Ryanair capitalises on Covid uncertainty to squeeze unions, rivals and Boeing

Joe Brennan: Pay restoration is up for negotiation along with new aircraft orders

Few investors in Ryanair were surprised when the carrier warned just before Christmas that the impact of Omicron on air traffic had forced it to more than double its full-year loss forecast.

But many have been left scratching their heads since chief executive Michael O’Leary accompanied the release of the company’s latest set of quarterly figures on Monday by sticking to a broad forecast that its net loss for the year to the end of March will land anywhere between €250 million and €450 million.

That outlook implies a loss of between €107 million and €307 million for the fourth quarter of the year alone.

"We see this wide range as most surprising at this time," said HSBC analyst Andrew Lobbenberg in a note to clients, noting that Ryanair has already completed one month of the quarter, has 60 per cent visibility of trading for the second and, unlike many of its rivals, has fully hedged its fuel needs at a significant discount to current sky-high market prices.

Bookings

Of course, O'Leary has plenty of reasons for remaining wary publicly, given how quickly Omicron wiped out Christmas and new year bookings. "We would caution all shareholders to expect further Covid disruptions before we here in Europe and the rest of the world can finally declare that the Covid crisis is behind us," he said on Monday.

But Ryanair investors probably weren’t the canny operator’s target audience.

It's more likely that he was sending signals to trade unions, rival carriers – and Boeing, its long-time aircraft supplier.

After all, it comes at a time when Ryanair has begun negotiations with some of its unions on the pace of pay restoration following Covid-19 cuts. Pilots agreed to take a 20 per cent temporary pay cut at the outset of the pandemic almost two years ago, while cabin crew largely stomached a 10 per cent hit.

Meanwhile, with the carrier planning to run its summer capacity this year at 114 per cent of 2019's level, O'Leary doesn't want rivals with less-bullish schedules to get any bright ideas. Credit Suisse analyst Neil Glynn reckons overall capacity in Europe for the key holiday travel season will be down by a "low- to mid-single digit percentage" from pre-Covid levels.

O’Leary was at pains to point out on an analysts’ call on Monday that forward booking rates at this stage of the year for summer fights are “running significantly behind” where they would have been pre-Covid. But has the pandemic just fundamentally changed how far ahead we plan travel?

Hike

The hike in seats being offered by Ryanair this summer is being fuelled by the company getting its hands on more “game-changer” Boeing 737 Max aircraft, which should help reduce its fuel use, carbon emissions, noise and costs. It expects to have 65 of these 197-seat jets by the middle of the summer, having taken delivery of its first last June. (It has a total of 210 on order).

Last September, Ryanair terminated talks with Boeing over a potential order for up to 250 larger, 230-seat Max 10 planes amid a standoff over pricing. O'Leary took a crack at the Seattle plane-maker on the analysts' call this week, saying its sales team have been "asleep", noting how traditional Boeing customers Qantas and several affiliates of Air France-KLM switched to Airbus in December.

Might O’Leary be hoping that his cautious near-term outlook will get Boeing back to the negotiating table?

For Bernstein analyst Alex Irving, who described Ryanair in a report this week as a 10,000lb gorilla and the biggest aviation story in Europe in the past three decades, the carrier "can go head-to-head with anyone".

“The group pioneered the low-cost model in Europe, with an approach that was at the time cutting-edge, but has since become gospel,” he said. “Investors have come to love it; competitors have come to fear it as few can match its low unit costs and low fares.”

Ryanair expects to carry just under 100 million passengers in its financial year through March, up from 27.5 million for the previous 12 months. It has sights on selling 165 million seats and returning to profit in its next financial year, rising to 225 million passengers in 2026.

Contract

While O’Leary regularly threw out the line in the Noughties that he’d retire “in two years”, he’s now with Ryanair for 28 years and his current five-year contract is due to expire in 2024. He’ll be 63 at that stage. And while it’s anyone’s guess whether he’ll clear off the runway then, observers are beginning to wonder.

“The group’s future is uncertain as it prepares for a life after CEO Michael O’Leary post-2024, with no obvious successor, and growth beyond that date not yet assured as a Max 10 order has as yet proved elusive,” said Irving.

Eddie Wilson, for one, who took over the day-to-day running of the airline in late 2019 under a restructuring that saw O'Leary become CEO of the wider Ryanair Holdings group, may disagree on the succession point.

But Irving believes that Ryanair’s 225 million passenger target for four years’ time is not credible without a fresh planes order.