Ryan air investors see turbulence, headwinds, storm clouds on the horizon

Source:Global Times Published: 2017/12/28 20:38:39

Ryanair investors are expecting a higher-cost future - but it may be more expensive than they think. More than 2 billion euros ($2.37 billion) has been knocked off the budget airline's market value since it caved in to pilots and recognized unions recently. That's more than the extra staff outlay may be worth. If easyJet is a guide, though, $18-billion Ryanair will have to go further.

Pilots on Sunday lifted the threat of a turbulent Christmas - and an embarrassing one for Ryanair after its cancellation of thousands of flights from September - by calling off industrial action. Chief Executive Michael O'Leary's climbdown allows unions for the first time in Ryanair's 33-year history.

Analysts at Investec expect Ryanair's staffing costs to increase by nearly 1 euro per passenger to just under 6 euros for each of the airline's 125 million annual customers as a result of the deal. That's a hit of around 100 million euros. Net of tax at around 10 percent, that's 7 percent of profit last financial year.

Put the post-tax damage on a price-to-earnings multiple of 13, and it's a hit to a value of 1.2 billion euros - suggesting that investors may have gone too far with the sell-off.

But easyJet, Ryanair's budget rival, is estimated to spend 9 euros per passenger per year on staff. Among other things, easyJet employs more crew members on its flights. If other unions pile on and Ryanair is forced to match these costs, well over 5 billion euros of shareholder value could be at stake, according to Breakingviews estimates. The recent action gets less than half way there.

It's true that the short haul market that Ryanair has come to dominate is expected to grow at a healthy 6 percent in the future, according to Investec, and the structure of its workforce is unusually flexible.

Even so, starting down the path of organized labor represents a new era. O'Leary was once quoted as saying he would rather cut off his own hands than recognize unions. His success building such a big airline has forced him to change his tune.

The author is Aimee Donnellan, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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