Comment: Ryanair to cut aircraft, pilots and crew, but who is to blame for surplus?

Ryanair is to cut hundreds of jobs because it has “too many staff”, chief executive Michael O’Leary informed employees this week.

Nine hundred pilots and cabin crew could go by October and another 600 in the New Year.

This represents a sharp departure from the usual O’Leary line about “growing like gangbusters” and an especially sharp turnaround from the situation less than two years ago when Ryanair had too few pilots to cover its schedule.

If you recall, Ryanair had to cancel more than 20,000 flights through September, October and winter 2017-18 owing to a shortage of flight crew.

O’Leary insisted a crew shortage was not to blame, merely pilots having too many holidays left to take near the end of the 12-month period.

But staffing levels generally need to take account of statutory holiday entitlements whatever EU jurisdiction you take off from and land in.

Taking a similar tack this week, O’Leary explained the job losses were needed because not enough staff were resigning.

Presumably, the pay increases and union recognition agreements Ryanair was forced to concede in the wake of the 2017 debacle made the carrier such an attractive place to work that the previous churn in workforce has abated.

Some employers value staff retention, of course. Ryanair certainly appears to value retention at the top, where O’Leary has just signed on for another five years.

Up in the Air

In a nice touch, O’Leary spelled out the new reality at the airline in a personal video message to staff.

I am reminded of the George Clooney film Up in the Air – a sharp satire on corporate ‘downsizing’ and business travel culture.

The film incorporates the genuine reactions of employees to being made redundant, including by video and virtual assistant.

In the Ryanair video, O’Leary told employees: “It’s been a challenging summer [and] we’re facing into a very difficult winter.

“I’m sorry to advise you this means we need to cut our aircraft numbers and our staffing. We will need about 600 less pilots and cabin crew for summer 2020.

“On top of this bad news, we already have a surplus of over 500 pilots and some 400 cabin crew because resignations have dried up to effectively zero since January.”

The increased likelihood of a no-deal Brexit at the end of October would damage Ryanair’s bases in the UK and Ireland, he added.

“We have to cut our aircraft numbers and our staffing not just in summer 2020, but also in winter 2019.

“This will result in some base cuts, some base closures, and I’m very sorry to say, some job losses this winter for pilots and cabin crew.”

O’Leary also blamed delays in the delivery of the Boeing 737 Max following the aircraft’s grounding in March.

He said the company would begin briefing staff and unions “in the next week or two” with final decisions about the losses by the end of August.

Ryanair posted the video online on Monday after releasing results for the three months to June – its first quarter. These showed a 21% decline year on year in quarterly profit after tax to €243 million (£219 million).

Passenger numbers grew by 11% year on year and revenue by 11%, but there was a 6% decline in average fare.

There are two points to make about that. One, passengers did not spend less to fly on Ryanair because the average drop in fares was offset by a 14% increase in ancillary revenues – people paying for ‘extras’ such as assigned seats and bags.

Two, the fares reduction is a result of Europe’s biggest airlines operating more seats on short-haul routes than they can fill at realistic prices.

Ryanair – the Walmart of aviation – is the master of budget flying. It’s not solely responsible for the overcapacity, but it has consistently led the way.

Now some of its staff will pay the price. There are other prices to be paid, of course – not least environmental, but that is a whole other issue.

‘There will be more failures’

O’Leary is not about to change strategy. On Monday, he noted: “The current weak fare environment has continued into Q2 [July to September] and we expect H1 [half year to September] fares to be down approximately 6%.”

But not to worry: “We continue to negotiate attractive growth deals as airports compete to attract Ryanair’s traffic growth.

“We expect [full year] traffic to grow by 7% to over 152 million [passengers].”

Ryanair remains in “pretty good shape”, insisted O’Leary, and will happily continue to put pressure on its competitors.

“There will be more failures this winter,” he declared – singling out Norwegian Air as a candidate.

O’Leary did identify where the pressure on fares is most intense – Germany and the UK.

He also apportioned blame, noting: “The two weakest markets were Germany, where Lufthansa was allowed to buy Air Berlin and is selling this excess capacity at below cost prices, and the UK where Brexit concerns weigh negatively on consumer confidence and spending.”

Hmm. Lufthansa was, indeed, allowed to buy Air Berlin in Dusseldorf. But easyJet was allowed to buy Air Berlin in Berlin, and Ryanair to buy Niki – then part of Air Berlin in Vienna – which Ryanair now operates as Lauda Air and is expanding rapidly.

On Brexit, UK outbound departures are up year on year so far in 2019 – so it’s debatable how much demand has been hit.

But since the airlines all added seats this summer over last, they have more to sell and can’t sell these at the prices they would like. Any market stallholder could tell you how this works.

‘Tough competition and sizeable overcapacities’

Lufthansa also released results to June this week – reporting on its second quarter and first-half performance.

It was very much a half of two halves for the German group which comprises Swiss, Austrian Airlines, Brussels Airlines and Eurowings as well as Lufthansa.

The group reported “a continuing strong performance on its long-haul business”. But “the price war in Germany and Austria had a negative impact on earnings”.

Chief financial officer Ulrik Svensson noted “tough competition in Europe and sizeable overcapacities, especially on our short-haul routes out of Germany and Austria”.

He reported Lufthansa made a loss of €116 million for the six months to June, a serious reverse on the €713 million profit it made in the same period last year.

Lufthansa won’t lose money over the full year, of course. It made a net profit of €2.18 billion in 2018 and expects a full-year profit margin of 6.5% on its hefty revenues this year.

It recorded a net profit of €226 million in the three months to June off a 4% increase in revenue to €9.6 billion. Half-year revenues were €17.5 billion.

The ‘network carriers’ Lufthansa, Swiss and Austrian chipped in with a half-year operating profit of €565 million – down on the previous year’s €989 million – but hardly disastrous, as they expanded capacity almost 5%.

However, low-cost subsidiary Eurowings lost €273 million in the six months, up from €220 million last year, with capacity up 4% but “substantial declines” in yields.

In June, Lufthansa unveiled a turnaround plan for Eurowings which competes with Ryanair and easyJet.

Lufthansa’s results statement emphasised: “Persistent overcapacities, aggressive competition and increasingly price-sensitive demand, particularly in the German and Austrian markets.

“Lufthansa expects the European market to remain challenging until at least the end of the year.”

I expect it to remain challenging for longer than that – what with Brexit on a knife edge, the prospects of no deal driving down sterling and the European Central Bank poised to cut interest rates and resume quantitative easing amid a euro-wide slowdown.

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