During the most recent earnings conference call Ryanair (NASDAQ:RYAAY) revealed that profits had fallen (as guided) year over year by nearly 21%. The announcement caused shares to fall nearly 3.5% to around $51.79 during trading the same day. A decrease in average fares by 4% and an increase in operating expenses by 8% were cited as factors behind the decrease in profits. In an earlier article I had cited strengths in Ryanair including prudent closure of less profitable routes, reduced operating expenses due to utilizing one aircraft type, and a lack of competitor success as factors that may add intrinsic value to Ryanair shares. Trans-Atlantic could be a future growth option for Ryanair, an airline looking for growth opportunities. Ryanair has a substantial cash position that could be used to bankroll long haul expansion. However investors should consider additional points beyond the balance sheet as Ryanair continues to expand.
CEO Michael O' Leary has made it clear that he envisions a low cost trans-Atlantic fare, as low as $10, becoming a reality in the near future. However,a recent Bloomberg article noted that many low cost carriers have tried and failed to enter the Trans-Atlantic market. These players have included names such as Skytrain, Laker Airways, People Express, and Tower Air. The article also goes on to suggest that a Trans-Atlantic business model is not conducive to the current Ryanair model. Investors should look to the following points when considering a Trans-Atlantic Ryanair:
Trans-Atlantic crossings are much more time consuming that inter-European flights. Ryanair would not only have to invest in Aircraft equipped for Trans-Atlantic travel, but would also have to reduce the frequency at which the company would operate flights (with a single aircraft) to Trans-Atlantic destinations. Ryanair currently operates a fleet of 737-800 aircraft which in a default 2 Class configuration can only fly 5725km. A flight from Dublin to Boston for example would require an aircraft that was capable of flying 4824 KM putting, Ryanair planes within the safe operating range (I am however no aircraft expert and one should note that factors such as weight of cargo, distance traveled over water, weather conditions, etc will impact which planes an airline can use). Furthermore other prominent destinations such as Chicago, Atlanta, Etc would fall outside of the operating range of the aircraft. Atlanta for instance is nearly 6990 KM from Dublin. Investors should note that Ryanair recently placed a record order with Boeing (NYSE:BA) for 175 737-800 aircraft.
Like Southwest Airlines (NYSE:LUV), Ryanair is able to cut costs by flying to lesser known airports, operating one type of aircraft, and maintaining near full utilization of aircraft. Trans-Atlantic flights would require Ryanair to fly into more expensive airports with customs facilities, operate more that one type of aircraft, and operate flights with lower overall utilization and frequency.
It has been speculated that failed Ryanair attempts to buy out Irish rival Aer Lingus were a means to gain access to long haul aircraft. However Ryanair has stated that it is now willing to sell its 29% stake in the competition. Failure to purchase Aer Lingus could be a factor influencing increased costs to a Trans-Atlantic venture. Furthermore Ryanair has come under fire as regulators feel that a Ryanair stake in Aer Lingus hurts competition on many routes.
Ryanair could be impacted by changes in funding to less profitable or money losing small airports in Europe. It was recently suggested by regulators that Ryanair had received money from small airports that was intended to sustain the airports and not Ryanair. A loss in subsidies could lead to potential airport cost increases, thus eliminating the advantage Ryanair has by operating at such airports.
Investors need to consider that Ryanair does not presently have aircraft suitable to long haul travel and would need to spend money in order to engage in Trans-Atlantic routes. Likewise investors need to consider that long haul travel is a departure from the current Ryanair operating model. Changing the operating model could lead to increased costs and reduced profits. Furthermore, Ryanair missed a potential opportunity to enter the long haul market at a reasonable cost by being vetoed in attempts to purchase rival Aer Lingus. Finally, investors should continue to evaluate changes in European airport subsidies as changes could substantially increase Ryanair operating costs. In essence, Investors need to remember that adding long haul service could impact profits and thus impact shareholder value.