La Característica De Ryanair

Ryanair is a low-cost, low-fare airline headquatered in Dublin, Ireland, operatig over 200 routes in 20 countries. The company has directly challenged the largest airlines in europe and has built a 20-year-plus track record of incedibly strong passenger growth while progressively reducing fares. It is not unusual for one-way tickets (exclusive of taxes) to sello n Ryanair´s web site for less tan €1.00. See Exhibit 1for an excerpt of Ryanai´s Web site, where fares between London and Stockholm, for example, are available for 19 pense (approximately US $0.33). CEO Michael O´Leary, formerly an accountan at KPMG, described the airline as follows “Ryanair is doing in the airline industry in Europe what Ikea has done. We pile it high and sell it cheap…For years flying has been the preserve of rich (people). Now everyone can afford to fly’’. Having created profitable operations in the difficult airline industry, Ryanair, as did industry analysts, likened itself to U.S. carrier Southwest Airlines, and its common stock has attracted the attention of investors in Europe and abroad.

Low-Fare Airlines

Historically the airline industry has been a notoriously difficult business in wich to make consistent profits. Over the past several decades, low-fare airlines have been launched in an attempt to opérate with lower costs, but with few exceptions, most have gone bankrupt or been swallowed up by larger carries (see Exhibit 2 for list of failed airlines). Given the exces capacity in the global aircraft market in more recent years, barries to entry in the comercial airline space have never been so low. Price competition in the U.S. and Europe, along with rising fuel costs, has had a deleterious affect on both profits and margins at most carries. The current state of the industry can be described for most carriers as, at best, tumultuous.

The introduction of the low-fare sector in the United States predated its arrival in Europe. An open-skies policy was introduced through the Airline Deregulation Act of 1978, wich removed controls of routes, fares, and schedules from the control of the Civil Aeronautics Board” . This spurred 22 new airlines to be formed between 1978 and 1982, each hoping to stake its claim in the newly deregulated market. These airlines maximized their scheduling efficiencies, which, in combination with lower staff-to-plane ratios and a more straightforward service offrering, gave them a huge cost advantage over the big airlines. This led to the current two-tier industry structure, with the low-fare airlines waring fare wars with the larger established carries.

This was, however, a challenging time for the start-ups. First, the Federal Reserve raised the funds rate from 7.93% in 1978 to 12.26% in 1982. This had a dramatic effect on the financing costs for the start-up airlines, making financing of capital expenditures excessively costly. In addition, at this time the incumbent airlines were generally in relatively strong financial positions. Their deep pockets made it posible for them to run at a loss on certain routes in order to undercut the start-ups where necessary. As a result, many of the new companies failed.

One notable exception, however, was Southwest Airlines. By focusing on secondary airports, lightning-fast turnarounds, information technology, and a strong firm culture, it managed to gain passenger share and profitability. Within a decade, ticket prices in the U.S. had fallen by 33%, and the volumen of passengers had more tan doubled.

In Europe, it was not until 1992, with the signing of the Maasatrich Treaty, that years of protectionism by the governments of the so-called flag carries began to be dismantled. In 1993, European Union (EU) national carriers were for the first time permited to ofter international services from other EU countries. By 1997, this was broadened to include domestic destinations and opened to any certified EU airline. Open skies had arrived in Europe.

Even before then, start-up airlines had begun to enter the European space. These companies would typically negotiate with their country’s flag carrier for the right to fly to secondary airports only. Ticket sales were handled by agents, and the resulting cost structure forced the star-ups to complete with the incumbents primarily on service. Because they were not competing to provide traffic for the major hubs but rather targeting custiomers who had not previously considered flights for travel, they, they were in effect growing the market and were thus not seen as a major threat to the legacy carries. However, with the Maastricht Treaty, the number of new airlines entering the industry greatly increased, and these start-ups were now free to compete solely on cost, looking across the Atlantic to the Southwest model.

Subsequently, as the new entrants vied for market space, prices fell, encouraging previously untapped demand. European passenger volumes had a strong upward trajectory (5%-plus compound anual growth rate between 1998 and 2003). However, while low-cost passenger numbers soared, the long-haul operators faced reduced traffic and higher fuel costs due to events such as the SARS virus and the September 11 attacks. The flag carriers, now financially constrained, were forced to renegotiate, and even cancel, contracts for the delivery of new aircraft from Airbus and Boeing. The two aerospace giants were left with significant numbers of planes for wich the start-ups proved to be welcome customers.

Unlike the arrangements legacy carries negotiated with major airports, start-up airlines negotiated dramatically lower landing and facility chargers with secondary airports. They argued that, because they were bringing a significant number of passengers the rents they airports from concession stands and other retailers. As the low-fare airlines had no particular loyalty to one airport over another, the threat that they could simply stop flying to a particular airport was real.

Ryanair

Ryanair was Europe´s first low-fare carrier, with an initial route between Waterford, Ireland and London. The initial cabin crew had to be no taller tha 5`2’ because the aircraft being deployed were among the smallest being flown on comercial routes. The company immediately challenged incumbents Aer Lingus and British Airways and obtained approval for a Dublin-London (Luton) route, charging less tan half of what the large carriers were charging. A Price war ensued, but over the next decade Ryanair eventually overtook Aer Lingus and British Airways on this route, the largest international route in Europe at that time. (See Exhibit 3 for Ryanair’s remarkable passenger growth from 1985 through 2004).

The company went publico n May 9, 1997, and shortly thereafter was voted “Airline of the Year” by the Irish Air Transport Users Committee, “Best Managed National Airline” in the world by International Avition Week magazine, “Best Value Airline” by the U.K.’s Wich consumer maganize, and most popular airline on the Web bye Google. Relative to that of other airlines, Ryanair’s common stock has perfomed reasonably well since the company went public, despite negative events such as the Iraq war and significant increases in fuel prices. The company emphasizes that it defines customer service by low airfares and safety, rather than by the quality of food, pleasantness of staff, and other peripheral ítems.

See Exhibit 4 for the stock Price performance of Ryanair and selected European airlines since Rynair’s initial public offering. Additionally, see exhibits 5-7 for Ryanair’s 2004 financial statements and supplemental revenue and cost information. The financial statements were prepared under Irish and U.K. acounting standards. Because the company has shares trading on the NASDAQ in the U.S. accounting standards (see Exhibit 8).

Ryanair’s objetives, as set forth in its 2004 annual report, include:

-Increasing passenger traffic by 20% each year

-Reducing fares by 5% each year

-Reducing costs by 5% each year

-Realizing a profit margin of 20% or more

To date, there are numerous factors that have contributed to the company’s profitability, including the following:

1. Cut-price deals. Ryanair will frequently sell a large numer of seats in advance for a nominal fee, for example, €1.00 or less. Indeed, currently approximately 25% of passenger tickets are free, and Mr. O’Leary has a goal of eventually bringing this figure to 50% by 2010. This attracts immense publicity as customers scramble to log in and purchase seats. For each seat purchased, tax and duties must also be paid, wich typically amount to €30- €40. The tickets are sold on a nonrefundable basis. Because they are so cheap, many buy multiple seats to gain flexibility, and the “no show” rate is therefore much higher for these types of tickets. Average fares reflect these cut-price deals as well as higher fares that travelers pay to secure sets on routes in higher demand.

2. Point-to-point-flights. Each route is a mini-business unit. Capacity is tailored to fit demand according to computer-simulated models. If a route is unoprofitable, it can simply be cut from the Schedule. Passengers may not buy connecting flights so must check in for each Ryanair flight individuallly. This reduces the firm’s liability in the event of a delay and reduces instances of lost baggage.

3. Flights to secondary airports. By avoiding the large hubs, Ryanair is able to negotiate reduced landing charges. There is the added benefic of lower congestion at such airports. This allows the aircraft to complete the journey in the shortes possible time. The downside to passengers is that sometimes these airports are located in locations far from the intended destionation.For example, the company flies to Frankurt-Hahn, not Frankfurt, wich is 100 kilometers away. As O’Leary states, “Fort he Price-sensitive customers, distance is no problema”.

4. Quick turnaround. Ryanair aircraft are expected tol and and take off again from an airport inside 25 minutes. This is only possible because the fly into secondaryy airports. This allows the firm to maximize the number of flighs per day.

5. No overnighting of staff. By flying point, a Ryanair plane ends the day where it started. This means that crew can return to their homes, and expensive hotel bills and per diems are avoided.

6. Internet bookings. The firm sells over 97% of its tickets via the Internet at its website, www.ryanair.com, wich is now the most popular European travel site. This cuts out travel agent commission costs (averaging approximately 10% of the ticket cost) and gives the airline other services such as car hire and rail tickets, for wich Ryanair collects a commission itself. O’Leary is not bashful about this substantial source of cost savings and revenues, having stated, “Screw the travel. Take the (agents) out and shoot them. What have they done for passengers over the years?”.

7. One class. Ryanair does not offer passengers the choice of business and economy class, eliminating the requirement for food to be delivered to the aircraft when it lands, thus facilitating low turnaround times. Moreover, offerinf only one clas of service furthers the goal of providing low fares, wich the company believes is the ultimaten in customer service. According to its passenger service and lowest fares chárter, “Ryanair believes that any passenger service commitment mus involve a commitment on pricing and punctuality, and should not be confined to less important aspects of “service” which is the usual excuse the high fare airlines use for charging high air fares”.

8. One aircraft type. The company files Boeing 737 planes exclusively. This reduces maintenance training costs and allows for bulk buying of spare parts. The strong financial position of the company allowed it to purchase many of the aircraft that had been canceled by incumbent airlines. These new airplanes are more fuel efficient and have a higher passenger capacity. As of the end of fiscal 2004, the company had fully hedged fuel costs through September 2004, but were largely unhedged thereafter. Subsequently, the company hedged its fuel through the end of fiscal 2006 at US$49 per barrel, while market values topped US$70 per barrel. Additionally, the company has ordered winglets that will be retrofitted on all aircraft, wich will reduce fuel burn by approximately 2.5%, wich translates intro savings of aproximately US $10,000-14,000 per aircraft per month.

9. Personnel costs and incentives. Because the aircraft that Ryanair pilots fly are new, the firm claims that their pilot’s experience is of value to the competition. Therefore, it charges pilots for training, the cost of wich is earned back by the pilots through years of service. Pilots have financial incentives for smooth landings, not so much for passenger confort but for reduced maintenance costs. Additionally, the airline does not provide food or beverages for free but does offer ítems for sale on each fligth. Fligth attendants are paid a commission based on the total of beverage and other sales in flight.

Ryanair has an entrepreneurial culture and takes great pride in breaking with old conventions. This spirit is disseminated from the top by the swashbuckling manner of CEO O’Leary. Irish business folklore has it that when he first decided to employ the Internet to sell seats, O’Leary did not hire a firm of IT consultants and web designers. He insted visited a local technical college and offered the Project as a challenge to the eager students in the computer lab. They learned by doing, and O’Leary got a Web site with the necessary functionality at a fraction of list Price. He is also know for wild publicity stunts, such as driving a tank to easyJet’s headquarters in England and broadcasting the theme to the televisión show “The A-team”. He taunts the competition even with the painting of aircraft. One of Ryanair’s airplanes is painted with the message, “Arrivederci Alitalia”.

O’Leary is not bashful of this company’s achievements, and has a unique demeanor for the company CEO, often charmingly foul-mouthed and offensive. In a recent interview, he stated “I don’t give a (*&%#) if nobody likes me. I am not a cloud bunny, I am not a aerosexual. I don’t like aeroplanes. I never wanted to be a pilot like those other platoons of goons who populate the air industry.”. Attacking competitors is not out of the question either, as he recently said of Jurgen Weber, CEO of Lufthansa, “Weber says Germans don’t like low fares. How the (*&%#) does

he know? He never offered them any.”

He positions the airline as a champion against inefficiencies and monopolies, and his manner has been described as arrogant and dismissive. Even in finalcial reports for investors, he often leads off with tirades against airports that charge too much or other issues that adversely affect Ryanair. For example, the 2005 road show included several slides titled “Stansted Airport: The Rip-Off,” wich highlightted costs of a cross-subsidization plan across airports run by the British Airport Authority. Similarly, in discussing 2005 financial results, the company report stated:

In Ireland, the situation at Dublin Airport has descended into a farce. The Dublin Airport Authoritty wich is responsable for this third world facility is to be rewarded for its incompetence by being allowed to build the second terminal. This facility will not be available until 2009 at the earliest and in the mean time passengers at Dublin will be forced to endure long queus and intolerable overcrowding while the Government protects this failed monopoly by blocking competition….The (prime minister) recently demostrated how hopelessly out of touch he is by claiming that the present overcrowded terminal has the capacity for 6milion more passengers per annum. It would appear that there aren´t any queues at the VIP escort to the Government jet….Had the Government heedes Ryanair’s calls for a competing second terminal seven years ago, this current embarrassment for Irish tourism would have been avoided. As always in Ireland the ordinary passengers suffer, while the politicians fudge.

Turbulence in 2004

Just after reporting third-quarter profit increases of 10% (quarter ended December 31, 2003), Ryanair issued a profit warning in January 2004 for the company’s upcoming full-year results for the fiscal year ending March 31,2004. O’Leary stated,

“While we now expect after-tax profits fot the current year to dip slighly, our annualized profit margin will still be in excess of 20%, and Ryanair will continue to be the world’s most profitable airline by margin”. Ryanair’s share Price dropped 3-% on the news (see Exhibit 9). The expected fall in profits for the fourth quarter was attributed to lower yields (i.e., average passeger fares) and lower load factors (i.e., seats with paying passengers as a fraction of total seats available). According to O’Leary, the lower yields were due to Ryanair’s strategy of steadily lowering fares as part of its battle plan. He argued, “This is not due to overcapacity. It’s the result of the ongoing fare was under way across Europe, and we’re winning them. It’s like Southwest in the U.S. When they first went into California, their stock Price fell by 40% to 50% due to fare wars with the likes of the United (Airlines) shuttle and other California carries. Ten years later, Southwest owned California”.

More bad news followed immediately after the profit warning, when Ryanair received an unfavorable ruling from the European Commission (EC) regarding $18 million in financial incentives it had received from Charleroi Airport in Belgium between 2001 and 2003. The commissioners indicated that the ruling was an attempt to encourage economic growth while simultaneously ending state subsidies that have been declared ilegal under the EU. The ruling put additional pressure on Ryanair’s stock Price. In response, O’Leary explained, “Any share Price jumps up and down, and ours is no exception. But as long as the basic business model is sound and you’re executing it properly, nothing will stop you-certainly not a buch of EU commissioners who think everyone should pay higher fares.

Financial Perfomance

Prior to the profit warnings in early 2004, Ryanair had been profitable every quarter and reported anual increases in sales, operating profit, and net income in every year (see Exhibit 10). As forewarned in January 2004, despite an increase in sales for fiscal 2004, net income declined for the fiscal year ended March 31, 2004 relative to the fiscal 2003 level. This was first reported year-over-year downturn in profits since the company went public.

Nevertheless, Ryanair continued to add capacity in 2004, increasing seat kilometers by 64%. The overall load factor for 2004 exceedes 80% relative to a break-even level of 59%. The company’s fleet of planes had 189 seats, implying that, on average, 111 seats had to be filled for the company to break even. Ryanair has the lowest cost structure of any comparable airline, as seen in Exibith 11. The company is obsessive about low costs, down to details such as making employees provide their own pens and not allowing the charging of cell pones in corporate facilities. Low costs permit Ryanair to charge lower fares and still provide a high return on in investment. See Exibit 12 for average revene per passenger, return on equity (ROE), and other financial metrics for 15 airlines. Ryanair’s average revenue per passenger (in US$) in just $49. The only other airlines with similarly low fares include U.K.-based easyJet (U.S.$77 per passenger) and Southwest Airlines (US$89). Nearly half of the airlines listed (all U.S.-based incumbent carries)report losses and/or have meaningless ROE because the denominator of the calculation (i.e., book value of equity) is negative. For 2004, Ryanair reports the highest ROE, 17%. The only other airline with profitability approaching that of Ryanair is Japan Airlines’ use of significant leverage, relative to limited leverage at Ryanair. Even with the relatively strong profitability, the stock market values Ryanair at just a modest level relative to other airlines, trading at a Price-to-earnings ratio of 20.8 relative to 50.5 for newcomer JetBlue Airways and 40.7 for veteran low-fare airline Southwest.

Valuation

Following the series of bad news announcements in early 2004, the investor community Split into two camps: those that saw to downturn in profits and cash flows as the end of Ryanair’s strong perfomance run versus those that believed to stock Price drop to be an overraction to a company that retained strong fundamentals. Exhibit 13 provides an analysis of Ryanair’s profitability and operating, investment , and financing activities over the most recent three years. The overall picture is that of a finaciallly healthy company with strong sales growth, high profitability, and negative net debt (i.e., interest-bearin liabilities less than cash and liquid resources).

Exhibit 14 summarizes equity analyst reports released during, the first six months of 2004 that encompass the profit warnings in January, the EU decisión in February, and the announcement of earnings in June. The recommendations span the range from sell, with target prices below the target prices at lofty levels up to 35% above the current trading Price (e.g., target Price of €4.40 when the current stock Price was €4.65), to buy, with target prices at lofty levels up to 35% above the current trading Price (e.g., target Price of € 6.00 when the current stock Price was €4.41).

Clearly, discrepancies i valuations reflect divergent opinions on numerous issues that plague the airline sector, such as fare competition, cost ontainment, regulation, and macroeconomic vulnerabilty. Perhaps not surprisingly, in contrast to many market observes in the airline industry, Ryanair continues to have a bullish Outlook, signing purchase agreements for an additional 140 Boeing 737 aircraft in February 2005. Each aircraft will have an approximate cost of US$51 million. With the addition of these aircraft to the 91 in service already, the company expects to grow anual passenger traffic to 70 million by 2012, almost triple the number in 2004.

...