Ryanair predicts era of high-fare travel is over
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Ryanair: “People say the era of low-fare travel is over now that oil is USD130 a barrel. Bullshit. The era of high-fare travel is over. I hope oil stays high for the Winter, so a lot of crappy airlines go out of business. A few carriers will be safe, but everyone else is in danger of going bust”, Michael O’Leary, CEO, 03-Jun-08.
Michael O’Leary has got what he wanted. The rain dance is over - the perfect storm has arrived. Ryanair can now press home its scale and cost advantages in the “bloodbath” the carrier has been predicting (seeking) since 2004. Or can it?
Last month, Mr O’Leary stated the carrier would compete and grow at the expense of profit margins over the next 12 months. He added, “frankly, shareholders are just going to have to take it on faith”. Those shareholders have seen the value of their Ryanair stock plunge 39% (even after this week’s 5% rally), due to the carrier’s decision not to hedge its fuel requirements, leaving it entirely exposed to the massive recent run-up in oil prices.
Ryanair would be in a much stronger position to take advantage of the long-awaited storm conditions if it enjoyed the hedging coverage of its competitors, even some of its nearest rivals, like Flybe, Jet2.com and British Airways.
Ryanair warns that if oil prices remain at USD130 per barrel and fares rise by 5%, the airline would “just about break-even” this financial year (after a record EUR481 million profit last year when passenger numbers rose 20% to 50.9 million, revenues rose 21% to EUR2.7 billion and average fares, including bag charges, fell 1% to EUR44). The market is more optimistic about profits in the year ahead, but analysts are still predicting a savage cut in Ryanair’s earnings from last year.
Mr O’Leary stated that, in the medium term, “high oil prices are really great for Ryanair’s business. Consumers become more price sensitive. It forces other airlines to consolidate or go bust”. He added, “people are going to move away from higher-price airlines, looking for value - they shop in supermarkets and they fly with Ryanair."
O’Leary conceded that Ryanair’s financial performance for the year to 31-Mar-09 was “entirely dependent on fares and fuel prices”. He added, “I think [oil prices are] going to fall in the medium term, I just don't know when that's going to be”.
In the meantime, Ryanair is pressing ahead with its rapid expansion. The carrier, which took delivery of 30 aircraft last financial year will add a further 40 this year.
May-08 load factors have encouragingly returned to last year’s levels.
ILFC CEO, Steven Udvar-Hazy, stated this week that the end of the Summer season would be “the critical juncture for global airlines”. This is true for Europe, though Winter 2008/09 is looming as the ultimate test. Ryanair plans to ground up to 20 aircraft – or 10% of its capacity – in Winter 2008/09 at its Stansted and Dublin bases, where airport charges have increased – more than double the number of aircraft it grounded last Winter. If oil prices stay above USD100 per barrel next Winter, Ryanair is predicting many carriers will not survive.
Overall, O’Leary is confident Ryanair’s earnings will rebound strongly when “irrational” oil prices settle down. But unlike Southwest, and even easyJet, Ryanair is unable to exploit the industry storm to its fullest. If fuel prices rise, some rivals are better protected by their hedges and Ryanair's margins are further undermined. If fuel prices fall, weaker rivals can hold out longer.
Like its botched investment in Aer Lingus, which attracted a hefty right-down last financial year in Ryanair's accounts, Europe's largest LCC has slightly missed the mark in the looming shakeout and will wear some collateral damage. That said, Ryanair should emerge from the turmoil in a more dominant position.