thenextwave

The end of the cheap airline boom years

Posted in aviation, business, strategy by thenextwavefutures on 21 December, 2009

Regular readers will know that I’m sceptical (see previous posts about Heathrow’s third runway here and here) about the long-term predictions that aviation demand will keep on growing – most of the main trends are pointing the wrong way (oil prices, restrictions on carbon emissions, competing technologies, government need for tax revenues from undertaxed sectors, along with changes in social values). So far, certainly in the UK, public policy hasn’t caught up with this. But with the news that Ryanair has noisily cancelled its order from Boeing for 200 planes, perhaps the industry has.

Don’t be fooled by the fighting talk from Michael O’Leary about Boeing’s incompetence in failing to complete the deal. O’Leary could pick a fight in an empty room, and as the Irish Independent put it, his aggressive statements in Boeing’s direction had the feel of the drinker outside the bar at closing time:

Having unexpectedly got more than he bargained for, the exuberant customer roars “hold me back” in the expectation that his friends will intervene to break up the incipient fracas.

Ryanair, it seems, now plans to start paying its shareholders dividends rather than investing in planes which are unlikely to generate profit. It’s caught between a market which is slowing down and its earnings targets – which may mean (given that costs have been squeezed out of the business ruthlessly and it’s already pulled a host of tricks to increase passenger revenues) that it has to increase fares to generate sufficient earnings.

Ryanair is the largest carrier in Europe, by passenger numbers, and its low cost rival Easyjet is second largest. Sir Stelios Haji-Ioannou, Easyjet’s founder and largest shareholder, has already been pushing Easyjet in the same direction.

“I’m delighted that Michael O’Leary now accepts what I’ve been saying for over a year – the era of endless fast growth and [an] ever larger aircraft fleet is near its end. Low-cost airlines are now the mainstream way to fly in Europe. As such, it’s getting difficult to find significant new passenger traffic which is profitable.

In other news stories he’s also quoted as saying:

Using shareholders’ funds to finance profitless growth is no longer acceptable. I look forward to companies like ours becoming ‘normal’ and starting to pay dividends.”

Ryanair won’t halt its fleet expansion immediately – it still has some planes outstanding from its previous order. But it’s hard to read these stories and not think of the ‘Boston Box‘, which links market growth and market share as a way to indicate strategy. The low-cost airline industry has just moved from the ‘star’ box (high share, high growth) to the ‘cash cow’ (high share, low growth). They are different sorts of businesses. No wonder O’Leary was telling the Financial Times this week that he might have to give way – in three years – to a  chief executive more suited to a more ‘sedate business’.

Or as O’Leary put it, more colourfully:

“I think you need me for the rapid growth and for the in-cost reduction initiatives, but once they’re all done you then need to hand over to somebody who’s a bit more respectful of politicians and bureaucrats, talks about caring about the environment and old people and f***ing jungles and fish in the sea and all that shite.”

The picture is from the Brand Ireland blog, and is used with thanks.

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