Michael O'Leary's latest strategy is a long shot, but when your traffic plummets 99 percent you've got nothing to lose.
Ryanair CEO Michael O’Leary has a plan, but it’s got a lot of moving parts.
Staying true to the airline’s culture of promising low fares, the airline boss is pinning his hopes on being able to offer the cheapest tickets across Europe to successfully emerge from the crisis over the coming years.
Achieving those new low fares won’t come easy though, he admitted during a first-quarter results update, at which he revealed the airline recorded a $216 million loss for the three months up to June 30, down from a profit of $284 million in the prior year’s quarter.
Meanwhile, revenue fell by 95 percent for the three months, from $2.5 billion last year to $146 million this year. This isn’t surprising considering traffic plummeted 99 percent, falling to 500,000 passengers from 42 million passengers in the prior year’s quarter.
Securing the Future
The figures aren’t reassuring, and O’Leary said he’s loathe to predict any short-term numbers due to second waves of the virus now appearing. But in the medium term there’s a clear strategy: more cost-cutting; a favorable post-Brexit trade deal; Boeing 737 MAX deliveries; and successfully suing rivals over “illegal state aide” in the European Courts.
First, the cash. Ryanair has some $4.5 billion on its balance sheet, while its “cash burn” remains neutral, so it has a degree of stability to weather the coronavirus storm. But O’Leary wants to do more than survive, and will focus on lowering operating costs even further. Only by doing this can Ryanair realistically offer lower fares, he argued, and take on his rivals — many of which he claimed will now flood the market with low fares after unfairly receiving billions of euros in state aid.
In the first quarter, Ryanair impressively managed to lower its overheads by 85 percent in the quarter.
“We are lowering our costs, we will face lower fares and yields in the coming years, but we have the business model to sustain it,” he said. “Cost leadership is where we’ve been focusing our energy over the last quarter, and that will be vital if our airlines are to compete against these hugely subsidized flag carrier for the next number of years. And this is what underpins a lot of the cost reduction measures we’ve been negotiating.”
Not all pilots and cabin crew are playing ball however, and Ryanair will shut its airport bases at Frankfurt Hahn, Berlin Tegel and Dusseldorf in Germany at the end of this summer after pilots rejected pay cuts.
Some bases in Spain may also shut, as unions haven’t agreed to the pay cuts the carrier wants, while there’s a “real risk” to some of its regional bases in Italy due to the “slow pace of negotiations with unions and the government trying to impose Alitalia’s pay rates and abysmal productivity on other airlines and airports”.
It is continuing talks to cut jobs and salaries. “That process continues, successfully I might add,” O’Leary said.
Bite of the Apple
O’Leary also took aim at rival airlines, and said competition in Europe will be distorted as flag carriers such as Lufthansa, Alitalia and Air France-KLM will be able to “engage in low cost selling” after securing government aid.
Ryanair is in the process of taking some of these governments to court, and O’Leary said Apple’s victory on July 15 gave him cause for optimism.
“We’ve been heartened by the success of Apple and the Irish government in front of the European Court of Justice, overturning the challenge that was made to the Apple tax base here in Ireland,” he said. “It demonstrates the court is willing to stand up for the European law, where the performance of the European Commission ruling over some of these egregious, illegal state aid has been abysmal.
“(Lufthansa CEO) Carsten Spohr didn’t expect to get so much state aid, he’s received more than he actually needed, which is in itself in breach of the state aid rules. We’re reasonably confident we’ll be successful opposing state aid.”
However, any victory would be bittersweet as he added appeals and hearings could take up to two to three years, during which time those airlines would have already benefited.
A Happy Split
Elsewhere on Brexit, which sees the UK quit the European Union on 31 December this year, O’Leary thinks a trade deal will be signed because coronavirus has shown the devastating effects of what happens when planes don’t fly.
“Brexit hasn’t gone away,” he said. “We hope this will be done in a managed way, certainly where air travel is concerned. The experience of the UK during the Covid outbreak, and the priority they gave the return of air bridges, will hopefully serve as a lesson or a reminder that the UK needs to have open air access with the rest of the European Union.”
Ryanair is also in talks with aircraft lessors, and believes it will have 40 Boeing 737 MAX aircraft in place for summer 2021. “This is key as we want to offer our airport partners across Europe growth potential to reverse significant and in some cases catastrophic traffic losses,” O’Leary said.
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Photo credit: Ryanair CEO Michael O'Leary is reluctant to make any short-term predictions due to the second waves of coronavirus now appearing. Ryanair