If low-cost means ever-lower service levels, then customers will probably look to buy elsewhere.
If low-cost means ever-lower service levels, then customers will probably look to buy elsewhere.
If you ever had any doubt about the importance of keeping your customers happy, take a look at what’s happening to a business that believed being cheapest was the only route to success.
Ryanair, a remarkable Irish business success story, has grown to claim the title of Europe’s biggest low-cost airline thanks to a policy of ultra-tight cost controls and even tighter control over its customers – to the point of outright rudeness.
Ryanair has expanded spectacularly for much of the past 20 years thanks to its total focus on costs and control.
From start-up status of 25 employees, one plane and 5,000 passengers in its first year, the airline has grown to 9,000 employees 175 aircraft (with a further 303 on order), and 81 million passengers a year.
Being cheap was the reason for Ryanair’s success, but cheap only takes you so far, which the airline is now discovering.
Over the past few months, perhaps due in part to the general slowdown in economic activity in Europe, Ryanair has been forced to issue two profit downgrade warnings as passenger numbers slide and competition increases.
Since July, the airline’s share price has been in a tailspin, shedding close to 30 per cent, ending a spectacular upward run that had defied the recession gripping Europe.
So far, management at Ryanair has blamed competition in a tight market for the profit warnings and slumping share price.
But if that’s the case it needs to be asked what’s changed, because the overall business environment in Europe has been lousy for at least five years.
What really seems to have changed in the world of Ryanair is that customers who have been treated like cattle in the name of cost control have had enough and are migrating to other cheap airlines, which offer better service.
Examples of Ryanair’s approach to customer relationship management are legendary, such as no seat allocation (just let the herd stampede onto aircraft), ridiculous and punitive charges such as $120 for re-issuing a lost boarding pass, and $50 for a standard check-in bag.
The company’s chief executive, Michael O’Leary, is another legend in the field of customer service with books written about his comments, such as:
• “People say the customer is always right, but you know what, they’re not. Sometimes they’re wrong and they need to be told so.”
• “What part of ‘no refund’ don’t you understand.”
• On re-issued boarding passes: “We think they should pay 60 euros for being stupid.”
• On the inflight experience: “Anyone who looks like sleeping, we wake them up and sell them things.”
Funny, in part, but the way Ryanair treats its customers appears to have gone too far; and Mr O’Leary’s starting to change his tune.
Baggage rules are being relaxed, as is the punitive booking and boarding pass re-issue policy, and a seat allocation system is being introduced.
Efforts are also being made to attract business passengers, who have traditionally shunned Ryanair, and aggressive selling techniques are being dropped on early morning and evening flights.
No-one at Ryanair will admit that the drive for cost (and customer) control has gone too far, though Mr O’Leary hinted that was the case when speaking at the company’s annual meeting in September when he said: “We should try and eliminate things that unnecessarily piss people off.”
What really seems to be happening at Ryanair is that a warning signal has sounded about the airline possibly reaching the limits of cost control, and the shrinking pool of passengers prepared to tolerate the near-intolerable travel conditions.
However layered over the issue of declining passengers and falling revenue is that order with Boeing for 303 new 737 aircraft which will, in theory, grow Ryanair by 200 per cent over the next 10 years.
That sort of growth will not be achieved by treating customers as stupid (another O’Leary comment). It will only be achieved by better customer service – or rather ‘some’ customer service.
All tied up
Retailers hoping for a return of ‘lost’ customers, who decide that it’s safe to spend some of the savings they’ve squirreled away over the past few years might be in for a nasty surprise – the savings might not be accessible.
According to some studies of the Australian economy, the national savings rate has soared in recent years to around 10 per cent of income, a spectacularly high figure by global stands.
Last week, however, analysts at the investment bank Credit Suisse blew a hole in the 10 per cent savings figure by pointing out that much of the money being reported as savings was actually tied up in superannuation, which is inaccessible for most people.
According to the Credit Suisse investigation, once you remove superannuation from the equation the savings rate drops to 2 per cent of income.
In fact it gets worse, because once you allow for the repayment of the principal on loans held by consumers, the savings rate dives into the negative.
At an estimated minus 3.6 per cent, the savings rate today is far better than it was before the 2008 GFC, when it stood at minus 15 per cent, but that improvement is being offset by tougher bank lending requirements.
“We believe that a major easing of lending standards, or a very strong increase in assets prices (rising house values), is needed to persuade households to draw down savings,” the Credit Suisse report said.
In other words, retailers hoping for a consumer-led recovery in trading will probably be disappointed.
Lynas lament
Investors with an interest in the resources sector have been warned in this column over the years about the risks associated with exotic minerals.
Graphite, last year’s hot commodity, has largely faded from view recently because the price has contracted, but the biggest fall in the exotic category of minerals can be found among the rare earths which, in some cases, have fallen by 70 per cent – and are still falling
For Lynas Corporation, the one-time darling of rare earth investors, the price falls have compounded the damage inflicted by construction delays at the company’s Malaysian processing plant
Since peaking at $2.55 just over two years ago, Lynas shares have plunged by 87 per cent, last week touching a 12-month low of 33 cents.
