Lean, mean flying machine gets S&P praise

Last week, the global financial ratings agency Standard & Poor’s published its first review of low-cost airline Ryanair.

Its contents are revealing on a number of fronts with relevance to Ireland, financial business models, and the ability of Irish corporates to perform at the highest level worldwide.

S&P tends to produce antiseptic reports that are high on clinical observation and low on verbiage. They are more akin to a doctor’s prescription that something penned by a wordsmith.

Analysis of hard facts is centre stage in how S&P judges and ranks any company. That ranking converts to a form of alphabet soup that most readers would consider aloof, arcane, and complex. BBB- and BBB+, for example, get S&P analysts excited, while the rest of us yawn. However, these rankings are vital inputs to the cost of borrowing by individual companies. Put simply, a high S&P ranking lowers the cost of debt, while a low ranking increases it.

The Ryanair review is important in that context. By securing a rating, the airline can enter capital markets and attract institutional investment flows that are huge but confined to instruments rated by the likes of S&P. Typically, a company will issue bonds on foot of an appropriate ratings and the interest cost attached to those bonds is heavily reliant on the rating agency’s score.

S&P has ranked Ryanair as a BBB+. This means S&P values Ryanair above leading global airlines such as Lufthansa (BBB-), British Airways (BB-) and the doyen of the low-cost airline world, Southwest Airlines (BBB-). That’s an impressive standing for an Irish company that has taken its fair share of abuse over recent years.

Equipped with this rating, Ryanair can source ultra low-cost debt to finance its order for 175 Boeing 737s. Those planes are purchased at low prices, due to the volume involved and timing of the deal, and will now be funded with low-cost debt, which means the business is growing with a highly competitive cost base.

Other airlines, even with large aircraft orders, are at a disadvantage because their funding costs are higher due to weaker balance sheets.

One of S&P’s key findings is that Ryanair’s balance is remarkably strong. That, too, is an interesting point because many financial analysts have argued for years it is technically “inefficient”. That is a term used to describe a balance sheet which could absorb higher levels of debt that drives greater returns on equity in a profitable company.

However, such analysis ignores the vagaries of the airline industry, whereby sudden events (terrorism, volcanoes, etc) can eviscerate profits overnight. An airline with an “inefficient”, cash-heavy balance sheet can absorb short-term blows and invest when others are unable to.

Another comment by S&P caught my attention. In the section marked “country risk”, the agency ranks Ireland as “low”. Compare that with the car crash economy we had as recently as 2009, when even the US was close to red-lining Ireland as a danger zone for its banks to operate in.

The path since travelled again makes Ireland a viable and attractive location for world leading companies, and what’s even more satisfying is that companies born and developed by Irish management teams are winning important endorsements such as this one from S&P.

You can expect announcements over the next year from Ryanair as it raises long-term money at interest costs of low single percentages. Those funds will support its planned expansion to over 100m passengers annually. In managing a low-cost airline, it is not just planes, airport costs, and labour that must be hyper-efficient. Securing money at very low interest rates is a key part of the mix too.

* Joe Gill is director of corporate broking with Goodbody Capital Markets. His views are personal.