In an industry rife with job losses, deferred aircraft orders and capacity cut backs, Ryanair’s half-year results are a clear indication that this airline is bucking the trend. For the first six months of its financial year to the end of September, Ryanair reported a net profit of €387 million, an 80 percent increase compared with the same period in 2008. It was fed by a 15 percent rise in passenger volumes and a 17 percent drop in yields.
Ryanair’s ability to capitalise on the worst recession in 80 years centres on the company’s ethos of driving costs to a minimum at every opportunity. At the end of 2008, CEO Michael O’Leary took advantage of the downturn and used it to secure a pay freeze for the company’s 7000 plus employees.
There have also been aggressive negotiations with airports to secure lower landing fees. As Ryanair is one of the only airlines expanding at a time when passenger volumes are collapsing throughout Europe, airports have found themselves with little choice but to accept the airlines terms. Those who resisted have been subject to the wrath of O’Leary’s ruthless bargaining power and highly mobile fleet. Cardiff, Cork, Manchester and Valencia airports refused to lower landing charges and bow to the demands of the airline and consequently Ryanair pulled most of its aircraft from these airports.
These measures contributed to a 27 percent fall in unit costs, with fuel per passenger expenses down 5 percent. However, ‘these results are heavily distorted by a 42 percent fall in fuel costs, which has masked a significant 17 percent decline in average fares,’ warned CEO Michael O’Leary. But why such a cautious tone? And why have investors not been convinced by these results?
A €15 per passenger profit and 18 percent growth in volume should be cause to celebrate. Amid unprecedented yield declines and consumer weakness, the low cost leader continues to be highly profitable while protecting its bullet proof balance sheet of €2.5 billion in gross cash. However, according to Director of Research at Bloxham Stockbrokers Joe Gill ‘consensus remains simply too high. Fading ancillary revenues and built-in unit fuel cost inflation next year demands highly conservative forecasts.’ Indeed, Ryanair have maintained final year guidance ‘towards low end of €200-300m range.’ Clearly analysts’ expectations have become detached from the facts and this has been built into the share value.
Maintaining this final year profit guidance ‘implies sharp losses in the second half of the year of about €180 million as the company drives yields down by 20%’ added Mr. Gill. The company has also taken a number of steps to maintain its competitive edge over rivals. The airline is imposing a pay freeze for the next two years and has locked away 50 percent of its fuel requirements for the first half of 2011 at $662 in the first quarter and $741 in second. This will help manage costs into next year by keeping per passenger fuel inflation to about 10 percent.
That said, there still remains a great deal of uncertainty around the future of the airline. The most critical of these is the company’s plans for future expansion. Already Europe’s biggest budget carrier, Ryanair has plenty of scope to grow in short-haul Europe and having the industries lowest unit costs will secure competitive advantage and profitability on the way through. However the airline has said its negotiations with Boeing on an order for 200 aircraft had not progressed much, adding that it could end its long-standing relationship with the aircraft maker. If the talks between Boeing and Ryanair collapse it would place serious constraints on the airline’s future growth.
Ryanair’s Chief Executive Michael O’Leary added that ‘we [Ryanair] see no point in continuing to grow rapidly in a declining yield environment, where our main aircraft partner is unwilling to play its part in our cost reduction programme.’
Government measures have also proven to be incompatible with this ‘cost reduction plan’ and the airline again called on the Government to scrap what it describes as the ‘stupid’ and ‘misguided’ €10 passenger tax introduced in April.
Ryanair continues to perform strongly in a brutal environment that has forced contraction, closures and emergency funding among its competitors. However given the challenges that remain, profit expectations for this airline are set to remain conservative as yields continue to be negatively impacted by the weakness of sterling. But looking at the bigger picture, if Ryanair and Boeing fail to reach a deal, then we can expect capacity to be capped and yields to stabilise, translating into higher average fares for the consumer.