Why the end of low cost travel will lift Ryanair shareholders
Published 26/05/2011 | 05:00
There was some surprise earlier this week when Ryanair boss Michael O'Leary forecast that the airline's fares will rise by an average of 12pc this financial year. Pundits quickly questioned whether the end of low fares was nigh.
The expected increase will follow a hike of the same proportion that the airline reported in the fiscal year just ended in March.
But it would be a mistake to mark this as the beginning of the end of the low-fare air travel that Ryanair pioneered in Europe.
Prices will rise, but compared to what passengers would have been paying 10 or 15 years ago, it's difficult to argue that they won't still be significantly better off.
Higher fuel costs force airlines in general to raise prices and Ryanair can follow suit, adding a little extra to its fares when rivals are under pressure to recoup operating costs.
But Ryanair maintains it's the fact that the average length of its flights is getting longer that accounted for the biggest part of the 12pc rise in average fares last year.
The airline has added routes to destinations such as the Canary Islands from a number of locations, extending the average journey time across its fleet. Longer journeys mean more fuel burn and, consequently, higher fares for passengers.
There is, however, another important element to this. Ryanair, as hard as it may be for some to believe, is maturing. Or at least its business model is. Gone are the days when new aircraft shipped to Ryanair from Boeing's Seattle factory could be deployed across a burgeoning network as quickly as they arrived on the tarmac in Europe.
Indeed, Ryanair terminated plans in 2009 with Boeing to buy as many as 200 new jets after the manufacturer refused to roll over on Ryanair demands related to pricing and after-sales service. That effectively ended longer-term expansion plans for Ryanair.
While tentative talks have taken place in recent months between Ryanair and Russian and Chinese aircraft manufacturers, don't expect any deals to be signed in a hurry.
Ryanair has reached a stage where breathless expansion is yielding to slower traffic growth. The focus is increasingly on squeezing more from passengers.
That's being done both through fares and ancillary items such as food and beverages, or via hotel bookings and car rentals -- from which the airline takes a cut.
And Michael O'Leary is the first to admit that ultra-cheap fares are unsustainable for the airline.
"Ultimately, I think that 99pc of people still want the cheapest fare, but there's no reason why our average price should be 50pc cheaper than anybody else," he told the Irish Independent in an interview a few months ago.
"I think it could easily be 25pc cheaper than everybody else, but that means a different kind of sales mission and a different kind of culture."
He explained: "You need to change the model. It's cheap, we're price competitive but we're not always the cheapest -- that's the way you've got to go."
But while passengers might end up paying more, for Ryanair shareholders, an end to break-neck expansion could have an upside. The share price could appreciate more significantly in the medium term as capacity growth decelerates and returns strengthen.