Quick quiz. Which has the larger market capitalization: Britain's flag carrier British Airways (NYSE:BAB) or Irish discount carrier Ryanair (NASDAQ:RYAAY)?
OK, British Airways does, but not by much: $4.9 billion compared to $4.6 billion for the substantially smaller renegade from Dublin. This might surprise you, but consider the fact that we're talking about the airline industry, which seems to revel in its own diseconomies of scale. Size of revenue base doesn't matter.
Profitable operations does. Note that the market capitalization of Southwest Airlines (NYSE:LUV) -- the prototype for other discounters such as Ryanair -- is larger than AMR (NYSE:AMR), Delta (NYSE:DAL), United, and US Airways (NASDAQ:UAIR) combined. Given these companies' past and perhaps future tarries with the various chapters of the bankruptcy code, this should perhaps not come as much of a surprise.
Ryanair doesn't operate in the U.S., though. It operates in Europe, where, if it can be believed, the airline industry may be in even worse shape, with levels of oversupply and competition that are simply mauling companies unable to keep their costs in check.
In this environment, Ryanair reported its first-ever quarterly loss yesterday, with results coming in at about $4 million below breakeven. This dampened, but did not negate, its profits for the year of about $250 million. Ryanair noted a roughly 47% increase in passengers to more than 23 million for the quarter. Ryanair's CEO, Michael O'Leary, said the company expected to see continued softness in fares over the next year, which it projects at 5% to 7%.
In a time when fuel prices have skyrocketed, you might think that portends disaster for any airline. Please note that there are differences in accounting that have managed to put Ryanair on a cusp of sorts. It was profitable according to U.S. accounting, but not according to European standards -- so you'll see alternating views on whether the company was in the red or black.
If you've never had the opportunity to catch a conference call with O'Leary, you're missing out. (Our conference call access comes courtesy of CCBN.) Ryanair's overall attitude matches his swagger -- the company's Internet site boasts that it "will be Europe's largest airline in the next 8 years." No qualifiers like "if this happens," or "given current growth rates." Will. Full stop.
O'Leary said that even if ticket prices dropped by 20% on average, Ryanair would have essentially breakeven performance. No company wants to just breakeven, but you can almost hear the relish in O'Leary's voice when he notes that if Ryanair, with its low-cost structure, is losing money in the fourth quarter, that the remainder of the industry which is already "losing money on an enormous scale" will be "blowing its brains out." Already, Swissair and Sabena (Belgium) have disappeared, KLM accepted a buyout from Air France (NYSE:AKH); Alitalia, Malev (Hungary), Olympic, and others are on respirators. And yet the Italian government won't allow Alitalia to trim its workforce to cut costs. Meanwhile, Ryanair's cost-cutting measures include getting rid of seat back pockets -- and reclining seats. In a war of attrition, (geez, in any war, actually) don't bet on the Italians to win.
O'Leary won't necessarily like having Ryanair lose money over the short term, but he'll take it if it means a large reduction in the number of airlines competing for the same passengers. Each domino that falls means a little more headroom for Ryanair.
One interesting side note: O'Leary's staff is also gambling a bit. Companies with high commodity costs (like jet fuel) tend to hedge their prices using forwards to insure against a rapid price rise. Well, we've already had the price rise, and Ryanair's hedges kept the company somewhat immune. But O'Leary noted that the company doesn't have any hedges in place after the end of the second quarter, since it felt that it "would be unwise to lock in at the current forward rates." In other words, Ryanair's betting that jet fuel prices will drop. Wow, talk about nerves of steel. Watch out if oil prices continue to spike.
Bill Mann owns none of the companies mentioned in this story.
