浏览： 日期：2020-06-10
Ryanair’s share price has dropped sharply over the last twelve months and, in particular, during the period from November 2007 to May 2008.
This paper explores the causes behind the drop in Ryanair’s value by examining areas which have impacted on Ryanair: its external environment (section A), the competitive environment (section B) and factors specific to Ryanair (section C).
Three sets of factors have facilitated the development of Ryanair and the low cost carrier (LCC) sector in general.
First, the legal conditions necessary for being able to fly between any two airports in the EU, irrespective of the airline’s nationality, came into force in 1993. At the time, this “third package”, as it was known, affected 15 EU Member States.
The size of the EU itself is a critical influencing factor. In 2004, ten further countries, mainly in eastern Europe, joined the EU on the same day and two further countries joined in 2007. By 2008, the air package covered not just all 27 EU member states but also Switzerland, Iceland and Norway. From a demographic standpoint, the enlargement permitted citizens of EU countries to travel to and work in other member states.
The UK in particular placed no restrictions on the ten countries which joined in 2004; the consequence has an explosion in passenger numbers. In 2003, for example, total passenger volumes between the UK and Poland was 512,000 passengers. In 2007, 4.4 million passenger movements between the two countries were recorded, with flights available from several cities in both countries.
Although a STEP and competitive analysis are often undertaken in isolation, we have here a classic example of bidirectional influence: although the freedom of movement of several hundred million people within the EU has undoubtedly contributed to the development of the LCC sector, the low fares and the increase in volume and geographically of available flights provided by Ryanair and its competitors has also caused the volume of passengers to increase. Thus, the two sets of factors can be seen as mutually re-enforcing.
Another area influencing demand is the Euro. The bulk of Member States have either adopted the Euro or else the national currency is locked into the Euro with a fixed exchange rate (the Danish krone, for example). From a consumer’s viewpoint, one of the risks of foreign travel has been removed, namely incurring losses through adverse exchange rate movements and price transparency, in that a German holidaymaker to Greece sees the prices in the holidaymaker’s own currency.
Source: Platts
Fuel accounts now for up to 40% of airline costs and the increases have fed through to higher fares via fuel supplements. Of the £36 costs incurred by easyJet, for example, £10 (i.e. 28%) is accounted for by fuel costs; for Ryanair, in the 12 months to March 2008, fuel costs were 37% of total operating costs.
The reason for the difference is due to fuel hedging policy. easyJet has 40% of its fuel hedged at $75 per barrel until September 2008, the end of its financial year. By contrast, Ryanair took a risk - and lost - on the price of fuel as, until recently, it had no hedging on its fuel at all. However, it has fixed the price of its fuel at around $125 for the rest of the year; in other words, at a significantly higher level than its largest rival.
Ryanair and other LCCs distribute their sales either mainly or entirely through the internet. Usage of the internet in countries which the LCCs serve is therefore a critical success factor. We can see from the Eurostat table below that, in three years, the proportion of households having broadband internet access has increased considerably in eastern European countries.
|
2004 |
2007 |
|
|
Poland |
8% |
30% |
|
Lithuania |
4% |
34% |
|
Slovakia |
4% |
27% |
|
UK |
16% |
57% |
Source: Eurostat
The three “new EU” countries sampled can be seen to be only a year or two behind the UK in developing mass access to high speed internet services.
A key social factor that has influenced demand for air travel is a trend away from having one large holiday and indulging in more city breaks. Once again, however, it is difficult to isolate whether this changing social behaviour is influencing the industry or whether it is competitive behaviour in the LCC sector which is driving the trend for short breaks.
Ryanair’s market is best defined as travellers within Europe and the Mediterranean area. The airline has bases in several European countries and is by no means totally dependent on the UK for traffic volume. Thus, Ryanair’s actual market is the intra-European air travel market, whilst its potential market also includes trips made by other modes.
The degree of competition is on three levels. First, within the LCC market, Ryanair is the market leader in terms of passengers carried and profitability. The next two largest players are easyJet and Air Berlin. There are several other players in this market including Wizzair and Sky Europe (based in central Europe), BMIBaby and Thomsonfly (UK), Air One (Italy) and so on.
The table below indicates the relative size of Ryanair and its two largest competitors previously and for the latest full year available.
|
Passengers carried |
2003 |
Latest |
|
Ryanair |
21.4 |
54.2 (Year to July 2008) |
|
easyJet |
21.1 |
42.0 (Year to July 2008) |
|
Air Berlin |
9.6 |
27.9 (2007) |
Source: various airline annual reports and traffic figures
Minimum growth has been at easyJet, which still managed an annual average growth of almost 19% per annum, which is more than triple GDP growth.
It should be remembered that the low cost sector is part of the wider commercial aviation sector and, indeed, easyJet believes that its biggest competitor is in fact British Airways rather than Ryanair. However, the total share of European travel covered by LCCs has been growing. Whilst LCC activity more than doubled between 2003 and 2007, overall European growth in air passengers was 31% over the same period (see appendix).
For trips not involving the UK, Ryanair has further competition from other modes (having to use Eurotunnel is relatively complex and expensive compared to jumping into a car). Europe’s high speed railway network is being developed in Spain, Italy, France, Germany and the Benelux countries and, as these railways continue linking across borders, competition from railways will intensify (for example, airlines have given up flying between Brussels and Paris, thanks to rail competition).
Last, and by no means least, is competition from the private car. Car has two major advantages over Ryanair: there is no need to book and the cost of the trip does not increase with the number of passengers.
Ryanair has traditionally targeted markets which are different to other LCCs. An examination of the route networks of easyJet and Ryanair reveals that whilst easyJet has a major part of its network devoted to holiday traffic between the UK and the Mediterranean, Ryanair has been more focussed on other markets such as workers travelling abroad and the VFR (Visiting Friends and Relatives) market. For example, the extensive route network Ryanair now has between western and eastern Europe targets principally east Europeans working and living outside their home country.
Ryanair has a two part pricing strategy. First, it aims to offer the lowest fares of any of its competitors and, thanks to its lower cost base, it is able to achieve this objective. Moreover, Ryanair runs very frequent price promotions: it is currently offering 2 million seats for sale in October, with prices starting from £10 return (including fees and taxes).
However, this fare covers just the core flight and excludes handling fees of £4 per person per flight for credit/debit card payments, checking in a suitcase (£8 one way) and airport check-in (£4 per person per flight). Ryanair would also hope to gain income through optional ancillary revenue streams such as in flight food and drink or car rentals booked via its site through Hertz.
The importance of the ancillary revenue stream to Ryanair can be seen by comparing the annual reports of 2003 and 2008. In 2003, ancillary revenue accounted for 13% of Ryanair’s total revenue stream. Thanks to the new charges for baggage and airport check-in, the proportion had climbed to 18% five years later. With increases in baggage handling costs and booking fees having increased in 2008, the 2009 proportion should climb to over 20% of the total.
|
Core |
Ancillary |
Ancillary / Total |
|
|
2003 |
732 |
111 |
13% |
|
2008 |
2,226 |
488 |
18% |
Ryanair has historically had two sustainable competitive advantages: it ordered most of its new fleet at a time when aircraft prices were severely depressed and, according to IATA (International Air Transport Association), it enjoys an operating cost advantage through very high utilisation of its aircraft and the use of secondary airports which attract lower costs.
For example, Ryanair flies to several cities in Poland from the UK, but not Warsaw. Also, Ryanair uses Weeze airport (one hour away from Dusseldorf) rather than the closer but more expensive Dusseldorf airport.
However, Ryanair’s share price signals its reliance on the UK economy above all, with 70 of its 159 aircraft based in the UK (Ryanair does not provide a breakdown of passengers by route or country). Therefore, the combined market of UK citizens travelling abroad and foreigners visiting the UK either for work or leisure purposes is by far the company’s largest market. With the exception of foreign leisure travellers, these markets are influenced by the state of the UK economy.
A quick way to examine an airline’s health is to check the company’s load factor (the proportion of seats sold on its aircraft). In the twelve months to July 2008, Ryanair’s load factor stood at 81%. By contrast, in the 12 months to July 2005, the load factor was 84%. Therefore, demand for Ryanair’s flights is not keeping up with the increases in capacity provided, as signalled by the drops in GDP during 2008.
Although a three percentage point drop may seem like a marginal difference, it means that on every Ryanair flight, there were an average of 5.7 seats empty which would have been filled in 2005 (Ryanair’s aircraft have 189 seats). As the cost structure of Ryanair and other airlines includes a high proportion of fixed costs, the marginal revenue from these empty seats would have delivered a significant improvement to the company’s bottom line. With over 1,000 flights per day, say 350,000 per annum and assuming an average revenue per customer of €40, the loss incurred by Ryanair due to the lower load factor is 350,000 * 5.7 * €40 = €80 million.
The drop in load factor is not a phenomenon specific to Ryanair. According to the European Low Fares Association, which covers 12 LCCs but not Air Berlin, load factors has been gradually dropping from 83% in 2006 to 81% in the twelve months to June 2008.
Not only has the UK been hit harder by the credit squeeze than most other European countries (for example, mortgage approvals have dropped for 14 months in succession and are now at their lowest ever level) but the combination of the crunch and the deteriorating economic situation has affected consumers’ willingness to undertake expenditure. Consumer confidence, as measured by Nationwide Building Society’s index, has fallen every month since September 2007
However, although there are specific factors driving the reduction in Ryanair’s share price – in particular, the price it is paying for its fuel in 2008 remains unhedged – the main factor is the downturn of the economy, the strength of the € against the £ (the exchange rate has weakened from €1.50 to €1.26 or so within a year, which makes Euro countries more expensive for UK visitors), the credit crunch as well as the price of oil. So, we can see that easyJet and TUI Travel, the UK’s largest tour operator, have also suffered slides in their share prices (see appendix).
There are three generic factors which can effect a company’s share price:
In this paper, I have given examples of all three factors in play, namely the oil price and the level of economic activity in the marketplace, overcapacity in the industry (as witnessed by declining load factors) and Ryanair management’s decision on fuel hedging.
Appendix
easyJet
TUI Travel (Thomson)
Air Passenger Volumes by Member State, 2003-2007
Source: Eurostat
“5-year low for air passenger growth “ Seen at http://news.opodo.co.uk/articles/2008-08-04/18715592-5-year-low.php [accessed on August 20th 2008]
“Air Berlin Company Profile”, seen at http://www.referenceforbusiness.com/history/1-Al/Air-Berlin-GmbH-Co-Luftverkehrs-KG.html [accessed on August 20th 2008]
CAA Airport Statistics, seen at http://www.caa.co.uk/default.aspx?catid=80&pagetype=88&pageid=3&sglid=3 [accessed on August 20th 2008]
Centre for Asia Pacific Aviation, “Ryanair's bludgeon now favourite to beat competitors scalpels” http://www.traveldailynews.com/pages/show_page/26766
[accessed on August 21st, 2008]
ELFAA, Statistics, June 2008 http://www.elfaa.com/statistics.htm [accessed on August 21st, 2008]
Eurostat, “Households having access to the Internet, by type of connection - (as % of all households)”, see at http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=0&language=en&pcode=tin00073 [accessed on August 20th 2008]
IATA, Economics Briefing no. 5, “Airline Cost Performance”, 2006, http://www.iata.org/NR/rdonlyres/09078492-F854-4B38-980D-2B0E0048F725/0/890200_Airline_Cost_PerformanceSummary_Report.pdf [accessed on August 20th 2008]
Mortishead C., “Low-cost airlines hit by recession and fuel price escalation”, April 2nd 2008, seen at http://business.timesonline.co.uk/tol/business/columnists/article3662046.ece [accessed on August 20th 2008]
Nationwide Building Society, “Nationwide Consumer Confidence Index”, August 2008, seen at “http://www.nationwide.co.uk/NR/rdonlyres/556107BB-D21F-4DAF-89CF-7AB878850BFE/0/JulyNCCI6August2008.pdf [accessed on August 22nd 2008]
Osborne H., “Mortgage approvals hit record low”, July 29 2008, seen at
http://www.guardian.co.uk/money/2008/jul/29/mortgages.property [accessed on August 20th 2008]
Ryanair, “Annual Report 2008” seen at http://www.ryanair.com/site/about/invest/docs/2008/Annual%20report%202008%20web.pdf [accessed on August 21st 2008]
Ryanair, “Roadshow Presentation: Full Year Results -31 March 2008” seen at http://www.ryanair.com/site/about/invest/docs/present/quarter4_2008.pdf [accessed on August 20th 2008]
