February 6, 2008

Silver lining for Ryanair in economic turbulence

Posted in International Economy · 24 comments ·

There is something so appealing about the candour of Ryanair. On Monday, first Michael O’Leary and then Michael Cawley, mentioned the R word.

Yes, there could be a recession in the airline business but as far as Ryanair’s top brass are concerned, that’s life.

O’Leary announced that there are going to be tough times ahead. He even suggested to investors that Ryanair’s profits could fall by 50pc next year.

Cawley was even more candid on Matt Cooper’s programme when he said that Ryanair would move aggressively into the downturn, slashing prices where they could and investors had to either come along for the ride or bail out now.

Ryanair’s management’s stance on oil was again unusually honest. If there is to be a recession, then oil prices will fall and as they do, one of Ryanair’s major costs will fall too. So rather than “hedge” their petrol exposure they are betting that oil prices will fall. Their view is “bring it on” and make the best fist of a bad situation.

Given the corporate bulls**t that most company bosses and their PR lackeys spew out day after day, it is a breath of fresh air to hear Mr Cawley.

Here is an adult treating the rest of us like adults; no spin, no obfuscation just the facts as they stare the management in the face.

They are looking at a fall in demand and a possible rise in costs which they can do nothing about. The Ryanair view is that their profits might fall, but so too will the profits of their competitors and the downturn gives them a chance to expand their market share at a time when everyone is suffering.

Now this might all be bluster from a company that has over-invested just as the industry is turning down, but the form of the Ryanair management is to tell it as it is. This is what makes them different.

Contrast this honesty with the type of stuff we are still hearing from estate agents. Rather than tell the truth that stamp duty revenue has halved since this time last year and will obviously go lower again, they are spinning about recovery before they have even admitted a downturn!

However, if you drive out to the newer suburbs or go onto any property website, you will see what is going on.

To save yourself the trouble, just log on to www.daft.ie and go to their map which shows how many properties are for sale all over the country.

It reveals the same pattern as we have seen in the US over the past few months: properties in the outer suburbs are now coming on stream almost daily and they are not moving.

For example, in one newly built estate — called Hopkins Haven (the name alludes to Gerard Manley Hopkins’s apparent fondness for the area) — in an outer commuter town like Monasterevin, neighbours are vying with each other to get up their For Sale signs.

There are five properties for sale on the one road here — all put on the market recently. There are 93 properties for sale in the town and all prices are falling.

This is Deckland and the trends for Deckland are ominous. Having spent more than a year there while researching ‘The Pope’s Children’ in Ireland’s commuter towns, I was fascinated by the explosion of outside decking in Ireland.

During the boom, most of us were prepared to dispense with our critical faculties and dream. So in a country that receives more rain than most, the preponderance of decking and its handmaiden — the top of the range barbeque and grill — verges on the delusional.

Nonetheless, go to any Woodies DIY shop on a Sunday morning and there you can see the Deckmen of Deckland, comparing barbeques and decks.

Up until very recently, the conveyor belt of rising house prices whisked Deckland along in an upwardly mobile dream. We were prepared to believe — like Americans — that tomorrow would be a better place than today.

This Hibernian version of the US’s manifest destiny is now under threat. And the reason is simple: outlying areas get hammered in property downturns.

In the UK for example, the commuting region of East Anglia saw falls in property prices of 40pc in the last slump, whereas in the borough of Kensington & Chelsea, overall average property prices did not fall at all.

This week, the Irish media is obsessed with the US election, however something much more pedestrian should be catching our attention.

An article in this month’s Atlantic magazine shows what might happen to Deckland in the years ahead.

In the US, like Ireland in the past few years, unlimited credit led to an explosion of building in the outer suburbs.

As long as prices were rising and petrol was cheap, a nice house in the suburbs was an asset; today it is fast becoming a liability.

Today, America’s suburbs are experiencing a huge increase in foreclosures as the mathematics of paying huge mortgages begins to overwhelm families who up until recently looked not only comfortable but wealthy.

As the Atlantic states, “Many areas of go-go growth — the southwest, California’s central valley, much of Florida, eastern Colorado and greater Atlanta — have been hardest hit”. All these areas are the new commuter-belt.

Ireland’s commuter belt — Deckland — is experiencing something similar. However, we are probably a year or two behind the US.

The Federal Reserve has acted to ease the burden on the average US homeowner by cutting interest rates aggressively.

Unfortunately, for the sellers in Hopkins Haven, our interest rates are determined by a haughty Frenchman, living in Germany, who doesn’t give a monkey’s about Monasterevin. And, worse still, no one back home has the courage or honesty of the Ryanair management to call a spade a spade.

  1. Jonathan

    Good article. I have one question though? Since the property market is in a downturn and activity is slowing to a standstill wouldn’t it be better for all (estate agents, banks, builders, buyers and sellers) to just admit that certain houses are worth 30-40% less and then return to more normal buying, selling and building activity? Or is it better to have a long, drawn out fall in value with a dead market and low activity for a long time? I suspect the former and if so then anybody who’s talking up the housing market is ultimately shooting themselves and everbodyelse in the foot.

  2. nick

    Could not agree more.

    O’Leary and Co are very smart and savvy. They totally seize the initiative and set the agenda (and they know no other Airline CEO could likewise do and say what he says and does) He also knows that his competitors are probably not as nimble or prepared as Ryanair is going into a downturn due to their bloated and inflexible business models or national shackles.

    Furthermore,he sets the markets expectations low giving himself more leeway and he also takes the wind out of the analyst community sails (to a certain degree).

    All that and yet he still manages to combine all the above with his usual “fly by the seat of our pants” Ryanair brand and market message.

    Isn’t it amazing how we Irish all look so much more impressive and credible on the world stage when we shed our national passivity, our now redundant “Irish charm” and we just stop apologising for success when it comes our way as if it was just “luck” and INSTEAD use our straightforward, clear and sharp Irish “common sense plaintalk” and intelligence as brilliantly exemplified by our “almost hidden away” world class talents such Geldof, Sutherland, Bono (yes, at times!), Mary Robinson, Pat Cox and O’learyetc.

    If you ask me these are the people that our young people should be shown as examples of what can be achieved and who dare to dream out loud and beyond our currently overpriced little Island.

  3. John Q. Public

    Does anyone think that certain senior civil servants/politicians should be given the boot and replaced with savvy capitalist tycoons? Would they not just try and get as much tax revenue in as possible from anywhere or would they focus more on home-grown industries?
    If Mr.O’leary were minister for enterprise would he help Irish entrepreneurs set up their own Viagra and false breast factories?
    We can throw ideas around all we want, it’s competitiveness that’s holding us back as players in the global market.
    Nick, all due respect I would’nt want any of the names you mentioned running the country.They talk the talk alright but don’t walk the walk.

  4. VincentH

    The use of the RBK&C as an example is not a good one, it will have a stable market in the same way that Ballsbridge will have one. Both are desirable and relatively small, with a population that it inured with money. Some may feel a pinch, in as far that £40,000 for a month during winter in Barbados will continue, but they will now fly first class rather that the usual air taxi.
    Your main point on Ryanair is correct, realistic, and have thought so when they started flying. But much like that cook Ramsay there is a bit more grit in the whetstone than strictly necessary.

  5. Jim Bulger

    We all now are supposed to give Ryanair praise and laud their honesty, admire thier business success and say well done with their €300m+ plus last year . I say they are as crooked as the banks , estate agents and the rest of the gangsters who are in power in this country. How do they make a lot of money ? By working their people to the bone with shit wages and bad working conditions. They also compromise the safety of the travelling public and other aircraft by their lack of sufficent training for the staff ,pushing pilots to their limits and then having no regard for the public by their contempt for regulations both for air safety and passengers. (See Prime Time Investigates)
    It is not mentioned in the news much but air traffiic controllers have major problems with Ryanair planes when setting speed restrictions (speed limits given to incoming aircraft due to high volume of planes in controlled airspace). If anybody has been around the airport when Ryanair planes land you will notice that their speed is significantly higher than other aircraft.
    An Official from some Goverment watchdog also was on the telly saying that it was always a major battle with Ryanair to enforce passenger regulations.
    Did anybody ever arrive a a Ryanair desk only to find out that the gate was closed and they had to fork out more money ?
    Honest Ryanair cheap and very nasty , would you fly with them ?

  6. VincentH

    If you ever sat on a bus or traffic for any length of time, Jim, then saving yourself 800-1000 euro -1990 prices- for flying to/near London or Paris on Ryanair would not matter that much. There is nothing stopping you from going to Weston if that is what you can manage.
    Who the hell cares if for at most three hours, you end up at the far end of Europe, that you are moved like cattle. And when they cop on that they are not taxmen or bill collectors for airports, things will seem better.

  7. Damien

    I agree. Ryanair, for all its faults, is a great business and suceeds at the one thing it’s legally mandated to do which is return value to it’s shareholders. It should be applauded for being one of the few homegrown champions especially in such a competative industry. We need to encourage more companies like this rather than becoming a landing strip for US companies in Europe (as profitable as that has admiteddly been in the past).

  8. Stephen Kenny

    It’ll be interesting to see what happens to Ryanair, given that, I believe, it’s business model is fundamentally based on retail. I’ve got so used to hopping around Europe.

  9. thecheekyone

    Jim Bulger

    Ryanair airplanes landing faster than other aircraft at EIDW? Where do people come up with these outrageous statements! I suggest you get your hands on a Boeing FCOM, and perhaps you will be guided towards the truth. . . . . .

    The Better Man

  10. Garry

    When you’ve done well being candid/honest is easier than when youve screwed up.

    Fair play to Ryanair, they have made some brave calls, and gotten perhaps all of them right.
    Management know well enough that they are doing a great job for their shareholders, no other management or parent company could make a significant improvement. Equally they know tough times are ahead and are making sure people know, so they wont be operating under false expectations from shareholders next year…… smart move…. Theres a lot of companies that have the worse issues; Sure where are the shareholders going to put their money in …. citibank?

    Estate agents seem to be reverting to telling it like it is in property…. they are advising vendors to be more “realistic” in their asking prices. If a house doesnt sell, they dont get paid so their interest (now) is in getting prices down where people buy again. Up to this they were getting the volume by spouting the “property only ever goes up” line to “investors” and FTB’s.
    Banks have an interest in having people taking on more debt, to ensure there are low default rates on existing debt, and are also nervous about the security on existing debt (value of houses vs. mortgages) So banks (and their economists) cannot be candid/honest as to the state of the property market. What are they going to say? House prices have dropped up to 20%, so the young couple who bought at the peak of the boom have lost say 70k. They would have been better off to have hung out in somewhere sunny like Australia for a couple of years, than staying at home and working hard to pay the mortgage. Another 20% drop is a possibility. That kind of candour wont sell new debt!

  11. Rob

    The property market is in decline all right but there are a few important things to note: Re Dublin prices will fall v little in the so-called exclusive areas and even if they do a Dalkey house quoting at 5 million may now be 3 million, i.e. v little use to most of the population. House prices that really fall will be in commuter belts and hence the areas that are most desired/useful will not see much of a fall. In addition there is too much wealth generated in certain areas for a need to sell off property, i.e. many landlords own 3/4 properties and the rent comfortably pays the mortgage, so even if the notional value of the property falls, there is no impact as the landlord holds onto the property. This is also why rents in city centre locations will not fall and in fact will only increase as the population increases. The property market requires careful analysis as just as there were daft s/ments made when the market was on the up, likewise equally daft s/ments are being made as its on the way down. A cut in interest rates will also lessen price reductions. Some punter was on about investing in gold for example. Gold has now reached the price it achieved 20 years ago. Some investment that would be. Rubbish advice.

  12. Marie

    Rents are a direct function of income and therefore have probably reached a ceiling already. You cannot mortgage this over 40 years with an intro teaser rate – its based directly on net income affordability (for a change). Landlords can ask what they want but the rents actually achieved do have threshold values. Besides, try and price people out of the rental market and they will leave the country – because they can – simple as that!

  13. ericD

    I agree with DM its high time we shook ourselves and see the wood for the trees,till the ice melts , and the skys go grey , lets make more money boys and girls!

  14. AndrewGMooney

    Some areas are immune to recessionary forces, RBKC being perhaps the most extreme example of ‘The Rich Will Always Be With Us’. #

    There’s was a Thatcherite Tory M.P who disparaged someone for being ‘nouveau riche’ by saying “he’s the type who has to buy his own furniture rather than inherit it”. He shagged everyone he could get his hands on but his name escapes me. Wrote it all in unexpurgated memoirs…..oh dear, incipient Alzheimer’s at 47!

    Anyway: Isn’t there a difference between the traditional ‘suburbia’ that so horrified Betjeman and the cancerous ‘exurbia’ of today?

    Presumably traditional ‘suburbia’ with decent established facilities and transport links will still be attractive.

    It’s the new ‘exurbia’ sprawl with no proper schools, medical or transport facilities that will surely bare the brunt.
    And ‘newly fashionable’ urban postcodes that were sold as ‘edgy’ and ‘vibrant’ but will quickly revert to crime-ridden and dangerous.

    Or, given that the debt addicts are found in all areas and echelons of society, maybe the dislocation will be across the board? Interesting times.

    I live in The Malvern Hills in England which is about 20 miles from Cheltenham and Hereford, and 40 from Birmingham. As well as being a pleasant established place to live with a reasonable local economy, it’s the ‘outer limit’ of rational commuting to Birmingham. The traffic congestion for commuters to Birmingham is becoming intolerable. Soon the price of petrol may also be unbearable torture. The train service is absolutely shambolic. Third World.

    I guess a lot of people will be looking for jobs in Cheltenham or Hereford!

    The biggest difference between UK and Eire seems to be the astonishing back-log of housing inventory in Ireland in proportion to population.

    I’m delighted Ryanair are making Birmingham International a major hub. More choice! More cheap flights! Bigger carbon footprint!

    PS: The M.P was The Rt Hon Alan Clark and the kiss-and-tell-tale-tales were called ‘The Alan Clark Diaries’.

  15. Rob

    Re rents, if check the statistics, rents didn’t increase in dublin for about 4 years and in fact in relative terms decreased. If anything as prospective buyers defer purchasing they add to numbers renting. Rents are now playing catch-up if anything.

  16. Marie

    Re rents (final word I promise!), there are those that think rents have to catch up with these over inflated housing values (in terms of monthly costs) – whereas I actually believe that the opposite is the case – housing costs have to realign ‘down’ to rents. Then and only then will there be an equilibrium.

  17. Rob

    Yeah, housing costs will come down and that will ease the pressure on rents. Its an interesting dynamic between the two sectors, although its not completely straightforward. For example house prices may decrease in the outer suburbs but i believe this will have little or no effect on say rents in the city centre. People will pay a higher rent to live near the centre of town and as commuter costs rise this will only make living near centres more attractive. The outer suburbs, without adequate facilities, will take a long time to recover any sort of saleable value. Don’t forget, they are not making any more land to build on in the city centre, whereas a city can always expands outwards. My best guess is that rents will continue to increase (in city centres) at a steady rate for the forseeable future. In fact as banks tighten their lending policies this will further pressurise rents to climb.

  18. Ash

    Take a look at


    for real evidence of rental price drops (some increases I agree) but the overwhelming evidence indicates that rents have peaked.

    It’s a simple question of affordability (and of course supply).


  19. eugene

    ” Don’t forget, they are not making any more land to build on in the city centre, whereas a city can always expands outwards. My best guess is that rents will continue to increase (in city centres) at a steady rate for the forseeable future. In fact as banks tighten their lending policies this will further pressurise rents to climb.”

    they are making new land in the docklands. rents in the city centre did not increase for more than half a decade from 2000-2007, and then a very minor correction was achieved as landlords assumed they could pass on interest rate increases. what the optimists on debt miss is the coming drop in population as net migration reverses. Rents are going tumble real fast real soon now.

  20. laura

    Good point Jonathan. However I do think estate agents are currently hanging on by the skin of their teeth as most base their commission on percentages rather than fixed fees. So they have a vested interest in talking up prices. The reality is that most of their market has dissipated: with a 20% vacancy rate, it would appear that market saturation may have occured. Secondly, any potential secondary market of lower earning, but desperate to buy would-be homeowners are shut out of the market by higher interest rates and fears of risky lending. It was fine to give Jane on 40k a year a 220k mortgage when her house was likely to be worth 1.5 times that in 2 years time – now that its not, its simply not worth advancing a 100% mortgage to her.

    I reckon any quick thinking estate agent who wants to survive will switch away from percentage based commission to fixed rate commissions, thus avoiding their own likely demise. I would guess also that a lot of estate agents are likely to collapse if properties are not selling, so it is definitely not in their interest to have huge amounts of unsold property on their books.

    Same goes, incidentally, for the private rented sector.

  21. Bobby boy

    Hi David,

    Thanks for another insightful article. In seeing some of the posts here it seems that, along with many of the prior posts on other articles, the focus is on property. I have not lived in Ireland now for about 5 years, but I visit from the states about twice a year. I spent most of my life in and around dublin up to that point. What I find remarkable in the comments made above is the belief that the city centre will be spared any ill effects in a housing downturn. I certainly agree that the poor areas at the furthest reaches of the commuter belt will suffer a far worse fate. As will the dozens of apartment complexes that have sprouted up in Blanchardstown and tallaght and ……..

    Hopefully I can speak with the benefit of some distance. It seems the comments above are coming with those with a large vested interest in not seeing rents or prices drop in the city centre, not with an unemotive slant. I have heard this not only in this forum but also from a number of friends in the last couple of years. And in short I think it is at best, naive. At worst, desperate and financially precarious. In a serious housing downturn it is unclear that any market would do well. For those immigrants coming in price does matter, and rather than look at the city centre they will undoubtedly take a slightly worse commute and move towards tallaght, Blanch, some of the not so great areas around the canals that have seen some development. Also, I wouldn’t underestimate the ability of a smart call center company relocating its office space to somewhere out in the commuter belt, in these dormitory areas, to offer cheaper office space, cheaper staffing (working for less given lower living and commuting costs) etc. It is not as clear cut as people believe or would like to make out.

    The other argument I hear non-stop is that Dublin is cheap compared to london. I am not so sure I agree when you compare relative wages one can achieve in the two cities. Especiallly in around central london and in comparing the payouts for the financial areas in the two cities. Furthermore, given what is going to happen in the investment banking field in the next few years, that would bode very very badly for London. Having seen the pain it rought for the property market there before the city could be in for a nasty shock. That price comparable is thus a moving (downward in my view) target.

    How about we compare Dublin to New York. Again, the potential earnings in new york city I would think far exceed those in Dublin. Yet how much more expensive are is NYC to Dublin. Its not that substantial at the 1bed/2bed level. Furthermore, if you want to compare what you would get in Tallaght or Blanch compare NYC to jersey City or Hoboken. The commute from there to NYC is much quicker and easier than the comparable from tallaght to dublin city center. It is also more comfortable. Not to mention the kind of amenities and diversity you get as an upside relative to Dublin. (Fine — healthcare is a nightmare in comparison).

    Or else, how about we compare to Munich or Berlin? Or to California? Or to Florida?

    Furthermore, when looking at Dublin 2 years down the road, how should one think of the prospects? How should we compare ourselves to an eastern europe increasingly speaking english that wants to stay at home? Or to Asia?

    How can we compete? Where will opportunity come from? what makes us better than the Croatians and Serbians who are no longer at war? We built tremendous momentum in property. We created enormous money velocity in our economy, like an engine producing power, but where did we store it? What should we do going forward?

    All in all I don’t think the prospects for Ireland look so great. We don’t seem to have great competitive advantage, any indiginous industries of any merit (other than tourism) or the work ethic we used too. We do have though a greatly enhanced sense of entitlement and pride. And as we all know pride comes before the fall. I can’t see pretty things for the irish housing market or economy, and I think it is easy to see a financial collapse coming in the economy — especially given all of that lousy debt is held by 2-3 banks. Not a nice scenario. I hope what I suspect is wrong. And I sincerely apologise if any of the opinions I give above are offensive to the reader, or if people feel my comparisons are erroneous. I would love to hear peoples opinions.

  22. Wouldn’t we all love to see the oil prices fall… 

    And how likely is that to happen? We are on $100 today again. It is true that $ is not worth much to us, but $100 and growing is a real problem…

    Ivan | http://www.SeoConsultant.ie

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