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Ryanair: Expanding East Requires Different Strategy

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With the European airline market increasingly competitive and economic conditions still in flux in the region, Ryanair is rumoured to be contemplating expansion in the Middle East and Russia, attracted by populous markets and rising demand for low-cost travel, which is hoped to boost passengers numbers.

Ryanair is believed to be interested in growing, initially in several markets such as Russia, Lebanon, Israel, Jordan and Egypt. The airline is hoping to achieve this through the establishment of a potential base in Cyprus, which could allow easy reach to the Middle East and Russia through the establishment of Ryanair Cyprus.

Could Cyprus become an important hub for Ryanair?

The focus on Cyprus by Ryanair has been driven by the aim of the local government to privatise debt-ridden Cyprus Airways, which according to corporate sources invited the Irish player to participate in the process. Although Ryanair expansions to date have not relied on mergers or acquisitions, rather through organic growth, Cyprus is seen as a good geographical stepping stone, which can allow penetration into the Middle East. In addition, Ryanair’s new fleet order of aircraft with wider range capability with Boeing could help the airline to achieve these ambitions.

Importantly, the potential acquisition of Cyprus Airways could help obtain the carrier’s operator certificate (AOC) which in turn would authorise Ryanair to fly outside EU borders. However, if this move is unsuccessful, the Irish airline could realise these objectives through its other bases in either Greece or Turkey.

“Gamechanger” to help

Ryanair, in September 2014, purchased 200 new Boeing 737 MAX 200 “gamechanger” aircraft. The sum agreed for the deal amounts to US$22 billion. With this new partnership, the airline aims to increase its fleet to 520 aircraft by 2024, according to corporate sources. By upgrading its fleet, Ryanair is targeting increased capacity and improved operational efficiency, which in turn can offset rising fuel costs, reduce fares and help expand its route network.

The move comes at a time when most of Europe's schedule airlines are going through a major restructuring process due to financial problems, especially on short haul and domestic routes, a niche that Ryanair dominates in most European markets.

Old Ryanair tactics will not survive in the Middle East

The Middle East low-cost airlines segment has grown significantly over the last couple of years, thanks to the increased activity of local players such as FlyDubai and Air Arabia. Low-cost airlines are expected to record a double-digit CAGR for the period 2013-2018, in such markets as Israel and UAE, up 19% and 10% respectively, showcasing the great potential of these destinations.

Despite that fact the low cost airline segment in the region differs very strongly from the one in Europe. In the Middle East most of the countries do not have the necessary infrastructure, such as secondary airports where Ryanair can fly from to reduce handling and landing fees, whilst benefiting from regional subsidies. Indeed the biggest challenges affecting the region’s capacity remain congestion and delays, which are increasingly common, with overhead, pre-landing waiting time sometimes taking 30 to 40 minutes.

Ryanair’s bullish approach with local airports in Europe has led to a strong disagreement on costs for using the airports. In many cases, Ryanair has been demanding an increase in fees from airports before contractual agreements expire. Such an approach, however, will not be possible in the Middle East, where policies differ strongly from Europe.

Also, Middle Eastern consumers have a penchant for luxury, which has led LCCs to introduce business class-style services. Jazeera Airways was the first to introduce a business class in 2009, straying away from the low-cost model altogether, yet keeping lower prices and achieving good profitability. In 2013, FlyDubai followed suit with its new business class services. Although Ryanair is keen to lure more business travellers onboard it will be highly unlikely that the Irish player will go the same route as its rivals in the region.

Despite these challenges, Ryanair’s decision is the right one in this time of maturity, unfavourable demographics and persistent economic difficulties in Europe. That said, local low cost airlines are not expected to remain silent and will respond by expanding their route network and customer offerings much more aggressively in the Middle East as an answer to any newcomers to the market such as Ryanair.

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