Summary
Ryanair may not order 737s just yet, but it is, as usual, looking out for its own interests and shareholders have every right to be pleased.
Analysis
As noted before (click), Ryanair is highly unlikely to follow in the footsteps of Easyjet and switch to an all-Airbus fleet because Boeing may not want to budge or buckle on price. Ryanair still has at least 100 or more 737-800s to take delivery of and with next year poised to be even more challenging than today, moves to return cash to shareholders is a good one.
There are a couple of reasons for this.
Firstly, Michael O’Leary knows that traffic growth is finite – with the UK introducing a new passenger duty that will hit many airlines, he has to be able to leverage price cuts against ancillary charges elsewhere across the business.
So rather than spend money on new airplanes, increasing utilisation of the existing fleet will become critically important as he and other CEOs balance traffic against capacity – and with so many 737s still awaiting to join the Ryanair fleet, the prospect of idle airplanes on the ground is a distinct one.
Secondly, by paying dividends, Ryanair stands to be in a better financial position when the time comes for shareholders to pump money back into the airline. Translate that into buyer power, and even if O’Leary does not conclude a deal with Boeing by year-end to secure further 737s from 2012 onwards, Ryanair will have the financial clout to order even more jets and drive a harder bargain with Boeing.
“If we can’t spend our cash buying cheap aircraft, we may as well give it back to shareholders,” said O’Leary today.
In their earnings release, Ryanair alluded to “deferrals and cancellations” of orders.
You have to question just why Ryanair would want to cancel orders, particularly at a time when it is talking to its major supplier about increasing the existing commitments it has.
Ryanair may well defer deliveries, particularly if traffic growth shows signs of further easing – but as his comment above shows, he is not in a position to jump the Boeing ship and embrace Airbus. There is more value to rewarding shareholders with money than saddling a bunch of Airbus A320s amongst the more popular 737-800 which it operates and inflate the cost base that the carrier has so aggressively sought to keep a lid on.
Ryanair has made it clear it was 737s on the cheap – there’s a reason why even Airbus will not entertain the thought of adjusting A320 prices the way it did for Easyjet.
Ryanair will end up back in the Boeing foray when it needs to expand. It may push back deliveries as a parting shot towards the US airframer as a result of not offering lower prices to them, but ultimately, no order is distinctly better than winning an order that erodes the value and business proposition of your portfolio of products.
On the face of some good half year results, Ryanair has taken the “opportunity” to blame Boeing for a change in its strategy.
That’s media relations for you.
For Ryanair, the 737 is integral to their operations and largely inelastic. Boeing has no immediate need to move on price for fear of other customers coming back to its door wanting to renegotiate existing deals.
Ryanair may have pioneered many things in the low cost sector, but unless it is willing to incur the huge costs of switching fleets to antagonise Boeing and pass on costs to its customer base to offset the huge expenditure, this is a move that is unlikely to materialise anytime soon, if at all.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
