Price Reductions: Ryanair And Market Dominance

The national minister for development, Íñigo de la Serna, has asked airlines to reduce their prices because of the cut to airport taxes that will come into effect on 1 March and which will be repeated each year until 2021. Although, as he has said, the government has no legal power to demand that they do cut prices, it does have some authority. The airlines are likely to play ball; it's wise to keep the minister sweet.

The first airline to say that it will reduce prices was Air Europa, the Mallorca-headquartered operation that flies the flag for Spanish aviation, a flag that has been progressively lowered to the point that it's almost sharing space with airport ground crews. Other significant airlines are either foreign or foreign-owned. For Juan José Hidalgo, the boss of Globalia, of which Air Europa is a part, a positive response to De la Serna's request was to have been expected: a patriotic statement of aviation intent.

Less patriotic and purely hardnosed was Ryanair's announcement that it will pass on the tax cut. Again, it was to have been expected. Michael O'Leary has constantly called for lower airport charges; they are all part of the low-cost mix. With Ryanair, though, how can anyone be certain that the reduction is being directly or partially applied? This is to not say that it won't be, but is to say that the airline's prices are flexible, and it has demonstrated its willingness to cut prices in order to guarantee occupancy.

In the final quarter of last year, Ryanair achieved 95% seat occupancy. That was some achievement. By coincidence, it also turned in a 95 million profit for the quarter. While this was down - it was attributed to the fall in the value of the pound - it was still a healthy return, given that its prices overall were 17% lower. Taking account of a reduction in airport tax shouldn't pose Ryanair any business difficulty.

The point with Ryanair, and indeed other airlines, is that price fluctuation reflects the application of science and in particular the technology of Big Data. Prices aren't determined on a whim or purely marketing speculation; there is knowledge to back it up. And this information has been gained over years through the analysis of purchasing behaviour and demand. You don't become a highly successful airline just by taking a punt.

By contrast, there is the case of Iberia, which now also has its low-cost brand. Its president, Luis Gallego, has said this week that 2017 is going to be a difficult year. IATA, the International Air Transport Association, is forecasting a fall in profits of the order of 16% because of a slowdown in global economic activity and rising costs. Iberia has yet to say if it will accede to the minister's request, but it was perhaps no coincidence that Gallego was sounding a warning about lower profits at the same time as the request was being made. There are, so it seems, some airlines, such as Ryanair, which have little problem adjusting to altered pricing mechanisms, while there are others which do.

It is the ability of Ryanair to sell places that leaves other airlines, especially Air Europa and Vueling, gasping to keep up. It has been suggested that additional flights in winter between Palma and both Barcelona and Madrid could cause "havoc" with competitors. Moreover, there is increased service between Ibiza and Madrid and Barcelona, to say nothing of other increases to, for instance, Gran Canaria. It's a full-frontal battle with Vueling, Norwegian and others, and one that Ryanair is well-positioned to win. It can get the occupancy, while competitors struggle to fill their planes. Price reductions? Bring 'em on.