It was cheeky of Ryanair chief executive Michael O’Leary to declare that full-year profits of €1.02bn (£0.9bn), down 29%, were “as previously guided”. He updates his guidance every few months so that, by the time of the big reveal, it’s hard to miss. The past year still included two profits warnings, let’s not forget.
Wind back the clock 12 months to get a sense of how much altitude Ryanair has lost. A year ago, O’Leary predicted €1.25bn to €1.35bn for the financial period that ended this March, calling his estimate “on the pessimistic side of cautious”. It turned out he was being heroically optimistic, which is why Ryanair’s share price has since fallen by a third.
Competitors’ share prices have fallen similarly and a few smaller rivals have gone to the wall, it should be said. Lower average fares – Ryanair’s were down by 6% to €37 – are affecting everyone. It is also true, as O’Leary never fails to mention, that Ryanair’s balance sheet is one of the strongest in the business. This year, the company can afford a €700m share buy-back.
Yet it is also hard to shake the sense that, in past years, Ryanair would have been setting the financial pace, rather than declining in line with the pack. Have the effects of strikes and cancelled flights in 2017 lingered? Is O’Leary struggling to adapt to a unionised workforce, one of the by-products of that saga? Whatever the explanation, last year’s 13% profit margin was pedestrian by Ryanair’s standards.
It also revealed how heavily the airline depends on “ancillary” revenues. This contribution covers everything from priority boarding to car hire deals to overpriced in-flight Kit Kats and has grown to become a third of the total. Such extra spending per passenger rose 11% to €17 last year and any interruption in that upwards trend would become a serious headache. In the meantime, the late delivery of Boeing’s 737 Max aircraft (assuming the grounded planes actually arrive) will delay fuel efficiency savings until 2021.
This time O’Leary opted for a very wide range in his latest profits outlook – anything from €750m to €950m. Ryanair’s financial performance is becoming increasingly hard to predict.
Labour must stop sticking to Rock
The Labour party front bench will not like Clifford Chance’s thoughts on the law around nationalisation, but the MPs would be well-advised to read the legal firm’s analysis – especially the passage about what happened with Northern Rock.
The nationalisation of the Newcastle-based bank in 2008 tends to be cited by Labour as evidence for how compensation for shareholders can be “decided by parliament”, a line repeated in last week’s Bringing Energy Home policy document that described how gas and electricity networks would be brought into public ownership.
Clifford Chance makes two points. One is obvious: Northern Rock was insolvent, so it’s an odd example to cite in the context of profitable energy companies. But the purer legal point is more important. The emergency legislation that allowed Northern Rock to be nationalised required shareholders to be paid compensation at market value. That value was nil, as judged by the independent assessor and as confirmed by the courts, but the legislation still referenced the market.
There are many ways to measure market value, of course. The process is more complicated than just looking at share prices, especially when, as with the energy sector, most companies live away from the stock market or are divisions of National Grid, which also has a substantial US operation. But Clifford Chance looked at all postwar nationalisations in the UK, starting with the Bank of England in 1946, and concluded there was some form of market-based compensation in all cases.
An incoming Labour administration can to try to ignore that history but it will invite legal challenges. Simply chanting “Northern Rock” probably won’t be enough.
Will regulators take action on Metro Bank?
Fund managers at Legal & General and Royal London have called for reform in Metro Bank’s boardroom, but the founder and non-independent chairman, Vernon Hill, will probably secure another thumping majority for his re-election at Tuesday’s annual meeting. Even after a collapse in the share price and last week’s highly dilutive £375m fund-raising, the bank’s core of US investors is assumed to be loyal.
If boardroom change is to be forced on Metro, then, it’s down to the regulators. They move slowly but it is hard to believe the Bank of England will be relaxed about Metro’s allocation of £900m of loans into the wrong risk bracket, which is how the tale started in January. Basic accounting mistakes reflect badly on the whole system. In the end, regulators tend to insist on a scalp.
