High traffic doesn’t equate profitability

A small post to clarify something that a lot of journalists and people don’t really understand. High passenger traffic doesn’t mean profitability. It seems like every time a low cost company announces an increase in its number of passengers, every journalist writes about the low cost model never meeting the crisis.

To take a pertinent example, let’s look at Ryanair.

The Irish budget airline announced, yesterday, a new monthly traffic record, handling 6.7 million passengers in July, up 19% year-on-year.

Yesterday, Ryanair’s shares rose up by 0,5%.

Why are Ryanair’s passenger traffic figures not a good indicator of how Ryanair is doing?

Because Ryanair is “addicted” to growth, and it is the only way for the company to survive. All its contracts, signed with public local authorities, require Ryanair to bring in more and more passengers. If the company couldn’t manage to bring in these passengers, it wouldn’t receive its subsidies. Without its subsidies, Ryanair wouldn’t last six months.

So what’s the plan for Ryanair? As they have to bring in a certain amount of passengers, it is not a rare thing for the company to discount 1M tickets at £1 each.

The indicator you have to look for is profitability. In Ryanair’s case, it is not as good as the passenger traffic would lead you to believe.

For example, “in the first quarter, ended 30-Jun-2009, Ryanair’s yield slumped 13% as the carrier grew traffic by 11%”. Ryanair conceded that traffic growth is strong, but at much weaker yields due to the recession and the impact of tourist tax in Ireland and the UK”.

These are the two things Michael O’Leary doesn’t like to bring to our attention, added to the fact that Ryanair announced that they expect a -20% or more yield decline over the full year. Because profitability is decreasing, and the trend is not favourable, Ryanair’s shares lost 5.5%.

This kind of growth strategy is ultimately dangerous because it creates artificial demand. Like Scott wrote on my blog yesterday, it could push some companies to do anything to load theirs planes. I also remember the story about Flybe paying actors to fill its planes!!