Ryanair's price wars are eating into its profits, but the low-cost airline is seeing a boost from lower fuel prices and is determined to stick to its expansion plans.
The Irish budget carrier yesterday announced net profits up by a whopping 550 per cent to €136.5m (£118m) in the first three months of the year. But the vast majority of the rise was thanks to a 42 per cent fall in fuel costs. Total revenues were flat, with an 11 per cent rise in traffic largely cancelled out by a 13 per cent fall in average fares.
A string of sales aiming to steal business from struggling rivals and keep Ryanair's planes full has pushed the group's "yield", or per seat profit, down markedly from last year already. Not only do the price wars show little sign of slowing, with another promotion – offering one million seats for €1 in September and October – launched yesterday, but Ryanair says yields could be more than 20 per cent down year on year in the second half of 2009, and is predicting that full-year profits will come in at the lower end of its forecast range of between €200m and €300m.
The relentless price-cutting is certainly boosting numbers. Some 16.6 million people travelled on Ryanair in the first quarter, the highest number of any European airline. Ryanair's aim is to use rock-bottom prices to catch passengers trading down from more expensive alternatives, and the group is on track to meet its target of 67 million passengers.
Michael O'Leary, chief executive of Ryanair, said: "The winners in a deep recession will always be those companies like Aldi, Lidl, McDonald's, and Ryanair who offer the lowest prices and the best service to consumers. We will continue to expand as others fail. We will also continue to drive down costs and pass these on in the form of lower fares right across Europe."
The company presents its price wars as an opportunistic grab for the potential passengers balking at the fares of non-budget rivals. But the carrier's repeated sales are also the only way to keep its planes full, which is vital for a business model reliant on continuing growth and full planes to maintain its economies of scale.
Gert Zonneveld, a transport analyst at Panmure Gordon, said: "Ryanair is a price-taker, rather than a price- setter – their fares come down to whatever it takes to fill the aircraft. Ryanair does believe that short-haul aviation is a commodity business and ultimately you will gain passengers because of the price rather than, say, the quality of the seat. But ultimately they are pricing to fill their aircraft."
The corollary is strict cost-cutting. The carrier took another 5 per cent out of its staff, airport and handling costs in the last three months, and Mr O'Leary took the opportunity yesterday of restating his violent opposition to the so-called "tourist tax". Last week, Ryanair announced plans to cut its Stansted services by 40 per cent this winter, blaming the airport's high charges and the Chancellor's plan to raise air passenger duty (APD) from £10 to £11 from November, while a slew of other European countries have cancelled the tax altogether.
"The dramatic decline in Britain's traffic and tourism figures is directly due to the British Government's £10 APD tax and the high airport charges," Mr O'Leary said yesterday. "We again call on the Government to follow the more sensible leads of the Belgian, Dutch, Greek and Spanish governments, all of whom have recently scrapped tourist taxes and have reduced airport charges, in some cases to zero, in order to stimulate tourism."
Ryanair's fuel hedging strategy also boosted profits. Although its impact is inflated by comparison with last year's very depressed figures, where unhedged Ryanair was walloped by the rocketing oil price, this year's picture is still less distorted, because the hedged price is more in line with the market.
Mr Zonneveld said: "Ryanair paid an average of around $120 last year, where the other airlines had hedged at $80, so everyone else came out smelling of roses and Ryanair looked like fools. But now the tables have turned and Ryanair's is a pretty decent performance."
The group is 90 per cent hedged for the first three quarters, and 60 per cent hedged for the final three months of the year. If the balance is hedged at the same level, the company will lock in fuel costs some €460m lower than last year.Reuse content