Ryanair's profits fall as it ponders stakes in Aer Lingus and London Stansted

1 August, 2012

Dublin-based Ryanair recorded a near 30% fall in earnings for the three months ending 30-Jun-2012 in spite of a 6% rise in passenger numbers and a 4% increase in average fares. Net profit for its fiscal first quarter came in at EUR99 million compared to EUR139 million in the year-ago period as revenues rose 11%. But the airline's total operating expenses grew at a higher rate of 17% primarily due to sharply higher fuel costs.

Ryanair’s decrease in net profit was in line with its own guidance, but below consensus forecasts of EUR114 million. Despite the fall in earnings during its fiscal first quarter the carrier is maintaining its full-year outlook and expects to earn between EUR400 million and EUR440 million for its fiscal year ending 31-Mar-2013 as continuing austerity measures, recession in Europe and lower yields at new bases will restrain fare growth. It anticipates growing passenger numbers by 5% to 79 million. Europe’s largest LCC in terms of passengers posted a net profit of EUR503 million in FY2012 and EUR403 million in FY2011.

Ryanair summary results: 1QFY2012 vs 1QFY2013

Ryanair has reported positive earnings in all but one year since it went public in 1997. The airline lost EUR169.2 million in the fiscal year ending 31-Mar-2009 owing mainly to a EUR222.5 million write-down in the value of its 29.8% stake in Aer Lingus, its much smaller Irish rival that it has tried to take-over twice – in 2006 and in 2008. Ryanair officially launched a third take-over offer for Aer Lingus on 17-Jun-2012.

Aer Lingus bid: Is the third time a charm?

In its third attempt to acquire Aer Lingus in full, Ryanair is offering to pay EUR1.30 per share in cash for the remaining stock. Ryanair Holding has notified European Union regulators of its intention to acquire Aer Lingus Group on 24-Jul-2012, and the European Commission’s Directorate General for Competition (DG Comp) has set a provisional deadline of 29-Aug-2012 to decide on the proposal.

The European Commission blocked Ryanair’s first take-over attempt of Aer Lingus on competition motivations, but Ryanair is arguing that the market has changed substantially different since its first unsuccessful bid in late 2006. The LCC believes that as the air transport market in Europe inexorably consolidates into “five large airlines/groups led by Air France, British Airways, easyJet, Lufthansa and Ryanair, the long term future of Aer Lingus, its brand and its growth prospects can best be secured within one strong Irish airline group, led by Ryanair, under which Aer Lingus’ fares and unit costs can be reduced and its recent traffic decline can be reversed”.

During a 30-Jul-2012 call discussing the company’s 1QFY2013 results with analysts, Ryanair CEO Michael O’Leary declined to comment on the Aer Lingus offer as it is under review by the EU’s competition authorities. He indicated the carrier and its lawyers are actively engaged with the EU Commission and he wants to give the DG Comp in Brussels “every opportunity to consider the issue, the competition issues, and the remedies that we will table. We're in the middle of a process – an extensive process engagement. It's underway. We expect to run through until the end of August or mid-September,” Mr O’Leary said.

Aer Lingus has rejected Ryanair’s two former offers and feels no different this time. It has called on shareholders, including Etihad with a minor stake of just under 3% and the Irish Government with a 25% stake, to reject the bid on the basis that it “fundamentally undervalues” the airline and that the transaction would harm competition. In its 30-page circular to shareholders, Aer Lingus chairman Colm Barrington said the “board has received legal advice that there is no reason to believe the European Commission would change its view given the increase in route overlap between Ryanair and Aer Lingus since 2007”. In supporting its call to shareholders to reject Ryanair’s bid, Aer Lingus also notes that its “strategy is working. Aer Lingus is a strong and profitable business”.

The airline on 31-Jul-2012 released interim results, showing that revenue during 2Q2012 rose year-over-year 6.7% and operating profit grew 17.8% to EUR31.7 million. The solid revenue performance was underpinned by both volume and yield growth of 1.2% and 5.3%, respectively. 

Aer Lingus summary results: 2QFY2012 vs 2QFY2011 and 1H2012 vs 1H2011

See related article: Etihad Airways gets springboard into Northern Europe with 2.9% stake in Aer Lingus

Ryanair fare increases are dampened by Europe’s crisis  

Ryanair’s revenues in 1QFY2013 (three months ending 30-Jun-2012) rose 11% to EUR1.3 billion while passenger numbers climbed by 6% to 22.5 million and total revenue per passenger increased 5% year-over-year to EUR57 due to a 4% increase in average fare to EUR44 and strong growth in ancillary revenues. The Irish LCC’s performance is similar to that of its UK-based rival, easyJet, which reported an 11% year-over-year rise in revenues in 3QFY2012 (three months ending 30-Jun-2012) to GBP1 billion as passenger numbers increased 11% to 16 million and total revenue per seat grew 2.8%.

See related article: easyJet counters Europe’s pessimistic moods and raises full-year profit guidance.

During 1QFY2013 Ryanair's ancillary revenues grew by 15%, faster than the 6% increase in passenger numbers, to EUR286 million due to a combination of an improved product mix and the roll-out of reserved seating. Ancillary sales now account for 22% of total revenue.

During the 30-Jul-2012 analyst call Mr O’Leary noted that the yield increase in the three months ending 30-Jun-2012 was dampened by the Europe wide recession, austerity measures, and heavily discounted fares at the airline’s new bases in Cyprus, Denmark, Hungary, Poland, Provincial UK and Spain. Ryanair opened a base at the new Warsaw Modlin Airport in Jul-2012 and opened a base at Budapest Airport following the collapse of Hungary’s flag carrier Malev in Feb-2012. At both airports Ryanair competes with Wizz Air.

See related article: After Malev’s grounding, Hungary could become large LCC market with Wizz Air and Ryanair moving i

Competition with Wizz Air in Hungary and Poland leads to high load factors and low yields 

Before and just after Malev’s grounding, Wizz Air was the largest LCC operating at Budapest Ferenc Liszt International Airport but Ryanair has taken over the lead position and now holds a 25% share of capacity in terms of seats, according to schedules in Innovata. Wizz Air, which is seen as the leading Central and Eastern European budget carrier, has a 22% seat capacity share. Ryanair flies to 30 non-stop passenger destinations from Budapest and Wizz Air to 32. The airlines compete head-to-head on at least 12 routes such as Barcelona El Prat, Charleroi, Eindhoven, Gothenburg, London, Madrid, Malaga, Milan, Warsaw Modlin Airport, Rome, Stockholm Skavsta, and Thessaloniki.

Budapest Ferenc Liszt International Airport capacity by carrier (% of seats): 30-Jul-2012 to 05-Aug-2012

Wizz Air is the dominant carrier at Warsaw Modlin it where it offers some 33,800 weekly one-way seats to and from the airport on 20 routes. Ryanair currently serves 12 gateways from Modlin with 13,600 seats approximately per week, according to Innovata. The LCCs compete directly on eight routes.

Warsaw Modlin Airport capacity by carrier (% of seats): 30-Jul-2012 to 05-Aug-2012

“Wizz Air has for the first time decided it wants to go toe-to-toe with us at those airports, so be it. Everybody's entitled to make some stupid decisions, but it means that we're having some very low-fare competition with Wizz Air over there. It does translate into higher-than-expected load factors and particularly in lower yield,” Mr O’Leary told analysts. He said both airlines are offering fares from Budapest Airport of HUF99 (EUR0.35) and “that will continue until higher fare airlines like Wizz realize that they can't compete with Ryanair on price. And they don't have a balance sheet or a way to compete with us on cost either.”

Mr O’Leary vowed Ryanair will continue to build its network and insisted the airline “will add more routes at both Budapest and Warsaw this winter, and for as long as Wizz or anybody else wants to compete with us on price, we would.”

Fuel pressures Ryanair’s operating expenses

Ryanair's total operating expenses during 1QFY2013 increased by 17% to EUR1.15 billion. This rise was primarily due to an increase in fuel prices and operating costs associated with the growth of the airline. Fuel, which represented 47% of total operating costs during the quarter compared to 43% in the prior period, increased by 27% to EUR543.8 million resulting from a higher price per gallon paid and a 4% increase in the number of hours flown.

Unit costs excluding fuel increased by 3% and unit cost including fuel unit costs rose by 10%.

The carrier's operating profit decreased by 22% to EUR132 million in the three months to 30-Jun-2012. Operating margin decreased by 5 ppts to 10%, which is still a very acceptable operating margin for the airline industry and above the industry average.  Its net margin dropped 4 ppts year-over-year to 8%.

Ryanair is considering a 25% stake in London Stansed Airport 

During the analyst call, Mr O’Leary confirmed Ryanair is potentially interested in taking a 25% stake in London Stansted Airport, which is currently a BAA-owned airport. The UK’s Competition Commission in 2008 ordered BAA to divest the airport to address competition concerns; but BAA has launched several legal challenges against the decision. The UK Court of Appeals in Jul-2012 rejected BAA's seventh appeal. BAA is owned by a consortium led by Ferrovial.

Ryanair for years has been calling for a speedy sale of Stansted, and it has been very critical of the continuous increase in charges at the airport. While the latter is a typical practice by Ryanair to achieve lower charges, the carrier has always maintained that Stansted has priced itself out of the market, and that the high charges are responsible of the steady decline in passenger throughput, from 22.3 million in 2008 to 18 million in 2011.

The airline is the largest carrier at Stansted and has an approximate 76% share of weekly capacity in terms of seats and ASKs, according to schedules in Innovata. Ryanair serves 115 non-stop passenger destinations from the airport.

London Stansted Airport capacity by carrier (% of seats): 30-Jul-2012 to 05-Aug-2012

Mr O’Leary said Ryanair has talked to about five different groups that are considering bidding for Stansted and some are very keen to get the airline to sign a traffic growth agreement as a precondition for their bidding. “Some of them want us to take a portion of the consortium to kind of demonstrate our commitment to delivering traffic growth, etcetera. We're not particularly interested in bidding for airport assets. It's not our business, but we don't have a difficulty taking a minority stake in Stansted Airport, as long as it is a really like-minded partner that's committed to reversing the doubling of airport prices that was imposed by the BAA monopoly four years ago.”

There is very significant traffic growth available to Stansted if charges are brought down, Ryanair's outspoken CEO said, adding that it would make a “very profitable long-term asset”. He concluded it would not require any significant capex to increase Stansted's passenger levels back to 22 million. “We think it's capable of going to 30 million passengers per annum on the current runway and terminal infrastructure,” according to Mr O’Leary.

Ryanair supports the ongoing campaign in the UK for additional runway capacity in the southeast. Mr O’Leary argued the expansion should not be focused around Heathrow, and concluded that “logically” the expansion should entail the second runway at Stansted, followed by a third runway at Heathrow and then a second runway at Gatwick.

Mr O’Leary said Ryanair is concerned that BAA/ Ferrovial “are trying to sterilise the land around Stansted before they sell it to prevent the second runway of being constructed in Stansted partly so they can force the authority then to construct a third runway at Heathrow”.

Ryanair plans to open more bases

Despite the challenging environment, Ryanair believes it will continue growing its traffic across Europe. The airline will open its 51st base in Maastricht (Holland) in Dec-2012 and Mr O’Leary said the LCC plans to announce more new routes and up to two new bases later this year. 

High oil prices and Europe’s recession will drive further consolidation and more airline closures. Air Finland and the Polish regional airline OLT Express are the latest casualties in Europe. Ryanair is well placed to quickly take advantage of airline bankruptcies and exploit short-term opportunities when they arise.  

Ryanair route network as of FY2013