Ryanair boss puts pressure on all his rivals
WHEN Ryanair boss Michael O’Leary promised on Tuesday to pump a million seats a month into a weak winter market and slash fares by 15 percent, he was ramping up pressure on rivals – and on investors struggling to see an end to Europe’s price wars.
Since Britain voted in June to leave the EU, the environment for the continent’s airlines has been rapidly deteriorating, wiping a quarter off the sector’s market capitalisation and triggering a string of profit warnings.
But executives across the sector have stubbornly resisted cutting the number of tickets on offer to raise prices, telling investors that short-term profitability is a price worth paying to maintain and grow market share. Rising pressure With analysts forecasting capacity increases this winter of 8 percent – the highest in a decade – the pressure is likely to keep rising in the coming months.
“There’s more supply coming on this winter and next summer and that’s why the market’s got very scared,” said a top-30 shareholder in easyJet, speaking on condition of anonymity. “And that’s just not going to change any time soon.”
“This is a tough year and you’ve just got to wait it out.”
On Tuesday Ryanair followed rivals including lowcost carrier easyJet, British Airways-owner IAG and Germany’s Lufthansa in issuing a profit warning, saying its profits would grow 7 percent rather than the 12 percent previously guided. But company shares climbed on the news as investors focused on O’Leary’s promise to ramp up capacity growth and grab market share.
“In every market we are competing with other incumbents, whether they be allegedly low-cost carriers or legacy carriers. We are taking very significant traffic away… and we see that continuing,” O’Leary said.
Low prices would last “two years if not more”, he warned.
Ryanair, which hopes to lift its European short-haul market share to around 20 percent by 2024 from 14 percent now, said it would add 6 million seats over the six months to the end of March, up from an earlier forecast of 4 million.
The airline intends to add 50 planes in the year to July 2017, up from 36 in the previous year. O’Leary said the company might add more than 50 planes in 2018 and 2019. ‘We are taking very significant traffic away… and we see that continuing.’
It says its business model, which fills planes irrespective of ticket price to minimise passenger costs and boost spending on extras, is uniquely suited to a period of low fares.
“There’s never been a worse time to be a competitor of Ryanair,” O’Leary said.
Investors in some rival airlines fear he may have a point.
The founder of easyJet, Stelios Haji-Ioannou, whose family remains the airline’s biggest shareholder with a 34 percent stake, believes the airline should start cutting capacity at the next available opportunity in 2018, revisiting his public opposition to easyJet chief executive Carolyn McCall’s 2013 deal to buy 135 new Airbus planes.
“Stelios has been very firm about this ever since 2013 that the fleet growth plan would be destructive of total shareholder value and it looks like he’s right,” his spokesman said. Forecast drop easyJet’s earnings per share will fall by more than 20 percent for the 12 months to September 30, a year in which it has grown its fleet by 16 planes, followed by a further forecast drop of 10 percent this year, according to data, as it adds 20 planes. Fleet growth is anticipated to continue at a similar rate in 2018 and 2019.
McCall has said the current tough environment is the right time to take advantage of its bigger scale and lower cost operations.
“History shows that at times like this the strongest airlines become stronger,” McCall said earlier this month.
But the collapse in fuel prices, which typically accounts for around a quarter of airline costs, has thrown a lifeline to many airline owners, and there has been precious little sign of capacity leaving the market. – Reuters