Ryanair and Eircom show their mettle in hard times

Unlike the sunny May that most of us have enjoyed, weather conditions in stock markets over the month were decidedly mixed. In general, investors had to endure declines in most equity market indices.

In Europe, the FTSE Eurotop 300 returned -0.7 per cent and the FTSE 100 in the UK declined by 1.3 per cent. In the US, the Dow Jones fell by 0.4 per cent, although the technology-heavy Nasdaq managed to rise by 3.5 per cent. In the Republic, the ISEQ fell by 1.8 per cent and, in view of the scandals affecting AIB, it is not surprising that the ISEQ Financials index declined by a slightly greater 2.1 per cent.

Worries regarding the potential negative impact on global economic growth due to high oil prices are likely to continue to unsettle investor sentiment for the foreseeable future.

Throughout this period of share price volatility, companies have continued to report good news regarding their business and financial performance. Earlier this week two of the Irish market's high-profile companies - Ryanair and Eircom - reported full-year results (to end-March 2004) to the market.

Although both companies are faced with very challenging and competitive business environments, they both delivered results that were in line with or slightly better than expectations.

Ryanair reported full-year profits before tax of €229 million. This represented a significant decline on the previous year's figure, although this had been well flagged to the market. Overall, adjusted earnings per share declined by 6 per cent compared with the prior year.

Rapid growth in Ryanair capacity combined with intensification of competitive pressures forced Ryanair's operating profit margin down to 25.2 per cent in 2004 from 31.2 per cent in 2003.

Investors in Ryanair will take heart from the fact that Ryanair remained marginally profitable in the fourth quarter (three months to end-March 2004). This was an extremely tough quarter and the fact that Ryanair could achieve profitability during that period, however modest, is testament to its robust business model.

The relentless drive to lower costs continued and, during the year, unit costs declined by 6 per cent. Unit costs are expected to decline by a further 5 per cent in the current financial year (excluding fuel costs).

Further sustained rises in oil prices would, of course, impact on Ryanair's total costs. The company actively hedges its fuel requirements and this policy has enabled it to limit the impact of recent rises in fuel prices.

On the outlook for the year, chief executive Michael O'Leary remains very cautious. The summer months are looking quite good, with 50 per cent of its summer seats already booked.

However, the full brunt of increased competition is expected to be felt over the upcoming winter season as weaker airlines reduce prices aggressively to generate cashflow.

Eircom's maiden results since coming back to the market provided few surprises but, on balance, the investment community viewed them as positive. Revenues declined by 3 per cent to €1,628 million but operating profits rose sharply helped by a reduction of 2 per cent in operating costs.

For telecom companies, EBITDA (earnings before interest, tax, depreciation and amortisation) tend to take centre stage as the preferred measure of financial performance amongst the investment community. Eircom's adjusted EBITDA grew by 9 per cent in 2004 to €602 million. The company spent €208 million on capital projects, a level of investment in line with its European peers.

By year-end, net debt declined marginally to €1,959 million, although this still leaves Eircom as a highly indebted company and limits its financial options.

Looking to the future, the industry-wide trend of reducing voice revenues is set to impact on Eircom over the medium-term. The roll-out of broadband services is a key element in Eircom's strategy of generating new revenue streams to offset the expected decline in voice revenues.

At the end of March, 38,000 customers had signed up for broadband and Eircom is confident that it will reach or exceed its target of 100,000 customers by end-December 2004. Broadband penetration in the Republic is only at 2 per cent of households compared with the European average of 12 per cent so that the potential for growth is large.

Another segment of potential growth for Eircom is a possible re-entry to the mobile market. It would have to do this by leasing airtime from an existing operator and then resell a service to its customers.

Currently, existing mobile operators are not obliged by the regulator to provide such access although this could change in time. However, at some point, it does seem inevitable that Eircom will offer a mobile option to its customers.

Although Ryanair and Eircom operate in completely different industries, their recent results highlight just how tough competitive business conditions remain in their respective markets.

However, investors can take heart from the apparent capacity of both management teams to steer their companies through to better times.