Category: Archive

High altitude, attitude

February 16, 2011

By Staff Reporter

Within the space of a week after Jan. 31 came three typical news headlines: “Ryanair reaches agreement with KLM to buy Buzz, Dutch airline’s low-cost subsidiary” was followed by “Ryanair orders 100 new Boeing 737-800s to a value of $6 billion,” and then “Ryanair announces passenger growth of 55 percent for January 2003.”
For good measure, another one: “Ryanair’s new routes from Milan start today. Seat sale: fly for 50 cents.”
As a business phenomenon, Ryanair is certainly a success story. Its deal to buy Buzz from KLM last week had analysts and market watchers wowed over yet another example of Ryanair’s “tooth and claw capitalism,” an accusation once launched at its chief executive, Michael O’Leary, by Taoiseach Bertie Ahern
Regardless, others have warned that Ryanair is not invincible. But its success must be seen in the context of its competition: the European air carrier market is still dominated by large, national and former national carriers, cost-inefficient and top-heavy with management.
One such is Aer Lingus, Ireland’s national carrier, which suffered a disastrous year after the Sept. 11 terror attacks, a year that saw Ryanair continue to expand, remarkably unfazed by the severe market downturn.
The fallout from Sept. 11 was dismissed by Ryanair’s famously hardnosed chief executive O’Leary, who said that the established airlines were hurting “not because of terrorist attacks, but because they are mismanaged.”
Last week it came as little surprise that several Irish newspapers reported a rumor that Ryanair may have Aer Lingus in its sights as its next acquisition.
O’Leary may have enjoyed the rumor but, said Merrill Lynch analyst Anthony Bor, it was just that: a rumor.
“That has an extremely low degree of credibility,” Bor said. “It would run against everything that Ryanair has built itself on.”
The Ryanair success is modeled on the “well-precedented example of Southwest Airlines in the U.S.,” said Bor. That model includes using only one type of aircraft — in Ryanair’s case, the Boeing 737 — which factors in considerable savings in spare parts, pilot, crew and maintenance crew training.
Another basic difference between Ryanair and more traditional airlines is that like Dallas-based Southwest, it uses facilities much more aggressively: a great deal of time is wasted at airports between arriving and takeoff: some aircraft sit on the ground for several hours. Ryanair focuses on a quick turnover from one flight to the next, also reducing the time it takes to collect baggage.
Then there is the airline’s famously cheerful corporate culture, epitomized by the denim shirt and jeans-wearing O’Leary, who has more than once staged photo opportunities for the press where he was seen helping ground staff to unload passenger baggage.
The success story has been well-documented: how O’Leary took over as chairman in 1990 and immediately went to study Southwest’s model in Dallas, returning with the determination that Ryanair could be even more low-cost and no-frills.
He targeted regional, second-level airports where Ryanair could establish cheap terminals and pay lower airport taxes: hence passengers to Frankfurt in Germany arrive not at the main Frankfurt airport but at another airport 30 minutes away from the center of town.
O’Leary has always joked that Ryanair seeks “world domination,” prompting another rumor: that the airline will sooner or later start a trans-Atlantic service. There was intense speculation that this would happen in 2002, when Ryanair made a 35 percent increase in profits while other airlines such as Aer Lingus lurched through the crisis year.
As yet, Ryanair says it has no firm plans for a trans-Atlantic route and analyst Bor said that he would be “gobsmacked if they were to go for a trans-Atlantic route. It goes against their whole business model, which is based on a single aircraft type.”
Ryanair looks set to dominate the European regional carrier service for the foreseeable future. One analyst brusquely asked, comparing Ryanair with the established carriers, how long passengers “will go on paying full-service carriers 12 times as much in order to get a cheese roll and a shorter trip to and from the airport.”
Could the bubble burst? Merrill Lynch’s report on Ryanair recommends it as a share investors should buy, but gives it a “high” volatility risk. Bor said that the airline does have vulnerabilities. “It is at risk to swings in macro-economics and to fuel price increase,” he said.
Andrew Koch, senior fund manager at HSBC Asset Management, told reporters at the weekend that Ryanair was still an excellent investment but that the airline will suffer a “savage market derating” when growth starts to slow.
The order for 100 new Boeing 737-800s “could arrive just as the low-cost market has become saturated. The scale of the financial risk to which the company is exposed is enormous,” Koch said.
With war looming in the Persian Gulf, Ryanair gave a typically cocky response to the question as to how a conflict might affect air travel.
“We expect some blip from the war, but in reality people have to travel and if you give them lower fares, they will travel,” said Michael Cawley, a deputy chief executive of Ryanair.
However, in contrast to analysts such as Koch, Irish stockbrokers Goodbody pointed out on its website last week that “low cost carriers account for 18 percent of U.S. passenger numbers, in contrast to just 9 percent in Europe. That suggests a potential addition of 33 million passengers for European airlines simply to catch up with the U.S. average and a market which is in a growth phase.”

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