Ryanair has reacted to higher fuel prices, economic turmoil and tighter household budgets with a promise to cut its fares. As cost is what defines Ryanair, it makes sense, therefore, to respond to difficult times with price cuts.
This is, first and foremost, excellent news for consumers across Europe, who are already beginning to feel the pinch and questioning the expense of foreign holidays. Every Ryanair price war makes those long weekends in France or Spain seem a little more justifiable, even if the airline does seem to claw back all the gains in hidden extras.
A price war is also good, ultimately, for Ryanair, as its relentless expansion usually comes at the expense of Europe’s crumbling legacy carriers. Michael O’Leary, Ryanair’s chief executive, does not believe in bunkering down ahead of recession and economic difficulties. He regards such an environment as an opportunity to hurt those rival carriers and to attract new passengers with low prices. The airlines that are most likely to take the brunt of a Ryanair offensive are crumbling national carriers in Europe, such as Alitalia. Other budget airlines will also suffer as they, too, will have to cut fares to compete.
However, and unfortunately for shareholders, Ryanair’s strategy of constant warfare does not sit well with continuous growth in profits when Europe is about to dip into recession. The airline has already announced a 27 per cent drop in third-quarter profits as higher costs and lower fares have eaten into its margins. Expansion will see costs rise even further, just as oil seems stuck at $90 a barrel. Combine these factors with yet further ticket price reductions and Mr O’Leary’s warning of a 50 per cent drop in profits next year seem less like a worst-case scenario and more of a disaster prediction.
Ryanair has bought off investors in the short term with another share buyback - €200million on top of the €300million announced last year - but that may be as good as it gets for shareholders for some time.
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Unlike Ryanair’s checked-baggage charges, this should come as no surprise to anyone, because the aviation sector is notoriously cyclical. The lean years are about to start for airlines, but at least the tickets will be cheap.