Business Irish

Wednesday 21 February 2018

O'Leary chomps at the bit for French and German slots

A MOST EXTRAORDINARY YEAR: Michael O’Leary continues to multitask
A MOST EXTRAORDINARY YEAR: Michael O’Leary continues to multitask
Richard Curran

Richard Curran

Ryanair chief executive Michael O'Leary knows a thing or two about horses for courses.

A similar idiom applies in the airline business. There is a kind of easy narrative knocking around about Ryanair. It's a newspaper journalist's dream, especially in the UK. It says that Ryanair stopped being rude to its customers and its profits have rocketed ever since.

It's a tempting but rather simplistic explanation of how the airline made a 66pc increase in profits last year. The Ryanair programme has revolutionised the company culture in customer service -but many of the old reliables of the airline remain very much in place.

The results show how Ryanair still keeps a very tight rein on costs, while the new family-friendly approach combined with business class allow it to go after a whole new range of customers flying to a load of new airports.

Michael O'Leary knew that he could have stayed with the same old model and continued to grow, but it just would have got tougher. His determination to buy Aer Lingus reflected the fact that he wanted to use that brand as a means of taking on the likes of Easyjet at primary airports.

Not landing Aer Lingus left him with the third option, which was to revolutionise the customer approach from within and fly to more primary airports under the Ryanair brand.

The customer respectability image makes that a lot easier. But everything else has to work too. The success of the new approach simply highlights how Ryanair's 29pc stake in Aer Lingus is a pure legacy issue that O'Leary will no doubt be happy to end in the coming weeks.

Not accepting IAG's offer could scupper its bid, which would force down the Aer Lingus share price. Ryanair already looks like becoming a forced seller of the stake anyway because of competition rulings.

Ryanair's stake is worth about €387m from the IAG bid, compared to the €400m Ryanair spent acquiring it. This is a great deal for Ryanair, especially when the stake was worth just €216m before Willie Walsh made his initial approach.

O'Leary can have no complaints on the personal financial front. At the start of May his 51 million Ryanair shares were worth €556m. That had gone up by another €35m to €591m this week.

His cash dividend payments on his Ryanair shares have hit close to €50m in the last four years.

The one blot on the copy book appeared to be the decision to hedge fuel costs at $92 per barrel. The airline found itself on the wrong side of a massive oil price drop. However, that will begin to even out as the hedging unwinds.

It is debatable how much profit Ryanair would have announced if it hadn't hedged on oil at such a high price. If the airline had got it cheaper, O'Leary probably would have ploughed some of the savings into lower fares to try and take out more of the competition.

As it is, Ryanair grew its net margin from 10pc to 15pc in the year to March 2015. Paying less for fuel will simply be another tailwind.

Ryanair clearly has its sights on more primary airports and has had talks with Charles de Gaulle Airport in Paris.

The more passengers it carries, the greater its bargaining power. After mopping up southern and eastern Europe, O'Leary has his eye on two large but difficult prizes - Germany and France.

For O'Leary, it has been an extraordinary year. And all from a man who is said to have the At The Races channel on the TV in his office.

Now that is multitasking.

Nama's best years are already behind it

Nama doubled its profits last year to €458m, but it may have already hit the sweet spot in terms of its best profit years.

The agency reported a very strong financial performance for 2014 and, when combined with profits from 2013, it has made about €670m in after-tax profit in the last two years.

This came after a very shaky start for the agency. Once it had acquired €77bn of loans for around €32bn, it found there was no market to sell assets back in 2010. So it had to start flogging off trophy properties in London in particular in order to get money in and start to pay down its massive borrowings.

At the same time, the value of what it had bought from the banks kept falling, as the agency has taken over €3.5bn in impairments since taking over the loans.

In the meantime, Nama has raced ahead with disposals as the market improved and managed to pay back €20bn of its €30bn or so in senior debt. Nama is now less of a risk to the Irish Exchequer.

But are its best years behind it now? At the end of 2014 it had net equity on its balance sheet of €1.2bn. Yet it is talking about making an overall profit of over €1bn when it winds down. With around €13bn of assets still to be sold, and the property market in a growth phase, this looks like an easy target.

However, annual profits from now should get smaller as the size of the business shrinks.

Nama still has a lot of property in Dublin and even some in London, but it may well be caught a little by dealing with the dregs of the portfolio in the next couple of years.

It still has over 600 clients on its books but that looks set to fall dramatically with the sale of the Project Arrow portfolio. It still has security on 229 ghost estates around Ireland, including 47 in Cork, 16 in Galway and 24 in Dublin.

The agency should make a billion alright. It would be a lot better than the sceptics imagined. But perhaps it isn't that hard when you buy €77bn of assets for less than half price.

Middle of the road house price solution

Property prices are on the march again, despite the dreaded Central Bank intervention on mortgages. Critics of Patrick Honohan's mortgage loan-to-value cap said it would either drive prices down or make no difference at all, because they would still rise anyway.

The figures suggest it is doing something in between. After a pause in house price growth, they appear to be heading back up again with a 1pc rise in April in Dublin.

This isn't exactly wrecking the market, but if Dublin prices grew by 1pc in April, continuing at that pace would see price gains of around 12pc per year. This is undoubtedly higher than Honohan and the Central Bank might have liked.

Mortgage figures suggest a drop off in mortgage take-up in the same month that Dublin prices climbed by 1pc.

The rental crisis is undoubtedly a big driving factor in all of this. Perhaps the Central Bank will take some comfort as to where house prices would have been if it had not intervened at all.

But before you cry "boom/bust", remember house prices nationally are still 37.8pc lower than their peak level in 2007. In Dublin they are 36.3pc lower.

Honohan's intervention hasn't wrecked the market or fully solved the problem. It is the kind of middle-of-the-road result they like down in Dame Street.

Sunday Indo Business

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