Ryanair is a leading discount airline based in Dublin. The company is known for its cost leadership strategy that has included some attention-getting publicity stunt ideas, and some that the company has actually implemented. The company is profitable, earning €544 million in the first half of fiscal 2012 and €400 million in fiscal 2011. The company flies low-cost scheduled flights around Europe and to nearby destinations in the Mediterranean regions. Ryanair was first mover in its industry, but now faces competition from a number of other budget carriers.
In its reports, the company outlines some of the factors that have an impact on the financial statements. One of its major hubs is in Dublin, and that airport has increased fees substantially of late, making that airport less viable for all airlines. Fuel costs have risen 37pc in the past six months, squeezing the company's margins. Ryanair is still expanding routes, however, despite the difficult economic conditions and some consolidation among its competitors. That said, some flights on existing routes have been rationalized for a net traffic reduction of around 4pc. The company also suffered financial in fiscal 2011 from the weather problems in December that affected its UK and Irish hubs.
While the current focus for Ryanair is on expanding its European network and adding new bases, the company is also contemplating the possibility of moving into the trans-Atlantic market (Galbraith, 2011). The company is also supporting the development of the C919 by Chinese manufacturer Comac, which would be the third player in the large aircraft industry (Areddy & Galbraith, 2011). The latter strategy would be risky for the company. This new company, while presumably competing on a low-cost strategy, would have no safety track record. Consumers may be skeptical of the new planes as a result, and Ryanair could have more mechanical issues as well, leading to a reduction in on-time flights.
The basic strategy of Ryanair, however, is sound. The company has continued to focus on its core markets, and continued to devise schemes to help improve its bottom line. For a cost leader, the latter may generate amusing headlines but exploring all options to maintain cost leadership is an essential component of the strategy. Ryanair's fuel strategy, another key component of cost leadership, is aggressive. The company is 90% hedged for fiscal year 2012, and at higher prices than the current market price. The company is also hedged 90% through 2013 and 50% for 2014 at prices significant higher than the current market prices. Whether these strategies pay off will only be determined by the spread between the hedge prices and the market price in these years.
There is a question of whether or not Ryanair's continued expansions into ever-smaller markets is going to lead them past the point of diminishing returns. The low-cost model has been successful in attracting fliers to destinations they otherwise would not go, and this helps the companies load factors on flights to small destinations. In the long-run, however, Ryanair may be forced to look outside of Europe for growth opportunities, as the European discount air market becomes saturated.
The European airline industry is intensely competitive. It is roughly divided into two segments -- what Ryanair terms of "high price" airlines and discount carriers. The former category consists of legacy carriers, most of which are or were flag carriers. These airlines typically have higher prices, international landing rights and a much larger size than discounters, although on the latter point many are being challenged by the largest discounters. For the most part, the flag carriers earn a substantial portion of their income from international routes, which have higher margins than routes within Europe. These airlines face competition on domestic and European routes from discounters and on international routes from overseas carriers, including American, Asian and Middle Eastern companies.
The discount airline industry is highly competitive as well. Ryanair was a pioneer in this industry, but it now faces a number of competitors. EasyJet is the largest, but Flybe, Air Berlin and others have emerged to capture segments of the European market. This segment of the industry caters primarily to vacation travelers and is therefore subject to economic shocks that impact on discretionary spending. A significant portion of the industry is dedicated to taking British and northern Europeans to sunny destinations in the Atlantic or Mediterranean. To diversify, the larger carriers have opened routes all around Europe. Ryanair, for example, has opened a base in Kaunas, which is the second-largest city in Lithuania. The ability to make destinations like this profitable is critical to continued growth among discount carriers. Ryanair's status as the first in the industry also has given it the largest market share among discount carriers and a significant degree of brand loyalty. That said, because the airlines in this sector compete with low prices, consumers in this sector are oriented towards a high level of price sensitivity. Therefore firms in this industry must focus on cost reductions in order to continue to be price competitive with each other.
The regulatory environment is also critical. In annual and half-year reports, Ryanair typically covers some of its regulatory issues. The airline believes that it sometimes receives unfair treatment for regulatory authorities. It also has concerns with the fees at government-run airports such as Dublin, something it argues would not be a problem if these airports were privatized. That said, if Ryanair is able to improve its influence over the regulatory environment, this should reduce the company's costs further.
Technological innovation also plays a role in the success of airlines. Ryanair is largely an Internet-based business with respect to marketing, ticketing and even the printing of boarding passes. The company makes extensive use of the Internet as a cost-saving measure and was ahead of the competition in this respect. As a result, the company is able to keep its costs down and has become adept at using technology to interact with customers.
Another critical external factor for the company is the price of oil. While the price of jet fuel is not perfectly correlated with the price of crude, it does follow a similar pattern. Jet fuel itself is not hedged, so it is difficult for any airline to perfectly hedge its fuel price exposure. The high degree of volatility in the price of crude is affected by a wide range of factors, including global demand, so Ryanair has no pricing power over this critical input. The company instead uses hedges to lock in its fuel costs. By achieving cost certainty, the company can set the levels of its other expenses and its ticket prices accordingly to achieve a profit. Ryanair has much better control over the cost of its other key input, labor.
There are two conflicting long-run trends in the airline industry. The first is that discount airlines are incredibly popular among consumers, despite the sometimes questionable fees and service. Consumers in Europe have become very price sensitive and this has driven consumer business with discount airlines. This trend, which is positive for the airline, contrasts with the trend towards higher fuel costs. The company improved its bottom line in fiscal 2010 (which is mostly the calendar year of 2009) as the result of lower fuel costs compared to fiscal 2009 (which is mostly the calendar year of 2008). Fuel costs, however, are rising again. Worse, the increase in fuel costs is likely permanent in nature as the result of increased oil demand in the developing world and flatlining production. This threatens the viability of the discount airline business model, as prices to consumers will inevitably need to rise. Many consumers have been enticed into the market with low ticket prices, and many will be flushed out of the market as ticket prices begin to rise.
Based on the income statements for FY2011, FY 2010 and FY2009, Ryanair has seen an improvement in its revenue growth for 2011. From 2009 to 2010, Ryanair's revenue fell slightly and the company only restored profitability because oil and gas costs declined, as most other costs increased. The 2011 fiscal year was something of a recovery for the company, with top line revenue increasing by 21.6% for the year. Profit increased 22.7% in fiscal year 2011. This recovery coincides with new routes and an increase in consumer demand for the year. Thus far, 2012 is ahead of the pace set for FY2010.
The company's profit margins are becoming healthy again. For FY 2011, Ryanair's operating margin was 13.5%, compared with 13.4% in 2010 and just 3.1% for 2009. The net margin is also increasing, with the company recording a net margin of 10.3% for FY 2011, compared to 10.2% for FY 2010 and a loss in FY 2009. That the company was able to increase the margin even as fuel prices increased shows that Ryanair exhibited strong cost controls in FY2011. Fuel costs as a percentage of revenue jumped from 29.9% in FY 2010 to 33.8%…