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Plenty of businessmen like to say that ‘business is war’ – but for Ryanair chief executive Micheal O’Leary, it’s more like a slaughterhouse.
The man who grabbed headlines a few years back when he warned of a ‘bloodbath’ in the airline sector is at it again. On Monday he warned that this winter we’ll see ‘blood on the walls’ for budget carriers.
All this carnage is a far cry from the comforting image of safety, comfort, and a touch of glamour, that most airlines like to punt. And it’s wrought havoc on share prices in the sector.
But as the old saying goes, the best time to buy is when ‘blood is running in the streets’ – and anyone who bought into the sector the last time Mr O’Leary started to talk like the director of a bad horror film, would have made a tasty profit. So is now the time to buy?
At the start of this month, Michael O’Leary warned of slowing profit growth at Ryanair. At the start of the week, he said that falling capacity meant it was having its third seat sale in two months. The airline plans to offer three million flights for £10 this summer, its busiest period, less than a month after offering one million tickets for as low as 1p plus taxes.
It was not what the markets wanted to hear. Shares in Ryanair closed 3.7% lower at €4.98 on the day, and fear rippled through the sector as rival airlines Easyjet and British Airways suffered similar falls. The shares are now standing at €5.00.
The slowdown isn’t restricted to Ryanair. Europe’s three largest budget carriers were all lighter in April. Ryanair’s flights were 83% full, down from 85%, while Easyjet and Air Berlin each suffered drops of around three percentage points. There have been several reasons trotted out for these problems – Gordon Brown doubling air passenger duty, higher interest rates squeezing consumers, and higher landing charges driving up prices, have all been blamed.
But what’s really beginning to bite at Ryanair’s heels is the growing competition in the low fares sector. There are now 60 low-cost copycat operators across the continent. The sector accounted for a full 24% of seating capacity in Europe last year, up from just 6% in 2002.
These rivals are beginning to eat into Ryanair’s business, and clearly Mr O’Leary has decided it’s time to start dealing with the upstarts, by turning up the heat with lower prices. This is exactly what happened during the ‘bloodbath’ fare war of 2004, when low-fare carriers like Ireland’s Jet Magic and the UK’s Duo Airways were driven out of the market place.
So while cutting fares will hurt revenue and profits in the short term, Ryanair is working towards its ultimate aim of squeezing out the competition. And as the lowest cost carrier in Europe by a long shot, that won’t be a problem.
Each passenger Ryanair carries costs the Irish airline about €40, against €60 for Easyjet and €70 plus for the typical flag carrier, such as British Airways. “Unlike a lot of other carriers it can take its fares down to levels that will guarantee it fills seats but at levels where no other carrier can go near them,” says one Dublin-based analyst.
And although consumer spending – both in the UK and Ireland – is being squeezed by rising interest rates, this could in fact work in Ryanair’s favour. As Mr O’Leary said on Monday, low-price businesses “like Wal-Mart or Ikea do better in downturns” – certainly compared to their higher-priced competitors.
In fact, as its rivals are squeezed out of the marketplace, Ryanair plans to buy more aircraft and expand even further. The group aims to fly 52.5m passengers this year, a figure it’s aiming to double by 2012. Which is why it has orders to increase the number of jets it has from 136 today, to 262 by 2012.
Easyjet has similar expansion plans. The share price has fallen 30% since its April peak of around 732p, which could be a good buying opportunity. On a p/e of 13.5 and PEG ratio of 0.43, it looks decent value.
But for investors looking for the real growth story, don’t take your eyes off Ryanair. It’s better placed than any other airline to ride out the storms on the horizon, with €2 billion on hand to do so, against just €1.3 for Easyjet. ‘They’ve got a balance sheet that’s virtually stronger than any other carrier in the western world, they’re awash with cash and they’ve just come out of a financial year that was exceptionally strong,’ says the same Dublin-based analyst.
They’ve already hedged their oil costs for next year which will make it 10% cheaper, giving them a “tremendous tailwind in terms of cost advantage on the fuel side, able to deal with things like weak demand, higher airport charges, and still come out the other end of it with a very strong EBIT [earnings before interest and tax] and bottom line profits growing. They’re guiding 5%, but I’ll bet it will be closer to 20% by the time we get to the end of the financial year.”
Turning to the wider markets…
In London, a late rally yesterday saw London stocks narrow their losses, but the blue-chip FTSE 100 index still ended the day 53 points in the red, at 6,596. Oil stocks including BG and Shell were higher as the crude price approached the $70 mark again. At the opposite end of the spectrum, retailer DSG International was the day’s biggest faller on disappointing results. For a full market report, see: London market close
Elsewhere in Europe,the Paris CAC-40 ended the day 63 points lwoer, at 6,029, whilst the Frankfurt DAX-30 was 125 points lower, at 7,964.
On Wall Street, stocks closed higher after a day of volatile trading. The Dow Jones was 56 points higher, at 13,545. The tech-heavy Nasdaq was up 17 points to close at 2,616. And the S&P 500 ended the day 9 points higher, at 1,522.
In Asia, the Nikkei fell back 51 points to end the day at 18,188.
Crude oil futures had fallen back to $68.64 this morning, having risen as high as $69.88 yesterday. In London, Brent spot was down to $71.40.
Spot gold was little-changed at $651.10 this morning, whilst silver had climbed ot $13.09.
Turning to currencies, the pound was at 1.9949 against the dollar and 1.4872 against the euro this morning, whilst the dollar was at 0.7452 against the euro and 124.03 against the Japanese yen.
And in London this morning, the Office of Fair Trading announced that it is to examine the UK homebuilding industry. The regulator will be addressing competition issues and buyer concerns and expects to complete its investigation by next summer.
And our two recommended articles for today…
Why rate hikes don’t always halt house price inflation
– What does London have in common with Auckland? It seems as though every time central bankers raise rates, house prices increase. Although Britain’s problems are nothing compared to the Kiwis’ currency tribulations. For more from Adrian Ash on why sometimes monetary policymakers are damned if they do – and damned if they don’t, see: Why rate hikes don’t always halt house price inflation
Will Whole Foods manage healthy profits?
– You can’t have missed the hype surrounding the opening of US-based health and organic food emporium Whole Foods in Kensington this month. It might be the place for West Londoners to be seen buying their groceries, but will the venture turn its owners a profit? To find out why retail sector expert Glynn Davis thinks the store may have missed its chance, click here: Will Whole Foods manage healthy profits?