Sunday 31 March 2013

Ryanair's 737 order,- Bad news for some others?


Michael O'Leary was on good form recently when announcing his airline's order for 175 new Boeing 737-800s, of which 75 are likely to be for fleet replacement and 100 for further expansion. This comes at a time when Easyjet is yet to find the right price in talks with Boeing and Airbus and as O'Leary puts it "Europe's flag carriers are getting significantly smaller".

Both things are significant.

Firstly, with Ryanair having taken up most of the slack on the existing 737 production line pending the time in 2017 when the enhanced MAX versions replace it, Boeing is no longer under such intense pressure to do a deal simply to keep deliveries moving and the plants and people occupied. As on cruise lines and many other businesses, few customers, if any, pay the actual list prices . In this instance it will have been worth Boeing's while to have offered Ryanair a very good deal to keep the lines flowing smoothly. The costs and organisational difficulties of substantially slowing them down and then ramping them up again are enormous. Now they don't need to offer anyone else a similar one , unless the prospect of recapturing Easyjet from Airbus makes it  strategically worthwhile in the long term . In all such things , one more order for you means one less for the competition so there is always a double whammy in prospect.

Pricewise this could all leave Easyjet in a difficult and exposed position. Airbus will also know that they probably don't now have to cut a deal with them to the bone. As result neither manufacturer is likely to offer the orange people as good a deal as Ryanair obtained. That means that Easyjet's cost of ownership of its next batch of aircraft would be higher than Ryan's for each of the ten plus years that they are likely to remain in the fleet . Reaction in Easyjet's boardroom at being beaten to the draw may well be "Ouch".

Secondly the general retreat and consolidation of Europe's legacy airlines in the face of the low cost airlines on short haul and the Gulf newcomers on long haul has been conspicuous for ten years or more. BA started its retreat in 1997 with the decision to forget about volume, shrink the rear cabins concentrate on the premium classes and go for higher returns on what they do through increased average yields and return on each square inch of floorspace. This has signalled an acceptance of steadily decreasing market share on many routes  The refusal to fight back has given the Asian and Gulf airlines every encouragement to go for the jugular and pile on routes, frequencies and sheer volumes of seats. The growth of these carriers volume low yield business has provided the revenue rock on which to grow still further until now their scale of operation can be overwhelming. They are able add more frequencies which again add to their business at the expense of those who do not can not react and the downward spiral for the legacy airlines continues.

On short haul the former national carriers, notwithstanding the setting up of some secondary hubs,-eg Munich, Barcelona, -have stuck to their business models of concentrating primarily on their home base hubs or at the most flying between their home countries and others but not between two or more othes either using sixth freedom rights or by setting up local national subsidiaries. Some innovative responses such as DBA and franchises have been tried and then abandoned, not through failure and reluctance to take the next essential steps to develop them by making the necessary next steps. A sort of managerial and financial vertigo sets in , aided by old empires within the core airline seeing such things as a threat to themselves. They become terrified at the prospect of investment . Much of this comes from the definitions of accountancy . Leases and loans for new aircraft . The fact that they are self liquidating year by year as the remaining term of the lease reduces and that they are more of an operating cost than a crippling financial burden is not understood in the conventional ivory towers. Perhaps they should refer to the BOAC 1966/7 Annual Report and Accounts which explains it all in stark simplicity : "These loans will be repaid during the lifetime of the aircraft". If they were seen on this basis the nightmares would fade and the opportunities would take centre stage and the thinking would be set as free as that in Dubai, Abu Dhabi, Doha and Istanbul . The simple fact is that on the day the accountants declare "We have no debt", the operating part of the airline will be declaring "We have no aircraft".

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