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Ryanair charm offensive clears way for assault on Europe

By Conor Humphries

DUBLIN (Reuters) - It took Ryanair boss Michael O'Leary three years, two profit warnings and a grilling by shareholders to admit it might be time to stop "unnecessarily pissing off" customers.

But 12 months of love-bombing and studiously matching rivals' perks has helped him deliver Ryanair's best summer ever, launch a growing business class and set the airline on course to control one in five seats on Europe's short-haul planes by 2019.

While Ryanair's service remains no-frills, the simple steps of asking staff not to hound customers, slashing punitive fines and ending the frantic scramble for unassigned seats appear to have convinced flyers to reconsider the airline.

It is now seeking to build on that with an aggressive marketing drive to convince 30,000 people a day to buy a new business class fare, which would cut its dependence on summer holidays and provide fatter margins to fund growth elsewhere.

"They're late to the game, but rolling this out with ruthless efficiency," said Gerard Moore, a Dublin-based analyst at Investec. "With the cost base and scale they have, the damage from coming so late to this is likely to be minimal."

LATE TO PARTY

The architect of "ultra-low cost" air travel, a model that made him one of Ireland's richest men, O'Leary has proved reluctant to give up hard-won savings in a decade of compulsive cost cutting.

"Ultra-low-cost was Michael's invention. His principle was that people would crawl over broken glass to get a cheap fare," said one former Ryanair executive, who spoke about the company on condition he not be identified. "But as time went on and those prices became more normal ... people start to say, you know what? Its not worth it."

In 2010 easyJet broke away from the budget pack by improving its service offering and quickly started attracting leisure and business passengers on the basis that its service wasn't as awful as Ryanair. O'Leary responded by deriding its CEO.

The three year delay in copying the easyJet model was in part due to Ryanair's bid for Ireland's former flag carrier Aer Lingus , which O'Leary has since said he wanted to use as a premium product to compete with easyJet.

Six months after the bid was blocked, and after two profit warnings a shower of abuse from investors at the company's 2013 annual general meeting, O'Leary dramatically announced the change of strategy.

"We should have moved quicker on addressing unnecessarily pee-ing people off," O'Leary told journalists this week, toning down the expletive he used when he first made the characteristically direct observation about his airline's obnoxious service a year ago.

Ryanair, he said, is "not there yet" and has another year or two of customer service improvements to go.

BUMPER SUMMER

Aer Lingus' chief executive this week said he was "flattered" that Ryanair was copying its strategy and said he was confident the first-mover advantage would make it hard for Ryanair to make up lost ground.

But bumper summer profits indicate the improvements may not need to be dramatic to win people back.

At check-in at Dublin airport, 3 miles from Ryanair's headquarters, of a couple of dozen passengers questioned, almost all said price, route and times were the most important, but several admitted they were making less effort to avoid Ryanair.

"I'd still prefer to fly Aer Lingus, but I'd be less negative than I would have been (about Ryanair)," said Paul Travers, a 55-year-old English teacher carrying his 2-year-old son to a Ryanair flight to Berlin, which he chose because the times were convenient.

Annoyances like having to print out boarding passes and out-of-town airports and the airline's "shrill" colours, were annoying, "but bearable," he said.

The sense that staff were no longer trying to catch you out was enough to convince Brenda Hudson, 68, to return to Ryanair after switching to higher-fare Aer Arann after a Ryanair staff member prevented her from boarding with a "tiny" handbag.

"It's more relaxing because you're not worrying, are they going to pick you up on something," she said.

PROFIT SURGE

A dramatic 32 percent upswing in profits in the six months to September as higher cost rivals Air France and Lufthansa cut profit forecasts, indicated the small changes were having an outsized impact.

In an unusual achievement in the ultra-competitive European short-haul market, Ryanair managed to increase passenger numbers while raising fares.

It also added adding 2 million passengers to the winter schedule, prompting it to upgrade its growth forecast to 114 million passengers by 2019 from 82 million last year.

That puts it on track to hit its target of 20 percent of European short-haul seats by the end of the decade, before it receives the second half of 380 Boeings it has ordered in the past 18 months.

COST OF NICE

Ryanair insists that the costs for the changes have been manageable, with unit costs, excluding the volatile fuel price, up 3 percent in the first half. Full-year marketing costs tripled to 35 million.

The chief executive of Hungary's Wizz air, which claims to have the second lowest cost base in Europe behind Ryanair, this week warned that Ryanair's shift from ultra low cost could leave the field open for it to dominate the ultra-low-cost space.

But analysts said that instead of focusing on cost inflation, it is looking to boost margins by attracting business passengers, which may give it scope to lower prices elsewhere.

Building on the improved service, Ryanair this summer introduced a new "business plus" fare, which offers free flight changes, fast-track airport security and a free check-in bag, all for an additional charge of around 50 euros each way.

As well as boosting margins, business passengers would ease the cyclicality of depending on holiday makers, with bumper profits in summer and losses in the winter forcing Ryanair to ground dozens of planes.

Ryanair estimates around a quarter of its 80 million passengers already travel for business, and it wants to get 12.5 percent using the new fares, around 30,000 tickets per day.

O'Leary said forecast penetration would reach "the mid-single digits", around a third of that target, this winter.

While rolling out one of its biggest ever marketing blitzes, it is aggressively increasing the number of high-frequency short-haul routes to major European business centres, like three-times daily flights to London from Glasgow and Edinburgh.

All the talk of a nicer Ryanair is essentially a "flag waving exercise" to draw attention to Ryanair's core strengths of Europe's lowest cost base and its largest route network, said Mark Simpson, analyst at Goodbody Stockbrokers.

"It is the network that will attract and retain the business customers. But first you have to get them to look at your product and they are doing a pretty good job so far," he said.

(Additional reporting by Sarah Young, Victoria Bryan and Ahmed Aboulenein; Editing by Peter Graff)