Ryanair Powers Ahead

If there’s one lesson to be learned from years of observing the aviation industry, it’s this: never invest in airlines. Most fail and the survivors’ profits flicker at the whim of a host of externalities, including fluctuating oil prices, volcanic eruptions and terrorism.

A caveat, however, should be made for European budget carrier Ryanair, which like its American role model Southwest Airlines, rarely passes a quarter in the red.

Ryanair’s latest Q3 profit was €18m on a 15 per cent rise in sales, causing the company to raise its earnings guidance for the full year to €540m, which would be a seven per cent improvement on 2011.

As ever, the airline has kept a tight lid on costs, while also significantly boosting ancillary revenues, up by a quarter to €13 per passenger due to the introduction of reserved seating.

Most impressively, growth was achieved despite unremitting economic gloom in Ryanair’s only market – Europe – and 20 per cent higher fuel prices. Combine such performance with a beefy balance sheet that includes €5bn in cash and you have as close to a blue-chip company as exists among airlines.

The price for Ryanair’s success (and where it deviates markedly from its spiritual forefather Southwest) is an appalling corporate image, although it is an expense gladly borne when so many hold their noses and use its services.

Unfortunately for the airline, European competition regulators can’t be persuaded to do likewise, and Ryanair is now pursuing its third takeover bid for Irish flag carrier Aer Lingus.

“Ryanair has submitted a radical and unprecedented remedies package to the EU in support of its offer for Aer Lingus. We believe these remedies address every current Ryanair\Aer Lingus crossover route and all other competition issues raised by the Commission,” stated Ryanair CEO Michael O’Leary yesterday (January 28).

Those remedies are believed to include offloading almost half of Aer Lingus’ short-haul routes to UK regional operator Flybe and the sale of many of Aer Lingus’ precious Heathrow slots to British Airways.

On the face of it these are sensible measures that should diversify competition between the UK and Ireland (although one wonders whether BA needs more control at Heathrow). Regulators may ask, however, how long that competition will survive in the face of Ryanair’s unmatched cost base.

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