We often look for business models that can withstand bad times. Traditionally, health and consumer goods (food, beverages, household goods, etc.) are regarded as sectors that are not sensitive to economic conditions, and therefore perform relatively well in downturns. In recent times, however, it may seem that there have been other companies that certainly are not what you would think of in this context.

Airlines are considered to be some of the most cyclically exposed companies you can find. Bad times reduce air traffic both among regular travelers, as vacation and leisure is not prioritized, and for business travelers, since lower activity reduces the need to travel. Within air traffic, some of the most successful companies in the last 15 years have been the so-called low-cost airlines such as Norwegian, Easyjet and Ryanair. In particular, Ryanair seems to have had an unusually successful business model despite the financial crisis and the Euro crisis over the past 10 years. Now, however, it appears that Ryanair has encountered tougher times.

Not only the stock price has begun to fall for Ryanair. Also, the results began to decline in the fiscal year that ended March 31, 2018, and they appear to be weaker in the years to come. With the exception of 2009, when the financial markets underwent its biggest economic backlash since World War II, falling results have been almost unknown to Ryanair since its inception. In 2009, the company was surprised like most others after having invested in a sharp increase in capacity, and when the financial crisis struck, a massive price cut was forced to fill the aircraft up to over 80%, which was quite good at the time. Such a capacity increase is not relevant now, and at the moment, aircraft capacity is actually up to 95%. Nevertheless, the results of the airline companies fall.

Utvikling i aksjekurser for Ryanair siden 2010 (i EUR)

Share price development for Ryanair since 2010 (in EUR)

There are several things that indicate that Ryanair's business model is not completely set up for very good financial times. This is also true for many low-cost airlines, but Ryanair is probably one of a kind. The business model is just about using price and marketing to fill all the seats on the their planes. However, the costs are equally important. Ryanair's model has always been extremely focused on all operating costs. It has also resulted in investing constantly in the latest aircraft to keep operating costs, including fuel, to a minimum. Norwegian has also been on the same line in recent years, but Ryanair has been far more careful about using debt to finance expansion than their Norwegian competitor has been.

But the good times are now looking to overtake Ryanair. During bad times it was relatively easy to push prices for everything, from airport charges to purchased services. Not least, in the wake of the financial crisis and the euro crisis it was possible to play employees across Europe against each other, thus pushing the wages of flying personnel very far down. Now the times are better. Demand for almost everything is higher, and suppliers and airports do not have to give up for Ryanair's price pressure in the same way anymore. And above all, employees have become significantly tougher with a series of strikes in different countries in recent months. This has meant that Ryanair has been forced to pay in wage negotiations in a completely different way from what they have ever had before. These cost increases do not seem to be reflected in the prices Ryanair are able to get back through increased ticket prices because as competition from other airlines is fierce.

All airlines seem to meet the same challenges as Ryanair, but the changes seem to be more marked for Ryanair than for the others. Michael O'Leary, and the others in Ryanair, seem to find an operating model that works for shareholders in economically relatively weak times (as long as there is no economic collapse), but that seem to withstand economically strong times far worse.

Are there other such business models out there? Well, maybe. Last week, Amazon was forced to raise its minimum wages by 100%!

Ivar Strompdal
12. oktober 2018