What’s eating Michael O’Leary? Profits are booming, passengers are flocking but all the Ryanair boss can talk about is ‘black swans’
Michael O’Leary seems to be in characteristically bullish form. And why wouldn’t he be? Ryanair continues to defy the gravitational pull that weighs heavily on the rest of the sector.
he airline reported profits after tax of €211m in the three months to the end of December 31. Traffic rose strongly to 11.8 million passengers in January, or 165 million for the rolling 12 month period – with a 2023 forecast of 185 million passengers, putting it well on track to reach its ambitious 225 million passenger target by 2026.
“We’re still the only airline that has materially returned to strong growth over our pre-Covid traffic numbers,” said O’Leary in a call to a group of industry analysts in recent days.
Ultimately, it is always when things are great that something comes along to upset the apple cart
But O’Leary’s bullishness was constantly punctuated by hints of nagging doubt. Over and over – six times in one short call – he warned the analysts about the potential for a “black swan event” that can pull Ryanair – and the rest of the cyclical aviation industry – back to Earth with a bump.
Despite once again posting numbers of which his competitors can but dream – and after years of constantly defying expectations and targets – O’Leary still refuses to relax.
“I generally tend to be a bit kind of nervous when things are going very well,” said O’Leary. “There’s usually a curveball sent somewhere to haunt us, it’s the nature of this industry.
“But looking around and absent any adverse development on Ukraine, Covid or some black swan event that we can’t foresee, it all looks worryingly strong into April and into this summer. As long as the French and German ATC (air traffic control) don’t f**k it all up, I think all operators in Europe will be positioned for a very strong summer of traffic. The difference between them and us is that we’ll be doing it with an enormous unit-cost advantage over every other operator,” he said.
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There is always the potential – unlikely perhaps – for a new, more worrying variant of Covid that prompts renewed lockdowns. Photo: Getty
But O’Leary’s repetition of the phrase “black swan” did not go unnoticed: “He referenced the phrase so many times that it was almost like he had just learned the meaning of the phrase,” said an analyst.
“It may be that things are going so well for him that he has this niggling thing in the back of his mind that it never goes this well for long. In a cyclical industry like aviation he knows that there is always something around the corner.
“There may also be an element of him trying to keep a lid on expectations. But, ultimately, it is always when things are great that something comes along to upset the apple cart.”
History suggests that this is very much the case: oil price shocks, terrorist attacks, pandemics and now war have all thrown the sector in to crisis in the past. And a shortage of pilots and industrial relations turmoil was enough to cause O’Leary himself to have a complete rethink about the Ryanair model itself in recent years.
But another analyst who has followed O’Leary’s career closely believes that the fear of the unknown is nothing new for the Ryanair boss.
“That’s his mindset, ultra conservative at all turns. And if you’ve been watching the airline industry over the last 10 years it’s not that hard to think about black swans because there has been a flock of them.”
But Ryanair’s crisis management coming out of Covid has been masterful, leaving it primed to enjoy the fruits of the post-pandemic traffic boom, says the analyst. The secret is the same as it ever was: a relentless discipline on costs.
Oil price shocks, terrorist attacks, pandemics and now war have all thrown the sector in to crisis in the past
Ryanair’s already industry-leading seat cost per passenger has remained at €31 despite fuel hikes and inflation that has, by contrast, left their competitors like Wizz Air, EasyJet, Lufthansa and IAG nursing high double-digit percentage rises in seat cost per passenger. So rather than taking on Ryanair head to head, in many markets, competitors are increasingly getting out of the way, with, according to O’Leary, Wizz Air moving aircraft to the Middle East.
So what are the potential calamities that keep O’Leary awake at night?
There is always the potential – unlikely perhaps – for a new, more worrying variant of Covid and climate change hangs over the industry like a dark cloud. A consumer recession could well dampen passenger demand in the year ahead, although fears of that are receding. But this would hit the entire sector and Ryanair has proven time and time again that it thrives amid sectoral adversity.
Right now, if O’Leary does lie awake at night fretting about black swans that could cause him specific problems, Boeing’s delivery schedule is likely one of his big concerns. The relentless growth that he still craves is completely dependent upon the American plane maker living up to its promises to Ryanair.
Back in November 2021, in the midst of a price dispute between the two long time partners, O’Leary was reported by Reuters as saying that the plane manufacturer needed to “get its shit together” after what he described as delays in the delivery of 65 jets.
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Ryanair has kept its per seat cost at €31 unlike competitors like Wizz AIr, EasyJet, Lufthansa and IAG who are nursing high double-digit percentage rises in seat cost per passenger. Photo: Getty Images
Things have calmed down since. Ryanair is expecting 51 planes from Boeing by June.
“There are still some uncertainties as to whether we’ll get all 51 aircraft that Boeing are scheduled to deliver to us by the end of May,” said O’Leary. “At the moment, we think we’re somewhere around 44, 45 aircraft. But it’s a kind of a daily and weekly thing we worry about with Boeing because obviously some of our growth into summer 2023 will be disrupted if we don’t get those 51 aircraft out of Boeing.”
This issue, as O’Leary knows better than anyone, is right at the heart of Ryanair’s success. Most airlines either lease large portions of their fleet or carry huge amounts of debt on their balance sheet for the aircraft they have bought. Ryanair has neither, and owns a huge and growing fleet of unencumbered aircraft paid for out of the cash that the growing fleet allows it to generate in ever greater amounts in a virtuous circle of growth.
A recessions would hit the entire sector and Ryanair has proven time and time again that it thrives amid sectoral adversity
With demand showing no sign of weakening and other airlines struggling to introduce extra capacity, Ryanair can keep filling its new planes and keep its numbers growing month after month – just as long as Boeing can hit its delivery targets.
“I think they’re very comfortable that Boeing is at least on track to deliver in the mid 40s In terms of planes,” said one analyst. “They need about six weeks’ notice in order to be able to sell the seats on a plane. They need to know by May one way or another to be able to avail of aircraft for the summer season.”
But whatever about the short-term deliveries, big decisions lie ahead for Ryanair about its fleet into the future if it is to maintain its advantage over everyone else. When an Atlas Air Boeing 747 – the last jumbo jet ever – rolled out of Boeing’s Everett factory near Seattle last week, the aviation world was gripped by nostalgia. Chances are Michael O’Leary was not watching the live stream, hanky in hand. But the end of the 747 could well be good news for Ryanair.
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A shortage of pilots and industrial relations turmoil was enough to cause O’Leary himself to have a complete rethink about the Ryanair model itself in recent years. Photo: Getty Images
Reports suggest that Boeing is planning to use the space vacated at the massive factory for a new Boeing 737 Max line – allowing it to boost production of the much newer aircraft, including its latest variant the Max 10.
Any boost to Boeing production is a good thing for Ryanair. It will have no bearing on deliveries this year but may help sway its decision-making on future aircraft purchases.
Ryanair’s 225 million target is based on a fleet of 620 aircraft, 149 of which will be new MAX aircraft.
“By 2026, the oldest 737-800s it still has in its fleet will be reaching 22 years of age,” according to Robert Boyle, of UK-based aviation focused Gridpoint Consulting.
“But even if it keeps all 409 737-800s going, that still leaves a gap of 35 aircraft to meet its 2026 ambition. For an airline that likes to maintain a homogeneous fleet, that might be a challenge. When it finally starts to replace the 737-800s, it will need another 20-30 aircraft a year,” he said in a blog post.
The relentless growth that he still craves is completely dependent upon Boeing living up to its promises to Ryanair
“So I think it will be hard for Ryanair to maintain both its growth ambitions and its aircraft cost advantage. Boeing is obviously betting that eventually Michael O’Leary will be dragged back to the negotiating table with more ‘realistic’ expectations about price. Ryanair’s competitors will be hoping that he instead opts to rein in his growth ambitions.”
With probably about five more years of a stunning career to run, there is little chance of such an outcome, according to another aviation analyst.
“I think there’s an increased likelihood that Ryanair is going to cut a deal with Boeing on the new MAX 10 aircraft, which is a bigger plane with 230 seats instead of the 197 seated current MAX.”
Finding the right deal has proven more difficult in recent times. The key metric O’Leary will be seeking in any such negotiation is the per seat cost of the new aircraft, said the analyst.
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An abandoned Dublin Airport during the Covid pandemic in 2021
“He will want that per seat cost to be the same good deal he is currently paying for the smaller version. If he can get a deal like that over the line he could well order another 200 Max aircraft, including the newer bigger model, and that will provide for the airline’s next phase of growth.”
Although he has to date built Ryanair on doing huge advantageous deals with Boeing, O’Leary insists he is agnostic on where he buys: “I couldn’t care less whether we operate a Boeing or an Airbus aircraft if there is a material cost advantage per seat, then we would order that aircraft.” O’Leary is well able to play the two manufacturing giants off each other and the relationship between Ryanair and Boeing has been turbulent at times.
‘Most of our competitors in Europe are Airbus operators, paying much higher prices for aircraft than we are for our Boeing orders’
“The Boeing order book is much weaker and it does need to get some orders for the next couple of years,” O’Leary told the analysts.
”Airbus are pricing up materially. That’s good for us. Most of our competitors in Europe are Airbus operators, paying much higher prices for aircraft than we are for our Boeings.”
O’Leary knows well there is nothing aviation manufacturing executives fear more than the unexpected. Could his sudden very public fear of a black swan swooping to spoil the party be his way of telling them not to get complacent with their best customer?
O’Leary zeroes in on his €100m bonus
Can Michael O’Leary achieve his bonus worth an estimated €100m? One senior aviation analyst believes he will – and quickly too. To do so requires O’Leary to hit one of two targets: Ryanair profits must exceed €2bn in any one year, or Ryanair shares must top €21 for a 28-day period.
After Covid decimated aviation, the chances of O’Leary adding to his largesse with the generous share-based bonus looked remote.
The original deadline was April 2024. But, as part of a new pay deal, the airline’s board decided to extend his contract to July 2028, setting that as the new bonus target deadline.
“I think he will hit one or other of the targets over the next year and a half – unless Covid or war or something else causes unexpected problems,” said the analyst.
“The consensus among analysts is for Ryanair earnings per share to reach €2.60 by 2025. Ten times that is €26. He only needs the share price above €21 for a month. After tax profits of €2bn are also very achievable as long as everything continues to go well.
“But what does another €100m actually mean to a guy like Michael O’Leary, other than another notch on the bed post?”
https://www.independent.ie/business/irish/whats-eating-michael-oleary-profits-are-booming-passengers-are-flocking-but-all-the-ryanair-boss-can-talk-about-is-black-swans-42326146.html What’s eating Michael O’Leary? Profits are booming, passengers are flocking but all the Ryanair boss can talk about is ‘black swans’