Ryanair
Irrepressible Jul/Aug 2022

Ryanair has surged out of the pandemic leaving its low cost and Legacy rivals in its wake. Might it do something really radical in its next growth phase?

Ryanair has just increased its traffic estimate for its FY23 (year to March 2023) to 166.5m passengers, which will be a 12% increase on the 148.6m carried in FY20, the last pre-pandemic year. Perhaps more impressively, it has been able to ramp up operations and add capacity without the disruption, delays and cancellations that have bedevilled other airlines.

As a result of its reliability and on-time performance Ryanair’s brand has miraculously improved — The Sunday Times headlined ”How Ryanair became this summer’s must-fly airline”. Even Michael O’Leary has been praised — “No more Mr Nasty Guy” opined one columnist. Perhaps.

The reason is that that Ryanair minimised staff redundancies during the pandemic, striking deals with key unions whereby employees were retained in return for temporary pay cuts (average remuneration was halved in FY2021 but has since been restored). It implemented a policy of rotating its flying crew on the greatly reduced services, so keeping their licences current. The total workforce was 17,268 as at March 2020, was cut to 15,016 the following year, but was brought back up to 19,116 by March 2022, ahead of the full lifting of restrictions on intra-European flying.

It was able to adjust to the pandemic largely because of its financial strength. As at mid-2019 it held €4.1bn in cash and equivalents, had shareholders’ equity of €5.3bn and long-term debt of €4.2bn. At the end of June this year Ryanair had €6.2bn of shareholders’ equity against €4.2bn of long term debt, while the cash balance was €4.6bn. In short, Ryanair strengthened its balance sheet during the pandemic.

This was achieved, as O’Leary regularly reminds us, with no government support (other than furlough-type schemes) in contrast to the state bail-outs provided to the Legacies. How Ryanair has managed its finances from FY17 through FY22 is traced in the table.

Although operating cashflow turned negative in the two pandemic years to -€0.5bn compared to €3.4bn in the two pre-pandemic years, capex was cut by €0.6bn, a net €0.7bn was raised from loans, €0.4bn from a share issue, and dividends/share buy-backs. which were a substantial €1.1bn in the two pre-pandemic years, were eliminated.

Ryanair returned to normal operations and profitability in the first quarter of this financial year (April to June) with passengers totalling 45.5m, 461% up on 2021, average load factor restored to 92%, and a net profit of €170m achieved, compared to a loss of €273m in 2021. For the full year, the financial outlook is very positive; HSBC expects an EBIT of €1.2bn and a net profit of €1.0bn, Bernstein goes for €1.6bn and €1.3bn. The net profit needs to get to €2bn to trigger O’Leary’s bonus of 10m shares at a strike price of €11.1 (currently €12.6).

Ryanair doesn’t spend much on its presentations; in fact it does seem to spend anything, happily recycling the same PowerPoint slides for the past 20 years, and the core message remains the same: “Europe’s Lowest Cost Wins!”. This year it estimates its LCC competitors’ cost (ex-fuel) per pax to be 26% (Wizzair) to 203% (Eurowings) above its own. This, according to O’Leary, means that it stands to benefit from the recession that unfortunately is threatening Europe as passengers will move from more expensive airlines to the lowest price provider, Ryanair.

O’Leary’s recession argument may not be as clear-cut as he makes it seem. In difficult times there is abundant evidence that essential spending trades down — with shoppers changing from quality to value supermarkets, for example — but discretionary spending — on holidays and travel in particular — may be cut completely. Ryanair’s passenger profile is complex: there is a substantial VFR component, business-related traffic notably on Dublin-London and intra-Italy, even high net worth travellers visiting their second homes in France, but a major part of its traffic base comprises moderate-income tourists taking their annual holidays in Spain. Leisure demand has soared in 2022, released from the frustrations of lockdowns, but will this continue into 2023, when the full impact of the energy crisis and rising interest rates hits less well-off households?

On the other hand, Ryanair is being helped by its competition.

Ryanair’s competitive positioning is indicated by the pie chart which estimates seat capacity, pre-pandemic on Ryanair’s network on an city-to-city basis (so it includes, for instance, Aer Lingus on Dublin-Heathrow as well as Ryanair on Dublin-Stansted). IAG, mostly British Airways, is the biggest competitor on this measurement. And British Airways’ recent performance has attracted a great deal of criticism for its unpreparedness for resuming full business, although part of the fault lies with Heathrow Airport and its extension of the 2022 capacity cap into next year. BA has had to cancel about a million seats in its winter schedule in response to which Ryanair announced a million new seats out of Stansted this winter.

The important Italian market is also looking very favourable — nearly half of the 73 737-8200s delivered have gone into this market. ITA (formerly Alitalia) has had to really downsize during the pandemic with the result that Ryanair will be offering four times as many seats as ITA this winter within Italy and Italy-Europe. And it looks as if ITA will be sold to the Certares/Air France consortium rather than MSC/Lufthansa (see Aviation Strategy, May 2022) which probably reduces further any chance of the new flag-carrier being a success or even of surviving.

As for the LCC competition easyJet has, like the Legacies, had to curtail services in the recovery. In the process it has dented its reputation. It also remains unprofitable — in second calendar quarter of this year it reported a net loss of £-114m (€-132m). But the real upheaval in the LCC sector has involved Wizzair.

Wizzair had a bold plan for the pandemic: it would pursue growth aggressively, build its A321neo fleet rapidly and enter new markets where the incumbents were weak. It looked as if this could be a successful strategy (see Aviation Strategy, May 2020) but it over-expanded and was brutally exposed to the fall-out from Putin’s invasion of Ukraine.

Demand in eastern/central Europe, Wizzair’s home market, fell sharply in the wake of the invasion, pushing RASK down by about 10% compared to pre-pandemic operations. In 2021 Wizzair management made a decision to go to a policy of no hedging on fuel and currency, because it had lost out on its previous hedging positions. This proved disastrous when fuel prices surged and the euro weakened against the dollar. CASK rose about 40% compared to pre-pandemic. Ryanair by contrast was fully hedged.

The result for Wizzair was a net loss in the second quarter of €452m, 56% of revenues, albeit that €140m of this was a non-cash foreign exchange loss on capitalised leases. So Wizzair has gone from being a genuine ULCC threat to Ryanair to being another deeply financially troubled airline.

The biggest problem facing Ryanair in 2019 was the grounding of the 737 MAX but because of the pandemic Ryanair was able to turn that into an advantage. At the end of 2020, in the depth of the Covid-19 recession, Ryanair renegotiated the pricing on its 2014 MAX order for 135 units and placed an additional order for 75 aircraft, the first MAX order Boeing received in the pandemic, bringing the full orderbook to 210 737-8200s (as Ryanair designates the aircraft). Boeing’ list price for this type, $122m, is pretty meaningless in Ryanair’s case as it has been able to combine its bulk purchasing power with critical timing to win very deep discounts — we would guess its unit price for the 2020 order to be in the range $35-40m.

By August 73 737-8200s had been delivered, leaving 137 on order (or officially on option). It is benefitting from a stream of new aircraft as its accelerates out of the pandemic — although the scheduling of deliveries is a little shaky and vexes O’Leary greatly. His newly emollient attitude apparently does not extend to Boeing management about whom he has been very rude, although he continues to praise the aircraft as a “game-changer” offering a 16% fuel efficiency improvement on the 737NG

Ryanair’s pre-pandemic traffic target was 200m passengers by 2024, which still seems eminently achievable, providing the capacity is available. Its longer-term target is 225m passengers by FY26 which implies a fleet of about 700 aircraft compared to 483 today.

It needs to complete another mega-order to continue its growth and replace the 737-800s that are being retired, keeping the average age of the fleet under five years, an important part of the airline’s low cost model. But last year Ryanair abandoned talks with Boeing on an order for up to 250 MAX 10s, which has a capacity of around 230 seats and is the closest to the A321neo. Boeing apparently was unable or unwilling to make any more price concessions; O’Leary commented: “Boeing have a more optimistic outlook on aircraft pricing than we do, and we have a disciplined track record of not paying high prices for aircraft”. Frustratingly for Ryanair, its position has been somewhat undermined by the fact that it got absolutely nowhere with Airbus, on price or availability, when it started to negotiate for a A321neo order.

Outrageous Wizz speculation

Some 15 years ago an intrepid equity analyst asked at the Investor Day meeting whether Ryanair was interested in taking over the then upstart Wizzair. O’Leary’s response was withering: he wouldn’t pay five euros for the airline. Since then O’Leary has stated many time that consolidation in the LCC sector is inevitable but this consolidation inevitably involves just easyJet/Wizz (which was attempted last year) or some combination of these two LCCs and a Legacy.

Here are some speculative points regarding Ryanair and Wizzair.

• The purchase price might be right. Wizzair’s stockmarket value has fallen by about 60% to €2.1bn over the past 12 months. Ryanair’s stockmarket value is €14.1bn which is 32% down on a year ago. Whatever the overall stockmarket trends, the valuation of the two airlines is likely to continue to diverge as analysts are suggesting a net loss this year for Wizzair of around €-1bn in contrast to Ryanair’s €1bn-plus profit. Unless there is some form of rights issue, Wizzair’s shareholders’ equity will be close to zero by this time next year.

• A Ryanair order for 250 MAX 10s, if an agreement can be reached with Boeing, would entail a capital commitment of $10-12bn as a semi-educated guess. In theory, Ryanair could solve all its future capacity problem through taking over Wizzair, which has outstanding orders for 312 A321neos across all variants, including long-range A321XLRs; the operating fleet is 157 aircraft.

• Despite O’Leary’s criticism of the costs of the operating leases that Wizzair’s A321s are on, overall unit operating costs for the two carriers are similar and their operating models are compatible.

• This would give Ryanair a dual Boeing/Airbus fleet, something that it has been seeking for some time in order to maximise competition between the two manufacturers.

• Regulatory issues should be controllable due to the limited network overlap (pre-pandemic Wizzair only accounted for about 3% of Ryanair’s market as measured on the broad city-pair criterion used above). Certainly, there should be less political opposition than when Ryanair tried to buy out Aer Lingus.

• Wizzair has over the past two years made opportunistic incursions into Ryanair markets in Italy and elsewhere, while central/eastern Europe is an expansion target for Ryanair.

• Wizzair has a well-recognised and well-regarded brand especially in central and eastern Europe; that could be retained under Ryanair Group’s multi-airline structure, which includes Buzz, Malta Air and Lauda.

• Might Indigo Partners — the incubator of and minority investor in Wizzair — have a role to play? JetBlue has thwarted Indigo Managing Partner Bill Franke’s aspiration for a US super-ULCC created through the merger of Frontier and Spirit (see Aviation Strategy, March 2022); might he turn his attention to helping create a European super-ULCC?