IS RYANAIR THE SOUTHWEST AIRLINES OF EUROPE? GERAINT HARVEY AND PETER TURNBULL
Between 2004 and 2013 the long-established ‘legacy’ airlines in Europe (e.g. Air France, Alitalia, British Airways (BA), Iberia, KLM and Lufthansa) increased their intra-European seat capacity by less than three million whereas low fares airlines (LFAs) (e.g. easyJet, Ryanair and Wizz Air) increased their capacity by almost 21 million seats. The total European market share of LFAs is now well over 40 per cent, with a dominant share (over 50 per cent) in many national markets for European flights (e.g. Hungary, Ireland, Italy, Latvia, Lithuania, Spain and the UK). This is much higher than other regional markets such as North America where the LFAs market share is around 30 per cent, despite the USA being the home of Southwest Airlines (SWA), widely acknowledged as the world’s first low cost airline.
7 Not only have LFAs grown rapidly in recent years, they have also grown profitably. Or rather, the market leaders such as Ryanair, easyJet and SWA have grown profitably, unlike the legacy airlines who have struggled to cover their long-run cost of capital (Button, 2003). Between 1999 and 2008 the civil aviation industry’s cumulative operating profit was a mere US$44 billion, translating into a margin of just 1.1 per cent. Over this same period, however, the world’s leading LFAs recorded much higher margins – SWA just under 9 per cent, Ryanair 19 per cent and easyJet 6 per cent – and delivered US$11.5 billion in operating profit (Tarry, 2010). On both sides of the Atlantic, the emergence of LFAs was contingent on the liberalisation of air transport services, as prior to the late 1970s in the USA and the mid-1990s in Europe the civil aviation sector was governed by strict rules on market access in the domestic market and bilateral air service agreements (BASAs) between countries that regulated international routes. BASAs typically specified the destinations (city pairs), carriers (typically the national ‘flag’ airline of therespective countries), flight frequency, capacity, and prices.
Some BASAs even included revenue sharing. As a result, an airline only had to be as efficient as the other airline on an international route and there was little or no incentive to drive down costs or drive up productivity – after all, prices were predetermined, capacity was agreed (reducing any scope for economies of scale) and any additional revenue generated might ultimately be shared with the rival airline/state. In the USA the domestic market was deregulated in one fell swoop in 1978, opening access to routes (city pairs) to new entrants who were free to set their own prices and offer whatever capacity the market would bear. In Europe the process of liberalisation was more gradual, with three reform packages (December 1987, July 1990 and July 1992) that changed licensing from national to EU criteria, opened access to the market and removed capacity restrictions (Kassim, 1996: 116). By April 1997 the Single European Aviation Market (SEAM) permitted full cabotage rights (i.e. the right of an airline from one Member State to offer services in another State, such that Ryanair, for example, can now offer flights from Madrid to Ibiza and Parma to Cagliari). Ryanair is now Europe’s largest airline – based on scheduled air capacity within and from Western Europe (over 89 million available seats in 2013) – well ahead of easyJet (66 million seats) and the major legacy airlines such as Lufthansa (58 million seats), Air France (44 million seats) and BA (39 million).8 In the words of Michael O’Leary, Ryanair’s CEO, ‘We cover all of Europe – a bit like a social disease.’9 The low cost business model pioneered by SWA, which is contrasted with the traditional legacy airlines model in Table 8.3, has been emulated by airlines across the globe, at least in terms of the technical and operational features of the model (Alamdari and Fagan, 2005). The well-known ‘Southwest effect’ is achieved
by dramatically reducing fares (on average by 65 per cent on a route), which then stimulates traffic (typically in excess of 30 per cent) (Gittell, 2005: 7–9) enabling the airline to establish a ‘dense’ route with high frequency between major cities that will sustain a high load factor (in excess of 80 per cent) and low fares. A simple calculation based on just some of the variables listed in Table 8.3 serves to illustrate the cost advantages of the low cost model. For example, LFAs will pay lower airport charges at secondary/regional airports, their maintenance costs will be lower for a single aircraft type, depreciation costs per block hour will be lower with higher utilisation (which is more easily achieved on a point-to-point route using less congested airports), and their distribution costs will be lower because of direct sales via call centres and internet sales (by-passing travel agents and thereby avoiding commission).
Taken together, the combined cost savings can amount to 20 to 30 per cent per trip for a LFA using an Airbus A319 or Boeing 737–800 on an intra-European route. With a higher seat density – LFAs are able to operate aircraft with around 160 seats with a single class cabin configuration, shorter seat pitch and narrower width and the removal of hot galleys, whereas most legacy airlines operate the same aircraft with 130 seats or less – and higher load factors (around 80 per cent compared to 65 to 75 per cent), costs can be reduced even further to anywhere between 30 to 50 per cent for most European short-haul operations. Ryanair, which is arguably in a class of its own when it comes to low(er) costs, enjoys a cost advantage of 60 per cent (Harvey and Turnbull, 2014: 14–15). Popular accounts of SWA – the management books that fill the shelves of airport bookshops (e.g. Freibergand Freiberg, 1996) – highlight the company’s strong corporate culture and the desire for all employees to ‘live the Southwest Way’ (i.e. display ‘a Warrior’s Spirit, Servant’s Heart, and Fun LUVing Attitude’) and ‘work the Southwest Way’ (‘to focus on safety, on high customer service delivery, and low costs’) (SWA, 2012: 5). SWA is a high security, high wage, high skill, high productivity airline, a textbook model of ‘best practice’ (soft) HRM. Security: the airline has deliberately pursued a conservative but consistent growth strategy of around 10 to 15 per cent per annum in order to deliver on its commitment to employment and job security. The company avoids layoffs at all costs because, in the words of Herb Kelleher, co-founder and former CEO, ‘Nothing kills your culture like layoffs … We could have furloughed at various times and been more profitable but I always thought that was short-sighted’ (quoted by Bamber et al.
, 2009: 92). A defining characteristic of the SWA Way is ‘its willingness to forgo quick solutions to invest long term in the maintenance of relationships among managers, employees and business partners’ (Gittell, 2005: 12). Wages: SWA is one of the highest paying airlines in America and frequently appears in the list of ‘best 100 US companies to work for’ (Bamber et al., 2009: 4–5; Freiberg and Freiberg, 1996; Gittell et al., 2004; SWA, 2012). Skills: in 2012 SWA recorded over 520,000 hours of health and safety training (over 11 hours per employee), over 17,000 hours on employees’ human rights (one in five employees participated in this training), and the company’s training programmes routinely cover environmental stewardship and sustainability. The airline’s ‘University for People’ provides training and career development to help employees ‘learn and grow’. Productivity: high productivity at SWA is achieved through the ‘relational coordination’ of activities during aircraft turnaround at the gate, which maximises the utilisation of the company’s most costly assets. This involves different employee groups – flight and cabin crew, mechanics, ramp, gate, baggage handlers, fuelling, cleaning, ticketing – working together, sharing information and solving problems in a socially complex work environment that is interdependent, uncertain and time constrained (the target aircraft turnaround is typically 20 to 30 minutes) (Gittell, 2005).
Employees work ‘as’ a team and not simply ‘in’ a team, which is critical for SWA’s system of relational coordination and rapid aircraft turnaround. Whenever problems arise (e.g. a flight delay or technical problems with ground handling equipment) resolution is sought within the team (bottom up) rather than via managerial fiat (top down). SWA regards employee wellbeing as an important driver of high productivity and outstanding customer service standards: ‘We create a culture of LUV. After all, happy Employees equal happy Customers, and happy Customers keep flying Southwest’ (SWA, 2012: 39). Underpinning the airline’s HR policies is an employee relations strategy built on cooperative collectivism. SWA is the most highly unionised airline in America – union density currently stands at around 83 per cent – and unions are treated as ‘business partners’, not ‘third parties’. Opportunities for employees to participate in decision making (e.g. on pay and benefits) has directly enhanced the performance of the organisation as SWA leads the way in timely contract negotiations (efficient collective bargaining), and the airline has only ever experienced one strike in its 40-year history (Gittell et al., 2004: 171–3).
Data from other US airlines indicate that efforts to avoid unions are not likely to produce a sustained improvement in either service quality or airline financial performance (ibid.: 177; see also Bamber et al., 2009). In a European context this conclusion on service quality certainly holds in the case of Ryanair – the airline recently came bottom in a poll of the UK’s top 100 brands (Which?, 2013) – but union avoidance has been central to the Irish airline’s unfolding business strategy and industry-leading profitability.
Ryanair is a vehemently anti-union company (O’Sullivan and Gunnigle, 2009) and has vigorously resisted organising campaigns by pilots in particular (Harvey and Turnbull, 2015). The company’s reasoning is twofold: ‘first that it makes it impossible for the pilot unions to have any influence over the Ryanair contract pilots, and second that it gives Ryanair far more workforce flexibility than a settled, unionised labour force would ever allow in practice’(Michael O’Leary, quoted by Learmont, 2013: 55). Ryanair’s (hard) approach to HRM is based on low security, low wages, minimum skill, but high productivity. Insecurity: Ryanair directly employs only management and a minority of aircrew (over 70 per cent of pilots and more than 60 per cent of cabin crew are hired via agencies on temporary contracts).
All ground operations – check-in, baggage handling, aircraft fuelling, etc. – are sub-contracted to third parties. Cabin crew are initially employed on a short-term contract with one of two agencies (CrewLink offers three-year contracts and WorkForce International only two years) while flight crew are hired by two different agencies (Brookfield Aviation International and Storm McGinley) but are required to supply their services to Ryanair via a (limited) ‘Employment Company’, as illustrated in Figure 8.4. For all aircrew, therefore, there is very limited security. While there are opportunities for promotion within the company, especially for First Officers who aspire to be Captain (job security), there is very high turnover (employment insecurity). Flight and cabin crew are paid only for flying hours (income insecurity). Pilot contracts with Brookfield, for example, state that ‘the services of the pilot are provided on an as required and/or casual basis’, but ‘there is no obligation upon Brookfield to locate or offer work’ (i.e. a ‘zero hours’ contract). Work insecurity is indicated by the reluctance of staff to report safety concerns. For example, a recent survey of almost 1,100 pilots revealed that:
• over 78 per cent did not ‘have confidence in the confidentiality of the Ryanair safety reporting channels’;
• almost 90 per cent were not ‘satisfied that the Ryanair safety system provides appropriate feedback on previous incidents that have occurred in Ryanair’;
• almost 89 per cent did not ‘consider Ryanair to have an open and transparent safety culture’.10
Low wages: cabin crew hired via an agency can expect to earn around €1,100 per month, including commission from in-flight sales of food and drinks. However, their contract stipulates three months unpaid leave (compulsory furlough) in every 12-month period between the months of November and March (Ryanair experiences much greater variation in its schedule – summer peak versus winter trough – than legacy airlines and other LFAs). Over a two-year period, therefore, their earnings are less than €20,000, but they must also pay for their own initial training (€500 to register, €1,649 for the actual training, €700 for accommodation – bed only – at the training school, and a €600 administration fee, deducted from monthly salary during the first six months of employment, if the candidate cannot afford to pay the training costs in advance) as well as hire of uniform (€30 per month).
Earnings minus training costs and uniform hire leaves the cabin crew with less than €16,000 (less than €900 per month), which is less than the UK National Minimum Wage for a worker aged 18 to 20 years. Most pilots have accumulated debts of between €80,000 and €100,000 to obtain a commercial pilots licence and must then pay €28,500 (in advance) for their ‘type-rate’ training at Ryanair (to fly Boeing 737–800 aircraft) and a further €2,400 for initial line training. A survey of more than 1,100 members ofthe Ryanair Pilot Group found than 45 per cent earned between €30,000 and €60,000 per annum, the majority of whom are First Officers (new recruits) who struggle to payoff interest on their debts after living expenses away from home. Both cabin and flight crew can be assigned to any of Ryanair’s seventy bases around Europe and they must cover all their own travel and accommodation costs.
Minimum skill: whereas Ryanair recruits pilots with only 200 flying hours, most airlines demand anywhere in the region of 500 to 1,500 hours11 and the latter is now the minimum requirement set by the Federal Aviation Authority in the USA. Interviews for potential cabin crew at recruitment days run by employment agencies are rather perfunctory – lasting only 10 to 15 minutes – with most attention on the candidate’s appearance, financial situation and willingness to be flexible. Training is ‘compliant with regulations’ rather than ‘comprehensive’, with emphasis on sales skills as well as safety. Shortcomings in the company’s training of cabin crew were exposed in a Channel 4 Dispatches documentary, ‘Ryanair Caught Napping’.12 High productivity: the most significant contribution to Ryanair’s low cost base comes from high labour productivity (Barrett, 2004: 93). Ryanair’s costs peremployee were less than €50,000 in 2011 to 2012 compared to well over €106,000 at Scandinavian Airlines (SAS), Europe’s highest cost legacy airline.13 With lower wages than its rivals and an intensive working schedule concentrated over a nine-month (summer peak) period when the majority of (temporary) staff work the maximum number of hours allowed under the European flight and duty time limitations (900 hours of flying), Ryanair has very low unit labour costs (labour productivity x labour costs).
The company’s profit per employee was over €81,000 in 2011 to 2012 compared to €49,000 at easyJet, less than €20,000 at Aer Lingus, and less than €1,000 at the International Airlines Group (incorporating British Airways and Iberia). Although Ryanair’s workforce is dispersed across Europe, everyone is employed on an Irish contract, as the ‘place of work’ is an aircraft that is registered in Ireland. Thus a Bulgarian worker hired to work in the cabin might be based in Spain and fly predominantly to Italy and Greece, but Irish law governs her terms and conditions of employment. As in the shipping industry, the flag of registration is ‘more convenient’ (a more permissive common law system in Ireland) and crew can be hired from whichever countries are likewise ‘more convenient’. ‘Rule shopping’ leads to ‘social dumping’, a situation described by the European Commission as: ‘where foreign service providers can undercut local service providers because their labour standards are lower’.
14 Clearly, this would be more difficult, and certainly less profitable, if Ryanair recognised trade unions in Ireland. Irish law provides for a form of ‘company-unionism’ (or what Americans call a ‘yellow dog union’) via an ‘excepted body’, defined by the Trade Unions Acts of 1941 (s.6(3)(h)) and 1942 (s.2) as ‘a body all the members of which are employed by the same employer and which carries on negotiations for the fixing of wages or other conditions of employment of its own members (but no other employees)’. Ryanair operates a system of Employee Representative Committees (ERCs) in each base for cabin crew and permanently employed pilots. ‘Agreements’ made by ERCs often have ‘conditional benefits’ attached to forestall union organisation. For example, pilots at several German bases working on a five days on/four days off roster were warned that:
this roster agreement and annual allowance will remain in place for as long as Ryanair [Bremen, Hann, Weeze] pilots deal directly with the company and engage in no work stoppages. If Ryanair is forced to recognise any pilot trade union or association at [Bremen, Hann, Weeze] or if there is any industrial action of any kind at [Bremen, Hann, Weeze] then the roster will revert to 5 on 3 off with 5 on 2 off six times per annum and the annual allowance will be withdrawn.15 Such arrangements are contrary to ILO Convention 98, which Ireland has ratified.
When a similar case involving pilots in Dublin was brought to the attention of the ILO’s Freedom of Association Committee, the Committee’ pointed out that: the existence of legislative provisions prohibiting acts of interference on the part of the authorities, or by organizations of workers and employers in each other’s affairs, is insufficient if they are not accompanied by efficient procedures to ensure their implementation in practice … Irish law does not ensure adequate protection against acts of interference (e.g. non-prohibition of conditional benefits) nor does it promote collective bargaining (e.g. by providing for a procedure to require an employer to recognize a trade union) (Case No.2780, C.87 and C.98).
Ryanair might claim to be the ‘Southwest Airlines of Europe’16 but its HR strategy and employment relations could hardly be more different, epitomised in the words of the respective CEOs: When I started out, business school professors liked to pose a conundrum: Which do you put first, your employees, your customers, or your shareholders? As if that were an unanswerable question. My answer was very easy: You put your employees first. If you truly treat your employees that way, they will treat your customers well, your customers will come back, and that’s what makes your shareholders happy (Herb Kelleher, co-founder and Chairman of Southwest Airlines).17 MBA students come out with: ‘My staff is my most important asset.’ Bull****. Staff is usually your biggest cost. We all employ some lazy ******* who needs a kick up the backside, but no one can bring themselves to admit it (Michael O’Leary, CEO Ryanair).18
Questions
1 What is the basis of cooperation between management and labour at (a) SWA and (b) Ryanair?
2 Are Ryanair pilots genuinely or falsely ‘self-employed’?
3 How would you characterise the soul and the scope of trade unionism at SWA (refer to Figure 8.3)? 4 What is the nature of employer authority and management’s attitude towards trade unionism at (a) SWA and (b) Ryanair (refer to Table 8.2)?
5 Can you foresee a time/place/circumstances when/where Ryanair might recognise a trade union (either willingly or unwillingly)?
Table 8.2
