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Let The Budget Air Wars Begin!


Ryanair prepares to prey on rivals during downturn

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Feb 11, 2008

France’s president, Nicolas Sarkozy, and his new wife, Carla Bruni, scored a notable victory last week against Ryanair, the budget airline.

For the unauthorised use of a picture of the couple in a newspaper advertisement, a French court ordered the airline to pay Bruni €60,000 (£45,000) in damages, plus a symbolic €1 to her husband.

The bill wouldn’t much have troubled Ryanair executives, who probably judged the publicity priceless – and who immediately offered to give another €60,000 to a charity of Sarkozy’s choice.

More worrying was last week’s downbeat assessment of the European aviation market by Ryanair’s chief executive, Michael O’Leary.

Warning of the double threat of high oil prices and a looming economic downturn, O’Leary said airlines faced “a perfect storm” over the next year.

His comments, which came with the airline’s third-quarter results, were enough to send airline shares into a spin.

The ebullient O’Leary has earned a reputation as the Jeremiah of aviation. Four years ago, he forecast a “bloodbath”, correctly predicting a dip in the market, though there wasn’t much blood.

In airline investors, he has a receptive audience. Made wary by the industry’s decades-old habit of losing money – and wiping them out in the process – they are easily spooked by signs of potential trouble.

Easyjet, Ryanair’s bitter rival, knows this better than most. In 2004, at about the same time O’Leary was making his “bloodbath” comments, it issued a decent set of half-year figures, but warned it was less confident about full-year trading than it had been.

The result was a huge sell-off, with the company’s stock-market value falling by 25%.

Only a few months later the shares started a long climb, taking the company to the brink of the FTSE 100 group of Britain’s biggest companies last year.

O’Leary may have intended to avoid a repeat of Easyjet’s sudden dive. “There was a range of analysts out there who were expecting a 10%-20% increase in profits for this year,” he said. “They had factored in higher oil prices, but thought that would be okay because we could pass it on in higher prices to our customers.

“We are just saying that might not be the case. That is based on nothing much more than our natural pessimism, but we have been a lot better at predicting these things than anyone else.”

Easyjet was more cheery when it reported figures last week. Although its load factor was slightly down, baggage fees and the strength of the euro meant its margins continued to improve. It maintained its forecast of a 20% rise in profits for the year.

Andrew Harrison, chief executive, said O’Leary had a record of managing shareholder expectations. “Their style is to manage expectations down to such a level that they cannot help but outperform,” he said.

“I am comfortable with our forecast of a 20% profit increase. Our capacity will increase this year by 15%, and we will increase our margins a bit on top of that. It’s guidance; it’s not a guarantee,” he said.

Airline trading can be volatile because of management’s inability to predict future seat sales. Harrison said Easyjet looked at bookings 60 days ahead. “But beyond that we have a lot of history of booking patterns and our own long experience of sales patterns.

“The basic point is that this market (short-haul flying in Europe) has grown reliably at 4%-5% a year, and we and Ryanair are the only ones making any money. My long-term view is still that in five years this company will double in size.”

Ryanair broke new ground with its guidance for the full year. Accompanying its figures was a “profit matrix”, projecting what would happen under a range of fuel prices and yield levels.

It was a wide range. Under the most benign conditions, profits would be up 6%. On the most pessimistic assumptions, they would fall by half.

O’Leary said the “storm” was unlikely to hit until the middle of the year. Easter falls early this year – in March – which traditionally flatters airline figures.

“Beyond that it is impossible to know. A lot of people out there think the glass is half full, but we think it is half empty. We will have oil at $85 a barrel for the next 12 months, and I don’t think any of our rivals can increase fuel surcharges again [Ryanair does not have surcharges].

“The reality is that airports are desperate for traffic. Six months ago I would not have considered routes from Birmingham or Belfast City airports because they weren’t offering us discounts. Now we have routes from both.”

Hard times will not halt Ryanair’s expansion plans. It intends to grow by 19% this year and carry 50m passengers. O’Leary sees a downturn as an opportunity to grab market share from higher-cost airlines. “We will be out there kicking arse,” he said.

Easyjet is growing rapidly on the Continent. Last week it opened a base – its 19th – at Paris’s Charles de Gaulle airport, traditionally an Air France bastion.

The building was opened by Luc Chatel, the French minister responsible for consumer affairs and tourism. Harrison said another base would open in Lyon in two months.

The budget carrier has also grown quickly in Italy. It now has 15 aircraft based at Milan’s Malpensa airport, not far behind the size of its fleet at its home base at Luton airport.

Analysts say that if there is to be a storm, Ryanair and Easyjet provide the safest havens for airline investors.

“They are best able to exploit a recession, said Citigroup, the banking giant. “They have the lowest costs and the strongest balance sheets among low-cost carriers, most of which are unprofitable and face financial difficulty.”

Citi has a target price of 650p on Easyjet, which closed the week at 409p, and €4.4 on Ryanair (€3.52).

business.timesonline.co.uk

Ryanair prepares to prey on rivals during downturn
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