Ryanair filed disappointing Q1 and Q2 results, with a 46% drop in profits this summer, and fares were down 15% year-over-year in Q1. So now the ultra-low cost Dublin airline is considering significantly raising its prices.
Consumers have pulled back as inflation has squeezed their wallets, and even bargain retailers have been hurt by ultra-cautious customers. “Management perceived a consumer under significant pressure, with spending falling due to the impact of higher interest rates and inflation,” according to an analyst note from research firm Bernstein this week. “Consumer pressure is and was the biggest story of sluggish yields.”
When the airline reported its first-quarter profits, Ryanair Chief Financial Officer Neil Sorahan blamed “frugal” consumers for sluggish sales.
“People want to get out there, but they’re just a bit more cautious in how they’re spending their money,” Sorahan said on an earnings call.
Currently, a typical Ryanair ticket costs just about $50 or 44 euros, but the airline’s outspoken CEO Michael O’Leary told Bernstein at the firm’s Strategic Decisions Conference he could see rising prices more than 30%, on average, during the next four to five years. The move would send prices soaring to $61.50 or $67.10 or between 55 and 60 euros. Ryanair and Bernstein analysts did not respond to Fortune’s request for comment.
“Budget airlines, similar to other businesses, raise prices when the conditions are right,” Peter Follows, author of Results, Not Reports, told Fortune. “It can be a more direct way to increase profitability than reducing costs.”
“But it has inherent risks,” warned Follows, who is also the CEO of Carpedia, a management consulting firm that’s served Delta, FedEx, and ASL Distribution.
The risk in raising prices
Price increases are typically driven by upping operating costs, such as fuel prices, airport fees, and other operating expenses, Follows said. This means businesses like Ryanair are attempting to push back some of the customers.
“The danger with increasing prices is that it can shift consumer behavior,” Follows said. “If the prices get too high, consumers look for alternatives [like] other carriers, other travel modes, or less traveling. If that leads to lower demand, then you’re eventually back into the spiral.”
Meanwhile, Ryanair competitor EasyJet has also raised prices—but for different reasons. EasyJet reported a stunning third quarter that ended June 30 with a 16% increase in pretax profits to nearly $314 million, also selling an extra 1.5 million tickets.
“Price increases may benefit in the short term,” Follows said. “But like the hotel industry, it will require carefully balancing supply and demand—or in more pragmatic terms, profitability and customer satisfaction.”
Other Ryanair challenges
Aside from consumer fatigue, O’Leary also blamed the airline’s poor performance on its fallout with online travel agencies (OTA) including Kiwi, Lastminute, and Opodo. These OTAs abruptly removed Ryanair flights from their websites this summer after the airline accused them of being “pirates” and “scamming” customers with higher fees.
The loss of bookings through OTAs “had a bigger impact on [Ryanair] than Michael O’Leary had expected,” according to the Bernstein note.
However, “OTAs need Ryanair more than Ryanair needs them,” O’Leary told Bernstein. Currently, the airline only offers OTA flights through eDreams and Booking.com, but O’Leary expects to sign more “eventually.”
Aside from the drama with OTAs, Ryanair is facing some internal turmoil of its own. O’Leary recently admitted his tendency toward anger could be affecting the company’s bottom line.
“In Ryanair there’s always some news flow,” O’Leary said during the company’s annual general meeting. “We’re fighting some union or some minister or I’m calling some minister an idiot or they’re calling me an idiot.”
But he also argues his bouts of outrage and outspoken nature have turned out alright in the end.
“The funny thing we’ve learned over the years is actually the bad publicity sells far more seats than the good,” O’Leary told The Wall Street Journal.
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