Wednesday 24 April 2019

Brexit the only cloud as O'Leary sets sights on 200 million passengers

More than 131 million will fly with Europe's largest airline this year and potentially 70 million more by 2024. Can it sustain such growth?

Ryanair boss Michael O'Leary Photo: Bloomberg
Ryanair boss Michael O'Leary Photo: Bloomberg

Dan White

Ryanair unveiled its first quarter results last week. These showed that it had increased the number of passengers carried in the three months to the end of June by 12pc to 35 million and after-tax profits by 55pc to €397m. Even allowing for the fact that the first quarter 2017 results were flattered by the fact that there was no Easter in the same period last year, these were still seriously impressive results.

Ryanair now expects to increase the number of passengers it carries in the year to March 2018 by 8pc to 131 million and after-tax profits also by 8pc to €1.4bbn-€1.45bn.

Alitalia was tipped over the edge into bankruptcy after its 11,000 staff rejected a €2bn cost-cutting plan
Alitalia was tipped over the edge into bankruptcy after its 11,000 staff rejected a €2bn cost-cutting plan

Italian flag carrier Alitalia effectively went bust in May when special commissioners were appointed to run the airline, which lost €199m in 2015 - the last year for which it has published financial results - and a total of €5.9bn over the past decade. The special commissioners have put Alitalia up for sale. Ryanair is one of a number of airlines to have submitted non-binding bids for Alitalia.

Is the bid for Alitalia an acknowledgement by Ryanair that it has grown so large that at least some of its future growth will have to come from acquisitions rather than, as has been the case up to now, being generated organically?

"It [the 200 million passengers target] will be easily met by overall growth in the market and market share wins. Ryanair is targeting Germany. It could add 20 million passengers there with another 10 million in Spain, 10 million (before Alitalia) in Italy and 15-20 million in Eastern Europe. Between organic growth and its fleet expansion programme, 200 million passengers is an achievable target", says Goodbody Stockbrokers aviation analyst Mark Simpson.

Long-time aviation-watchers will remember that this is not the first time that Alitalia has flirted with insolvency having previously gone bust in 2008. This time it was the rejection of a €2bn cost-cutting plan by Alitalia's 11,000-strong workforce that tipped the airline over the edge.

In fact, if the Italian Government had not allocated the most lucrative slots for flights between Rome's Fiumicino Airport and Milan's Linate Airport to Alitalia, where it has a de facto monopoly, it would probably have folded years ago.

So what does Ryanair see in Alitilia? Isn't it one of those over-manned, over-unionised, inefficient airlines that Michael O'Leary has spent most of his 23 years as Ryanair boss railing against? Just for good measure there is Ryanair's previous history of failed acquisitions with the EU having blocked not one but two Ryanair bids for Aer Lingus on competition grounds. Why should it be any different with Alitalia?

"There will always be an Italian solution to Alitalia", predicts Davy Stockbrokers aviation analyst Stephen Furlong.

"There could be an interim deal where there wouldn't be the competition issues that would arise if Ryanair took over the whole of Alitalia".

Furlong believes that the most likely resolution of the Alitalia saga is a break-up of the airline with a shrunken Alitalia retaining its long-haul routes and Ryanair picking up some or all of its short-haul routes. Would this give Ryanair access to some of the lucrative Fiumicino-Linate routes currently controlled by Alitalia?

Not alone would an Alitalia break-up, which hived off its short-haul routes, minimise possible competition issues, it would almost certainly have other advantages for Ryanair.

"Somebody will have to pick up the tab for Alitalia's debts and other liabilities. You can be fairly confident that somebody won't be Ryanair", predicts Davy's Furlong.

The plight of Alitalia and many other flag carriers is testament to the success of Ryanair and other low-cost carriers in completely reshaping the European aviation market.

Since 2004 the European aviation market has grown at an annual average rate of 4.2pc. However, the low-cost carriers have achieved average annual growth of 13.4pc while the flag carriers have grown at less than 1pc a year. What this means is that the low-cost carriers' share of the total market has grown from 13pc to 40pc since 2004. And the low-cost airlines' market share will continue to grow, with Furlong pointing out that they account for most of the new aircraft being delivered by manufacturers.

Ryanair is the largest of these low-cost airlines with 15pc market share. In terms of passenger numbers carried, it is now just ahead of Germany's Lufthansa as Europe's largest airline and almost six times larger than Alitalia, which last year carried just 22.6 million passengers.

In addition to its near-dominant 48pc share of the Irish aviation market, Ryanair is also the market leader in a slew of other European countries including Poland (30pc), Belgium (29pc) and Spain (19pc).

It has also overtaken Alitalia as the market leader in Italy with 28pc share. Ryanair occupies the number two slot in the UK with 18pc and is growing strongly in Germany where it currently has an 8pc share.

The only major European aviation market that Ryanair has yet to crack is France.

Driving the growth in Ryanair's passenger numbers to 200 million is a series of huge aircraft orders with Boeing. In 2013 Ryanair ordered 183 Boeing 737-800s, to be delivered during the five years to the end of March 2019.

It has followed this up with an order for 110 of the new 737-Max-200 aircraft, with options for another 100, to be delivered in the five years ended March 2024.

At list prices these orders will cost Ryanair up to a gross $36.7bn (€31.3bn at current exchange rates). However, these gross figures will be significantly reduced by the discounts Ryanair receives from Boeing for ordering in bulk. Ryanair will also dispose of some of its older aircraft as the new ones are delivered.

Ryanair expects its total fleet, which stood at just under 400 aircraft at the end of June 2017, to increase to as many as 585 aircraft, including some leased planes, by the end of March 2024. Underpinning this fleet expansion are the lowest costs in the business, just €27 per passenger in the first quarter, which in turn allow Ryanair to offer passengers the lowest fares.

Ryanair's average fare in the first quarter was just €41 compared to €51 at Hungarian low-cost airline Wizz, €77 at Easyjet and €78 at Norwegian. This cost advantage will widen further when the first of the Boeing 737-Max-200s are delivered in two years time.

Not alone does the 737-Max-200 carry eight more passengers than the 737-800, 197 vs 189, it also burns 16pc less fuel per seat.

A modern efficient fleet, low costs, low fares and soaring passenger numbers. What could possibly go wrong for Ryanair?

In a word: Brexit. Ever since last year's referendum vote, the company has been issuing ever more strident warnings about the possible consequences of Britain leaving the EU without an interim aviation agreement being put in place first.

Ryanair has been one of the major beneficiaries of the EU's "open skies" policy, which allows airlines registered in one member country to fly to and between other member countries. At last week's results presentation, Ryanair chief financial officer Neil Sorahan held out the prospect of a suspension of flights between the UK and the EU in March 2019 if Brexit goes ahead without an interim agreement.

In practice it probably won't come to that. If Ryanair is excluded from the UK market it will concentrate on mainland European markets instead. This would result in fare wars erupting in those markets.

"If you are Lufthansa you could see Ryanair squeezing five years of growth in the German market into one year", says Furlong.

Air France could also be hit by a hard Brexit - London is the second-biggest route of its Dutch KLM subsidiary. The prospect of Ryanair seeking to recoup lost UK business on mainland Europe will serve as incentive to EU governments to be flexible on the aviation issue in the Brexit talks, he believes.

All of which points to some sort of interim agreement being put in place. However, time is of the essence. Airlines plan their schedules up to a year in advance.

Ignoring Brexit in the hope that something will be cobbled together at the last minute in March 2019 won't cut it. Even if passengers could somehow be persuaded to buy them, no airline would knowingly sell tickets that it wasn't sure it could honour. Ryanair and its competitors will need to have a clear indication of the likely outcome by early 2018.

A far more likely casualty of Brexit are Ryanair's three UK domestic routes, which account for less than 1pc of its total business. O'Leary held out the possibility of these being either closed or transferred to a minority-owned UK-registered company that would operate them on Ryanair's behalf.

Not even Brexit it seems can halt Ryanair's growth to 200 million passengers and beyond.

Sunday Indo Business

Also in Business