Ryanair optimistic despite turbulence in Europe

O'Leary is confident EU investigation won't hurt its low-cost businessmodel, writes Siobhán Creaton, Finance Correspondent

The British media has been joking that in Ireland, Brussels is pronounced "Charleroi". Ryanair prefers to call the airport, which is 46 km from the Belgian capital, "Brussels South" although more recently its colourful chief executive, Mr Michael O'Leary, has taken to calling it the airline's "Waterloo".

This week he was confidently predicting that the European Commission's investigation of the very generous terms and conditions offered there by the Walloon regional government won't threaten its low-cost business model.

But with airline chiefs across Europe screaming about the sweetheart deals that have contributed to the more than 20 per cent cost advantage Ryanair now has over them, Mr O'Leary knows the airline must brace itself for some collateral damage.

Alitalia's chairman, Mr Giuseppe Bonomi, is the latest of Ryanair's rivals to publicly criticise the subsidising of low-cost carriers.

"The time has come to take legal action against cut-price companies," he declared. Others are increasingly complaining to the Commission that Ryanair - the carrier that so vociferously opposed the provision of state aid to the major airlines in the past - has itself become the Europe's most heavily subsidised airline.

The European Commission has already stated that Ryanair did receive state aid at Charleroi. It now has to decide whether the Walloon regional government was more generous with its inducements to attract Ryanair than a privately owned airport would have been.

It will consider issues such as the benefits that have accrued to the region since Ryanair established its first European base at Charleroi and how consumers have fared and could potentially threaten its ability to sustain low fares.

The Walloon regional government was certainly unstinting when it came to doling out its citizens' taxes to Ryanair.

It was agreed that the Irish airline would pay 50 per cent less than the published landing fee and be indemnified against any losses it might suffer if airport taxes were to rise over the 15-year contract.

It gave a €250,000 contribution towards the cost of providing hotel accommodation for its staff, up to €1.9 million for the opening of three new routes, and €768,000 to defray the cost of recruiting and training pilots and crew. Other monies were offered for the purchase of office equipment.

In addition, Ryanair is charged €1 per passenger for the use of the airports ground handling charges, a 90 per cent discount to its €10 advertised price. The Commission has already noted that while it is not unusual for airlines to negotiate a discount, in this case the price charged doesn't cover the cost of the service.

If the deal were to be unwound, the airline could have to repay many millions to the Walloon tax payers and, more significantly, it may be forced to pay higher charges at other state-owned airports and thus raise its fares.

Mr O'Leary acknowledges that the findings will become a blueprint for all future deals. At best, he believes the Commission could shorten the deal, reducing the terms and conditions available to less than the 15 years originally agreed.

In a report this week, NCB Stockbroker's analyst, Mr Shane Matthews, predicted that the Commission would not significantly alter Ryanair's costs and that it would continue to fly to secondary airports.

He believes the fly in the ointment will be that Ryanair will be forced to repay the money it received towards accommodation for its crew.

The ruling is expected before year-end and Ryanair will immediately appeal it, a process that could take two years. It will no doubt be highlighting the fact that despite its generosity, Charleroi airport will be profitable two years ahead of target, suggesting that the deal was far from one-sided.

It has already challenged the decision of a French court which ruled that a €1.4 million payment from Strasbourg Chamber of Commerce as part of a joint marketing deal was illegal. Mr O'Leary immediately shut down flights into Strasbourg but will bring people to Baden-Baden instead, some 40 km away.

About 20 per cent of the airports used by Ryanair are publicly owned and there is little doubt that all of these deals will be closely examined in the short term.

Apart from the obvious financial attractions of using out-of-the-way airports, the efficiency they can offer - in terms of facilitating a swift turnaround of its aircraft - is also crucial to Ryanair.

The NCB report suggests that the difference between turning an aircraft around in 25 minutes rather than 60 minutes is worth about €4.4 million annually to Ryanair.

It means it can put on two extra flights a day than if it flew into more congested hubs.

By being the first to seek out these idle airports, Ryanair not only got the best deals but also forced them to compete for its business. The airline promises to bring millions of passengers through their doors and has generally stuck with those deals.

Mr O'Leary says the concerns about the Charleroi deal are akin to those previously expressed when Ryanair began to take on British Airways and again with the abolition of duty free.

"We are in one of those temporary periods at the moment where some are saying the EU decision on Charleroi will end low-fares as we know it," he told shareholders at the annual general meeting this week.

Mr O'Leary says it's steady as she goes and that the biggest threat facing Ryanair is the same as always - the risk that the management team will make mistakes.