By Robert Tolan
Friday saw Ryanair CEO, Michael O’Leary, announce a temporary 50% pay cut for all employees, including executives, in an effort to bolster its balance sheet amidst the uncertainty of the situation sweeping the world. Given the trajectory of its share price, now €8.81, a sobering 50% decline compared to its January price, the terrain ahead may be looking worse for shareholders.
O’Leary’s decision was merely an attempt to slow down the bleeding that started last week as deaths from Corona virus soared. International travel has now been brought into question which brings problems of its own for air travel within Europe’s Schengen area, the largest revenue maker for Ryanair, and indeed uncharted territory for free movement. As the European economy is stuck in gear for the foreseeable future, O’Leary has hinted at the possibility of future redundancies.
The threat of heads rolling within the company probably could have come a little sooner. The current debacle is not a cause but rather a symptom of deeper issues within the company. Consider the following facts; it traded at a high of €18.41 almost two years ago, the price has been down trending since, Ryanair has undergone a major re brand, profits have stagnated despite increasing passenger numbers and industrial relations issues have become a mainstay of the company.
With €4bn in cash equivalents the company will not be able to weather the most adverse pandemic scenario, the European economy stalling well into the summer or even later, and so some sort of guillotine must be brought to the stage. The maverick O’Leary must return for his company’s fortunes to reverse.
The more liberal of observers will say Ryanair ought to wait out for government support of some sort. This is entirely unreasonable. The government assistance Ireland could afford is not enough to keep a pan-European airline afloat and the EU’s bureaucracy and failure to codify an approach to assisting businesses in ‘black swan’ events such as pandemics mean neither fig leaf will come in time. Ryanair could find itself occupying the grave beside Flybe, which was offered government support that proved fruitless, if it is not careful.
This would cost thousands of direct jobs and tens of thousands of indirect jobs. The cuts required in the short-term would amount to a few hundred job losses and indeed those people affected would be entitled to redundancy payments. Certainly this act could ease industrial relations woes for the time being as the seriousness of the situation facing the company strikes employees. Only then will investors change their minds on Ryanair and see value in the €8-10 range which will recapitalise the company.
It is also advisable that O’Leary reduce the number of subsidiaries, now 11, to fortify the company’s financials. As significant amounts have been ploughed into the recently acquired Laudamotion and the 1-year old Malta Air, merging these, for instance, offers the most sensible way of achieving economies of scale. There appears to be far too many duplicate processes concerning HR and marketing across the group which must be eliminated for the company to once again become an investor favourite.
Regardless of the action taken by Ryanair, it is becoming increasingly apparent the Irish economy needs activist investors for its most prominent companies to flourish. If it were US-based, it is unlikely it would have escaped the clutches of value hungry investors like Carl Icahn or David Einhorn. There is certainly plenty of value to be found in Ryanair, there is still a need for a low-cost airline, but the execution of the business model has deteriorated over the years. The best antidote to this is somebody willing to force the necessary, and in this case obvious changes, who is willing to take the decision O’Leary has in recent years shied away from. Failing this, thousands of jobs rather than a few hundred may be lost.