Confident Ryanair moves to cut swathe through European skies

CAN the formula which has brought Ryanair such success flying from Dublin to the UK be repeated across Europe? Those who invest in the company's shares will be betting that it can.

So far the airline's success has been based on attacking and developing one of the busiest routes in Europe - Dublin to London - and then building on this by flying from lreland to UK regional airports. Future growth will depend on whether it can repeat this success - built on low costs and low fares - on other routes, originating not only in Dublin but also from Stansted in London and elsewhere in Europe.

Its success on Dublin-UK routes has been remarkable. Not only is it now earning substantial profits, but it is no exaggeration to say that it has been one of the catalysts of growth in traffic across the Irish Sea.

Take the Dublin-London route, for example. In 1985, before Ryanair's arrival, 994,000 people flew this route, while last year the number rose to 3.34 million. Over half the extra passengers flew with the independent airline. And now this success has been repeated to a range of UK provincial locations.

The company is confident it now has the correct formula. And that it will travel. The number of passengers it carries has risen to over three million from 650,000 in 1990. Meanwhile, revenues have been increasing at 26 per cent a year, while costs have been rising at just 19 per cent.

The result is predictable: Ryanair earned operating profits of £23.7 million last year, representing a remarkable 24.5 per cent of turnover (excluding a £9.8 million performance payment to the chief executive Michael O'Leary under a programme now discontinued). By comparison, Aer Lingus's operating profits of £42 million represented a profit margin on its core air transport business of just 5.5 per cent.

Ryanair hopes to translate this success into new routes and new markets. It has recently started flights to Beauvais in France and Charleroi in Belgium and in June proposes to start flying from Stansted to Stockholm. At yesterday's press conference Mr O'Leary said the airline was now negotiating with 18 other airports throughout Europe, seeking low-cost deals on charges to allow further route expansion.

A review of the company, published yesterday by its brokers, Davy, pointed to a study by the UK Civil Aviation Authority which said that 34 routes within continental Europe had scope for a new operator, with eight of these involving Scandinavian airports and a further nine Brussels and Paris. So Ryanair's move into these markets is likely to be the first step in an expansion plan that will soon see it offering new routes from Brussels, Paris and Stockholm to other destinations.

In doing so it is aiming to take advantage of the liberalisation of the EU air market and its own low-cost formula to fill a niche in the market. It is hoping to emulate the success in the US of the Texas-based South-west Airlines, which has thrived on a no-frills, low-fares policy. A US airline investor, Mr David Bonderman, last year took 20 per cent of Ryanair and is now a major force behind its strategic push into Europe.

Ryanair is aiming for a gap in the market. It believes the big European airlines will concentrate on the major intercontinental routes, while the middle-sized national carriers will be hamstrung by high costs and EU rules which will limit cash injections from their government share-holders.

This gives Ryanair the opportunity to repeat its success on the London-Dublin route in new markets across Europe, using the same low-cost formula. In this way, it can meet demand for point-to-point traffic as well a feeding passengers into major airports for onward journeys to the US and elsewhere.

It will aim to continue pressure on its own costs, as shown by the recent dispute with travel agents on the commission paid on airline tickets. The Competition Authority ruled in Ryanair's favour and said it would take legal action if the travel agents boycotted Ryanair as a result of the airline's demand for a lower commission payment.

Ryanair will also fight to hold down landing shares and hope that EU liberalisation can make an impact on costs imposed in areas such as ground handling and air-traffic control.

Success cannot he guaranteed, of course. Ryanair has had its turbulent patches. By 1991 it had accumulated losses of close to £20 million and the future was looking bleak. But a reorgansiation and rationalisation that year set the basis for further growth, and the company has also benefited from the buoyancy of the economy and the general health of the airline industry over the past couple of years.

Dr Tony Ryan and his family stuck with the airline through its troubled years and will now benefit handsomely from the flotation. Meanwhile, the flotation will raise Ryan air's profile and underpin its financial position. But it will bring with it a new pressure to perform and grow as Ryanair tries to expand from being an Irish airline to a European carrier.