June 05, 2007

Ryanair Poised to Win Price Wars, Squeeze Competitors

Ryanair Holdings Plc's shares have plunged as higher costs, stiffer competition and slower growth in demand cut into profit. The airline, which reports earnings tomorrow, may emerge victorious from the turbulence.

A capacity glut is making it harder for Ryanair and rivals including EasyJet Plc to fill seats. That prompted the carriers to start a price war last month aimed at luring travelers. While lower ticket prices may drive down revenue, it's also offering an opportunity for Ryanair, Europe's biggest discount carrier, to squeeze out smaller competitors that can't afford to cut fares.

``Ryanair wants the price war'' to drive out rivals, said Stefan Halter, an analyst at HVB Group in Munich with a ``hold'' rating on the stock. ``They want to gain market share.''

Twelve of 19 analysts with ratings on Ryanair's shares, surveyed by Bloomberg, recommend buying the stock, which has dropped 14 percent from a record on April 20.

``Investors are at greater risk if they short-sell Ryanair stock and it was to rally,'' than if they buy and it falls further, said Howard Wheeldon, an analyst at BGC Partners in London.

Dublin-based Ryanair threw down the gauntlet to its rivals on May 9, saying it would sell 10 million seats for as little as 10 pounds ($20). The same day, Luton, U.K.-based EasyJet said it expected average fares to fall through the middle of the year. Ryanair Chief Executive Officer Michael O'Leary said his airline would drive down its own yields, or average ticket prices, with the promotion.

Riding It Out

With more cash on hand than its closest low-fare rivals and the best operating margin of any European airline, Ryanair can ride out the storm, analysts said.

``This industry is cyclical,'' said Ryanair's chief financial officer, Howard Millar, at a May 31 press conference in London. ```The fundamental of this business is that it is going to grow.''

Ryanair has grown from operating a single 15-seat airplane in 1985 to being Europe's third-largest carrier by market value. The airline pioneered ``no-frills'' air travel in the region, offering flights for as little as 0.01 euro (1.3 cents), or sometimes for free, to undercut competitors.

Like other discount carriers, Ryanair makes up for low fares by charging passengers extra money for everything from snacks and drinks to checking baggage. The strategy earned it 307 million euros in the year ended March 2006, compared with 11 million euros in 1997, the year it first sold shares to the public.

Attracting Competition

Its success has attracted more than 60 low-fare airlines to operate in Europe, resulting, at least for now, in excess capacity and bruising competition. Discount carriers accounted for about 24 percent of total seating capacity in 2006, up from 6 percent in 2002, according to OAG Worldwide, a schedule publisher.

Ryanair aims to fly 52.5 million passengers this fiscal year and to double the number by 2012, overtaking Deutsche Lufthansa AG, Europe's second-largest airline, in terms of passengers.

Such vaulting ambition means it plans to nearly double its fleet to 262 jets by 2012 from 136 as of April. EasyJet, the second-largest European discount carrier, has 138 aircraft and 192 firm orders for Airbus SAS planes, with options on a further 123. Germany's Air Berlin Plc, the third-biggest, boosted its fleet to 88 planes in 2006 from 79 the year before.

``They've gone a little bit over the top in terms of expanding capacity and ordering future aircraft,'' said BGC's Wheeldon.

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