Last week saw the largest corporate transaction involving an Irish company ever. Yet it got precious little press coverage. Indeed, during the week, rather than going big on this huge business story, RTE twice carried a story about the company, Ryanair, being fined a modest €375,000 by the Dutch consumer agency, rather than focusing on the $16 billion deal announced last Tuesday.

 

Quite why Ryanair’s modest woes rather than its major triumphs tend to get more media coverage is a matter for another discussion, but what is clear is that the deal to buy 175 planes, at a list price of $16 billion, represents an enormous vote of confidence by Ryanair in its future.

 

It has been clear for a while that Ryanair’s aggressive expansion could only be sustained by expanding its fleet – but there is expansion and there is expansion. This constitutes a mega deal and it tells us as much about the state of the airline industry, and the state of the seller as it does about the chutzpah of the buyer. Details emerging suggest that Ryanair has got the deal of the century.

 

Its press statement said that it paid a price which is “not dissimilar” to the price it paid for jets in 2005. Back then, Ryanair paid only 53 per cent of the list price.

 

Ryanair won’t tell us what the planes cost this time around, but if it is a similar deal, it implies that Ryanair has secured 175 planes for the price of about 85 or 90. The list price for a 737 is in the region of $85 -$95 million if a rich company wanted to buy a single one. The rumour is that O’Leary got his planes for half that.

 

This move would be yet another example of Warren Buffett’s investment mantra which Ryanair follows of “buying when everyone is selling and selling when everyone is buying”. This strategy was best evidenced by Michael O’Leary heading to Seattle to meet Boeing and place an order days after 9/11 in 2001.

 

He is at a similar game now, sensing Boeing’s weakness and playing his hand.

 

This time around, Boeing is weak because of the problems you might have read about, with the launch of its new 787 Dreamliner jet. This is supposed to be the new big thing in long-haul travel, but there have been all sorts of glitches. The selling point of this new jet is that it is built in one piece, so there is no need for rivets joining bits of the plane together.

 

This brings down its weight and, as a result, will save between 18 and 20 per cent on fuel costs. But the problem is the electronics on test flights haven’t been up to scratch, delaying its launch. Therefore Boeing is in need of good news to counter this PR problem.

 

The second reason Boeing needs a good news story is that it is being hammered by Airbus in the short-haul market, the market in which Ryanair reigns supreme. This is because Airbus engines are designed with bigger fans, which are more fuel-efficient than Boeing’s. As a result, Airbus is out-performing Boeing by as much as eight to one in the new order business. But, of course, Airbus planes are more expensive and, when you are dominating your rival, you don’t discount your prices, which is why Ryanair is dealing with Boeing, which is now at its weakest.

 

The other reason Ryanair got a good price is that it is buying the last big batch of an old model of plane. This, as you can imagine, was hugely significant for Boeing. Boeing is upgrading its planes and is going to unveil a new, more fuel-efficient model by 2018. Ryanair knows this and so has come in and bought all the old stock. What manufacturer would not like a deal whereby a client came in and lifted most of the model the manufacturer itself was intent on phasing out?

 

So, what’s Ryanair’s risk?

 

Well the risks are two-fold. The first is that the airline will be left in eight years time with an outdated fleet, which is less fuel-efficient than the new models of both Boeing and Airbus. The second is that the market will dip and it will be left with too many planes. On the first concern, Ryanair knows that it will have less fuel-efficient planes in the future, but its management is taking the view that it is better to have capacity today, take advantage now and worry about ten years’ time in ten years’ time. They have probably learned from Boeing’s 787 experiences.

 

There is a huge difference between talking about a new model and actually delivering a new model. So Ryanair may be gambling that Boeing will slip up and it will be in pole position.

 

The second concern that the market may dip is something that Ryanair has obviously decided is a small risk. Unlike other airlines, it has the cash now and it is going for it. For example, Ryanair made €750 million in cash last year. The difference between this cash take and the €500 million of recorded profits is depreciation on planes.

 

Ryanair calculates that, after this deal, it will have the capacity to drive costs even lower and squeeze its competitors. According to its press release, Ryanair will end up – after retiring planes and giving back leased planes – with about 410 planes in total, up from the present fleet of 305 planes.

 

The company has said that it intends to increase passenger numbers by 3 per cent per annum for the next four years, bringing total passengers flown from today’s 80 million to 105 million by adding four to five million passengers per year.

 

To put this expansion in context, adding four million passengers per year would mean that Ryanair would create an airline the total size of Aer Lingus every two years.

 

The model is the same, lower fares than the rest, based on lower costs. In the Ryanair view, there are people who want to travel and will pay €70 to go to destinations that most people never contemplated in the past.

 

The price, rather than the destination, drives the decision. This is quite different from most tourist boards, which claim there are people who, for example, have always wanted to come to Dublin. Ryanair’s counterclaim is no, there are people who want to travel for €70 and, if they happen to go to Dublin, fine, but they will go to Aarhus in Denmark or Girona in Spain for that price just as happily.

 

Once the airline creates a route, the evidence is that people reinforce the demand for Ryanair by telling mates. The initial route decision is validated by word of mouth by people saying: “I went to a great place last year for €70, you should go too.” Given its growth rates, it is hard to argue with Ryanair.

 

O’Leary obviously thinks that Europe is full of opportunity, with countries where people are still used to paying €200 for a seat he can provide at €70. A quick look at the figures suggests that he is not wrong. Ryanair is the second-biggest airline in Greece, the biggest in Poland; it is strong in Germany and, unexpectedly, the second-biggest airline in Morocco. It is growing rapidly in Scandinavia. This is also happening because there are lots of under-used airports.

 

Given that the Ryanair nightmare is for these shiny new Boeings to be stuck on the ground because of congestion, making no money for the airline, it’s not surprising that it avoids the big airports. For the passenger, this is never ideal, but, given the way 80 million of us have responded to the Ryanair view of things, it is clear that we get over such inconveniences.

 

The biggest deal in Irish corporate history has been done by arguably the country’s most audacious company, driven by its most single-minded leader. Now this is truly a good news story worth reporting.
Like it or loathe it, Ryanair is doing the business and, after last week’s deal, it is doing it with a seriousness and an intent rarely seen – not only in this country, but in any country.

0 0 votes
Article Rating
31
0
Would love your thoughts, please comment.x
()
x