Yesterday, Ryanair was delighted to announce that it had increased its profits by 13%. But the really interesting part of this story is that they only had 5% more flyers. So the question becomes: where did all this profit come from?
Ryanair is famous for its unexpected charges. You constantly read these horror stories about people forking out enormous sums of money in airports for having breathed too deeply at check-in and arriving at the gate two minutes after their row allocation was meant to board (even though they were standing in the queue the entire time and the delay was caused by the ground-staff trying to fine the gentleman in front of them for attempting to board in a wheelchair when he had paid to board on crutches).
Which I honestly thought was a bit exaggerated. Until I read the Ryanair General Terms and Conditions.
But more of those in a moment.
So it comes as no surprise that when you look at the Ryanair Income Statement, you see “ancillary revenues” up by over 20% and counting for almost a QUARTER of all revenue. Just to clarify: Ryanair splits its revenue streams into “scheduled” and “ancillary”. It’s not clear what they mean by the split (that would be telling), but they do love to talk about “improved product mix” in relation to the ancillary side of things.
My guess is that “ancillary” refers to anything that the customer didn’t anticipate. So if you booked your flight from London to Dublin (£20) on a low season special, and paid to check-in one bag (£20), then you’d fall into the scheduled revenue category. But if you had to change your flight (£75), and replace your boarding pass (£70), and book on additional luggage (£120), then you’re squarely into “ancillary territory”.
The Important Point
Without the ancillary revenue, Ryanair would be deeply loss-making. Also, doesn’t it seem absurd that so much of an airline company’s sales come from things that aren’t plane tickets?
So Why Are Passengers Paying These “Optional” Charges?
As any good astrology would tell you, we have some pretty basic beliefs about ourselves. You know, in the same way that 96% of all drivers think that they’re above average? And when it comes to travel plans, we generally reckon that:
- we’ll be organised in the future;
- we’re pretty good at anticipating our future needs and wants;
- we won’t over-shop when we’re on holiday; and
- we’re rational.
Here is the Ryanair value proposition: if you’re right, then you’ll get a really cheap flight and the best end of the deal!
I strongly dislike budget value propositions. They play off our loss-aversion bias. Because when you book a more expensive flight with a more lenient airline (£79 to Dublin on British Airways), what you’re saying is: “I’m not good enough to take the Ryanair bet: so I’ll have to take the loss (the higher ticket price) up front.”
At the same time, it plays off our over-confidence bias – which is our tendency to over-estimate our abilities around time-management and self-restraint.
So, reluctant to miss out on a good deal, and confident that we can be relied upon not to ruin it, we roll the dice and book the twenty pound special on Ryanair. At this point, we’re about to be the victim of an even more serious bias: refusing to alter the flight plan, even when it costs an obscene amount of money. We’re officially a captured market.
Example: you’d rather pay to replace the boarding pass you lost somewhere in duty-free, even though it would be far cheaper to buy a new ticket, because you can’t stand the thought of staying in the terminal any longer. In other words, the budget airline is forcing you to place a price on your inconvenience and discomfort.
It’s so very clever.
Here are some charges from the Terms and Conditions:
- Decide to take a change of clothing at the last minute during high season? £130 one way if you didn’t think you were going to take any luggage initially.
- You had to buy another bag to carry your unanticipated trinkets? £135 one way (and sometimes as high as £160).
- Lost your boarding pass? £70.
- Need to change your flight time? £75.
All of the above? Moments where it would probably be cheaper to turn around and re-book yourself onto the next British Airways flight. Or, even, the next Ryanair flight (ie. rebook, don’t change your booking).
But none of these options is nearly as cheap as it would have been to just book onto BA in the first place.
The Greater Implications
Every finance decision that we make is framed within those same biases. And plenty of others (check out the wikipedia list!).
It’s extraordinarily difficult to be objective when making the big decisions (and even the small ones, as Ryanair is proving). We’re human: we don’t like to believe that we’re wrong; and we like to believe that we know better. And the only solution to that is getting some advice from an experienced professional, and spending a bit of time every week thinking about the way that you think.
Disclaimer: I’m about to sound like a hippy.
In all seriousness, I genuinely believe that the best financial decision you can make is to invest in regular weekly appointments with a good therapist*: so that you can get to know yourself, and your biases, a bit better.
It’s just good for business.
PS: I’m proud to say that this is one of those rare situations where the practice and the preaching are not at odds.
*A Cognitive Behavioural Therapist. Not such a fan of the psychodynamic crew. But that’s, um, a personal bias…