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Ryanair – Financial Strategy

Ryanair
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Ryanair – Financial Strategy

Ryanair have an interesting threesome heading up their group. The notorious Michael O’Leary, (CEO) who seemingly is the company spokesperson. Then, there is economist and travel trade expert, Peter Bellew (COO) and finally, Chairman David Bonderman – the billionaire investor managing a portfolio for clients in excess of $75bn. The last of which is renowned for spending $7 mill on his 60th birthday party that involved John Cougar Mellencamp and headliners, The Rolling Stones.10 years later, Paul McCartney was on the party bill. When you have so much to spend, you had better know how to make it. Between these three, they sure do know how.

Ryanair, financial strategy is inherently linked to their business as a low cost provider of air travel. High volume, low margin selling floated over some hefty fixed and variable costs. How do they generate cash and profits?

Ryanair started [1] in 1984, with its head office in Dublin, not only carries more passengers than any airline in Europe – but carries the highest number of international passengers out of all airlines. It operates on a low cost business model. In 1987, Michael O’Leary was appointed as a personal financial advisor to Tony Ryan. At the time, passenger numbers were increasing rapidly along with financial losses. O’Leary insisted that the company had not reached a tipping point yet and bravely, sought even more customers at low prices.

Regional airports were selected to avoid handling charges and by 1995, 2.5 million passengers were carried with ‘no frills’ offered to any of them. After 1992, shares were floated in Dublin and New York, which provided working capital to expand rapidly. Most significantly, they proceeded to buy 155 new planes.

2004 was a poor year for low cost airlines, but despite losing millions, Ryanair survived and by 2005 were transporting more than 22 million passengers. Turnover exceeded E1.2 bn. In 2006, a change of policy meant costs were reduced by charging passengers fees for their airport check in. In 2009, the company lost E169 mill.

Ryanair

By 2010, the Ryanair average fare at E33, was less than 50% of Easyjet’s average fare. In 2010, more losses were sustained due to strike action, flight cancellations and poor weather. In 2011/12 when fuel prices soared, Ryanair grounded more than 80 planes to drive down costs. Repeated attempts to buy Aer Lingus failed, but in 2013 a series of customer service improvements were introduced to add value to customers. At this stage Ryanair was only the fourth cheapest airline in Europe, after fees were added. The next year they moved into a new Dublin Head Office and bought another 200 Boeing aircraft at a cost of more than $22bn.

Thereafter, holiday packages were offered, chartered flights and a service for booking connecting flights, at no additional fee. Ryanair aims to secure 160 million passengers business by 2022. Low or no Head Office rent has been paid for more than a decade. Is this typical for a company whose fixed costs have to be paid from low margins? I think not.

The company has been plagued by employment issues, especially strike action for charging pilots for their training. Initially, shares were offered as incentives. Unions were resisted, but eventually Pilot Unions appeared, which resulted in the company moving to contract their pilots as agents. Strike action is an ongoing problem at Ryanair, which results in cancelled flights.

Today, 20% of Ryanair’s income comes from ‘non-ticket’ income. This has brought relentless negative publicity for charging for ‘optional extras’ which flies in the face of their claim to being a low cost, no frills airline. Some potential cost cutting ideas mooted have been deemed to be ridiculous, such as non reclining seats so that cleaning is faster. Cuts in customer service, have darkened their reputation and have landed them in the courts. Webforms, without phone numbers became the preferred means to submit complaints which needless to say, was a PR disaster.

Publicity and reputation management got worse towards the end of 2017. Flight cancellations, employee vacation arrangements (mainly pilots) was a shambles – along with run ins with the Advertising Standards Authority for controversial and misleading advertising. They were accused of looking for free publicity from courting controversy. Ongoing criticisms include those for surcharges, some fuel incidents (emergency landings) and over and above all of this, from 2004, more than 60 new low cost airlines appeared as competitors.

The financial information [29] for the past four years, 2015 – 2018, are simplified as follows as follows:

  1. Income is growing steadily.
  2. Liquidity is dropping off slightly (understandably).
  3. Margins and Profitability are improving (ROE at 32% is attractive for a low margin, no frills offering.
  4. There is quite a bit of retained earnings left in the balance sheet to grow.
  5. Total assets are growing and so is the total equity.
  6. Cash flows are improving.

As shown in this summary of the data tables shown below:

  1. Revenues are up $2.7bn, to $8.7bn.
  2. Gross profits are up from $3.6bn to $4.2bn.
  3. Operating income is up from $1.1bn to $2bn.
  4. Net income is up from $0.93bn to $1.7bn.
  5. Current assets are down from $6.1bn to $5.1bn.
  6. Total assets are up from $13bn to $15.2 bn.
  7. Current liabilities are up from $3.5bn to $4.1bn.
  8. Total liabilities are up from $8.7bn to $9.7bn.
  9. Retained earnings are up from $2.9bn to $5bn.
  10. Total equity is up from $4.3bn to $5.4bn.
  11. Total liabilities and equity is up from $13bn to $15.2bn.
  12. Current liabilities are up from $3.5bn to $4.1bn.
  13. Net operating cash flow is up from $1.8bn to $2.7bn.
  14. Net borrowings are down from $1.3bn to ($0.48bn).
  15. Net cash flow is up from ($0.58bn) to $0.35bn.
  16. Net borrowings are down from $1.3bn to ($0.48bn).
  17. The liquidity ratios are:
    1. Current 123%
    2. Quick 123%
    3. Cash 120%
  18. The profitability ratios are:
    1. Gross margin 48%
    2. Operating margin 23%
    3. Profit margin 20%
  1. Income statementRyanair Income
  2. Balance sheetRyanair Balance Sheet
  3. Cash flowRyanair Cash Flow
  4. Profitability ratiosRyanair Profit Ratios

The 4 images above are from www.nasdaq.com

So let’s discuss these questions, regards the financial strategy Ryanair have adopted:

  1. Have Ryanair provided themselves with an adequate margin of safety in the short term, from future shocks such as fuel cost rises, strikes, competitors discounting or PR disasters? If so, how? If not, why not?
  2. How do you think the top three executive add value to the company?
  3. How did Ryanair sustain its losses before it reached break-even? Why did the executive adopt this waiting game?
  4. What do you think Ryanair did well, to benefit from discount ticket sales, yet still were able to improve margins?
  5. What is Ryanair’s biggest financial threat moving forward?
  6. If you were a shareholder for the past four years, would you be happy? What would make you sell your shares within the next four years?
  7. What options do competitors have to counter the current Ryanair financial strategy?

Your comments and experiences would be appreciated below. This way, we build and clarify the real strategy story.

Here are some links below, numbered and referenced in the narrative above. They are designed to ignite your thinking. Please add your comments below and more valuable sources if you like.

[1] Wiki [2] Website
[3] Croatia services [4] Subsidiary
[5] Litigation [6]Pilot training
[7] £5 flights [8] Chairman of the Board
[9] Record flight bookings [10] Cost savings
[11] Strike Action [12] Shareholders
[13] EU flights [14] Mini Case study
[15] Collaboration [16] Being nice
[17] Case study [18] Annual Report 2015
[19] Strategy Report [20] 2016 revamp
[21] Financial Analysis [22] Analysis of Ryanair
[23] Strategic Planning [24] Strategic Analysis
[25] Investor relations [26] Nasdaq
[27] Market watch [28] Annual Report 2016
[29] Ratios [30] Income statement
[31] Profile [32] Insider financials
[33] Michael O’Leary [34] Peter Bellew
[35] David Bonderman [36] TPG Capital
[37] Twitter

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