How Ryanair rushes the rival

“We have achieved tremendous cost advantages over our competitors,” said Michael O’Leary, Group CEO, on Monday: “We are seeing a major upheaval in European aviation in favor of Ryanair.”

No question: Ryanair should continue to grow. The airline wants to create around 10,000 new jobs in the cockpit, in the cabin and on the ground in the coming years. With almost 600 aircraft in the fleet and the goal of carrying up to 225 million passengers a year in 2026 and even 300 million guests in 2034, the low-cost provider is increasingly ahead of the European competition. This also applies to profit, as Alex Irving of Bernstein Research predicted in a recent study. Ryanair will go from being a pure growth stock to a stock with a high payout.

Like all airlines, Ryanair suffered severely from the pandemic and the ever-changing travel restrictions that have been imposed over the past three years. But some figures demonstrate how strong the airline is now again. Ryanair carried around 160 million passengers between January and December 2022. No other European airline came even close to such a number.

Number two, the Lufthansa Group, managed 102 million passengers. Even if the much sought-after Italian ITA and the Portuguese TAP were already part of the group, and if the Scandinavian SAS, also considered a takeover candidate, were also included, the group would only have had around 144 million passengers.

Ryanair is as big as the Southwest model

In terms of passenger numbers, Ryanair is now as big as Southwest, O’Leary’s American role model. If the verbally aggressive airline manager manages to increase the number of passengers to 225 million by 2026, that would not only be a new record in Europe.

Even the industry giants in the USA – one of the largest aviation markets in the world – have never broken the 220 million passenger limit. American Airlines set the previous record in 2019 with 215 million passengers. In the same year, Lufthansa achieved its own record of 145 million passengers.

Such traffic figures are of limited significance. What matters is how well an airline earns from its customers. According to industry analyst Irving, Ryanair could soon set new standards on this point as well.

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The growth rates are going down a bit, as even O’Leary admitted on Monday. According to him, the company will no longer grow in double digits like in previous years. But an annual rate of around 6 percent is also possible in the medium term, according to O’Leary.

In addition, says Bernstein analyst Irving, the company is reaching a size that allows it to make more money. High ticket prices help. Ryanair expects supply in Europe to remain tight for at least four more years – and flying will be more expensive for the time being. One reason is the aircraft manufacturers’ problems in delivering new machines on time.

On the other hand, Ryanair took precautions with the mega order for Boeing, according to O’Leary. The company has ordered more aircraft than the airline needs for its fleet renewal. The aircraft currently deployed came into the fleet in two waves between 2004 and 2012 and 2015 and 2018. The first of these aircraft are due for their next major maintenance.

Ryanair CEO Michael O’Leary

The airline recently bought 300 new Boeing 737 Max jets, including 150 as options.

(Photo: Reuters)

This so-called D-Check is due every seven to eight years, depending on flight performance. The machine is largely dismantled. That costs around one million dollars per plane, which is also down for months. It is obvious that Ryanair will skip this new D-Check for aircraft that are more than 20 years old.

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The reason: The core of the strategy of low-cost providers is to use the jets with maximum productivity. This is usually measured in block hours, the deployment time between releasing the parking blocks before take-off and reapplying these blocks after landing. According to Irving, Ryanair has eleven block hours per jet per day, Lufthansa nine. Archrival Wizz Air from Hungary even manages twelve hours.

An older jet that breaks down more often does not fit into this strategy. The Ryanair management around O’Leary therefore assumes that around half of the newly ordered aircraft will replace older equipment. The rest is for growth.

The new jets are bigger and more efficient

In addition, Ryanair has ordered the 737 Max 10. Compared to the previously used 737-8200, it offers a good 30 seats more space. In addition, the jet is significantly more economical. This helps to further reduce operating costs, which in aviation are usually recorded with the value “CASK”, the cost per seat and flown kilometer. Ryanair itself expects a cost reduction of around ten percent.

This data can now be used for calculations. Irving calculates the annual investments, including the purchase of aircraft, at two to 2.5 billion euros. At the same time, Ryanair, with a fleet of 600 aircraft, is able to achieve annual funds of four to 4.5 billion euros with its operative business. After deducting capital expenditure, this results in a free inflow of funds (free cash flow) of around two billion euros per year.

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A large part of those funds, Irving hopes, could benefit investors and shareholders. Because Ryanair does not have high debts to pay off – the annual financial statements presented on Monday show that the company has more liquid funds than debt (financial plus leasing liabilities). The so-called net financial position amounted to around 560 million euros at the end of March 2023.

Although O’Leary said that takeovers are a fundamental option for Ryanair. However, the management is rather skeptical about this topic, so large sums of money are probably not needed here. Share buybacks on a larger scale are unlikely, explained the Ryanair boss, but promised an appropriate dividend.

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