In association with Travelport
Much has been made in the media over the last few weeks of Ryanair’s eagerly awaited date with destiny, namely the fact that it is finally facing up to a low growth environment where customers kick back against the business’s brash reputation.
And it is certainly true that many of the airline’s current ailments are indeed self inflicted, not least the fact that the revenue per customer line is looking very anaemic, largely because Ryanair has pushed prices down in order to grow the top line.
This is classic cut-throat Ryanair tactics, designed to make the competitors sweat and prove to its institutional investors that it is still top dog.
But ‘the growth at any costs’ strategy is beginning to run out of steam in much the same way that other former top dogs such as Tesco have hit the buffers – that much is obvious form the results, which weren’t great – to put it mildly.
The big challenge is that Ryanair is pushing on an inelastic market, ie a market that is already over-stretched and hasn’t got much bounce left in it. That means that as prices fall, revenues also start to sag as overall growth stays anaemic.
The cause of this inelasticity is the continuing malaise afflicting the eurozone. There’s no getting away from the fact that in many of Ryanair’s key target markets such as Italy, demand is incredibly subdued.
I’d also suggest that Ryanair’s other classic revenue trick is also about to hit the buffers – lowering headline fares but pushing up ancillary revenues by increasing charges on everything from allocated seating through to credit card fees.
There’s already growing evidence that customers are kicking back against the endless series of fees and charges levied and new EU-wide rules on credit card fees are likely to start hitting the bottom line over the next few years.
But this long list of gripes and concerns about Ryanair’s market-beating model need to be put into a broader, more positive context.
If you’re going to fight a price war in a market that is experiencing slower growth, it’s best to be the lowest-cost airline – which Ryanair undoubtedly is.
In fact the one message that keeps coming through loud and clear is that the Irish airline is doing a fantastic job of cutting costs even as top line growth moderates.
Paradoxically that cost discipline might come under pressure in the next year as Ryanair addresses the other side of the revenue equation – where sales growth will come from.
Looking at the recently released trading statement it’s clear that 2014 is a big year for the airline. The big positive will be that Ryanair is ideally positioned to benefit from a slowly rebounding eurozone.
My guess is that 2014 and more likely 2015 are going to see even more aggressive moves by central bankers to kick-start growth in both Europe and Japan. That should help Ryanair hit its numbers and halt the margin decline.
Looking at the airline’s own forward guidance we can see this confidence making an appearance in the already solid numbers for 2014 with Ryanair declaring that “forward bookings in Q4 and into FY’15 are running significantly ahead of last year, albeit at weaker yields”, helped along by rising load factors.
In terms of marketing and sales we can expect not just a new website, but also a new app, and a host of features orientated at capturing the elusive business traveller.
Crucially we should expect Ryanair’s tickets to come on to at least one GDS system this year, although I can’t see it offering any substantive incentives whatsoever to travel agents to use its flights.
Looking at destinations, the airline is stepping up its battle to get into business traveller airports and it’s intensifying its assault on Alitalia in the domestic Italian market, both smart moves which should excite investor interest.
And last but by no means least, we really can’t under-estimate the impact on both fuel efficiency and revenue control from the commencement of delivery of new Boeing planes due to start in autumn of this year.
As I’ve said many times in this column, the biggest advantages go to those big businesses able to use their immense capital funding power to buy the cheapest, most efficient transport assets.
Outfits as diverse as Carnival (with its latest cruise liners) and Tui Travel (its new Dreamliner planes) are currently reaping the “scale premium” as I call it, to improve the customer experience and lower the cost base.
Once we add that into Ryanair’s already lean and mean business structure, we can begin to see where the next spurt of growth will come from.
The only fly in the ointment is that Ryanair’s shares are currently priced at a premium to most of its competitors largely because it has been growing faster – that looks anomalous now at 20 times forward profits and I wouldn’t be surprised if some investors start selling the shares as they wait for proof that Ryanair’s various new initiatives are starting to pay off.
So there may be more trouble ahead for the Irish airline as the share price slides, but the remainder of 2014 and 2015 should be much more positive.