Category Archives: Current Affairs

Landing in Trouble: Ryanair's Position Amid Coronavirus Meltdown

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.

Coronavirus Worries Sink Stock Markets Worldwide

Stock markets tumbled on Monday as the number of Coronavirus (now officially known as COVID-19) cases increased across the world.

As the centre of the outbreak of the virus, China continues to suffer more than anywhere else. The overwhelming majority of the worldwide cases are still in China, forcing authorities into a frenzy. People are unable to travel for work and millions are stuck in quarantine. American companies with a large presence in China, such as Apple and Nike, are failing to meet revenue projections and are bringing the struggles in China over to U.S. markets.

In such a globalised world, both the health and economic impact of the virus has spread very quickly. Other Asian countries such as Japan, Singapore, and South Korea are growing in fear of what the Coronavirus may bring. Outbreaks in Iran and Italy have shown that the virus is not as well-contained as had previously been thought. Italy’s inclusion in the borderless Schengen Area also plays into fears about the further spread of the virus. Although they have stated it is not a pandemic yet, the WHO has said that the world should prepare for one. Such a statement can only worsen the attitudes of investors.

Analysts believe that the decline in markets is due to the shock in the global supply chain. For example, in the case of companies like Apple and Nike, an absence of manufacturing in China has led to lower production of iPhones or sneakers, interfering with what otherwise would have been a greater number of products to transport and sell across the world. Because there are so many companies that can be involved in any supply chain, negative effects of the virus are being felt all over the business world.

The Nikkei 225, the main stock market index in Japan, closed down 3.34% on 25 February. The FTSE 100 Index in London had its worst single-day performance on Monday since the 2016 Brexit referendum. In New York, the NASDAQ-100 Index NDX opened the week down nearly 400 points (4%) from its closing on Friday the 21st. The Dow Jones has fallen over 1,400 points over the course of both Monday and Tuesday.

While the equity markets have fallen worldwide, investors have flocked to much safer assets. The prices of gold and bonds have risen suddenly as investors have moved their money to prevent any further losses. The rising prices of “safe-haven” assets have coincided with the yield of the 10-year U.S. Treasury note, a benchmark in the pricing of fixed-income securities, falling to a record low on Tuesday.

The shift towards safe-haven assets demonstrates a lack of trust in the stock market amidst the uncertainty of the Coronavirus. There are many that worry that this could be the beginning of the end of nearly a decade of strong growth worldwide. It is still far too early to tell if the world economy is actually entering a decline but providing that authorities, particularly in China, can contain and relieve the anxiety around the virus, stock markets should return to growth. However, if the virus is harder to contain than thought and it takes several more months to subdue, the damage may be too much for economies to overcome. Regardless of how the virus is to be handled going forward, it is nearly impossible to know that there is a recession until it is too late.

A Long Road Ahead? Here’s what happened when the 33rd Dáil Convened Today

  • This afternoon the 33rd Dáil convened for the first time, with 48 newly elected and 112 returning TDs.
  • No leader secured the required number of votes to become Taoiseach today, and there are differing arguments as to how long talks on the formation of a new government will last.
  • Fianna Fáil TD Seán Ó Fearghaíl beat independent Denis Naughten and was re-elected as Ceann Comhairle, meaning Fianna Fáil’s seats are now on a level with those of Sinn Féin at 37.

Today the 33rd Dáil convened with the agenda of electing the Ceann Comhairle and seeing through the Taoiseach nomination process, which entails a vote among all TDs on candidates put forward for Taoiseach.

None of the four leaders that were nominated to become Taoiseach – Mary Lou McDonald of Sinn Féin, Micheál Martin of Fianna Fáil, Leo Varadkar of Fine Gael or Eamon Ryan of the Green Party – conjured up the 80 votes required to win. This is due to the lack of success thus far in inter-party discussions to form a coalition or come to any sort of agreement on how the next government should look following the general election on February 8th, which returned no clear majority. The results of the nomination process instead simply give an indication of the level of support for the main parties’ respective candidates among TDs.

Leo Varadkar received 36 votes in favour of his becoming Taoiseach, Micheál Martin received 41 votes, Mary Lou McDonald received 45 votes and Eamon Ryan received 12 votes. With none hitting the 80 vote threshold, the Dáil will now be suspended and Leo Varadkar will remain as a caretaker Taoiseach.

Sinn Féin’s Mary Lou McDonald benefitted from the support of 5 Solidarity People Before Profit TDs and a handful of left-leaning independents. The Social Democrats chose to abstain from voting for any candidate for Taoiseach, criticizing the process as a “popularity contest”, which is a dent to Mary Lou McDonald’s numbers as she would have been hoping to secure the support of all smaller left-leaning parties. However her party will surely be buoyed by today’s result as they enter into the coming negotiations, however long they may last.

In the election for Ceann Comhairle, Fianna Fáil TD Seán Ó Fearghaíl beat independent Denis Naughten and was re-elected, meaning Fianna Fáil’s seats are on a level with those of Sinn Féin at 37. Fianna Fáil TD Michael McGrath stated that he believes the loss of the seat will have little impact on their ability to play a key role in the formation of a government.

Fine Gael, with their 35 seats, appear intent on leading the opposition in the next government, with TD Richard Bruton suggesting that such an outcome would present an opportunity for the party to reflect on their weaknesses. TD Simon Harris reiterated his party’s position of ruling out any potential coalition with Sinn Féin, and stated that the impetus to form a government was on “the party that has won the most votes – Sinn Féin – and the party that won the most seats – Fianna Fáil.” Leo Varadkar, however, has not ruled out the prospect of his party forming an alliance with Fianna Fáil.

Micheál Martin believes that talks in relation to the formation of a new government could last up to two months, which has recent precedent given the 70 day wait for the formation of a new government in 2016. Fellow Fianna Fáil TD Michael McGrath is more optimistic and suggests it is more a matter of weeks. Fianna Fáil maintain that they have ruled out a coalition government with Sinn Féin. Sinn Féin, however, suggest they are open to negotiating with all parties.

Meetings between party leaders will intensify in the coming days as the Dáil is suspended and discussions on how to form a government begin in earnest. There remain numerous possibilities on the outcome of such talks. There may be a minority government made up of left-leaning parties led by Sinn Féin, a minority Fianna Fáil and Green Party coalition bolstered by a confidence-and-supply agreement with Fine Gael, or perhaps a Fianna Fáil and Fine Gael alliance. It’ll be a long road of debate and compromise and intra-party bickering. And if discussions end up fruitless, we may be headed for another general election.

“We have a deal!” But where to next?

Just as fears of a no-deal Brexit were reaching their peak, news came from Brussels yesterday that a deal is finally reached.

Last Thursday Boris Johnson, the prime minister of the UK, had a semi-formal meeting with Leo Varadkar in the Thornton Manor. Although no one really expected this would lead to any kind of breakthrough, the results were rather surprising. When the two came out of the private meeting room with a smile, declaring that they see “a pathway to a deal”, the exchange rate of pound sterling gained more than 2% against the US dollar on that very day. One week later, the EU passed the new Brexit deal.

Yesterday was definitely a day to remember in both the UK and the EU’s history, but after the cheerful moment, we need to stop and think about what could happen next, and what the implications are.

Firstly, the deal is not final. It did pass a difficult hurdle – coming to an agreement with the EU. However, the hard journey through the British parliament has just begun. Boris Johnson has two days to seek allies before the unusual “Super Saturday” session in the House of Commons. Although Boris believes the deal is of the best interest for both parties and is quite confident about the results of the voting, analysts hold different opinions. Sporting Index, a lottery company who successfully predicted the results of previous Brexit votes, have sent out an email estimating the “Yes” vote would be 313 while Boris needs 320 to pass the deal in the British parliament.

In one scenario, the deal will be passed in the British Parliament this Saturday. This will mean no hard border between Ireland and Northern Ireland, and the rights of EU citizens in the UK will be protected (as will those of UK citizens living in the EU). The UK will leave the customs union as a whole, while Northern Ireland will still remain an “entry point”. For most of us life will remain the same, except we might notice that grocery shopping seems a bit more expensive. Establishing the UK to EU “entry point” on the island is set to make Ireland more of a focus area between the two, which will give rise to both opportunities and challenges. Dublin had already seen big names such as Travelers Insurance Company moving its European business to Ireland to avoid risks associated with Brexit. If the deal is passed and Brexit is official, more London-based international companies will start seeking new bases in the EU, and Ireland is no doubt one of the most appealing options.

If the deal is not passed by the House of Commons, the Benn Act will require the PM to seek an extension of the Brexit date from the EU. For businesses in the UK, this will amount to another period of uncertainty and continuous economic stagnation. For the past three years, uncertainty has caused numerous British companies and investors to suffer, and has seen the bankruptcy of long-standing companies such as Thomas Cook. The Benn Act may appear to be inconsequential for the EU from a political perspective – or even beneficial. However, given the significance of the UK in the global market, the ramifications of further uncertainty for businesses operating there may result in harm for industry in the EU.

Saudi Aramco’s impending IPO is set to be the largest in history

  • The oil giant’s mammoth IPO, to be formally announced this Sunday, is set to earn $40 billion for the kingdom.
  • Saudi Arabia is pushing forward after delays caused by international scandals, drone-attacks and fears of an economic downturn.
  • Investment banks are sharing in $450 million in fees paid out by Aramco in exchange for help with the listing, to the dismay of environmental and human rights groups.

Saudi Arabia’s state-owned oil giant Saudi Aramco has been planning its initial public offering (IPO) for about three years. The energy company is the most profitable in the world, making $111 billion last year – more than the top five publicly traded oil companies combined. On Thursday the government is expected to give the official thumbs-up for the IPO to go ahead, and a formal declaration is to take place this Sunday.

The Crown Prince Mohammad bin Salman’s hope is that selling 3% of the shares in Aramco will raise money (estimated at $40 billion) for the kingdom’s sovereign wealth fund, and the proceeds are going to be used to diversify the Saudi Arabian economy away from an over-reliance on oil. This means it is projected to be the largest IPO ever, with the next highest being Alibaba’s 2014 IPO which raked in $25 billion.

A portion of the oil giant’s shares will be floated on the domestic stock exchange in the capital Riyadh, called the Tadawul, with general plans to pursue a listing on an international exchange at a later date. Why is it that such a lucrative opportunity for the kingdom has taken years to come to fruition?

Intense global backlash related to the murder of the outspoken critic of Saudi Arabia’s government, Jamal Khashoggi, last year almost certainly spooked international investors and resulted in the oil company pushing back its IPO. But more recent crises have heaped uncertainty on the nation’s oil industry specifically.

On September 14, two of Aramco’s largest refineries at Abqaiq and Khurais were attacked by drones, paralysing about half of the nation’s oil production (output plummeted by ~5.7 million barrels per day, which equates to about 5% of global oil production) and destabilising global financial markets. The U.S, a host of European countries and Saudi Arabia itself blamed Iran for the bombings, although the Yemeni Houthis declared themselves responsible.

Aramco states that it has recovered production to pre-drone strike levels, at about 10 million barrels per day. This remains shy of its full capacity of 12 million barrels that it expects to reach by the end of November. While this suggests the oil giant may be resilient in its ability to rebound back to its preferred output, the attacks nonetheless reveal major vulnerabilities in the firm’s infrastructure. Its seeming unpreparedness for threats of this nature no doubt worried potential investors, delaying its IPO.  

On October 7th, one of the Big Three credit rating agencies, Fitch Ratings, downgraded Saudi Aramco’s credit score by a notch given these concerns over security. In addition to all this, at the beginning of this week the price of a barrel of Brent crude measured at less than $60, and this is below the level prior to the drone attack. This signals universal fear among investors of an impending global economic slowdown.

Nonetheless, it’s full steam ahead for Aramco’s entrance to the public market, and in its effort to sweeten the deal for hesitant investors the firm is offering $75 billion in annual dividends. The kingdom is also going to pay between $350-$450 million in fees to professional advisors in exchange for help with selling its shares. This equates to about 1% of the expected proceeds of $40 billion, which is a lower proportion than many engaged in the project were anticipating. For comparison, Alibaba paid $300 million to its pool of investment bankers, coming to about 1.2% of its $25 billion proceeds.

Among those hired to sell Aramco’s shares are ex-Trump national security advisor and partner at Goldman Sachs Dina Powell, and ex- United States congress representative Eric Cantor. According to Bloomberg, “The roster of bankers reads like a who’s who of finance, underscoring the importance of Saudi Arabia a year after the murder of government critic Jamal Khashoggi prompted a brief spell of skittishness over doing business with the country.”

A question hovers over the company’s valuation. The Crown Prince originally desired a valuation of $2 trillion – but this looks to be overly ambitious. A recent Economist report which took the dividend yield as a reliable metric for valuing an energy company found that a valuation of about $1.2 trillion is closer to the mark.

The listing has incited criticism from a swathe of environmental advocacy groups (such as Earthworks and Share Action), discouraging potential investors from financing “the biggest single infusion of capital into the fossil fuel industry” since the passing of the Paris climate agreement in 2016. It has also attracted the ire of human rights watchdogs, who blast Saudi Arabia’s abysmal human rights record in a letter sent to nine international banks associated with Aramco’s IPO (such as JP Morgan Chase and Credit Suisse). The antipathy is only set to escalate following the formal announcement this coming Sunday.

Luckin Coffee: Legend or failing unicorn?

Luckin Coffee was founded in 2017, yet has already established more than 3000 wholly-owned shops in China. The coffee chain successfully completed its IPO in the US this March, only 18 months after the founding of the company, raising $561 million. You may have never heard the name, but it is quickly becoming a key competitor in the ~$10 billion Chinese Coffee retail industry, and threatens the current leading player, Starbucks.

   To differentiate themselves from Starbucks, Luckin Coffee self-describes as a Coffee-Network or Coffee Technology Corporation. In its prospectus, the word “technology” appears 88 times, followed by the third most used word “network”, which appears 79 times.

Technology is clearly the key to its operations. Luckin states that AI enables them to analyse their customers’ behaviour and select better services and products tailored for each individual based on big data. The Luckin Coffee app also plays a major part in their operations. In fact, all purchases of Luckin Coffee are made through its apps (iOS, Android and Wechat’s built-in-apps), and no cashier can be found in any of its shops.

   As opposed to the company itself, the founder of Luckin is probably more famous. Zhiya Qian, the former COO of CAR (China Auto Rental), is known for leading the “subsidy war” in China’s car rental industry and won a large market share for the company. She strongly believes that her success in the car rental industry can be replicated in the fast-growing Coffee retail industry.

   The inner logic of this marketing model is simple. The initial approach is characterised by the use of large amounts of subsidies to break into an industry, in order to build customer loyalty and seize market share with rapid expansion. Having achieved this, the company makes use of “internet thinking” and reduce subsidies to turn losses into gains when most of the other competitors are no longer competitive. Luckin is still in the first stage, as it is still quickly opening more shops and offering huge discounts such as 81%-offs, and pricing the cost of a cup at around 1 euro to attract customers (while the general price per cup is between €4 and €6). The money burning strategy is no doubt doing its job, but the problem is how long can it last?

   In the financial statements from the prospectus, for the three months ended 1st March 2019, Luckin’s total revenue reached $713 million. However, the net loss is $110 million higher. This financial data is a dangerous signal that the speed of growth of the company might not be able to justify the money they have been burning in a foreseeable period of time. Data shows that if Luckin continues losing money at this rate, the company’s cash flow will be in severe danger and may not survive for another two quarters. This may be one of the reasons driving this start-up to rush to hold an IPO. Despite its financial state, Luckin still holds a positive attitude towards its strategy, claiming they will not slow down the rapid chain growth and will continue subsidising its products.

Last month, reporters found some Luckin Coffee shops have started to sell “convenience store food”. Meanwhile the company updated its business scope, adding clothes, shoes, hats etc to its product line. Is this a sign that Luckin Coffee is transforming into a comprehensive new retail chain to save its cash flow? The answer will be seen in no time.

Facebook’s New Global Cryptocurrency, Libra, Hits a Regulatory Roadblock

  • In June Facebook unveiled its plans to launch a new cryptocurrency named Libra, planned to be rolled out in the first half of 2020.
  • Despite efforts to soothe privacy and antitrust anxiety, backlash to the proposal is relentless.
  • A recent Financial Times report suggests that some of its backers are due to cut ties in the wake of severe regulatory scrutiny.

Facebook have announced plans to roll out a new cryptocurrency, called Libra, in the first half of the coming year. The new digital currency can be conceived as a sort of fusion between Bitcoin and fintech services such as Revolut – users will be able to exchange their money for Libra coin and send and receive funds instantly via Facebook’s messenger services, Messenger and Whatsapp. But its ambitions are massive. The long-term aim of Facebook is to build a global digital currency and render worldwide transactions fee-free, instantaneous, and unrestricted.

Libra is an effort by the social media company to build a payments system in the west akin to Tencent and Alibaba’s success in China. There the proliferation of mobile payments – facilitated by Tencent’s WeChat and Alibaba’s Alipay (together accounting for 93% of Chinese mobile payments) – are bringing the country ever-closer to complete cashlessness. WeChat itself originated in 2011 primarily as an instant messaging app, and only integrated a digital wallet in 2014 to compete with Alipay. In this sense Facebook appears to be following a similar route in its quest to dominate the payments industry and quash cryptocurrency and fintech rivals alike – by offering Libra to the 2.4 billion users it already has on its platform.

Facebook seeks to win users over and capture a huge share of the financial payments industry by solving the flaws inherent in Bitcoin – the decade-old and ceaselessly volatile cryptocurrency suffers from long waits for transactions to complete, huge energy costs in said transactions, and an erratic and unpredictable price. The sending and receiving of Libra coin is to be near-instant, intended to consume as little energy as standard debit card transactions, and will be tied to several global currencies in order that its price remain stable.

In order to mitigate privacy concerns or uneasiness that signing up to Libra grants Facebook a disconcerting amount of access to peoples’ financial activity, Facebook says it will decentralise all decision-making related to its currency. A diverse group of 28 firms is to form the Libra Association (including Mastercard, Visa, Spotify, and Uber) responsible for monitoring Libra’s blockchain – that is, the database which keeps track of who owns which Libra coin. Facebook claims that relinquishing exclusive control of access to peoples’ financial data to this group of firms ought to soothe privacy-conscious users’ fears. It’s an uphill battle though, particularly given sustained criticism of its handling of users’ data following the Cambridge Analytica scandal last year. This is partly responsible for the decline Facebook is seeing in usership. In Ireland, the last nine months has seen a drop of 300,000 users – mostly young people. “[Facebook] have twice as many over 50s than they do people under 18,” according to Newstalk’s Jess Kelly.

This trend away from the social network does not bode well for ambitious business ventures on Facebook’s part. But it’s the red tape associated with establishing a new currency that presents the biggest obstacle to the firm’s success. An official investigation into Libra has been opened by EU antitrust agents, and a backlash from data-protection officials across the globe fuelled by privacy- and competition-concerns is raging.

The sting of such regulatory opposition is beginning to be felt at Facebook. In a Financial Times report last week entitled Facebook’s Libra backers look to distance themselves from project, FT claimed that three of Libra’s founding backers professed apprehension about the intense scrutiny of regulators, and a desire to cut off ties with the project altogether. Worsening tension between Facebook (who have “become exasperated by the [project’s] members, according to two people close to the project,”) and the Libra Association may herald a delay in Libra’s arrival, particularly if others in the Libra group share their more vocal colleagues’ dismay. If the tension devolves into outright enmity, perhaps Libra will be shelved altogether, with an augmented form of a mobile payments system to be developed in its place.

Whether Facebook surmounts the tide of regulatory hostility or not, its drive to diversify away from advertising revenue into the global payments system is clear. If this ambition is to successfully take shape in the form of Libra in the next nine months, or some other mutation of same further down the line remains to be seen.

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