Want to fly for free? I don’t mean “free” trips based on points, but truly free tickets. That’s what Ryanair boss Michael O’Leary is suggesting could happen with his airline. Speaking recently at the Airport Operators Association conference in London, O’Leary suggested that a revenue sharing model with airport concessions was a viable way to generate sufficient revenue to fund flights, removing the need to charge fares.
The challenge for us in the future is to keep driving air fares down. I have this vision that in the next five to 10 years that the air fares on Ryanair will be free, in which case the flights will be full, and we will be making our money out of sharing the airport revenues; of all the people who will be running through airports, and getting a share of the shopping and the retail revenues at airports.
It’s unclear if this dream is grounded in reality.
Airport-based subsidies are common in the industry, especially at smaller airports. Cutting landing fee costs or even offering revenue guarantees to airlines attracts new routes and can stimulate demand. Airport authorities see it as an investment in their future. And many airports, including across Europe, have made those investments. Charleroi, south of Brussels, offered Ryanair big discounts on landing and ground handling fees over a 15-year contract in the late 1990s. Eventually that deal was deemed illegal by EU courts and Ryanair was told to repay some of the savings while the contract was trimmed to five years. A decade later the ruling was overturned and it was declared that the payments were not subsidies. And in the interim plenty of other airports have followed a similar path.
Zadar, Croatia is reportedly on the hot seat now. Ryanair is owed EUR 612,000 by the airport for promotional incentives for 2015 and 2016, reports EX-YU news. The carrier is said to be promising a 20% increase in operations – bringing tens of thousands more passengers into the airport and the surrounding community – but it wants the local tourism board and airport to pay for the expansion. With 60% of the passengers flying on Ryanair, the carrier has some leverage to make such demands. And if an agreement isn’t struck, Ryanair can always move its growth plans elsewhere. Thus far the locals have balked at the increased funding request.
The City of Derry airport in Northern Ireland faces similar challenges, reports the Belfast Telegraph. Ryanair is set to walk away from flights to Stansted and Faro, Portugal by April 2017. Local authorities are seeking funds to help subsidize the routes, keeping the service in place. In pushing for such funds, mention was made of the £9 million used to subsidize United Airlines’ Belfast route to Newark, a subsidy that was recently declared illegal and revoked, on the heels of which United announced it would terminate the route. Pursuing a similar approach for Derry could result in a similar outcome, though it might keep the flights alive in the short-term.
It is worth noting that Ryanair is not the only carrier to receive such incentives to launch new services. The practice is not even reserved for only low-cost carriers (LCCs). It happens across the globe. But Ryanair is quite vocal about the value of such moves to its operations and is not shy about blaming slashes to such funding when it cuts routes. Can it move to a revenue share model with concessions to boot?
An upside to O’Leary’s notion is that such a move would put the onus on Ryanair to deliver the passengers (and with them, an expectation they’ll spend money along the way). And O’Leary isn’t necessarily talking about making all seats on those flights free. Ryanair could trim the price on some of its promotional fares – the tickets that are typically under £10 today. And maybe the carrier can extract sufficient revenue from a few airports here and there to make it possible.
But let’s not forget that Ryanair must also contend with its growing fleet and passenger capacity. The company has more than 100 737-800s set for delivery by the end of 2018 and another 100 737MAX (plus 100 options) for delivery starting in 2019. That’s a lot of seats. And as the route map fills in, Ryanair arguably has less negotiating power to drive such deals. After all, the airports know that the planes have to go somewhere.