Ryanair’s Tryst with Boeing 737 Max

Ryanair Holdings PLC (LON:RYA) is a Dublin, the United Kingdom domiciled low-cost airline and is Europe’s largest budget airline. The airline operates low fare, no-frill passenger airline services to destinations between Ireland, the United Kingdom, Continental Europe and the middle east. The company has been one of the pioneers of the low-cost business model in Europe, achieving rapid success in a small period of time. The company operates over 300 Boeing 737-800 aircrafts flying 225 destinations across 40 countries. The airline is one of the principal competitors to traditional full-service airlines in Europe and has tried aggressively to steal away market share from the former by adopting competitive pricing strategies. In order to optimize most of its low-cost business model, the company also markets convenience solutions and travel protection through its own Website. Other than travel, the company offers boarding and lodging services and a host of other services; it also has its own passenger handling and ticketing administrations support at Dublin Airport.

737 Max Deliveries

Boeing 737 is the mainstay of the Ryanair Holdings Public Limited company, having operated so many aircrafts for such a long period of time. The company has been able to achieve economies of scale in its maintenance, pilot training and servicing segments. Not being able to receive the newest models of this aircraft thus puts an extra burden on the operations of the company as it is unable to employ other aircraft models on account of heightened switching costs.

The crisis with this particular model of the Aircraft started with two of Boeing 737 MAX models falling victims to two fatal crashes within a short period of time, one after the other. The first one being the Lion Air Flight 610 crash in October 2018 and another one being Ethiopian Airlines Flight 302 crash in March 2019, causing in a total of 346 deaths. Investigators looking into the reasons for the crashes soon found that the cause of both crashes is linked to the new Maneuvering Characteristics Augmentation System (MCAS) installed on the newer generation MAX models of this aircraft. The system, it was revealed repeatedly made the Aircraft to nosedive, leaving little room for the crew to take corrective action later. Further a study conducted by the Federal Aviation Authority of the United States and the Boeing company revealed that MCAS did indeed pose an unacceptable safety risk to the aircraft. As the news of the flaw in this flight operating software began to spread, airlines all over the world started to ground their inventory of the Boeing 737 max and by the end of March 2019 all the civil aviation authorities of the world had banned the aircraft from taking commercial flights.

Airlines are not the only ones suffering because of the crisis with the aircraft. After the second crash of this particular aircraft model, several airlines cancelled their orders of the model, leading to a major plunge in the stock price of The Boeing Company. By 14 March 2019 the shares of the company had lost 11 per cent of its value and by 23 March 2019 it had lost 18 per cent, shaving off nearly $40 billion in market capitalization of the company. Since then, several reputed Investment banks and research houses have downgraded the company on account of the uncertainty of the future of its flagship product. The production loss at Boeing also affected the fortunes of nearly 8,000 suppliers to the company, with General Electric, the American Aero Engine manufacturing giant, reporting a loss of $ 1.4 billion on this account. The losses among major airlines and aircraft leasing companies have also been mounting significantly. The grounded aircraft not only means a major loss of revenue for these companies, but they also incur major maintenance costs during this period, leaving aside the personnel cost of staff who are without work during the period. Other than that, the Boeing company, directly and indirectly employs nearly 1 per cent of the United States’ workforce and the production cut at the company’s plant is anticipated to cut the 2020 GDP growth of the country by 0.5 per cent.

Ryanair Holdings Plc last year had been plagued by weakness in the UK aviation market due to Brexit headwinds weighing heavy on consumer confidence and spending habits. In Germany also the company was facing problems with excess capacity which are often sold at lower than cost prices. The company’s performance for the full year last year had been poor due to the intense fare competition amongst airlines. The unprecedented delivery delays of Boeing 737 MAX models, slow traffic growth, and heightened fuel bill are expected to keep the costs of the company high during the first half of 2020 and would exert pressure on the company this year as well. Moreover, the company had also been plagued by employee strikes last year, which it was able to negotiate and solve temporarily; the difficult trading conditions this year could very well see this problem surfacing again.

Ryanair Holdings Plc has high hopes from the Boeing 737 MAX models. It has ordered about 210 numbers of a special model of this Aircraft called the Boeing 737 MAX 200, which has eight more seats and offers 16 per cent more fuel efficiency. The company believes that these aircrafts would be a game-changer in an industry, which is becoming increasingly price competitive. The company which was set to introduce the new model of the aircraft by the beginning of 2020, is now expecting to fly them by May of 2020. Among other things, the reason for this delay is the tougher than anticipated technical challenges that the Boeing company is experiencing with these new models, the renewed distrust among civil aviation authorities and the negative perception among the general flyers regarding the safety of this model of the aircraft that has evolved over the past one year. From the company's side more than anticipated time and money would have to be spent on pilot retraining to fly these new aircrafts as the Boeing company has stated that the problem required technical remediation which is carried out on the model. Significant amount of simulator training will be required for pilots to be able to fly these aircrafts.

Meanwhile, Michael O’Leary, the Chief Executive Officer of Ryanair, has decided to take on the problem of negative public perception by the horns. He has stated that the company will not be providing any advance information to the passengers on which model of the aircraft they will be boarding, nor any refunds will be made if anyone refuses to fly the new model. He further stated that the allocation of aircraft to a particular route of a particular sector is only done the night before, and there is no scope of providing advance information at the time of booking. The company, like most other airlines in Europe, is subject to the enhanced environment regulations being imposed on the industry by the European Union. These new aircrafts would not only provide the company with better-operating economies but are also extremely important if it wants to meet the European environmental regulations.