RYANAIR - KING OF THE SKY OR PIE IN THE SKY?
10th March 2021
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CONTINUED FROM THE ARTICLE ON THE FREE WEBSITE AT www.sextonreadsthecharts.com IN THE MARKET TOPICS SECTION
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I examined the aircraft depreciation policy of RyanAir and five other major European airlines. I was expecting that RyanAir would come in at the top, as it usually does where financial metrics are concerned. Instead, it was rock bottom.
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RyanAir has one of the most optimistic depreciation policies of these six airlines. Per the annual report for the year ended 31st March 2020, it's jets are depreciated on a straight line basis over 23 years to an estimated residual value of 15% of the market value. The new Boeing 737 max has a list price of $125 million but new jets are usually sold at half the list price, so make that $62.5 million, converted to euro at an exchange rate of 1.19 equals €52.5 million.
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The annual depreciation charge would then be calculated by RyanAir as follows: €52.5 million less 15% equals €44.6. Divide that by 23 and you get an annual depreciation charge of €1.94 million.
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Of the six airlines I examined, the one with the most conservative depreciation policy is Lufthansa. The very prudent Germans depreciate their jets on a straight line basis over 20 years to a residual value of 5%. That is radically different to what RyanAir isdoing. Lufthansa's annual depreciation charge for the same jet would be: €52.5 million less 5% equals €49.875 million. Divide that by 20 and you get an annual depreciation charge of €2.49 million.
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That is nearly 30% more than the depreciation charge shown in RyanAir's annual accounts! The depreciation charge is overwhelmingly the most significant expense in an airline's accounts.
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When Michael O'Leary retires, and it could be any day now as the man has so much money, the first job of the new man or woman in as CEO might well be - a massive write down of the aircraft fleet arising from a change to a more prudent depreciation policy.
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O'Leary's straight talking, take no prisoners approach, is a joy to behold in a world of meaningless corporate-speak. His achievement in turning a tiny Irish airline into one of the largest and most successful in Europe was remarkable. But this is worrying.
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The depreciation policy will probably be far from his mind when he is watching his horses at Cheltenham next week. I remember his horse 'Balko Des Flow' winning his own race, the RyanAir Chase in 2018. I was wondering what 'Balko Des Flos' meant, so I looked it up just now on google.
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'Flos' is the French for flowers. But 'Balko' did not appear anywhere. I searched on for another few pages, and it finally appeared on something called the 'urban dictionary' which informed me that it was a term in gay pornography for a man with a giant penis!
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There is a message in there somewhere. I think.
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The others, in ascending order, with the best (most conservative) first and the worst (most optimistic/aggressive) last, aircraft depreciation policies are as follows:-
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Air France - KLM
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Straight line over 20 to 25 years depending on the aircraft, to a residual value of 5% (except in specific cases).
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International Airlines Group (IAG)
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Straight line over 23 years, to a residual value of 5%.
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Wizz
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Straight line over 14 years, to a residual value of 50%, for an expected useful life of 28 years.
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That works out at about the same as RyanAir's policy.
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Easyjet
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Straight line basis over 23 years, less estimated residual value "which is reviewed annually against prevailing market rates for similarly aged aircraft".
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There is an absence of transparency for Easyjet compared to the others, so for that reason I've put it down at the bottom of the charts with RyanAir.