Thousands of canceled flights and disgruntled customers; reprimands from regulators and slower growth this winter. After what CEO Michael O’Leary described as a mess of Ryanair’s own making over the allocation of pilots’ leave, it’s fair to say the Irish LCC has had a difficult few weeks. 

But with the short-term situation seemingly under control–flights mostly rebooked, customer communications improved and regulators placated–the real challenge begins. 

How can Ryanair retain its workforce while keeping a lid on costs in an increasingly competitive European market? 

It will be a complicated juggling act, but industry watchers are confident that Ryanair’s management can pull it off. 

The cost of the pilot leave debacle itself—estimated by the airline to be around €25 million ($30 million) before the second wave of cancellations and changes to the winter schedule were announced – may be small change in the context of a net profit of €1.3 billion in the last financial year. 

But longer-term, higher labor costs now seem likely. Earlier this month, as rumors swirled about pilot shortages, mass desertions to rivals and pilot plans to unionize, O’Leary, usually more outspoken than contrite, was forced to plead with Ryanair’s pilots not to jump ship, offering more money and a mea culpa for “management failure” in a letter to them.

Captains can now expect a pay increase of €10,000 and first officers €5,000 at four of the airline’s largest bases—Dublin, London Stansted, Berlin Schönefeld and Frankfurt—the letter says, while offers at other bases depend on competitor pay. There will also be a 12-month “loyalty bonus” of up to €12,000 for captains and up to €6,000 for first officers, payable monthly from November 2017 to October 2018. The money is aimed at preventing departures to competing airlines. 

“It looks as if there will be some escalation in pilot costs if they pay these bonuses and loyalty bounties,” JLS Consulting director John Strickland said. “How much labor costs go up and whether they can claw back savings in other areas will be the key to what the final calculation comes out at. They’ve certainly recognized that they had an own goal and they simply cannot afford to have that again in terms of their credibility.”

Finding ways to offset the pay rises, as well as a pledge to benchmark pilot pay against competitors Jet2 and Norwegian and exceed their salaries if Ryanair’s are found to be lower, will be a challenge.

“Could they enter into negotiations with partners such as airports or aircraft maintenance providers? It won’t be easy, but it is in their DNA to always focus strongly on costs,” Strickland said.

But that cost-cutting reputation works both ways–the LCC’s strong track record on minimizing costs means it will be harder for it to find any remaining areas with room for maneuver. 

However, Strickland is confident that Ryanair’s management will find a way out of its difficulties, and believes the fact that Ryanair has maintained its full-year financial guidance is a good sign. “The financial markets are a key barometer, and so far they are buying into what Ryanair management is telling them,” he noted. 

“They run a tight ship and this is obviously going to use up some management time, but that is partly why they are trying to move quickly. They have the benefit of the winter being a quieter season which gives them a chance to regroup.” 

Court ruling

The need to placate and retain angry pilots is not the only labor issue Ryanair is facing. 

In a ruling before the cancellations were announced, the European Court of Justice came down on the side of employees who wanted to be allowed to take Ryanair to court in Belgium, where they were based and performed their duties, rather than in Ireland, where the airline is headquartered and their employment contracts were issued. 

This development also has the potential to increase Ryanair’s costs over the long-term, forcing it to rethink where and on what type of contracts it hires employees. 

Some analysts estimate the ruling could add 5-10% to the airline’s cost base in the next few years. O’Leary insisted there would be no increase. 

The truth is probably somewhere in the middle. “In terms of costs per passenger, employee costs at Ryanair come in fifth, after fuel, airport and handling, ownership and maintenance, and route charges,” Warwick Business School professor of strategy Loizos Heracleous said. 

Employee costs account for €5 out of a €27 total excluding fuel, he explained. “Therefore, any reasonable increases will not have a large impact on Ryanair’s bottom line. Further, potential changes in employee terms presume lengthy court cases with uncertain outcomes.” 

Heracleous is also confident that Ryanair will be able to weather its labor-related difficulties. “Even though the recent cancellations have a reputational impact at Ryanair, the longer term performance implications are not significant given its size and fast growth. Ryanair will continue to be the dominant player in the low cost sector in terms of numbers of passengers-—120 million over the last year and counting—and in terms of profitability with a 20% net profit, versus an industry average of 8%.” 

– Alan Dron contributed to this article