Irish airline Ryanair (Nasdaq: RYAAY ) made a bold move recently when it offered to acquire long-haul carrier Aer Lingus. The deal is audacious not only for daring to take on the Irish government and the employee unions, but also for its sheer scope, as it promises to create a rather unique venture.
If the deal goes through, Ryanair will have married a low-cost short-haul carrier with a long-haul trans-Atlantic one. While there are carriers like Zoom Airlines and MAXjet (for business travelers) that offer some level of low-cost competition on the trans-Atlantic flights, Ryanair, by size alone, has the potential to make quite an impact. Even heavyweight British Airways (NYSE: BAB ) , which derives a substantial portion of its profits from trans-Atlantic flights, should be worried.
Meanwhile, back home .
One of the most intriguing questions raised by this news is, why hadn't JetBlue (Nasdaq: JBLU ) and Southwest (NYSE: LUV ) offered this type of service long ago? While such a venture may be a difficult road, it is also a highly profitable market space, and passing that up may be a strategic mistake.
Granted, both of these U.S.-based low-cost carriers have good reasons for not expanding into the international long-haul market. First, there is difficulty because the flights are still tightly regulated, and U.S. and European officials have not yet reached the appropriate understandings needed to truly liberalize the trans-Atlantic marketplace.
Furthermore, many of the profitable hallmarks of the low-cost, short-haul business model are not quite as applicable in the long-haul market. Short turnarounds, luggage-light passengers, low catering costs, and last-minute bookings are all in shorter supply on the demanding cross-ocean trips. Travelers may be willing to tolerate an hour-long flight with no reclining seats, for example, but when the flight length is 10 to 12 hours, it becomes an entirely different matter.
On the flipside, I've commented before on the disruptive threat that Southwest and JetBlue presented to the legacy carriers in the U.S., and one of the key takeaways was that Southwest in particular failed to move up-market to the more profitable international market. Carriers like Continental (NYSE: CAL ) have used that strategic choice to their advantage, by considerably expanding international offerings to great success. Now it seems that Ryanair is taking advantage of that strategic error as well.
It is clear why Southwest and JetBlue haven't exactly charged into this market; it doesn't play to their traditional strengths, which were developed in a U.S., as opposed to an international, marketplace. However, that decision may come back to bite them in a big way soon enough. Ryanair, in contrast, doesn't seem to view similar constraints as a huge stumbling block to success.
Will Ryanair's bet be proven correct? That remains to be seen, as there are many question marks surrounding the deal, but this Fool likes its willingness to step up and challenge the status quo.
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