Over the past week, the stock market valuation of Ryanair has dropped by €2.4 billion. That is an enormous number by any measure but it leaves the Irish airline with a stock market capitalisation of €16.7 billion. That still leaves it the largest airline in Europe and materially bigger than Lufthansa (€8.9 billion) or Aer Lingus-owner IAG (€13.6 billion). Other supposed high-profile airline brands like Air France (€2.8 billion) or SAS (€600 million) are even smaller. This is the context in which any debate about the headline-grabbing labour disputes around Ryanair, made even more visible during the peak holiday season, has to be analysed.
Ryanair's success over the past two decades has been built on its consistent pursuit of growth. Armed with a succession of large orders for new low-priced Boeing aircraft and a business model honed to optimal efficiency, it has aggressively entered geographies across Europe. In each of those markets, incumbent airlines, all of whom were heavily unionised, have been exposed to intense levels of price competition. As consumers were offered more choice and real price discounts, the incumbents have been forced to restructure, retrench or merge with other carriers.
This dynamic, in itself, has provided ample motivation for unions to fight Ryanair at every turn. That opposition was further emboldened by Ryanair’s refusal since inception to recognise unions across the European market. It is against this background that two significant developments during 2018 can be considered.
First, Ryanair has laid out plans to grow its passenger volume from about 140 million this year to over 200 million in five years’ time. That growth of over 40 per cent will outpace normal market expansion so it does not take a genius to figure out the consequences for competing carriers in markets already served or planned for entry during that period.
Second, Ryanair crossed the rubicon last December and chose to engage proactively with trade unions and recognise them across Europe. This has created an entirely new set of relationships which both the unions and Ryanair management have had to adjust to.
Geared up
On the union side, representatives have to engage with an employer which has, understandably, a visceral problem with employees of competing airlines representing its own staff. For the Ryanair management team getting geared up to build and operate a functioning union relationship has undoubtedly been a challenge, given their history. Add to this a lattice work of different unions across countries and functions (eg pilots, cabin crew, engineers), many of whom compete with each other for employer attention, and you can appreciate the associated challenges.
Ryanair crossed the rubicon last December and chose to engage proactively with trade unions and recognise them across Europe
Building this relationship was never going to be a simple or short process with high-fiving employers and employees marching onwards and upwards in unison. Instead, an entire phalanx of relationships had to be developed, with the aim of moving to a position which allows the airline to grow without persistent interruption to operations while providing employees with a competitive set of incomes, career opportunities and working conditions. We are all now watching this evolve in real time and the various skirmishes taking place in a variety of countries bears witness to that.
Any thoughts that this marks the beginning of the end for Ryanair is wildly misplaced. Despite the stumbling linked to the self-inflicted pilot-rostering shortage last autumn, and nine months of gunboat diplomacy between unions and the company, Ryanair remains the most potent airline in Europe. Its updated balance sheet, published just last week, has shareholder funds of €4.4 billion, has reduced its already low net debt by 9 per cent in just three months and generated after-tax profit of €11 for each passenger carried in the past quarter. Moreover, despite incurring three days of pilot strikes in Ireland and cabin crew stoppages in three other EU markets, the impact on actual flights flown as a percentage of the system has been minimal. The airline still expects to make profits of over €1.25 billion this year after taking account of the disruptions.
Market mainstream
I believe that for Ryanair all of this marks an evolution from being the scrappy underdog to being a mass market mainstream European airline that continues to operate a low-cost business model which drives growth through low fares on reliable and safe flights. That definition already applies to Southwest Airlines, the largest carrier inside America, which also began as a no-frills carrier in the 1970s. It now recognises unions and has systems and practices in place that allow negotiations which keep the fleet flying while continuing to grow. Its stock market value is currently over $30 billion (€25.7 billion).
For Ryanair this marks an evolution from being the scrappy underdog to being a mass market mainstream European airline
For investors who hold Ryanair shares, the volatility at present is uncomfortable but understandable. They have no interest in Ryanair becoming akin to Air France-KLM where unions dictate key decisions, management is in disarray and finances are being hammered by repeated and elongated strikes. They want instead to see a union-company relationship that provides a competitive package for employees in exchange for reliability, flexibility to grow and a cost base that ensures the type of profits which support employment numbers while building shareholder value.
If the price for that outcome is short-term disruption to profits, it is a cost worth bearing. The alternative is to allow Ryanair become a basket case of unending disputes and disruption that leads ultimately to job losses and closure. Just ask the former shareholders and redundant employees in Alitalia and the grounded Air Berlin how that feels.
Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal