Ryanair news unsurprising in this market

Eleanor Steed
By Eleanor Steed October 18, 2016 16:26

Ryanair news unsurprising in this market

During the third and fourth quarters of 2016, it does not matter what sector a company flies; if it has the bulk of its revenues in GBP and the bulk of costs in Euro or USD then it will see margins fall. The announcement of a cut to Ryanair’s expected full-year profits to a range of €1.3bn to €1.35bn from €1.375-€1.425bn is therefore no surprise whatsoever. In fact today’s announcement if anything shows that Ryanair is weathering the Brexit and European/North African terrorist actions rather well; it is far less exposed than the likes of EasyJet, for example. But what is of interest to all is how falling margins will affect Ryanair pricing as it moves to keep load factors up at 94%.

Ryanair confirmed today that average fares in the six months to September 30, 2016 had declined by 10% but CEO Michael O’Leary commented that the airline expects a far sharper-than-predicted fall for the six months to March 2017 of between 13% and 15%. This is a very steep decline indeed and one that competitors will not be able to follow. EasyJet, having stayed away from Ryanair (and vice versa), might find a trickle of business floating away from Luton to Ryanair at Stansted if a pricing gap really opens up but even that is unlikely on most key city pairs.

The real battle will take place over central and Northern Europe with AirBerlin routes being targeted and, ever increasingly, with NAS is rubbing up against Ryanair. People forget that in Europe the low-cost carriers and flag carriers have moved away from each other as the market has developed and LCCs, taking the lead from the US ULCCs, have also made sure that they avoid each other for survival. Therefore Europe is a far more mature market than a decade ago with competition not the real worry for most but actually right now bad luck seems to be the key differentiator. If you are the airline exposed to a country suddenly politically unstable with war on its boarders, such as Turkey and all of North Africa, you are going to take a very big hit; the same goes for airlines serving cities suffering major terrorist actions. These airlines would either have to scale back rapidly or diversify and compete heavily. It is interesting that on the main in Europe airlines are not choosing the latter but the former option. They are choosing the path of least resistance; choosing to lease aircraft to keep them earning rather than try to deploy them in competition on new routes to create growth, which is a symptom of an uncertain market where levels of passenger growth are stagnant or declining. Ryanair has thus far not cut back on growth plans across Europe, the day it does is perhaps the day to worry about the near-term for all airlines in Europe.

For Ryanair though decision time looms – NAS has its transatlantic service in full swing between Europe and the USA and now it is going to South America damaging as it does the prospects of the major Atlantic carriers. Now Delta is considering a full-on assault by launching low cost services of its own to counter the threat. This move will most surely force the Oneworld alliance to follow and that means IAG and AA will need to take action. With Brexit causing economic uncertainty and increasing the price of holidays, maybe the market for these flights is starting to grow in the UK. Surely this is the moment for a deal between Willie Walsh and Michael O’Leary to jointly launch low-cost connections between Europe and the Americas? Stranger things have happened. But can O’Leary ever really retire without having started low-cost long haul services across the Atlantic?

Eleanor Steed
By Eleanor Steed October 18, 2016 16:26