Europe offers Ryanair enough scope to justify scale of expansion, say analysts

A discount of about 40-45% would bring the cost of the 150 aircraft down to $4.95-$5.4 billion

The sheer scale of Ryanair's acquisition of up to 150 new aircraft from Boeing will be a major test of the airline's ability to manage its growth over the next decade.

But analysts believe that the impressive record of the airline's management and the scope to increase the size of the no-frills market should guarantee that Ryanair is not expanding too quickly.

As Merrion Stockbrokers analyst John Mattimoe put it: "The penetration rate of the low-cost carriers in Europe is just 6 per cent against 18 per cent in the United States so the potential demand is there for both Ryanair and EasyJet. Ryanair also has a product that has proven itself and this deal will allow it reach its 25 per cent annual growth target without any logistical problems."

Based on the $60 million (€68.28 million) per aircraft list price for 737-800s the deal would have a capital value of $9 billion. But in weak markets for aircraft manufacturers and following the intense competition between Boeing and Airbus for the order, Ryanair will have secured significant discounts on the list prices.

A discount of about 40 to 45 per cent would bring the cost to Ryanair of the 150 aircraft down to between $4.95 billion and $5.4 billion. The contract, made up of 100 firm orders and 50 options on aircraft, is the biggest single order to date for next-generation 737s.

Ryanair needs to increase its existing fleet of 49 aircraft if it is to achieve its ambitious growth targets of a 25 per cent per annum rise in passenger numbers.

Some 21 of the new fleet will replace Ryanair's older 737-200 over the next four years. The new aircraft have seating capacity of 189 passengers compared with the 149 passenger capacity in its existing 737-200 aircraft. Adding more Boeing aircraft to its existing Boeing fleet - rather than Airbus aircraft - will help Ryanair keep down its operating costs.

"The terms are exceptional and will reduce our operating costs over the next eight years," according to Mr O'Leary .

Ryanair has put low-cost loan finance in place with US exporters bank EXIM to fund 85 per cent of the purchase price and will pay the 15 per cent balance out of its own cash. Because the payouts will be spread over the eight years of the contract the deal will put no immediate pressure on Ryanair which has cash of €700 million (£551 million) and a strong operating cashflow. The first payment on signing the contact was for just 1 per cent of the contract.

There is no need to go to shareholders for cash for the deal Mr O'Leary said, but added that this financing option would be "kept under constant review" over the period of the contract.

Asked about the operational risk to the airline of placing such a large firm order, Mr O'Leary said much of this risk was eliminated by sticking with Boeing.

"The risk would have increased if we switched to Airbus. We know the Boeing aircraft and there will be operating cost advantages in having a younger fleet," he commented.