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Enhancement of Operating Results through Ancillary Services. Ryanair distributes accommodation services and travel insurance primarily through its website. For hotel services, Ryanair has a contract with Hotelscombined PTY Ltd, and they provide a hotel comparison website to Ryanair which generates commissions for Ryanair on the number of bookings made. Ryanair also has a contract with Bookings.com to market hotels during the website booking process. In addition, Ryanair has a contract with the Hertz Corporation (―Hertz‖), pursuant to which Hertz handles all car rental services marketed through Ryanair‘s website or telephone reservation system. Ryanair also sells bus and some rail tickets onboard its aircraft and through its website. For the 2014 fiscal year, ancillary services accounted for approximately 25% of Ryanair‘s total operating revenues, as compared to approximately 22% of such revenues in the 2013 fiscal year. See ―— Ancillary Services‖ below and ―Item 5. Operating and Financial Review and Prospects—Results of Operations—Fiscal Year 2014 Compared with Fiscal Year 2013—Ancillary Revenues‖ for additional information.
Focused Criteria for Growth. Building on its success in the Ireland-U.K. market and its expansion of service to continental Europe and Morocco, Ryanair intends to follow a manageable growth plan targeting specific markets. Ryanair believes it will have opportunities for continued growth by: (i) using aggressive fare promotions to increase load factors; (ii) initiating additional routes in the EU; (iii) initiating additional routes in countries party to a European Common Aviation Agreement with the EU that are currently served by highercost, higher-fare carriers; (iv) increasing the frequency of service on its existing routes; (v) starting new domestic routes within individual EU countries; (vi) considering acquisition opportunities that may become available in the future; (vii) connecting airports within its existing route network (―triangulation‖); (viii) establishing new bases; and (ix) initiating new routes not currently served by any carrier.
Responding to Current Challenges. In recent periods, and with increased effect in the 2012, 2013 and 2014 fiscal years, Ryanair‘s low-fares business model has faced substantial pressure due to significantly increased fuel costs and reduced economic growth (or economic contraction) in some of the economies in which it operates. The Company has aimed to meet these challenges by: (i) grounding (approximately 70 in fiscal 2014 and 80 in fiscal 2013) aircraft during the winter season; (ii) disposing of aircraft (lease hand backs totaled four in the 2013 fiscal year and eight in the 2014 fiscal year); (iii) controlling labor and other costs, including through wage freezes for non-flight crew personnel in fiscal 2011 and fiscal 2013, selective redundancies and the introduction of Internet check-in in fiscal 2010; and (iv) renegotiating contracts with existing suppliers, airports and handling companies. There can be no assurance that the Company will be successful in achieving all of the foregoing or taking other similar measures, or that doing so will allow the Company to earn profits in any period. See ―Item 3. Key Information—Risk Factors—Risks Related to the Company—Changes in Fuel Costs and Fuel Availability Affect the Company‘s Results and Increase the Likelihood of Adverse Impact to the Company‘s Profitability‖ and ―—The Company May Not Be Successful in Increasing Fares and Revenues to Cover Rising Business Costs.‖ In recent years, in response to an operating environment characterized by high fuel prices, typically lower seasonal yields and higher airport charges and/or taxes, Ryanair has adopted a policy of grounding a certain portion of its fleet during the winter months (from November to March inclusive). In the winter months of fiscal 2014, Ryanair grounded approximately 70 aircraft and the Company announced in May 2014 that it intends to ground approximately 50 aircraft during the winter months of fiscal 2015. While seasonal grounding does reduce the Company‘s operating costs, it also decreases Ryanair‘s potential to record both flight and nonflight revenues. Decreasing the number and frequency of flights may also negatively affect the Company‘s labor relations, including its ability to attract flight personnel interested in full-time employment. See ―Item 3. Key Information—Risk Factors—Ryanair has Decided to Seasonally Ground Aircraft.‖
Route System and Scheduling As of July 25, 2014, the Company offered over 1,600 scheduled short-haul flights per day serving approximately 186 airports largely throughout Europe, and flying approximately 1,600 routes. The following
table lists Ryanair‘s operating bases:
(a) In April 2014, Ryanair announced that it would open bases in Cologne, Gdansk and Warsaw Modlin.
(b) In July 2014, Ryanair announced that it would operate a base in Glasgow International Airport.
See Note 17, ―Analysis of operating revenues and segmental analysis,‖ to the consolidated financial statements included in Item 18 for more information regarding the geographical sources of the Company‘s revenue.
Management‘s objective is to schedule a sufficient number of flights per day on each of Ryanair‘s routes to satisfy demand for Ryanair‘s low-fares service. Ryanair schedules departures on its most popular routes at frequent intervals; normally between approximately 6:00 a.m. and 11:00 p.m. Management regularly reviews the need for adjustments in the number of flights on all of its routes.
During the 2014 fiscal year, Ryanair opened 121 new routes across its network. See ―Risk Factors— Risks Related to the Company—Ryanair‘s New Routes and Expanded Operations May Have an Adverse Financial Impact on Its Results.‖ Low and Widely Available Fares Ryanair offers low fares, with prices generally varying on the basis of advance booking, seat availability and demand. Ryanair sells seats on a one-way basis, thus removing minimum stay requirements from all travel on Ryanair scheduled services. All tickets can be changed, subject to certain conditions, including fee payment and applicable upgrade charges. However, tickets are generally non-cancelable and nonrefundable and must be paid for at the time of reservation.
Ryanair‘s discounted fares are ―capacity controlled‖ in that Ryanair allocates a specific number of seats on each flight to each fare category to accommodate projected demand for seats at each fare level leading up to flight time. Ryanair generally makes its lowest fares widely available by allocating a majority of its seat inventory to its lowest fare categories. Management believes that its unrestricted fares as well as its advancepurchase fares are attractive to both business and leisure travelers.
When launching a new route, Ryanair‘s policy is to price its lowest fare so that it will be significantly lower than other carriers‘ lowest fares, but still provide a satisfactory operating margin.
Ryanair also periodically runs special promotional fare campaigns, in particular in connection with the opening of new routes, and endeavors to always offer the lowest fare on any route it serves. Promotional fares may have the effect of increasing load factors and reducing Ryanair‘s yield and passenger revenues on the relevant routes during the periods they are in effect. Ryanair expects to continue to offer significant fare promotions to stimulate demand in periods of lower activity or during off-peak times for the foreseeable future.
MARKETING AND ADVERTISINGRyanair‘s primary marketing strategy is to emphasize its widely available low fares, route choice and great service. In doing so, Ryanair primarily advertises its services in national and regional media across Europe. In addition, we use topical advertising, social media, press conferences and publicity stunts. Other marketing activities include the distribution of advertising and promotional material and cooperative advertising campaigns with other travel-related entities, including local tourist boards. Ryanair also regularly contacts people registered in its database to inform them about promotions and special offers.
RESERVATIONS ON RYANAIR.COM
Passenger airlines generally rely on travel agents (whether traditional or online) for a significant portion of their ticket sales and pay travel agents commissions for their services, as well as reimbursing them for the fees charged by reservation systems providers. In contrast, Ryanair requires passengers to make reservations and purchase tickets directly through the Company. Currently, over 99% of such reservations and purchases are made through the website Ryanair.com. Ryanair is therefore not reliant on travel agents. See ―—Strategy— Taking Advantage of the Internet‖ above for additional information.
In May 2012, Ryanair further upgraded its reservation system in order to facilitate the continued expansion of the airline. The upgraded system gives the Company the ability to offer more enhancements to passengers, as the new platform is far more flexible in terms of future development. Under the agreement with the system provider, Navitaire, the system serves as Ryanair‘s core seating inventory and booking system. In return for access to these system functions, Ryanair pays transaction fees that are generally based on the number of passenger seat journeys booked through the system. Navitaire also retains a back-up booking engine to support operations in the event of a breakdown in the main system. Over the last several years, Ryanair has introduced a number of Internet-based customer service enhancements such as Internet check-in, priority boarding service and limited reserved seating since January 2012. Since October 2009, Ryanair has required Internet check-in for all passengers. These enhancements and changes have been made to reduce waiting time at airports and speed a passenger‘s journey from arrival at the airport to boarding, as well as significantly reduce airport handling costs. Ryanair has also introduced a checked-bag fee, which is payable on the Internet and is aimed at reducing the number of bags carried by passengers in order to further reduce handling costs. On April 1, 2014, the Company entered an agreement with Travelport who operate the Galileo and Worldspan GDS. The Company‘s fares (except for the three lowest fare categories) will be distributed on the Galileo and Worldspan systems. Ryanair has negotiated an attractive per segment price and expects to sell tickets via travel agents at no commission to a mix of largely business/corporate travelers. See Item 3. Key Information—Risk Factors—Risks Related to the Company—Ryanair Faces Risks Related to Unauthorized Use of Information from the Company‘s Website.‖
As of June 30, 2014, Ryanair had a principal fleet of 297 Boeing 737-800 aircraft and 5 additional leased aircraft acquired on short term leases for the summer of 2014 to provide extra capacity. The principal fleet was composed of 297 Boeing 737-800 ―next generation‖ aircraft, each having 189 seats. Ryanair‘s fleet totaled 297 Boeing 737-800s at March 31, 2014. The Company expects to have an operating fleet comprising approximately 426 Boeing 737-800s at March 31, 2019 depending on the level of lease returns/disposals.
Between March 1999 and March 2014, Ryanair took delivery of 348 new Boeing 737-800 ―next generation‖ aircraft under its contracts with Boeing and disposed of 51 such aircraft, including 25 lease handbacks.
Under the terms of the 2013 Boeing Contract, Ryanair has agreed to purchase the 180 new aircraft over a five year period from fiscal 2015 to 2019, with delivery beginning in September 2014. The new aircraft will benefit from a net effective price not dissimilar to that under the 2005 Boeing Contract which was approved by shareholders in 2005 and will be used on new and existing routes to grow Ryanair‘s business.
The Boeing 737-800 represents the current generation of Boeing‘s 737 aircraft. It is a short-to-medium range aircraft and seats 189 passengers. The basic price (equivalent to a standard list price for an aircraft of this type) for each of the Boeing 737-800 series aircraft is approximately US$78.1 million and the basic price will be increased for certain ―buyer-furnished‖ equipment, amounting to approximately US$2.9 million per new aircraft, which Ryanair has asked Boeing to purchase and install on each of the new aircraft. In addition, an ―Escalation Factor‖ will be applied to the basic price to reflect increases in the Employment Cost Index and Producer Price Index between the time the basic price was set in the 2013 Boeing Contract and the period 18 to 24 months prior to the delivery of any such new aircraft.
Boeing has granted Ryanair certain price concessions as part of the 2013 Boeing Contract. These will take the form of credit memoranda to Ryanair for the amount of such concessions, which Ryanair may apply toward the purchase of goods and services from Boeing or toward certain payments, other than advance payments, in respect of the new aircraft. Boeing and CFMI (the manufacturer of the engines to be fitted on the new aircraft) have also agreed to provide Ryanair with certain allowances for promotional and other activities, as well as providing certain other goods and services to Ryanair on concessionary terms. Those credit memoranda and promotional allowances will effectively reduce the price of each new aircraft payable by Ryanair. As a result, the ―effective price‖ (the purchase price of the new aircraft net of discounts received from Boeing) of each new aircraft will be significantly below the basic price mentioned above. The effective price applies to all new aircraft due for delivery from September 2014.