Ryanair: Flying to the top on nickels and dimes

Earlier today, Irish airline Ryanair (RYAAY) posted a 550 percent rise in its quarterly profits. While largely due to a significant reduction in the price of gas, some of the company's impressive earnings jump is due to a recent 13 percent drop in average fares, a move that spurred an 11 percent jump in traffic. Net profits for the three months ending on June 30 was $136.5 million euros, a significant rise over the 132 million euros predicted by analysts.

It isn't hard to see how Europe's cheapest airline makes its money. While not exactly bait-and-switch, Ryanair engages in what might be euphemistically be called bait-and-nickel-and-dime, offering insanely low fares, then hitting its customers with fees for everything, including boarding passes, carry-ons, online check-in, infants, checked baggage, baby strollers, sports equipment, and musical instruments. Ryanair's CEO, Michael O'Leary, has even proposed charging customers for airsickness bags, bathrooms, and obesity.
O'Leary has played his more bizarre suggestions for maximum promotional value; whether or not he is serious about making customers pay for nature's call, there is little doubt that his fare structure is a stroke of genius. Even with all its fees, Ryanair is still, far and away, the cheapest short-hop airline in Europe. This means that, even after customers realize that they were roped in with amazingly low prices, they still have to acknowledge that they are getting very good deals. While this may result in some disgruntled flyers, it also results in repeat business, particularly after the memories of bad fees fade.

This, incidentally, stands in stark contrast to the many U.S. carriers that have experimented with Ryanair-style fees. Last year, when gas prices rose stratospherically, JetBlue decided to start charging for pillows, U.S. Air charged for nuts and blankets, and other airlines instituted a variety of nuisance fees. The difference is that these airlines, unlike RyanAir, were charging market rates on their fares, which means that customers couldn't even console themselves with the knowledge that they were getting particularly good deals. In Ryanair's case, outrageous fees seem understandable, and aren't likely to harm the company's relationship with its customers; in the case of America's airlines, many consumers are still feeling very mistrustful.

Despite the pleasant earnings surprise, investors have reacted negatively to Ryanair's lower outlook for the rest of the year, and the stock is down over seven percent in Monday morning trading.
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