Ryanair’s O’Leary ‘loses battle but wins war’ in mega Boeing deal

Anyone that has booked a summer flight recently will know that the bargain prices on offer just a year ago – when airlines were trying to get bums back on seats after the pandemic, even as they grappled with rising fuel and other costs – are few and far between.

They may find consolation – short-sighted, of course – to learn that even European airline industry’s most hard-nosed figure, Ryanair chief executive Michael O’Leary, is not getting the type of deals he once did.

Ryanair announced on Tuesday that it has signed up to buy as many as 300 Boeing 373 Max 10 aircraft – at a total value of more than $40 billion (€36.6 billion), based at the jets’ listed price. That’ about $133 million each.

Big orders like that always come at a steep discount. Few have been as successful as O’Leary getting the best price – having famously used industry crises in the past, such as the fallout from the 9/11 attacks and the height of Covid travel 2020, to strike large purchases.

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Analysts estimate that O’Leary has landed his latest agreement at between $38 million (AllianceBernstein) and $57 million (Morgan Stanley) per plane. That represents a discount of between 57 per cent and 71 per cent on the list price.

But number crunchers reckon that markdown is not as steep as what O’Leary would have achieved when he walked away from talks on a mega 737 Max 10 order in September 2021, decrying “egregious pricing by Boeing”, when pessimism prevailed across the industry.

If Ryanair’s share price were to exceed €21 for a period of 28 days before the end of his current contract to 2028, it’d trigger an option for the CEO to buy 10 million shares at almost half that price – delivering a gain of about €100 million

“Whenever an airline places an aircraft order, the actual purchase price is not disclosed. Airlines claim they obtained very major discounts relative to the published list prices, whilst aerospace manufacturers will conversely argue that the new contract is advantageous for them,” said Barclays analyst Andrew Lobbenberg in a report this week.

“Looking from the outside, the best way to judge how beneficial an order is for either party comes from judging how the balance of power sits between airlines and aircraft [makers].”

[ Ryanair orders 300 new Boeing 737 Max 10 jets worth more than €36bn ]

With air travel having rebounded strongly following the pandemic and aircraft backlogs are at record levels (the earliest Ryanair can get hold of new planes is 2027), it means that Boeing had a rare upper hand as negotiations restarted earlier this year with Europe’s largest carrier. Boeing plans to start delivering to customers in 2024, following expected certification of the planes from US authorities later this year.

Still, Ryanair’s share price rise of as much as 7 per cent this week to as high as €15.89 suggests the market is relieved a deal has been done.

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“Ryanair has lost the battle to pay less per plane in each subsequent order, but won the war: the MAX-10 offers a considerable unit cost advantage thanks to lower fuel burn and a higher seat count,” said Alliance Bernstein analyst Alex Irving.

The jet’s 228 seats are a fifth more than the 189 seats fitted in the Boeing 737 Next Gens, which still make up most of Ryanair’s aircraft. Ryanair expects that half the new deliveries will replace 737 Next Gen aircraft, cutting its fleet’s average age and fuel consumption.

Had Ryanair not put in an order for new planes now it would have faced the risk of having to shrink from 2025, when its last Max-8200 planes are scheduled to be delivered and Ryanair will be continuing to retire its legacy 737-800 aircraft.

[ EU court backs Ryanair’s challenge against Lufthansa state bailout ]

“Given recent investor questions on the sustainability of Ryanair’s growth beyond deliveries of the current order, we see [Tuesday’s] announcement as an incremental positive for the stock,” said Goldman Sach’s Patrick Creuset.

Assuming it takes all 300 Max-10 models – and adding in deliveries from an existing order for Max-8200s – Ryanair will grow its fleet from 540 aircraft now to 800 by the end of 2033.

The carrier expects to grow passenger numbers from 168 million in its latest financial year, which ended in March, to 300 million in 2033, which, it estimates, will equate to almost a third of all European short-haul traffic.

However, the rate of growth will inexorably slow over the period, due to the sheer scale of the group’s market share.

Even factoring in Ryanair having to fork out between €2 billion and €2.5 billion a year for plane purchases and maintenance during the most intense phase of deliveries over the next decade, Alliance Bernstein’s Irving estimates the group will still be throwing off net cash of about €2 billion a year.

Even though there is room for growth in central and eastern Europe, Ryanair is now on the cusp of ‘morphing from a growth engine into a steadfast cash return stock’

He’s pencilled in that the company will be dishing out €1.7 billion by way of dividends and share buy-backs to investors two years from now – rising to €2 billion by 2028.

“The prospects for Ryanair are changing dramatically. Its core markets in western Europe – still 85 per cent of its seat capacity – are essentially fully penetrated,” Irving said.

Even though there is room for growth in central and eastern Europe, Ryanair is now on the cusp of “morphing from a growth engine into a steadfast cash return stock”.

[ Ryanair flies 16m passengers in April in spite of French air traffic control strikes ]

Ryanair returned more than €6.8 billion to investors through share buy-backs, a special distribution and special dividends between 2008 and 2020, but payouts have been on hold since then as the carrier grappled with the pandemic and, more recently, focused on paying down debt. It has never paid a regular dividend.

A number of investment banks have increased their 12-month share price targets for Ryanair in recent days on the back of the Boeing deal, with consensus now at slightly over €21.

For O’Leary, that’s a key landing zone. If Ryanair’s share price were to exceed €21 for a period of 28 days before the end of his current contract to 2028, it’d trigger an option for the CEO to buy 10 million shares at almost half that price – delivering a gain of about €100 million.