There is no secret that the world runs in cycles – when there is economic growth, a downturn will follow. Every industry feels the impact of an economic downturn and aviation is no exception to the rule. However, in aviation, some use these downturns to their advantage – not only to attract more passengers on their flights but to also purchase aircraft at exceptionally good prices.
It seems like for an airline like Ryanair, which only operates the 737, now would be the perfect time to purchase more Boeing aircraft. Surely the on-going 737 MAX crisis has significantly reduced the price of the aircraft, as Boeing would be more than interested in selling the aircraft in an obvious economic downturn for the manufacturer?
Yet Michael O’Leary, the Chief Executive Officer of Ryanair, during an event in London on October 1, 2019, said that “there are no pricing opportunities on aircraft”, as he thinks that “we [Ryanair – ed. note] have to wait for the next turn in the cycle”.
Throughout history, low-cost carriers showcased more resilience and flexibility during downturns in the industry. They also managed to do some brilliant pieces of aircraft business.
Some more successful than others
While network airlines struggled to make ends meet, low-cost carriers thrived. Ryanair managed to grow between 2000 and 2003: from 7 million passengers at the beginning of the millennium to over 16 million travelers boarding Ryanair’s aircraft in 2003. The same story repeated itself once again at the end of the previous decade – between ’08 and ’10, the Irish LCC increased its traffic by 16 million passengers.
Ryanair was not the only low-cost carrier that was growing in Europe. EasyJet’s traffic also increased, albeit the growth was more modest. The British airline welcomed 5.1 million more passengers in FY2010 compared to FY2008. Hungary’s Wizz Air, which commenced operations in 2004, managed to welcome 7.5 million passengers in 2009. Considering it was done in just five years – a very impressive feat, bearing in mind the softening demand for air travel in the background of the financial crisis.
But did full-service airlines really drop off in 2008-2009?
Oh boy, they did. The European Commission published a report on January 21, 2010, analyzing the industry’s results in FY2009. Out of the Top 20 airlines in the world, only six managed to increase their passenger numbers: Air China, British Airways (only by 0.2%), China Eastern, China Southern, Emirates and, surprise, surprise, Ryanair.
In Europe, mainline carriers offered 700,000 fewer seats per week in 2009 than in 2008, accounting for a 6.7% drop in weekly capacity. European low-cost carriers reduced their weekly capacity by only 0.4% or 25,000 seats – even so, Ryanair, easyJet and Wizz Air all managed to increase their capacity by 16.4%, 7.4% and 22.4%, respectively.
But why were low-cost carriers able to grow?
Caught with their trousers down
As Lehman Brothers closed its doors and the financial crisis went into full swing, legacy airlines were caught with their trousers down. Simply put, they were not prepared for the combination of severe oil price swings and the tumbling passenger demand.
While fewer travelers chose to fly, even during the most difficult periods the crowds want their bread and circuses. Low-cost carriers had the operational flexibility to offset the lower load factors with cheaper ticket prices.
To illustrate, Lufthansa (LHAB) (LHA) reported that operational costs related to fuel rose by 39.3% in 2008 compared to 2007. Next year, fuel expenses did not offset the rise from the year before, as they only dropped by 32.3% in 2009. The German airline operated quite a few gas-guzzlers – it even had six Airbus A300-600 aircraft, which in 2009 was already a 26-year-old design. In addition, Lufthansa’s (LHAB) (LHA) long-haul operations mainly relied on 82 quad-engine aircraft: 52 Airbus A340s and 30 Boeing 747s. Operational costs of such aircraft, coupled with the complexity of maintaining six different aircraft types becomes a burden during a downturn when revenue flows are drying up. Already in 2009, Lufthansa (LHAB) (LHA) realized the fact that such operational costs will not fly – the airline announced Climb 2011, an initiative to reduce costs by $1.1 billion (€1 billion).
In contrast, Ryanair managed to control their costs by owning brand new Boeing 737 aircraft. But preparation, as it were, already began much earlier – on an industry-wide recession that started in 2001. Airlines were not the only ones that felt the results of the downturn, as aircraft sales also started to take a turn for the worse. Compared to 2000, Boeing delivered 275 aircraft less in 2001 (589 in 2000 versus 314 deliveries in 2001). The U.S. based manufacturer’s sales only recovered in 2004, when it delivered 271 planes compared to 246 in 2003.
The Irish airline pounced on the opportunity to acquire aircraft for a discount price. In 2002, Ryanair announced that the low-cost carrier will purchase 100 new Boeing 737-800 aircraft, delivered between 2003 and 2009. The deal also included 47 options. With the order, Ryanair hit the jackpot – not only the airline was granted “certain price concessions with regard to the 737-800 aircraft being purchased under the 2002 Boeing contract”, but the new contract and a relatively short delivery queue allowed the no-frills carrier to phase out their 21-year-old Boeing 737-200 aircraft by “March 2007”. As of September 30, 2002, Ryanair possessed 21 737-200s. In December 2005, the airline stored its last Boeing 737-200, EI-COX, according to planespotters.net data, completing their phasing-out plan much sooner than expected.
But the jackpot only bore fruit years later, during the aforementioned recession of 2008. While in FY2009 Ryanair spent over $1.3 billion (€1.2 billion) on fuel, which resulted in a $184 million (€169.2 million) loss, FY2010 was a fruitful period for the airline – the fuel bill was only $976.8 million (€893.9 million), with the final line of the financial report showing a profit of $333 million (€305 million). So, during the peak of the economic downturn, Ryanair still managed to increase their capacity and most importantly, reduce costs – the New Generation 737s definitely consumed less fuel than any of the old aircraft that you could find in mainline carriers’ fleets.
Other low-cost carriers have also used deteriorating economic situations to their advantage. In 2002, easyJet announced that it is switching from the Boeing 737 and jumping on the Airbus A320 family train. Reportedly, the British airline received a very substantial markdown of about 30% for the 120 firm and 120 option deal for the A320s. Wizz Air signed a Memorandum of Understanding for 50 Airbus A320 aircraft at the “uninspiring” 2009 Paris Air Show, in which Boeing did not even announce any new orders.
But the 737 MAX crisis is a fairly temporary event, as Boeing still expects aviation authorities to give the green light for the MAX to fly before the end of 2019. If Ryanair does not pounce now to order new aircraft, it seems like O’Leary is gambling on a more wide-scope recession that would allow the Irish airline to acquire aircraft for even cheaper and thus, thinking long-term.