A radical fix for airlines: Make flying free
Ireland's Ryanair gives away tickets to earn big profits from other aspects of the travel experience.
By Matthew Maier, Business 2.0 Magazine staff writer

(Business 2.0 Magazine) - Michael O'Leary, Chief Executive of Ireland's Ryanair (Research), Europe's most profitable airline, wants to make air travel free. Not free as in free from regulation, but free as in zero cost. By the end of the decade, he promises, "more than half of our passengers will fly free."

The remarkable thing is, few analysts think his prediction is far-fetched: Ryanair already offers free fares to a quarter of its customers.

By a wide margin

Even without free flights, Ryanair has become one of Europe's most popular carriers. Last year it flew 35 million passengers to more than 100 European destinations, while its customers paid an average fare of just $53. The airline enjoyed revenues of $1.7 billion, up 20 percent over 2004, at a time when most competitors were stuck in a holding pattern.

Even more impressive, Ryanair's $368 million in net earnings gave the airline an industry-leading 22 percent net profit margin. (By comparison, Southwest Airlines's (Research) net margin was 7.2 percent.) "Ryanair has the strongest financials in the European airline industry," says James Parker, an equity analyst with Raymond James.

The secret? Ryanair's austere cost structure almost makes Southwest look profligate. In addition, the Irish airline puts a price on virtually everything except tickets, from baggage check-in to seat-back advertising space. As a result, last year Ryanair collected $265 million--15.6 percent of overall revenues--from sources other than ticket sales.

"We weren't the first to figure this out," O'Leary says. "But we do it better than everybody else."

The similarities to the Southwest model are hardly coincidental. In 1991, when Ryanair was just another struggling European regional carrier, O'Leary went to Dallas to meet Southwest executives and look for lessons he could take back to Ireland. The visit prompted a wholesale reconsideration of how the airline did business.

Following Southwest's lead, Ryanair embraced a single type of aircraft--the venerable Boeing (Research) 737. Likewise, it focused on smaller, secondary airports and began to offer open (unassigned) passenger seating.

But Ryanair has since gone even further. A Trinity College-educated accountant who spent several years at KPMG, O'Leary is maniacal about keeping costs down. "We want to be known as the Wal-Mart (Research) of flying," he says.

Like the retail giant, each time Ryanair comes up with a new way to cut costs by a few million dollars--for example, by removing seat-back pockets to reduce weight and cleaning expense--O'Leary passes the savings along to customers in the form of lower fares.

No free peanuts

It also means charging passengers for practically every amenity they might consume. There are no free peanuts or beverages on Ryanair flights; 27 million passengers bought in-flight refreshments on the airline last year, generating sales of $61 million, or an average of $2.25 per person.

On March 16, Ryanair eliminated its free checked-bag allowance and began charging $3.50 per piece--a "revenue-neutral" fee that was offset by cutting ticket prices by an average of $3.50. Ryanair expects the move to save $36 million a year by reducing fuel and handling costs.

The airline is just as aggressive in its efforts to develop new sources of revenue. Today, 98 percent of Ryanair's passengers book their flights online, and the company's website sees roughly 15 million unique visitors a month--making it Europe's most popular travel site.

The airline uses that traffic as a marketing tool for related services; each time a passenger books a rental car or a hotel room, Ryanair earns a percentage of the sale. Linking customers to such services brought in more than $100 million during 2005.

O'Leary is also starting to turn his planes into media and entertainment plays. He's offered advertisers the opportunity to repaint the exteriors of Ryanair's planes, effectively turning them into giant billboards. (Hertz, Jaguar, and Vodafone (Research) have purchased space on the fuselages of Ryanair's 737s).

For passengers seeking distraction, Ryanair intends to offer in-flight gambling in 2007, with the airline earning a tiny cut off of each wager. O'Leary thinks gambling could double Ryanair's profits over the next decade, but he's not stopping there.

He also envisions a day when the airline can charge passengers for the ability to use their cell phones at 35,000 feet. And he's expressed interest in partnering with operators of airport parking lots and concession stands to capture a bigger slice of the cash that passengers spend on the ground getting to and from his planes.

Add it all up--relentless cost cutting on the operations side, combined with innovative efforts to extract more revenue from each traveler--and O'Leary's plan to give away half of Ryanair's seats by 2010 starts to look quite sane.

Sure, taking to the skies on Ryanair may feel more like riding in a subway car than an airplane, but strapped U.S. carriers, take note: Flying people from here to there for free could truly be liberating.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.