Effects of Unionization on Ryanair

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Effects of Unionization on Ryanair

By its own admission, Ryanair's senior management has not treated its employees fairly. The mistreatment of Ryanair employees by management is what fueled employees to push for unionization. Unionization may see Ryanair’s profit margin drop by 10% as it will bring about a dramatic change to Ryanair’s cost-driven business model. The airline will have to move away from its use of short-term contracts to long-term contracts, increase pay and improve its employee's benefits packages.

FINANCIAL implications of unionizing

On the heels of Ryanair's announcement to recognize unions, the company's value dropped by more than €2 billion in three days. As many investors continue to speculate on what impact unionization may have on Ryanair's profits, the general agreement is that unionization will place Ryanair's profit performance in the same league as that of Southwest Airlines, whose profit margins are estimated at 10% compared with Ryanair's 20%.

In December 2017, Ryanair's chief operations officer, Peter Bellew, stated that "Ryanair was adapting to 'a new reality' in dealing with its workers." However, information regarding Bellew's statement about the airline's adaptation to a "new reality," is yet to be released. Mr. Bellew estimated that the changes could cost Ryanair an extra €100 million every year. Ryanair labor costs per passenger stand at $4, "less than half its nearest rival," which gives the airline ample breathing room to deal with the effects of unionization. Some analysts believe that unionization may cause Ryanair’s labor costs to increase up to 20%.

According to Stephen Furlong, an analyst at Dublin stockbrokers Davy, if the airline wants to remain as profitable, Ryanair would need to "build the business to 200 million passengers annually on 600 aircraft by 2024." Ryanair currently has a fleet of 422 Boeing 737s and catered to 129 million customers in 2017. In spite of the current climate of uncertainty faced by Ryanair, Mr. Bellew noted that the airlines' forecast will remain, "the business would make between €1.3 billion and €1.35 billion."

Ryanair's current work process

Ryanair uses an outsourcing model, which is a cost-driven business model focused on cost minimizing wherever possible. According to the European Cockpit Association (ECA), Ryanair's "systematic use of contractors and self-employed pilots," who provide their services through temporary agencies, negatively impacts employee working conditions." This model placed limitations on employee access to crucial benefits such as paid vacation, maternity leave or sickness. While this model has proven highly beneficial to Ryanair, it could also be the reason why the airline has such a difficult time retaining pilots. According to Peter Bellew (Ryanair COO), one of the airline's biggest problems is its inability to retain pilots. Mr. Bellew admitted that senior management encouraged that pilots who chose to leave the airline should not be contacted, nor should they be persuaded to stay.

Another component to Ryanair's low-cost business model is its use of secondary airports. Secondary airports have very few routes and plenty of room to grow. By using this strategy, Ryanair has negotiated airport rates that are highly skewed in their favor, which has given the airline a monopoly in this space. In fact, during 2016/17, 70% of Ryanair's secondary routes had no competitor. Unionization challenges this entire business model and the European Court of Justice ruling legitimizes this challenge.

In the past, Ryanair forced its employees in Europe to handle their disputes in Irish courts. The European Court of Justice ruling states that cabin crews based outside of Ireland can now handle legal claims in local courts. This means that employees can challenge Ryanair's "atypical employment set-ups under the laws of their own country." In their bid to unionize, Ryanair pilots have also received support from Southwest Airlines pilots.

WORK Changes that may occur

The work process changes that may occur at Ryanair due to the effects of unionization are still unknown as the case is still very new. However, we can use Southwest (a top low-cost airline in the U.S.) as a case study based on the similarities between the airlines (Ryanair is Europe's top low-cost airline). Southwest has experienced unionization and the work changes made by the airline have recently come to fruition. In fact, Ryanair's CEO, Michael O'Leary used the Southwest business model as a template for Ryanair. Based on these similarities, we can analyze the work process changes that have affected Southwest Airlines to gain some insight into work process changes that may affect Ryanair.

After four years of negotiations, in 2016 Southwest Airlines agreed to provide their pilots with new four-year contracts, which included a 15% pay raise. The airline also agreed to increase pay by 3% in 2017 through to 2020. In 2017, Southwest announced that it would share $586 million in profits with its employees, in addition to the extra $351 million the airline contributed to employee 401(k) plans. More recently, Southwest Airlines announced that they will be rewarding employees with a $1,000 bonus in response to the new GOP tax bill. This is indicative of a move towards longer-term employment, pay increases, and better benefits overall. Similar changes may occur at Ryanair.

SUMMARY

Ryanair has not released any information regarding the changes it is willing to make to its work process. However, we can deduce that the move to unionization will have some major financial implications for Ryanair. The airline will have to increase its labor costs per passenger quite significantly, which will decrease its profit margin. Serious changes will need to be made to Ryanair's cost-driven business model, which may include hiring long-term staff, instead of outsourcing, and increasing pay. These changes may lead to higher pilot retention and greater job satisfaction.
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