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.
Bravo David. When can we coax Mr O’Leary and your fine self into government. Well done Ryanair. A lot of people moan about the service but you just cannot beat the value for money. Nice article
RTE did actually cover it, just on the business side so away from everyone really. http://www.rte.ie/news/business/2013/0319/377316-ryanair-deal-to-buy-175-new-boeing-planes/
Still you raise a very good point. The average person is only interested in bad news and the news organisations target that.
As for Ryanair, I’d argue that it isn’t just the price people like. I’ve chosen Ryanair to places where other airlines fly to for cheaper. Ryanair is great because you know exactly what you are getting. A seat on a plane run like a bus service. Want something extra, then sure pay for it.
Without Ryanair most of use wouldn’t move out if this place.
O’Leary is not a game player. This is why the civil service / vested interest propaganda machine blanks Ryanair. There also seems to be a huge resentment of Ryanair due to their views on unions etc..
Did the Sunday Business Post have an article on it?
I am genuinely more than surprised by the gusto with which you laud the Ryanair deal, for two reasons, both of which you actually give in this piece. Firstly, you express surprise at RTE (et al) giving priority to stories about fines imposed by consumer protection agencies on Ryanair and then you surmise that if the companies expansion plans come to fruition it “would mean that Ryanair would create an airline the total size of Aer Lingus every two years”; surely the point you are missing with Ryanair’s business model is that the consumer (ie low-cost/budget travellers) are expressing grave… Read more »
Good to see the realist analysis of Ryanair here. So many people go out of there way to criticise Ryanair and just can’t acknwoledge that without Ryanair putting manners on the rest of them, we’d still be taking the boat and train to catch flights to the rest of the world.
The critics have a choice, why don’t they just shut up and choose a different airline. Ryanair is an enabler.
How much export business is gone, because poeple can get on a plane and go meet customers.
I first travelled to London as a young man with Aer Lingus in 1982 the cost was 210 IRP (266 Euro return), it was 7 years before the creation of Ryan Air. I was earning 400 IRP (508 Euro) per month as a graduate computer programmer. A flight to London by Aer Lingus in 1980 was half a month’s pay for a graduate with 2 years experience. If it were not for Ryan Air the Irish people would have been effetely denied travel by the State. Therefore we can assume that a without Ryan Air (and a few Croke Parks)… Read more »
Two today, impressive.
Boeing V Airbus The real issues here are all about America v Europe or more importantly Common Law v Code of Napoleon . I disagree with the wisdom of Ryanair making this decision of brinkmanship when they do not have any cards to play .Their tactics are absolute pure bluff and a very risky gamble to pacify the shareholders of Ryanair .Who will be retiring soon from Ryanair that hold significant stock ? The ENARCHY ( aluminae of ENA Ecole National de Administrif ) hold ALL THE POWER in Europe and can DISTROY Ryanair with a blink of an eyelid.… Read more »
Good piece, David. Ryanair ALWAYS have tended to take advantages of lower contract availability – they hedge on fuel also to take advantage of price fluctuations. As for their routes – I think they long since realised that the “real” business isn’t places like Dublin but high capacity countries such as Germany and the UK. Aside from Dublin, Irish airports are far too small to sustain the kind of business RA need. On the other hand, they do use “loss leaders” to drive competition out of Irish airports. Only Aer Lingus has been big enough to fight this – and… Read more »
Suggest you read up a bit on Air plane manufacturers. Neither Airbus or Boeing build Engines!! Rivets the main reason 787 is lighter? Hmmm
Ryanair was an opportunistic model which worked well in the early days. Just like Ireland was back in the late 80s. It is nearing the end of its life and will goo poof! like the Celtic Tiger. Building routes to nowhere today. No courage to really go after the new Asian markets. It is becoming king of the irrelevant. They are not cheap anymore – not by a long shot when you peel back the headline pricing. Ryanair has to go long haul intercontinental or start a new type of business or die. Time is running out and the guys… Read more »
Many workers from the United Kingdom have left their jobs with Ryanair and as result the company is recruiting now contract labour from agencies as far away as the Baltic States and Poland. Pilots were recently told that in order to graduate from older planes to newer aircraft, they would have to pay for their own retraining. A cabin crew who works for Ryanair writes her experiences on a website where she says: ‘’Ryanair does not care about its cabin crew and just takes the most they possibly can squeeze out of us. After a twelve hour day without a… Read more »
Hi, I read this article an interpreted it in the way it was written to be intentionally upbeat and thankfully someone writing in the papers is doing his bit to be positive. Could I respectfully suggest however that the more important story needing to be told about Ryanair was the fact that it was only founded by Tony Ryan after he had 34m written off with a down payment of 4m when GPA collapsed into nothing during its failed attempt to float on the stock market. The current chair of AerLingus Colm Barrington lost over 10m that time. The Late… Read more »
+1
Year’s ago we used to marvel at the size of the Greek Shipping fleet with envy. If only we could have a flag carrier on that scale it would enhance our image abroad from that of Guinness swilling Potato eaters. Then along came Michael O’leary and now most Europeans are envious of us – they may carp on about the rigid rules but still fly Ryanair all of the time. O’Leary got a rough ride here when he started up and he doesn’t owe any favours to anybody as a result. I saw it happen first hand – Aer Lingus… Read more »
Yes, thank God for the like of Ryanair amongst others in giving Aer Lingus and the others manners, but as for their service, well, it’s crap!! I flew with them once, but I’ll never fly with them again. Once was enough in my book!!
If everyone earned 1 euro a week we would be all OK but who could afford to fly.
The race to the bottom sponsored DMcW. or is that the other way about?
:)
!
So you want a minimum wage that allows all who work able to fly. The trouble with a minimum wage is that that it puts the least skilled labour out of a job at all.
http://dollarvigilante.com/blog/2013/3/26/dont-bother-raising-the-minimum-wage.html