Lida Mantzavinou comments on Q3 2012 Ryanair results
Ryanair’s Short Term Solutions Drive the Airline’s Profits – Long Term Growth Remains Uncertain
Ryanair’s Q3 2012 financial results show that the low cost carrier will exceed its latest profit expectations for the year. Frost & Sullivan estimates that the airline, compared to last year, is set to report a 5% increase in profit after tax in its full year results in March 2013.
“The current air transport environment in Europe has been beneficial for low cost carriers,” notes Frost & Sullivan Consultant Lida Mantzavinou. “Increasingly trends, such as business and leisure passengers becoming more price sensitive, national carriers going bankrupt (e.g. Malev), legacy carriers significantly cutting down frequencies and capacity in order to decrease losses (e.g. Lufthansa, IAG, AF/KLM), as well as charter carriers reducing their fleet size or halting operations (e.g. Swiss charter Hello), have allowed the low cost carriers to grow and be the only ones, which are able to offset oil prices and generate profits.”
Ryanair’s success lies on low cost operation processes, allowing for the least unit cost in the market and lowest average fare, although increasing. Another factor supporting the achievement is the launch of new ancillary charges, such as reserved seating, that increased revenues by 12% in the first half of the year.
Ryanair finds short term solutions to remain financially positive. However, the low cost carrier faces difficulties in growing in the long term. “Currently, Ryanair’s growth is being constrained by the regulatory environment on two main aspects,” explains Ms Mantzavinou. “Primarily, EU’s denial to approve the Aer Lingus take-over that would allow the carrier to expand its fleet, overcoming the lack of new aircraft deliveries that has been already constraining its growth, and benefit from economies of scale, that would further reduce its unit cost and increase revenues. Secondly, additional taxes imposed on short haul routes, such as ETS, put pressure on low cost carrier’s fares. ”
“As more consolidation is expected to take place in the next two years and once airline groups see benefits from their restructuring programs, expected in 2014, competition in the short haul market will intensify, pushing average fares downwards,” summarises Ms Mantzavinou. “Ryanair in the short term should seek to grow inorganically through other acquisitions benefiting from the fact that European airlines are currently valued below net asset value (NAV).”