Ryanair leads airline sector into strategic cloud
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Oliver Taslic
LONDON, July 22 (Reuters Breakingviews) -Post-pandemic “revenge travel” has proven a boon for short-haul budget airlines over the last few years. Even so, results on Monday from $17 billion Irish group Ryanair RYA.I suggest a limit to what hard-up consumers will stomach to decamp to sunnier climes. That’s a problem for the whole sector.
Ryanair, Europe’s largest airline by passenger numbers, laid out a turbulent picture. Although demand for travel remained, with traffic up 10%, average fares fell 15% year-on-year in the first quarter as the carrier was forced to cut prices to fill seats. CEO Michael O’Leary warned that fares in the second quarter – the key July to September period – would be materially lower than last year, compared to previous expectations of prices being flat to modestly up. Shares were down 15% in mid-morning trading, while rivals easyJet EZJ.L and British Airways owner IAG ICAG.L fell 8% and 4% respectively.
Not so long ago, airlines looked to be sitting relatively pretty. Their plane suppliers, Boeing BA.N and Airbus AIR.PA, have been struggling to hit their delivery targets, with the U.S. company under regulatory scrutiny and its European rival suffering from parts shortages. Certain aircraft are also being grounded to undergo engine inspections. Constrained sector capacity plus strong consumer demand should in theory have enabled those who had sufficient planes to hike their prices. UK-based easyJet, for example, noted in May that its engines were of a different sort to those being grounded, and that it expected to receive 16 Airbus A320 family aircraft this financial year as planned – a potential boon.
If this demand only now exists at lower prices, though, it’s a problem. Across the sector, cost inflation is showing up everywhere from maintenance – due to the need to fly older aircraft for longer – to straightforward labour costs as pandemic-scarred crew members lobby for higher pay. Ryanair said its operating expenses were up 11% year-on-year, with fuel hedge savings offsetting higher staff and other costs. One of these is the invidious predicament of being “over-crewed” – hiring staff for Boeing planes that haven’t arrived.
O’Leary still reckons Europe’s long-term flight capacity will be affected, due to ongoing delivery problems from Airbus and Boeing, Pratt & Whitney engine inspections, and industry consolidation. Lufthansa’s LHAG.DE stake purchase in Italy’s ITA, for example, was recently approved by the European Union. But in the short term, thriftier consumers mean airlines will have to discount to fill their planes – and the sector’s investment appeal will diminish.
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CONTEXT NEWS
Ryanair said on July 22 that net profit for the three months to the end of June, the first quarter of the Irish carrier’s financial year, was 360 million euros, down 46% on the same period last year and below the 538 million euro profit forecast in a company poll of analysts.
Average fares were down 15% in the quarter, and management said that ticket prices were continuing to deteriorate.
“Fares are now moving materially lower than the prior year and pricing … continues to deteriorate,” CEO Michael O’Leary said in a video presentation.
Efforts to boost fares in recent weeks failed as consumers resisted, he added.
Fares in the July to September quarter, when European airlines typically make most of their profit, are “softer, trending towards materially lower”, Chief Financial Officer Neil Sorahan said.
Consumers are being “a little bit more frugal, a bit more cautious,” he said in an interview.
It is too early to forecast profit for the full financial year, which ends on March 31, he added.
Ryanair shares were down 14.5% as of 0940 GMT, while easyJet shares fell 8.3%.
Editing by George Hay and Katrina Hamlin
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