service too). It is starting to look uncomfortably crowded in the piggy-in-the-middle LCC sector.

What all the airlines have in common is their move away from an all-in price includes a broad range of services, to an ancillary pricing model. The FSCs traditionally offered an all-in pricing model providing a broad range of services. There were few ancillary extras that passengers needed to buy. In contrast, the LCCs have always operated a core flight plus a broad range of ancillary extras to buy model. As the 2013 Ideaworks Yearbook of Ancillary Revenue shows, all the airlines now look to ancillary extras to provide a significant part of their revenues. Ryanair's revenue from ancillaries is about 24% of its total revenue, marginally above Easyjet's 21% and significantly above Lufthansa's 0.5% and Air France/KLM's 5%. Ryanair's Michael O'Leary has gone on record saying that he would like to offer the core flight for free (if he is allowed to do so) and only charge for ancillary extras.

Ancillary extras are a source of much confusion and much hubris. There is some evidence that the higher satisfaction ratings for US LCCs versus their FSC competitors is due in part to the move towards the wholesale adoption of ancillary extras by the FSCs. They were always expected on LCCs and were largely factored into passenger expectations. In contrast, the costly new ancillary extras on the FSCs were usually part of the previous all-in flight. Having to now pay for what was previously (effectively) free triggers loss aversion and a host of other cognitively dissonant behavioral factors.

The other problems with ancillary extras seems to come when customers fall foul of the published rules. Ryanair is very open about its ancillary extras and its pricing policy. They are published for all to read in black on white. If customers are too lazy to read them, too stupid to understand them, or expect that they can get around them by arguing their case at the airport they only have themselves to blame when Ryanair – or Easyjet and the FSCs come to that – refuses to play along. Would the same customers expect Tesco to take back a perfectly good tin of baked beans, Aviva to take back an insurance policy, or Toyota to take back a new car, just because the customer doesn't want to stick to the rules? I don't think so either. So why should Ryanair, (or any of the other airlines), be expected to do so?

The post-recessionary economy has created an environment where a minority of malcontents think the rules that apply to the rest of us shouldn't apply to them. I am not talking about bankers, hedge-funds or private equity, I am talking about the chattering middle classes. They are having a tough time economically and that is somehow 'unfair'. The notion that they should educate themselves further, work harder, or take a few more calculated risks doesn't occur to them. They are happy to get great bargains like Ryanair's ultra-low cost flights, but they cry foul when they have to abide by the rules that go along with them. That the rest of us are waiting patiently in line with just our permitted 10kg of hand baggage (like 80% of passengers) to board the next flight to DÜsseldorf Weeze doesn't matter to them. Ryanair's customer experience is not customer-friendly enough and that is somehow 'evil'. The fact that 81 million customers chose to fly with Ryanair doesn't somehow count for them either. If this minority of moaning minnie's doesn't want to abide by Ryanair's rules they should stay at home. It really is as simple as that.

Graham Hill
@grahamhill

PS. If I had bought GBP 100 of Ryanair shares on their flotation in June 1997, the investment would today be worth GBP 1,375, a CAGR of over 80%. If only I had been so prescient.