Ryanair (NASDAQ:RYAAY), known to many for drastically low airfares and the outlandish commentary of CEO Michael O'Leary, which includes eliminating and charging for toilet use in order to add more seats, has proven itself to be the premier discount air carrier within Europe. Operating a point to point model similar to that of Southwest Airlines (NYSE:LUV), Ryanair has proven that the low cost carrier strategy can be highly profitable, especially in comparison to the hub and spoke model utilized by many legacy carriers. Scrutinized for false advertising and flying to out of the way airports, Ryanair has demonstrated that the combination lower operating fees and the little direct competition of smaller airports can be used to the company's benefit. Ryanair has demonstrated a commitment to this strategy by closing and shrinking less profitable operations, specifically after increases in operating costs for the airline.
History of Base Closures:
Ryanair has demonstrated a commitment to terminating or reducing crew base operations at airports that are no longer favorable to the success of the airline. Notable hub and base shrinkage and closures over the past 5 years are seen as follows:
In 2010 Ryanair closed a crew base in Marseille that resulted in the moving of 4 Aircraft and the loss of 200 jobs. This was the result of employees being paid under contracts drafted under Irish law instead of French law. Ryanair decided that it would be a better financial to serve the airport with aircraft based at other airports. The incentive for using the Irish style contracts was substantial payroll tax savings.
In 2012 Ryanair announced a 40% reduction at a crew base in Budapest after substantial increases in airport landing fees and a lack of efficiency amongst airline services. Ryanair stated that the current conditions were not conducive to the growth of the airline at the airport.
In 2013 Ryanair announced that it would be cutting around 170 weekly flights at London Stansted Airport, one of the airline's largest bases. The airline had been intending to increase flights offered by 6% until the airport announced an increase in fee's for airlines. Ryanair operates over 50% of the flights out of Stansted Airport.
The repeated pattern of base closure and shrinkage helps to reaffirm the airlines commitment to a low cost strategy. Furthermore, this strategy provides leverage for the airline in influencing airports decisions as Ryanair has proven it will pack up and leave if they are unhappy with operating terms. This is significant as Ryanair is typically the majority holder of gates and slots at many of the destinations to which the airline operates flights. The massive volume of flights offered has allowed Ryanair to continue maintain great leverage in negotiating airport fees.
Lack of Competitor Success and Growth:
The success of Ryanair operations within Europe has impacted the sucess of other airlines operating within Europe. Ryanair is the largest airline in Europe and carried a record near 80 million passengers in 2012. Recent points of interest for investors are listed below.
Flybe, a low cost competitor within Ireland and the UK has announced a 10% cut of its workforce. The cuts are intended to help Flybe reduce costs as part of a reorganization plan.
Low cost carriers now carry 50% of outbound traffic from the UK to other destinations, putting a great damper on the success of "legacy" and national carriers.
Ryanair has some distinct advantages over traditional legacy carriers in that they operate only one type of aircraft. The impact on cost savings can be compared to that of Southwest Airlines where Southwest is able to save on training and maintenance costs by operating only one type of aircraft. Most notably Ryanair is able to utilize the following advantages:
Ryanair's modern fleet of Boeing (NYSE:BA) 737-800 aircraft has afforded the airline fuel savings by 4%. This decrease follows the installation of winglets on all of the aircraft within the fleet. While I did cite a potential hangup for 737 operators (in light of potential maintenance problems), I do feel as though these effects will of marginal impact.
Ryanair's recent order of 175 Boeing 737-800 aircraft came at a near 50% discount to the list price per aircraft. While many airlines negotiate prices that are well below the list price, the Ryanair order intrigued many because of the magnitude and cost of the order.
Investors need to give Ryanair serious consideration as a potential growth opportunity. Ryanair has proven that a model dedicated to ultra low fares and ultra low costs, can yield record profitability. Ryanair has a proven track record of making appropriate adjustments to routes as financial conditions change. Furthermore, Investors should feel comfort in knowing that the scale of Ryanair operations will continue to help the airline to realize substantial cost savings in future operations and purchases.
Additional disclosure: One should complete their own due diligence before making final investment decisions.