"RYANAIR'S goal is to be profitable on each of its new routes from its inception by commencing service at fares that are substantially lower than those of its competitors, but that provide a satisfactory operating margin" - page 25 Pathfinder Prospectus.
That sentence epitomises the driving force behind Ryanair; confidence, determination and a will to succeed. If it does succeed in its goal, particularly the bit that says from its inception then it will prove its sceptics wrong. But Ryanair whose shares will shortly be floated, has plenty of hurdles ahead which are not readily apparent from all the hype being generated about the company.
The sceptics cannot deny that Ryanair with its low costs, no frills philosophy has performed a meritorious service for the air travelling public, through lower air fares, particularly on the Dublin/London route. Indeed, without its presence, Aer Lingus would more than likely be charging much higher fares.
However, now that it has decided to turn itself into a publicly quoted group, it must face the full rigours of a no frills financial scrutiny. The hurdles include an ageing fleet that will need to be replaced between 2005 and 2008, a need to generate the same, or greater, profitability out of the substantial rise in capacity this year, an ability to keep its costs low and a good dollop of luck. It will also have to allay a perception that its changed depreciation/maintenance policy was designed to push up the profits prior to the flotation.
Ryan air has gained considerable benefits from operating used aircraft which it purchased at relatively low rates. The average age of its fleet is 15.8 years. This is well ahead of its competitors. Aer Lingus, for example, has an average age of 5.8 while its oldest aircraft is 9 years old. The average for British Midland is 5 but City Jet is much higher at over 12.
Ryanair believes the aircraft should be replaced when they are 25 years old. Six will reach this in 2005, the remainder between 2006 and 2008. However, the price of aircraft has escalated because of buoyant demand. The average price of $9.3 million per aircraft for the eight used Boeing 737-200A delivered in 1996 and scheduled to be delivered in 1997, for example, is 78 per cent higher than the price previously paid. Also, Ryanair will have refurbishment costs of $415,000 on each of these aircraft.
But Ryanair is undaunted by these hurdles and always seems to have a positive response to any questions about its future viability. The cash flow will easily refinance any replacements and the company flush with the cash from the flotation will be able to buy new aircraft, is the quick response.
In some ways, the expansion of Ryanair is reminiscent of Aer Lingus's expansion in the 1980s which led to so much trauma for the State airline. Ryanair had 11 aircraft at the beginning of this year, it now has 13 and by the end of the year this will be expanded to 19.
That begs the questions; is it expanding too fast and will it be able to fill the expanded seats? Ryanair says this represents a 30 per cent expansion in 1997 and a further 30 per cent expansion in 1998; growths it has already attained.
But what about the restating of its 1995 results which increased its net profits from £5 million to £12 million? Here again Ryanair has what appears to be a very plausible explanation. It runs like this: around £1 million of the increase was due to a change in the depreciation policy to bring it into line with other airlines, but the majority of the change was due to a review of maintenance costs. Its argument goes as follows: by 1996 it had contracts in place and the costs were predictable; Ryanair maintains that the maintenance costs are still very conservative and also, it does not agree that older aircraft are less safe than new ones arguing that adequacy of maintenance is what matters.
One of the criticisms directed at Ryanair is the inability of its aircraft to land in very poor visibility and the subsequent diversion of its aircraft to different airports. It has improved in this area but it still operates in accordance with category 11 minimum landing requirement which requires a minimum horizontal visibility of 350 metres and vertical visibility of 100 feet. However the delivery this year of a Boeing 737-200A is expected to enhance the landing requirements (for these aircraft) to category 111, the same as operated by Aer Lingus.
Ryan air has also benefited considerably from the payment system to its cabin staff. Based on productivity, these costs, as a percentage of operating revenues, are lower than many airlines. The cabin staff are paid a low basic wage (£5,340) and guaranteed 600 flights at £9 per flight (£5,400). They make the rest, possibly £7,000, on commissions for selling duty free goods.
Duty free could be phased out in 1999 but Ryanair has a ready answer saying the cabin staff could be selling meals and goods on commission to make up for this loss! Well that is hardly plausible but Ryanair concedes that if this does not work: it might have to make up the balance by restructuring the salaries. This could be a potentially explosive area for Ryanair particularly as chief executive Mr Michael O'Leary got a whopping bonus payment of £16.7 million for 1995/7.
If duty free goes, it could lead to higher landing fees, as airports try to make up for lost revenue and Ryanair, like the other airlines, would suffer loss of revenue. Dutyfree accounted for 5.3 per cent of its revenue last year.
Ryanair is coming to the market at an opportune time. It can show a healthy rise in operating revenue from £86.2 million in 1995 to £136.4 million in the year to March 31st 1997, and a rise in profit before tax from £15.7 million to £25.6 million. It carried 3 million passengers last year and it expects this to rise to 4 million this year as it opens up new routes.
As an investment medium Ryanair has pluses and many potential minuses. With a rising airline market over the past few years, it has had a comparatively easy ride and this should continue over the short term. The real testing time will be thereafter.
