During European low cost carrier Ryanair’s investor call their CEO Michael O’Leary declared that “more airlines [will] suffer casualties” (go bust).
“I think we’re entering into what I describe this morning as a grim winter,” the chief executive told analysts on a call. “It’s not related to Ryanair or unions, it’s related to excess capacity and certainly our willingness to continue to lower air fares into this winter. If there’s going to be a fare war, we want to lead this and win it.”
Copyright: trevorbenbrook / 123RF Stock Photo
His argument seems to be:
- There’s too much capacity, too many airlines flying too many planes
- Ryanair will lower fares to keep planes full. With high fuel costs and low fares that will push competitors to the brink.
- European carriers will go out of business
- That will solve the pilot shortage problem
- And it will damper union demands for higher wages
He seems to have rivals like Norwegian and Wizz Air in mind.
Copyright william87 / 123RF Stock Photo
Just because Ryanair has fuel 90% hedged at $68 per barrel, compared to lower levels of hedging than its competitors, doesn’t mean that it benefits from a fare war. It could simply pocket the difference in fuel costs and the spot price and continue to charge higher fares.
And just because Michael O’Leary says something doesn’t mean it’s true. He’s been talking up making passengers stand, and making them pay to use the lavatory, for many years.
However last year he predicted that Norwegian and Monarch Airlines wouldn’t survive the winter. Norwegian is still flying, and British Airways parent IAG has taken a small stake. Monarch ceased operations October 2, 2017.
I haven’t noticed any great sales or promotions this winter.
Well. O’Leary is certainly right that some of his competitors have really bad business plans. A bankruptcy is certainly possible.
But it might not be because of fuel. Oil went up 50% year-over-year without any material change in supply and demand. Oil is now a financial instrument, and with the US stock market selling off, so is oil. That could give airlines like Norwegian some breathing room. Unless it’s already too late.
“He seems to have rivals like Norwegian and Wizz Air in mind.”
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I think you’ll find it’s WOW Air, not Wizz. Wizz is doing fine, whereas WOW needed a bond sale in September to survive (they came within days of going bust). That bond sale gives them around 6 months to a year unless fuel declines.
And two European LCCs have already gone bust, Primera and (last week) Cobalt Air.
Norwegian only survived by selling assets and a share offering in March. That gave them liquidity but their operating margins are still lower than last year. Their Q3 earnings call is in a few hours and I’m waiting with interest. They made a genuine profit in Q3 last year and it’ll be interesting to see how their margins stack up. Unless they increase they’re back in trouble as they don’t have many assets left.
In short, MOL is probably right that one of WOW and Norwegian (or both) won’t be around at the end of 2019, at least as independent companies.
Ryan could make a great takeover move on Norwegian if his prognostications are correct. Talk about doing some bottom fishing. And, it would give Ryan the connections to offer seamless TATL services. Will be interesting to watch
There are plenty of economy seats being sold cheaply. But it is the front of the plane that pays the bills, and have not seen much increase in capacity for C/F, much less discounting. Of course C/F is irrelevant for Ryanair and other LCCs – maybe that’s why we will see more LCC bankruptcies.
It is hard to see how capacity will continue to climb as fuel costs rise, and there does not seem to be much potential for fare hikes given all the seats out there. Definitely a recipe for failure when the next recession hits.