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Monday, 2 November 2009

How many "partners" do you have?

If there is one modern business term that I despise, it is the use of the word “leadership” when the speaker actually means “management”. I never rate managers by their leadership, but I might judge them according to their followership.

A close second is the patronising term “our people”, which is meant to mean the staff employed by a company. Actually they are not “your” people. They are the people who pro tem you employ, and who when the occasion suits you may well throw out on the scrap heap, but more likely they will simply decide they don’t want to be known as “your people” any more, and leave. They know it and so do you, so stop pretending.

But right up there is the word “partner”, often used by technology companies to exaggerate their relationships with suppliers, customers or shareholders who might flood the company with cash if business takes off but are much more likely to walk away when it burns. Get this straight, a partner is another company that enters into a joint venture with you with a view to sharing the profits with you. It is not a supplier or a customer whose interests are fundamentally different. What you save from your contract costs them money, and vice versa.

So when I read this part of Ryanair’s profit announcement this morning, my toes were curling.

I regret to report that we have made little progress in our discussions with Boeing for an order of 200 aircraft for delivery between 2013 and 2016. We won’t continue these discussions indefinitely and have signalled to Boeing that if they are not completed before the year end, then Ryanair will end its relationship with Boeing and confirm a series of order deferrals and cancellations. We see no point in continuing to grow rapidly in a declining yield environment, where our main aircraft partner is unwilling to play its part in our cost reduction programme by passing on some of the enormous savings which Boeing have enjoyed both from suppliers and more efficient manufacturing in recent years.

We would prefer to grow, but if Boeing doesn’t share our vision, then I believe that Ryanair should change course before the end of this fiscal year and manage the airline over the next three years to maximise cash for distribution to shareholders. If we cannot invest our surplus cash efficiently in new aircraft, then we should distribute it to shareholders.

For all Michael O’Leary’s bluster, I wonder whether Boeing really consider themselves to be his "partner". Indeed we can conly speculate whether they just see this as a preamble to a climbdown. Ryanair already operate 210 leased planes with a further 109 to be delivered before the end of 2012. The orders he referred to were a further 2000 to be delivered between 2013 and 2016. 150% growth over 7 years. That’s 14% annual continuous growth of a fleet that is already bigger than BA, although traffic at many Irish and UK airports has slumped, with Ireland facing a decline of 15% of its air traffic, and the UK set to lose almost 10% of its traffic according to the airline. Very easy then for Boeing not to share the vision of their “partner”. Particularly when “sharing a vision” really means “dropping prices”.

And don’t get me started on domains and spaces. These people know no maths.


The King of Wrong said...

Surely Boeing's reputation would be tarnished by a partnership with Ryan Air?

As you suggest, it's far more likely that Ryan Air will stop growing soon no matter what - yesterday's tax hike, and another in 12 months' time, will hit them hard.

Of course, now that they've shot their bolt with Boeing, if they really do want planes, let's see how good a negotiating position Airbus thinks they've got after a public spat with the only other supplier in the market...

Alex said...

KofW, you are correct. The truth is there is no partnership. Some firms, particularly those that are partnerships (e.g. lawyers, accountants) can be very irked when other firms say they are in partnership with them.

Ryanair's growth plans are to expand into Europe, but that gives them much more complexity and their Irish base/hub will be a problem. Operating between many smaller jurisdictions will give them added complexity.

The truth is that whilst manufacturers like to sell planes they know that there is a global limit to demand. Boeing might love to sell 500 planes to Ryanair, but even if Ryanair could raise the finance to do so Boeing know that there is no point in taking a massive cut for volume production because Ryanair wouldn't be able to use all of the planes and would be forced to sell some at discount prices, killing the market for new Boeing planes, so all in all, Ryanairs scope is limited. Aircraft manufacturers have long and global memories and they have seen this all before, particularly from Irish buyers. Google GPA (Guinness Peat Aviation).

Furthermore Boeing know that Ryanair will always operate at lowest cost with one plane manufacturer, because all their pilots & mechanics are trained and certified for a single model or family, so this is mostly b/s from O'Leary.

The King of Wrong said...

Very interesting - I'd never heard of GPA, but I certainly recognise the names involved.

Good point about the training/certification/logistics, too - if it's anything like defence then the lifetime maintenance costs are something like 150-200% of the purchase price, and there can be no economies of scale if the fleets are distinct.

I suspect the picture for Boeing might be even worse than that - if Ryanair are still talking about leasing, rather than buying, then that would also mean a glut of cheap secondhand planes going to third world markets a few years down the line. In extremis, they wouldn't be able to sell them at all and the Boneyard gets a few more "retirees".

Presumably, Boeing would also be concerned about the stability of their customers - flag-carriers will always be bailed out, but nobody would miss Ryanair, and if they went bankrupt that would flood the market with nearly-new planes at dirt-cheap prices.

So, yeah, if Boeing's answer is anything other than "jog on!", I'd be very surprised!

Alex said...

The manufacturers and the aircraft financing banks and lessors all have their own estimates of future aircraft demand by aircraft type, so there is a consensus view as to how many need to be built. These might be owned or leased, the airlines and the manufacturers are fairly indifferent to this, but the banks and independent leasing companies will have their own views. If Ryanair are acking down from their expansion plans it is probably because some banks and maybe Boeing are telling them their plans don't stack up at present.