Oncoming turbulence for Ryanair

The airline was forced to cancel thousands of flights last year as pilots and employees went on strike to protest about their working conditions and voice the desire for a recognised union. These widespread cancellations damaged Ryanair’s reputation for punctuality and customer service, and contributed to added costs. During the third quarter, costs excluding fuel increased by 6 per cent, largely due to higher staff costs (including the 20 per cent pilot pay increases), investment in engineering headcount, pilot and cabin crew training, and costs associated with air traffic control strikes. These staffing issues are not yet fully resolved. What's more, the cost of fuel increased by a third year on year and Ryanair has hedged 90 per cent of its fuel requirements for next year at a price that is higher than this year.

Costs are rising against the backdrop of increasing competition in the European airline industry. Ryanair expects more rivals to fail and close bases in 2019 due to industry overcapacity, but in the meantime fares are falling across the sector. Indeed, average Ryanair fares fell 6 per cent to under €30 during the third quarter. In January, it lowered fare guidance for the second half to a 7 per cent decline, from the 2 per cent decline previously expected. While third-quarter ancillary revenues (just over a third of sales) rose by 26 per cent, the company still reported a €20m loss for the three months. Full-year profits are expected to be between €1.0bn and €1.1bn, compared with a €1.45bn after-tax profit last year.

Brexit is another potential headache. Indeed, UK investors in Ryanair looking to offload shares may be doing the airline a favour. If the UK leaves the EU without a deal then UK shareholders will no longer count towards the 50 per cent threshold of shares needed to be owned by EU nationals. UK shareholders will not be forced to sell their shares, but could lose voting rights, and therefore be put at a disadvantage to their European peers. 

It’s not all bear points for Ryanair. Ultimately, the airline has the lowest cost base in the industry, a strong balance sheet and an industry-leading load factor of 96 per cent. The advantage of the model is illustrated by last year's handsome operating profit margin of 23.3 per cent and lease-adjusted return on capital employed of 17.1 per cent – something most other airlines might envy. It's investing to keep ahead of the pack with the first delivery of the five “game-changer” B737 Max aircraft from April. These aircraft are 16 per cent more fuel efficient with 4 per cent more seats. Management expects these to make unit costs more favourable over the next five years.

The company also believes it has found a more efficient group structure, and over the next 12 months Ryanair will split out Ryanair, Ryanair UK, Laudamotion and Ryanair Sun. This is a similar structure to British Airways and Iberia parent company International Consolidated Airlines (IAG). Mr O'Leary will become group chief executive. His replacement as chief executive of the Ryanair division is yet to be found.