December 18, 2017 / 5:04 PM / a year ago

Breakingviews - Ryanair investors faintly see higher-cost future

Ryanair CEO Michael O'Leary arrives at the Ryanair AGM in Dublin, Ireland September 21, 2017

LONDON (Reuters Breakingviews) - Ryanair investors are expecting a higher-cost future – but it may become more expensive than they think. They have knocked over 2 billion euros off the budget airline’s market value since it caved in to pilots and recognised unions on Friday. That’s more than the extra staff outlays may be worth. If easyJet is a guide, though, the $18 billion Ryanair will have to go further.

Pilots on Sunday lifted the threat of a turbulent Christmas – and an embarrassing one for Ryanair after its cancellation of thousands of flights starting in September – by calling off industrial action. Chief Executive Michael O’Leary’s climbdown allows unions for the first time in Ryanair’s 33-year history.

The company’s shares plunged by more than 10 percent from Thursday’s close to about 14.60 euros on Monday afternoon. Analysts at Investec expect Ryanair’s staffing costs to increase by nearly 1 euro per passenger to just under 6 euros for each of the airline’s 125 million annual customers as a result of the détente. That’s a hit of around 100 million euros – net of tax at around 10 percent, that’s 7 percent of profit last financial year.

Put the post-tax damage on a price-to-earnings multiple of 13 times, and it’s a hit to value of 1.2 billion euros – suggesting at first glance that investors have gone too far with the selloff. But easyJet, Ryanair’s budget rival, is estimated to spend 9 euros per passenger per year on staff. Among other things, easyJet employs more crew members on its flights. If other unions pile on and Ryanair is forced to match these costs, well over 5 billion euros of shareholder value could be at stake, according to Breakingviews estimates. The recent action gets less than half way there.

It’s true that the short haul market that Ryanair has come to dominate is expected to grow at a healthy 6 percent rate in the future, according to Investec, and the structure of its workforce is unusually flexible. And in areas other than staffing, other factors come into play.

Even so, starting down the path of organised labour represents a new era. O’Leary was once quoted as saying he would rather cut off his own hands than recognise unions. His success building such a big airline has forced him to change his tune.


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