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Ryanair’s 2008/09 expansion programme could permanently reshape Europe’s shorthaul market. And the major airlines are becoming largely powerless to respond.
CEO Michael O’Leary is not renowned for his subtlety, but the next few months could witness a real triumph of his bludgeon over their scalpels. The result will be indelible, entrenching Ryanair with Europe’s dominant short haul market share – or not.
easyJet and Ryanair have consistently led the market this year in expanding across the region, with capacity growth well ahead of their larger opponents.
Intra-Europe passenger numbers growth by airline: Jan-08 to Jul-08
Source: Centre for Asia Pacific Aviation & company reports
(Note: European routes only. Lufthansa not shown. See graph below for y-o-y July figures with SWISS included)
With competitors’ tactical positions already set, the decider will come down to one main item: the unpredictable price of fuel. Recent investor reaction to announcements of Ryanair’s likely future losses due to high fuel costs was ugly, to say the least. The subsequent upwards rebound when oil prices then fell shows, in mirror image, what can happen if prices head north again, were Ryanair to remain unprotected.
Ryanair share price: Sep-07 to Aug-08
Source: Centre for Asia Pacific Aviation & Yahoo Finance
But Ryanair does now have a window of certainty, for better or worse. According to Mr O’Leary, the airline can make money with fuel below USD130. If that is the case, there is a practical and reliable way of setting up a predictable cost base – and be profitable. Even with a couple of billion pounds in the bank, profitability is what investors want.
As fuel prices have recently tumbled, the heat will soon be on to put in place some serious long term hedges, both for fuel and for currency (a big issue for any airline with large UK exposure to non-Euro denominated cost items). By doing so, much external cost uncertainty could be removed.
However, perhaps the least favourite job in the world today would be working in Ryanair’s Treasury group. Their CEO would have been underwhelmed with the currency and fuel hedging calls to date and there is more than a reasonable chance that the message was passed along. Whether they or O’Leary have been calling the shots, it has almost come down to a case of “if Ryanair calls left, then go right” with its recent hedging strategy.
Even when Ryanair did finally decide to hedge its fuel this month, it managed to pick a moment when the price was in freefall. With 90% of September’s fuel now hedged at USD129 and 80% of Q3’s (October-December) at USD124, there is at least a known downside. Even if the LCC pays more for its fuel than its neighbours, it can still be profitable at these levels.
And that is where the bludgeon strategy remains effective. Mr O’Leary is now also applying his blunt instrument to Boeing and Airbus, as he seeks another 200-400 aircraft. With variable costs under control and a product cost well below the main opposition, the expansion formula is almost perfect.
July’s passenger numbers are illuminating, with each of the big three holding back on growth in the largely discretionary leisure peak period.
European Carriers passenger numbers and passenger number growth on intra-European routes in Jul-08
Source: Centre for Asia Pacific Aviation & company reports
(Note: Lufthansa includes SWISS)
Ryanair looks to be on the brink of establishing a near-impregnable position in the market. To complete the formula, a short sharp drop in fuel prices (with some effective hedging), along with a prolonged economic slowdown would give the bludgeon plenty of room to move. You can forget the old-fashioned nonsense about “small is beautiful”.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
