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WIKI ANALYSIS
Ryanair (NASDAQ:RYAAY) is a low cost airline that offers point-to-point service on more than 1,100 scheduled short-haul flights per day to over 147 locations throughout Europe and Morocco.[1] It carried approximately 49 million passengers in the fiscal year 2008.[2] In 2008, it had €2,714 million in revenues, an increase of approximately 20% since the previous year. Ryanair did, however, report that its net operating profit slid in the first quarter of April-June 2008 to $33 million from $185 million a year earlier. [3]
The airline is based on a low-cost, low-fee structure, for which the ability to secure low-cost labor, services, and jet-fuel are essential. Although it has limited costs by negotiating low fees with many airports, it remained subject to rising fuel costs. In July 2008, fuel costs had increased to 50% of operating expenses from 36% in the year prior.[4] In July 2008, the company purchased the option to buy (or "hedged") 90% of its fuel needs for September 2008 and then 80% for the upcoming quarter at $124 and $129 a barrel respectively.[5] To decrease costs, the company has specifically chosen many of its destination airports because they have low fee structures or because the company was able to negotiate lower airport fees. [6] However, many of its low-cost agreements with airports have been coming under legal action by competitors or the Commission of European Union or expiring as of 2008, which could also become an increasing cost for the company. [7] The company earns most of its revenue in euros or sterling and has many of its expenses in dollars; however, it has also hedged against currency fluctuations to minimize the risk it is exposed to.[8]
Although the company had released disappointing earnings in July 2008, the company CEO stated in August 2008 that the company has € 2.2 billion of cash and is aiming to increase profits after this year. [9]
Corporate Overview
As of 2008, Ryanair offered more than 1,100 scheduled short-haul flights per day to more than 147 locations throughout Europe and Morocco, with 26 locations in the United Kingdom/Ireland. The company carries approximately 45.5% of all scheduled traffic between London and Dublin, its primary route. [10]
Business segments
- Scheduled Revenues (82.0% of sales) are directly related to the scheduling of a flight, but do not include luggage, insurance, or other fees. All of Ryanair's flight offerings are within Europe and 26 (17.9%) of its 147 destinations are in the United Kingdom or Ireland.[13] These revenues were made on a margin of 18% by focusing on low operating costs and having the highest load-factor possible (through the use of low-fares). Because the company does not use a class-based system of premium prices for first and business class sales, all of its revenues in the scheduled service category are derived through the sale of various fare classes. Scheduled revenues for 2008 were 2,226 €m, an increase of 18.72% since the end of 2007.[14]
- Ancillary Revenues (18.0% of sales) are earned from non flight-scheduled services (such as checking in bags), car-rental agreements with Hertz, In-Flight Sales, and Internet-Related Products (such as insurance and other products which can be purchased online). This segment is further divided into:
- Non Flight-Scheduled Services include fees for the use of credit/debit cards as well as fees for checking in luggage, a fee that has historically been included in the ticket by its European competitors. Ryanair incentivizes ground-handling crew to rigidly uphold baggage weight limits to maximize its revenue in this area. With €344m in revenues in 2008, non-flight scheduled services represent 68.5% of all ancillary revenues.[15]
- Car-Rental services are provided exclusively through a contract with Hertz. Ryanair receives a commission on all sales. With €25m in revenues in 2008, car rental services represent 5.2% of ancillary revenues.[16]
- In-Flight Sales include the sale of food, beverages, commercial goods, bus tickets, and rail tickets aboard its planes. Air staff are incentivized by commission to sell these products. With €73m in sales in 2008, in-flight sales represent 15.0% of ancillary revenues.[17] It is also planning to release a mobile phone service in August 2008 if regulatory clearance is granted. [18]
- Internet Related sales include all sales that are made with the ticket sale including accomodation and travel services. With €54m in revenues in 2008, internet-related sales represent 11.3% of ancillary revenues.[19]
Operating metrics
The steady growth of passengers travelling (around 20% per year since 2005) as well as the increase in spending on ancillary expenses (primarily on non-flight scheduled services such as credit card fees and baggage handling) have resulted in flight revenue and even more significant increases in ancillary revenues. [20]
| ' | 2008 | Change | 2007 | Change | 2006 |
| Total scheduled revenues (in €m) | 2,226 | 18.72% | 1,875 | 30.75% | 1,434 |
| Total ancillary revenue (in €m) | 488 | 34.81% | 362 | 39.77% | 259 |
| Total Revenue (in €m) | 2,714 | 21.32% | 2,237 | 32.13% | 1,693 |
| Operating Income (in €m) | 537 | 13.77% | 472 | 25.87% | 375 |
Between 2007 and 2008, the number of passengers traveling with Ryanair increased by 19.76%; however, the load factor, or the percentage of seats filled on the planes remained at 82% because the number of available seat miles, or number of miles that could be flown, also increased by 29.06% within year. Because Ryanair runs many very cheap promotions in order to increase its load factor, the unit revenue per passenger mile (the revenue per mile that each actual passenger flies), and the unit revenue per available seat mile both fell. The unit costs per available seat mile did, however, fall as well as Ryanair cut costs. The costs did not, however, fall as much as the revenue, so profits had to be increased by increasing the number of passengers.[22][23]
| ' | 2008 | Change | 2007 | Change | 2006 | Change | 2005 |
| Passengers (in millions) | 50.90 | 19.76% | 42.50 | 22.13% | 34.80 | 26.09% | 27.60 |
| Revenue Passenger Miles (RPM) (in billions) | 34.45 | 28.08% | 26.90 | 32.51% | 20.30 | 136.24% | 14.90 |
| Available Seat Miles (ASM) (in billions) | 41.30 | 29.06% | 32.00 | 31.69% | 24.30 | 136.52% | 17.80 |
| Load Factor | 0.82 | 0.00% | 0.82 | -1.20% | 0.83 | 98.81% | 0.84 |
| Unit revenue per Revenue Passenger Mile (RPM) (in € cents) | 0.065 | -7.14% | 0.070 | 0.00% | 0.070 | 92.11% | 0.076 |
| Unit revenue per Available Seat Mile (ASM) (in €) | 0.054 | -8.47% | 0.059 | 1.72% | 0.058 | 92.06% | 0.063 |
| Unit Costs per Available Seat Miler (ASM) (in €) | 0.051 | -5.56% | 0.054 | 3.85% | 0.052 | 98.11% | 0.053 |
Strategy
Ryanair undertakes the following strategies to decrease its costs and increase its appeal to clients. It considers these strategies to be important differentiating factors from its competitors.
- Point-to-Point Flights: Ryanair uses a point-to-point flight system whereby all flights are sold on a one-way basis. This eliminates minimum-stay and other flight rules which often cause one-way fares to be much more expensive than their equivalent in a round-trip fare class in the industry in general. [25]
- Low Fares: Ryanair uses low-fares to stimulate demand for its flights. The company has frequent offers for fares between 0.00£ or € and 5.00£ or € for weekday flights. The company seeks to offer many of these fares in order to increase demand for flying as well as for its ancillary services.[26]
- Customer Service: The company has fewer lost bags, better punctuality, and fewer cancellations than the competitors in its peer group.[27] Its 2008 on-time performance was 88% for 2008, which put it ahead of Aer Lingus (approximately 78%), Air France (approximately 82%), British Airways (approximately 65%), easyJet (approximately 74%), Lufthansa (approximately 81%), and SAS (approximately 81%). It accomplishes this on-time performance, however, through its use of airports with cheaper fee structures. [28]
- Commissions: The company uses incentive based payments for both on-ground checkin staff and on-flight sales, which incentivizes staff to hold to regulations and promote sales.[29]
- Low Operational Costs: The company has limited its entire fleet to the Boeing 737, which the company claims lets them save on training costs as all staff are only be trained for one type of aircraft and are then mobile throughout the entire fleet. The company also saves on maintenance supplies and labor as only one type of parts and skills are needed. [30] It has a fleet of 166 Boeing 737 aircraft, each having 189 seats. [31] The company is currently (as of August 2008) in talks, however, with both Airbus and Boeing to purchase more aircraft as its fleet is set to expand to 300 aircraft by 2012. The airline had not yet secured these new contracts as of August 2008. [32] The company is also implementing other cost-cutting measures such as lower salaries, pay freeze, and cutting jobs. [33]
- Online Reservation System: The company started an online reservation system in 2000 and in 2008 booked 99% of all fares through this online reservation system. The online reservation system is more cost-efficient than traditional, agent-based ticketing.[34] The company does not, however, accept bookings on its system by third party websites, which use automated systems to complete bookings on the website. These systems have accounted for sales of about 1,000 tickets per day which will be refunded by the company as it only allows ticket sales on its own website. [35]
Key Trends and Forces
Increasing Airport Charges
Airport charges, or fees that airlines must pay in order to use airports, are rising significantly throughout many of Ryanair's hubs.[36] Although the company was often able to arrange lower fees than rival carriers through legal action, choosing airports that are further away from destinations than standard airports, and brash negotiations, fees are now increasing as a result of contract expirations, challenges from competitors, and airport authority decisions.[37] In September, 2005, the airport authority at Dublin Airport approved an increase of airport charges by more than 22% in order to offset the building expense of €800 million for a new terminal. In March 2007, Ryanair's discounted agreement for airport charges with Stansted Airport expired, effectively increasing airport charges by approximately 100%. In July 2006, Air France challenged Ryanair's low-cost agreements with Marseille's airport, while the European Commission has begun investigating the agreements for low charges that Ryanair has with Frankfurt's Hahn Airport. The company's low-charge agreement with Brussels (Charleroi) airport was deemed state-aid by the European Commission in 2004 and was thus terminated. [38]
Because being able to negotiate low airport costs constitute an important part of Ryanair's low cost-structure, Ryanair consistently fights the price increases in court in an effort to keep its costs down. One such example is being played out at Stansed Airport in 2008. An April 2008 increase of Stansted's airport charges by 15% has caused Ryanair to enter into legal action against the British Airport Authority; however, the company has stated that it does not believe that it will win the legal action. [39] The increase in prices at Stansted airport has now become a factor in the companies decision to cut some service from that airport. [40] The company has decided to ground 15 aircraft operating on the Dublin-Stansted route during the winter starting in the 2008-2009 year. [41] In total, it will ground approximately 250 flights at Stansted's airport.[42] If airport charges increase to the point that a route is no longer profitable or sustainable, as they did at Stansted, Ryanair will cut those unprofitable flights, which could decrease profits if more suitable routes are not found.[43]
Fuel Costs
The cost of jet fuel accounted for the 36.4%, 39.3%, and 34.5% of all operating expenses for Ryanair in the years 2008, 2007, and 2006 respectively [44] Ryanair's CEO had publicly stated that the company would not hedge fuel, or pay a fee to purchase the fuel at a set price, in 2008 unless fuel went under $100 per barrel. [45] Ryanair's decision not to hedge, however, was overturned in July because the company believed that fuel prices were going to continue to rise. [46] On July 25, 2008, Ryanair purchased the option to receive 90% of its fuel requirements for September, 2008 at $124 per barrel and 80% of its fuel requirements between October 2008 and December 2008 at $129 per barrel. [47]
Michael O'Leary, CEO of Ryanair, stated in late July 2008 that fuel expenses accounted at that point for approximately 50.0% of all operating expenses, which represents a significant increase even from the end of the 2008 fiscal year. [48] Overall costs from April - June 2008 were up 18% from the costs from the prior year. Although the breakdown of these costs was not made available, because the airline has laid off employees and is on a cost-cutting campaign, it is likely that all of these increased costs are related to increased fuel costs, representing most of the drop in profits from April - June 2008 from $185m to $33m. [49]
Currency Exchange Rates
Ryanair's revenues are primarily denominated in U.K. pound sterling and the Euro. This distribution shifted toward the Euro in 2008. Ryanair buys jet fuel and other supplies in US dollars, so an increase in the U.K. pound and Euro's value against the dollar is beneficial for the revenue of the company.[50] The chart below shows the percentage of revenues denominated in GBP and Euros.
| Year | Great British Pound | Euro |
| 2008 | 38% | 62% |
| 2007 | 44% | 56% |
In the 2008 and 2007 fiscal years, the company entered several forward contracts, principally between the US Dollar and the Euro to protect the company against the variability of exchange rates between the dollar and the euro. The company states that unrealized losses resulting from these contracts were approximately €65.2 million for the 2007-2008 fiscal year. [52]
Competition
After the Open Skies Treaty of 1992 created freedom of air transportation within the European Union, the number of low cost carriers within the European Union increased dramatically. Ryanair carried approximately 49m passengers in the 2007 calendar year, making it the leader among airlines in Europe in terms of number of passengers carried.[53]
Market Share
Ryanair offers the greatest number of seats per-week of any of all Low-Cost Carriers within Europe. Its closest competitor, EasyJet, offers approximately 20% fewer seats each week. Here, Ryanair's per week seat offering is compared to the top 25 European based Low Cost Carriers in terms of seats offered per week.
As 27% of Ryanair's destinations originate in the UK and Ireland, the airline is often seen as a short-haul carrier within the UK and Ireland and also from the UK and Ireland to other destinations. In this case, it makes sense to compare the company to the short-haul service of the top four airlines originating in the UK and Ireland. [55]
| ' | Number of Passengers (in millions) | Percentage of passengers transported by the top five airlines originating in the United Kingdom and Ireland |
| British Airways Short-Haul | 20.58 | 16.28% |
| Aer Lingus Short-Haul | 8.1 | 6.41% |
| easyJet | 38.2 | 30.23% |
| Ryanair | 49 | 38.77% |
| British Midlands | 10.5 | 8.31% |
Ryanair has been able to avoid fuel surcharges, has a low-record of lost bags, and a high record of on-time performance in comparison with its competitors.[60]
| ' | Average Fuel Surcharge | Punctuality (% on time) | |
| Ryanair | £0 | 88% | |
| Easyjet | N/A | 80% | |
| Air Berlin | € 25 | N/A | |
| Aer Lingus | N/A | 72% | |
| Lufthansa | € 24 | 81% | |
| Air France-KLM (AFLYY) | € 31 | 84% | |
| British Airways | £20 | N/A | |
As high-speed trains have cut down on the journey time between different points, they have also become competitors to Ryanair and other low-cost airlines. [62] As train service becomes more rapid and affordable, it has become a significant competitor on routes which can be more quickly reached by rail. In 2008, it had 69% of all passengers from London to Paris and 64% of all passengers from London to Brussels.[63]
References
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 18
- ↑ IATA Scheduled Passengers
- ↑ New York Times, "Ryanair Shares Tumble on Earnings Report," July 29, 2008
- ↑ Forbes Magazine, "Ryanair Hurt By Bad Bet", July 28, 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 11, Pg. 75
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 21
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 21
- ↑ RYAAY 2008 SEC Filing 20-F, Item 11, Pg. 75
- ↑ Forbes Magazine, "Ryanair aims to increase pretax profit to 900 million euros by 2012, August 10, 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 18
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 18
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 18
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 18
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 18
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 25
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 25
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 25
- ↑ BTN News, "Mobile Phones for Ryanair", August 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 25
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 18
- ↑ RYAAY 2008 SEC Filing 20-F, Item 8, Pg. 62
- ↑ RYAAY 2008 SEC Filing 20-F, Item 8, Pg. 62
- ↑ New York Times, "Ryanair Shares Tumble on Earnings Report," July 29, 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 8, Pg. 62
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 20
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 19
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 19
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 19
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 19
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 19
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 19
- ↑ Reuters Business News, "Ryanair in talks with Boeing, Airbus on Orders," August 2008
- ↑ New York Times, "Ryanair Shares Tumble on Earnings Report," July 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 20
- ↑ PSFK, Quoting The Sun, "Ryanair Refuses to Honor Tickets Bought Through Third Parties," July 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 27
- ↑ Financial Times, "Ryanair expects to lose BAA battle", August 8, 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 27
- ↑ Financial Times, "Ryanair expects to lose BAA battle", August 8, 2008
- ↑ Times Online, "Ryanair grounds aircraft with winter cuts," July 18, 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 21
- ↑ BBC "Ryanair warns of potential losses", July 28, 2008
- ↑ Times Online, "Ryanair grounds aircraft with winter cuts," July 18, 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 4, Pg. 29
- ↑ Seeking Alpha, "Ryanair Holdings Airline or Energy Bear Fund," July 2008
- ↑ Ryanair Hurt By Bad Bet
- ↑ RYAAY 2008 SEC Filing 20-F, Item 11, Pg. 75
- ↑ Forbes Magazine, "Ryanair Hurt By Bad Bet", July 28, 2008
- ↑ New York Times, "Ryanair Shares Tumble on Earnings Report," July 29, 2008
- ↑ RYAAY 2008 SEC Filing 20-F, Item 11, Pg. 75
- ↑ RYAAY 2008 SEC Filing 20-F, Item 11, Pg. 75
- ↑ RYAAY 2008 SEC Filing 20-F, Item 11, Pg. 75
- ↑ IATA Scheduled Passengers
- ↑ European Air Transport Market Analyses, 2007
- ↑ European Low-Fares Airlines Association Statistics
- ↑ Finfacts.com Ireland Business News
- ↑ About BMI
- ↑ British Airways Statistics
- ↑ European Low-Fares Airlines Association Statistics
- ↑ Ryanair Annual Report, compiled from most recent Annual Reports
- ↑ Ryanair Annual Report, compiled from most recent Annual Reports
- ↑ The Guardian, "European Railways take on low-cost airlines," July 2007
- ↑ The Guardian, "European railways take on low-cost airlines" July 2008
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