After 32 years in operation, Ryanair and its CEO Michael O’Leary have bowed to pilot pressure in recognising unions for the first time in the company’s history. The decision came after relentless pressure from pilots and the threat of strikes before Christmas across its European network. O’Leary’s refusal to recognise trade unions was at the heart of the low-cost airline business model he developed, transforming a small Irish regional airline into Europe’s largest carrier by passenger numbers. “Recognising unions will be a significant change for Ryanair, but we have delivered radical change before,” O’Leary said in a statement. “We hope and expect that these structures can and will be agreed with our pilots early in the new year.”
Market estimates vary but the additional pay costs should be managed from the company’s significant operating cash flow. Estimates of €2.3bn in the market should absorb the extra staffing costs and sustain the company’s capital expenditure programme over the coming years. Despite the increases the company’s cost base will remain below the industry average and its closest rival easyJet. Nonetheless the company’s share price has suffered as a consequence, the stock fell more than 16% in the month of December alone which wiped over €3 billion off the market value of the company.
Has the share price decline been overdone, I hear one ask? Given this monumental shift from management the market remains wary of its future strategy, particularly when it comes to Mr. O’Leary’s position at the top. He has been instrumental in the company’s meteoric growth and were he to step aside with no natural successor in place I have no doubt we could see further weakness in the stock. That said, the company is in great shape and the balance sheet remains strong. Their end markets likewise are strong with an improving macro environment across Europe. On a 12.7x PE valuation, in line with its LCC peers like easyJet, perhaps the stock should be trading back up at a premium given its superior growth and returns. Clarity on O’Leary’s position is key in the short term as the trading numbers and passenger stats should be positive.
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