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Ryanair to emerge bigger as Europe consolidates

25-Sep-2008

The next carrier in our airline outlook series is Ryanair, which despite recent self-declared “stuff-ups” on fuel prices, remains very well positioned to benefit from market churn this Winter. Ryanair recently stated its outlook for the financial year ending 31-Mar-09 remains “largely unchanged”, although it expects to break-even if oil prices average USD100 per barrel this Northern Winter. This represents an improvement from the previous forecast (in Jul-08) of “break-even to minus EUR60 million”, but could be prematurely optimistic, given the big spike in global oil prices in the past week.

Ryanair had hedged most of its Jul-Sep-08 quarter fuel requirements at USD124 per barrel, which, with the benefit of hindsight, was a “stuff-up”, according to CEO, Michael O’Leary.

The carrier still expects oil prices will weaken in line with slower economic growth, which would allow Ryanair to "return to substantial profitability" in 2009, with the carrier ultimately aiming to increase its pre-tax profits to approximately EUR900 million by 2012.

Ryanair predicts difficult operating conditions this Winter, as the UK, Irish and European economies go into recession “and consumer confidence plummets”.

Ryanair will respond to the current challenging operating environment, as always, with fare sales and aggressive pricing over the European Winter, to continue to stimulate travel demand, maintain high load factors and take market share from competitors.

In the past four months alone, Ryanair has launched 16 major fare sales. Deeply reduced fares are expected to continue to be offered, with the carrier stating it plans to lower prices by up to 5% this financial year to maximise pressure on its rivals. 

Major Ryanair fare sales: 04-Jun-08 to 16-Sep-08

Date

Seats

 Price

Destination

Travel period

Booking period

16-Sep

5 million

EUR5

Network-wide

Oct-08 and Nov-08

16-Sep-08 to 21-Sep-08

10-Sep

3 million

EUR1

Network-wide

Sep-08 and Oct-08

10-Sep-08 to 14-Sep-08

04-Sep

3 million

EUR5

Network-wide

Oct-08 and Nov-08

04-Sep-08 and 07-Sep-08

03-Sep

6 million

GBP10

Network-wide

Oct-08 and Nov-08

03-Sep-08 and 07-Sep-08

27-Aug

1 million

GBP1

Network-wide

Sep-08 and Oct-08

27-Aug-08 to 31-Aug-08

20-Aug

2 million

EUR5

Network-wide

Oct-08

20-Aug-08 to 24-Aug-08

14-Aug

5 million

EUR10

Network-wide

Sep-08 and Oct-08

14-Aug-08 to 17-Aug-08

07-Aug

1 million

GBP5

Network-wide

Sep-08

07-Aug-08 to 10-Aug-08

30-Jul

1 million

EUR1/GBP1

Network-wide

Sep-08

30-Jul-08 to 07-Aug-08

24-Jul

n/a

GBP1

UK to Scandinavia

01-Sep-08 to 31-Oct-08

24-Jul-08

24-Jul

n/a

GBP5

UK to France

01-Sep-08 to 31-Oct-08

24-Jul-08 to 25-Jul-08

10-Jul

n/a

EUR40 off return ticket

Network-wide

n/a

09-Sep-08 to 28-Mar-09

03-Jul

n/a

EUR10 off return ticket

Network-wide

n/a

Sep-08 to Mar-09

30-Jun

100,000

GBP10

From Ireland to over 50 holiday destinations

Summer Holidays

30-Jun-08 to 02-Jul-08

16-Jun

100,000

GBP10

106 routes to/from France

n/a

16-Jun-08

05-Jun

250,000

GBP10

n/a

n/a

n/a

Source: Centre for Asia Pacific Aviation and Ryanair
^ (inc taxes &charges)

Expects more airline bankruptcies “in the coming weeks”

While Ryanair has the financial stability to ride-out the current difficulties in the operating environment, with cash reserves of over EUR2 billion, the outlook for the rest of the European airline industry is particularly bleak. Ryanair forecasts there will be more airline bankruptcies “in the coming weeks”, as Europe’s "non-viable, loss making airlines run out of cash or have their credit facilities withdrawn".

Sees chance of Aer Lingus acquisition boosted by Europe consolidation trend

Mr O’Leary forecasts the “extraordinary pace” of European airline consolidation to continue and anticipates “three large high fare groupings led by British Airways, Air France-KLM and Lufthansa” to emerge this Winter.

The carrier stated it expects the European Commission to give a “rubber-stamp approval of these mergers”, which Ryanair expects will improve its chances of appealing against the EU's prohibition of its 2006 merger with Aer Lingus.

Ryanair, which already has a 29.82% shareholding (equating to 159.2 million shares) in the troubled Aer Lingus Group, is reportedly considering launching a EUR1 billion bid for Aer Lingus, after the carrier forecast a significant loss in 2009 (Aer Lingus reported a loss of EUR20.2 million in 1H08). Ryanair reiterated that Aer Lingus “is far too small to survive as an independent regional airline, and we believe its future can best be secured as part of one strong Irish airline group (where it would continue to be separately branded and managed), rather than being a tiny subsidiary of a high fare airline grouping controlled from London, Paris or Frankfurt”.

Focused on continued cost-cutting efforts

Meanwhile, Ryanair stated it is currently focused on reducing its non-fuel cost base, adding that "revenue would look after itself."

In its latest cost-cutting attempt, Ryanair has reportedly requested its 1,700 pilots volunteer to take unpaid leave this Winter, stating it would otherwise “allocate unpaid leave to some Dublin and Stansted-based pilots from November onwards". The carrier has also:

  • Imposed a pilot recruitment freeze;
  • Enacted accompany-wide pay freeze;
  • Announced redundancies in its Dublin call centre;
  • Renegotiated numerous airport maintenance and handling contracts;
  • Increased discretionary charges for baggage and airport check-in.

The airline also plans to introduce check-in kiosks in Oct-08 at the airline’s main bases in Dublin and Stansted to further reduce airport staff and handling costs.

In 1Q09 (three months ended 30-Jun-08), Ryanair’s operating costs increased 43.6% year-on-year to EUR769 million, as a result of higher fuel costs (fuel costs increased 91.5% year-on-year to EUR367 million to represent 47.7% of the airline’s total operating costs), in addition to the higher level of flight activity.

Capacity growth of approximately 14% planned for FY08/09

Despite its capacity reductions over the European Winter (including some hub development delays due to the Boeing strike), Ryanair expects to carry just over 58 million passengers in FY08/98, an increase from 51 million in FY07/08. Overall, Ryanair will continue to expand its operations aggressively for the remainder of 2008/09 (although at a slightly slower rate than previously planned), growing its overall capacity during the European Winter by 8-9%, following an 18-19% capacity expansion over the Summer months.

Ryanair passenger growth forecast (4Q08 vs 1Q09 forecast): FY07 to FY12F

Source: Centre for Asia Pacific Aviation & Ryanair

Outlook: Tough conditions in European market, but opportunities exist for Ryanair

Ryanair has been predicting, and seeking, “bloodbath” conditions since 2004. Now the time has arrived, Ryanair plans to use the difficult operating environment to its benefit, capitalising on its scale and cost advantages, its strong brand and its large cash reserves, as it focuses on gaining market share from its competitors and stimulating demand with deeply discounted fares.  

In doing so, Ryanair is willing to suffer “short-term pain for long-term gain”, as it positions itself to benefit and grow from opportunities arising from the expected wave of airline bankruptcies and mergers this Winter.

This is an excerpt from the latest edition of Peanuts! Weekly.


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