Ryanair has an amazing growth record—in passenger numbers, fleet, network and profitability. But now, Europe's largest and the world's second-largest low-cost carrier (LCC) is slowing down: It is not taking any new aircraft this year, anticipates an increase in passengers of just 2% and expects to post lower profits as average yields and fares contiue to fall across its network. At the same time, it is upping its service standards.

So is Ryanair, known for its cut-throat approach to costs and strict no-frills strategy, moving toward a hybrid model?

If it were up to CEO Michael O'Leary, he would not change a thing because, he says, “We couldn't be any more customer-friendly; we have 81 million people who think we're wonderfully more customer friendly than any other airline. That is why they fly with us.” But, he admits, “there are irritants out there. We are consciously going to eliminate those. The website does not function properly; it is too complicated.”

Customer-service initiatives include fully reserved seating across its network beginning Feb. 1, 2014. This return to reserved seating is in response to customer feedback via the airline's “Tell MOL [Michael O'Leary]” page on its website. About 60% of passengers called for allocated seating, which the CEO confessed, surprised him “personally.” Ryanair will also soften its rigorous carry-on policy and allow a “small” second carry-on bag, which is part of the new 10-year agreement with London Stansted Airport to facilitate airport shopping. The new hand-luggage policy will be rolled out across the network Dec. 1.

The reserved seating has revenue potential as passengers can preselect their seat for a €5 ($6.75) fee, and this will offset minor losses in ancillary revenue in airport-related fees, such as baggage, check-in and boarding card-reissue tolls. Overall, Ryanair expects ancillary revenues to trend downward toward about 20% of revenues in the midterm. Ancillary revenues grew strongly by 22% in the first half and helped offset the falling fares revenue.

Average fares, including checked-baggage fees, fell 2% year-on-year to €52 in the first fiscal half. Ryanair expects fares and yields will continue to fall in the reminder of its fiscal year—9% in the third quarter and by 10% in the fourth quarter ending March 31, 2014—due to a combination of increased competition and softer economic conditions across Europe. The airline has revised its full-year net profit guidance to between €500 million ($675 million) and €520 million.

This marks the second time this year Ryanair has adjusted its full-year profit outlook. To be clear: The airline is not sliding in the red and a net profit of between €500 million ($675 million) and €520 million is still very good—certainly for a European airline. In its latest financial forecast, issued in September, the International Air Transport Association expects European airlines to post a $1.7 billion (€1.3 billion) net profit in 2013. This means Ryanair would contribute almost 40% of the total net profits generated jointly by Europe's more than 300 airlines.

The LCC is also still growing its passenger traffic, albeit modesty, in spite of a decline in capacity. Ryanair is not taking any new aircraft this year, and by the end of its fiscal year will have reduced its Boeing 737-800 fleet to 300 from 305. In the first six months, traffic rose 2% to 49 million, and the airline is expecting a 2% increase for the full fiscal year.

Europe is a low-fare environment for now and, says O'Leary, “if that's where the market is, that's where the market is.” Our business model is “load factor-active, yield-passive,” therefore, well-suited to capitalize on the prevailing low-fare trend, he notes. “We will take whatever pricing we get to ensure we hit load factors of 82-83 percent year-round, because that continues to drive both the cost reduction on the airport side, the unit-cost efficiency on the employee and aircraft side, and the very strong performance in ancillary revenues.” Ryanair posted a 6% rise in October traffic and a 1% increase in load factors as a result of a range of lower fares and aggressive seat sales.

The airline will remain true to its historic strict cost decline. Unit costs, excluding fuel and adjusted for sector length, fell 2% in the first half. They are expected to fall 7% in the second half, and this will “widen the gap between us and every other competitor in Europe even further. Ryanair is well-positioned to return to strong, profitable traffic growth from September 2014 onward,” asserts O'Leary. The LCC will start to take delivery of its order for 175 new 186-seat 737s in September.

Ryanair is not the only European airline to feel the effects of Europe's persistent sluggish economies, resulting in low demand for air travel and strong price competition on short- and medium-haul routes. Irish peer Aer Lingus, for instance, in September, revised its full-year guidance for an operating profit, before exceptional items, to about €60 million from €69.1 million, citing weakness in short-haul bookings and yields.