Wednesday, June 06, 2007

The Miracle of Low Cost Air Travel?

Ryanair, Europe's largest budget airline, has posted a 33 per cent jump in profits to some £300 million. Yet, Ryanair shares promptly fell by more than 6 per cent.

As interest rates move inexorably upwards then Ryanair like every other carrier will see passenger demand squeezed downwards. The credit card fuelled travel bonanza is close to coming unstuck here in the UK and traffic figures at the Scottish airports in particular show the dip in demand. If Ryanair's results announcement is taken at face value they are talking of a dip in their yield and a rise in their costs. If they don't find a way of increasing their route network significantly over the next year they have a problem. This year Ryanair’s load factor dropped from 83% to 82% and low cost airlines live or die by their load factor. However, profitability is also about yield per passenger and Ryanair will have difficulty in maintaining theirs over the next twelve months

There's another issue. The traditional carriers, BA, Lufthansa, et al are all under the same pressures. They will be trying to maintain their load factors and if there's any attempt to creep the Ryanair fares upwards any further then the 'bargain' of the Ryanair, who use airports that are often further from the city they claim to serve, will be threatened. The 'deal' in transport is not just about the airfare, it's the total journey cost. easyJet and the other low cost carriers are all under the same cosh. While some travel is destination related much of this air travel bonanza is purely a discretionary purchase with travellers seeking a destination to enjoy some vacation time. Therefore it’s not just about competition on a particular route it’s about competition across the holiday market.

It's why Michael O'Leary, a brilliant tactician and businessman, is attacking the British Govt and the BAA. He knows that he has to eek out every penny of savings he can. Will he manage to convince Gordon Brown that taxes need to come down on air travel? I very much doubt it. Will Ryanair have reduced profits next year? Definitely.

And one more thing. O'Leary has announced he'll leave Ryanair in 2008

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