Since its founding three decades ago, Irish budget airline Ryanair (NASDAQ:RYAAY) has built a big business flying bargain-seeking travelers around Europe. In doing so, it has legitimized the low-fare/high-fee ultra-low-cost carrier business model, which has been imitated by numerous other airlines across the world.
Now Ryanair wants to bring its act to the trans-Atlantic market. When it begins flying to the U.S. -- probably around 2020 -- it could bring some much-needed competition to a market currently dominated by American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL), United Continental (NASDAQ:UAL), and their European joint-venture partners.
Ryanair's big announcement
On Monday, Ryanair's board approved plans to begin trans-Atlantic service near the end of the decade. The carrier announced that one-way fares would start at an eye-popping £10 -- roughly $15 at current exchange rates -- although taxes and fees for things like baggage and seat selection could add hundreds of dollars to the total cost.
By contrast, even cheap trans-Atlantic plane tickets cost roughly $800-$1,000 round-trip today, including taxes. Economy round-trip tickets on legacy carriers such as American, Delta, and United can easily exceed $2,000 (including taxes and fees) for nonstop flights during the peak summer travel season.
That said, Ryanair won't actually sell many seats for $15. Most one-way economy tickets would be priced at £99 (roughly $150) or more, and Ryanair is considering filling up to half of the space on its trans-Atlantic jets with more expensive premium seats.
The nitty-gritty details
Ryanair's board approved flights between up to 14 European cities and a similar number of U.S. destinations, according to The Guardian. U.S. cities receiving Ryanair service could include New York, Boston, Chicago, and Miami, with flights to cities such as London, Dublin, and Berlin.
Cheap flights across the Atlantic would be appealing to many travelers, despite the nickel-and-diming that is a key part of Ryanair's business model. However, the whole concept depends on Ryanair striking a deal with Boeing or Airbus for long-haul aircraft.
For the business case to make sense, Ryanair must buy planes that are fuel-efficient but also reasonably priced. Ryanair operates an all-Boeing fleet today, and CEO Michael O'Leary has expressed interest in Boeing's Dreamliner for long-haul operations -- just not at the going price!
However, Boeing's Dreamliner is more or less sold out through 2020. Boeing isn't likely to need big discounts to push the backlog out even further, given the Dreamliner's stellar range and fuel efficiency. This might give Airbus an opportunity to sell the A330neo, which it has been marketing as a cheaper alternative that offers enough range for most routes and fuel efficiency that is almost as good as the Dreamliner's.
What it could mean
Ryanair isn't the first budget airline to attempt to break into the trans-Atlantic market. However, its well-known brand and large route network in Europe will give it a leg up against less-established carriers.
Market leaders including American Airlines, Delta Air Lines, and United Continental don't have to worry too much about the threat from Ryanair for now. These legacy carriers get a significant proportion of their revenue on trans-Atlantic routes from lucrative business travelers.
Even if Ryanair includes a significant number of premium seats on its flights, business travelers tend to be loyal to one airline. Since they're not paying for their own tickets, they care more about service and frequent flier rewards than price. This limits the ability of budget carriers to compete on price with legacy carriers for business traffic.
On the other hand, American, Delta, and United still need to fill the "back of the plane" at reasonable fares to maintain their profitability. If Ryanair significantly undercuts them on fares, they could have trouble selling economy tickets without big discounts.
It will be years until Ryanair begins U.S. flights, and it could take a decade or more for it to carry out its growth plans here. But in the long run, Ryanair flights from the U.S. to Europe could fundamentally disrupt the airline industry, leading to more bargain fares for trans-Atlantic travelers.