Last week I said the very best companies can reinvent themselves. That is, when the world around them changes, they can change their business model.

It’s a difficult thing to do. It requires an unusual degree of vision and charisma and ruthlessness from the people in charge. 

Those in charge have to see how the world is changing. They have to inspire staff to follow them. They have to fire or demote people. And they have to do all this without much pressure from outside, at a time when things seem to be fine.

Ryanair did its biggest-ever deal this month, for 300 Boeing 737 Max . The list price of the planes is $133 million each, or $40 billion in total. Though Ryanair won’t have paid anywhere near the list price, it’s one of the biggest deals of the year. 

It’s a deal that could set Ryanair up for the next ten years. But it’s not an example of a company pivoting and changing with the times. Ryanair has excelled not by changing with the times, but by having one excellent idea and sticking to it religiously.

It’s hard to pick the single year Ryanair set on its current path, so I’ll go with 1992. 1992 was the year Michael O’Leary flew to Texas to meet Herb Kelleher, the founder and CEO of Southwest Airlines. Southwest was the original low-cost airline. From his meeting with Kelleher, O’Leary came away with a template for how to disrupt the airline industry. 

In 1992 the airline industry had only recently been deregulated. Going back to the 1940s, airfares were regulated. Airlines competed not on cost, but on quality. The regulation was repealed by the Carter administration, but the high-cost culture remained. 

Kelleher’s insight was that an airline with a blank slate and a low-cost culture would be at a structural advantage over high-cost legacy airlines. And he told O’Leary all about it. Apart from a general obsession with cost-cutting, some important ingredients were keeping planes as full as possible and using only one type of aircraft to keep maintenance costs low.

Keeping planes as full as possible sounds like a no-brainer since it costs the same to fly a plane whether it’s full or empty. But to fill planes, the airline must sell the early tickets cheaply. Legacy airlines made a big margin on business class travellers, so they can’t discount aggressively without cannibalising those sales. So their planes fly with a lot of empty seats. 

The other key point was to pick one aircraft manufacturer — ideally one aircraft — out of Airbus and Boeing, and stick with it. The idea is that maintaining planes is expensive. The less variation the better. Ryanair decided to throw in its lot with the Boeing 737. 

The good thing about picking one aircraft is that maintenance is cheap. The bad thing about it is that Boeing has Ryanair over a barrel. It knows how much it would cost Ryanair to switch to Airbus. So it can negotiate hard.

This decision has implications for Ryanair’s capital structure. Ryanair knows capex on aircraft is one of its biggest outgoings. It knows it has limited leverage over Boeing. It knows the only way it can get a deal on new aircraft is to buy at the bottom of the market. But it can’t know when the bottom of the market will come. So it needs to keep a strong balance sheet at all times, so it’s ready to do a deal when the opportunity arises. 

Ryanair’s previous opportunistic deal was directly after 9/11. The discounts it secured from Boeing in that deal set Ryanair up for the following decades of growth. 

These new 737 Max will do two things for Ryanair. They will dramatically increase the size of its fleet. And they will dramatically reduce the fuel cost per passenger.

Ryanair currently has 537 aircraft. If it takes all 300 737 Max (it has negotiated for 150, with an option on a further 150), that number is expected to grow to 800 aircraft by 2034.

Each 737 Max carries 21 per cent more passengers than the current generation of 737, and they use 20 per cent less fuel. That shakes out as 33 per cent less fuel per passenger.

This year, with its 537 aircraft, Ryanair is forecast to spend €3.86 billion on fuel. If Michael O’Leary could snap his fingers and replace 300 of his current 737s with 737 Max, the saving would come to €1.4 billion per year. That’s compared to Davy’s 2023 forecast net income of €1.34 billion.

To be sure, this is not the way the Ryanair CFO Tracey McCann, is thinking about it. These aircraft will take almost a decade to arrive. And they will have to be paid for: the plan is to fund them mainly from internal cash flows. 

Three ways Covid helped Ryanair

Ryanair is one of the few airlines to have benefited from covid. Its earnings took a short-term hit, yes. But Ryanair often doesn’t prioritise short-term earnings. It’s in the business of killing competitors. The value for Ryanair shareholders lies in the future when its one of the few airlines still standing in a consolidated European aviation industry. One that looks more like the US aviation industry. That’s when it’ll combine its low costs with increased pricing power. And much of the surplus which has, up to now, been enjoyed by passengers will go to shareholders.

Covid helped Ryanair kill off its competitors — like Alitalia and Norwegian Air Shuttle — quicker. The result has been huge growth in market share. Since the end of 2019, Ryanair has grown market share by 14 per cent in Italy, 13 per cent in Hungary, 11 per cent in Austria, 11 per cent in Poland, 9 per cent in Ireland, 3 per cent in the UK and 2 per cent in Spain.

Covid gave Ryanair a chance to buy aircraft more cheaply. By wounding competitors, it strengthened Ryanair’s hand against Boeing. Though it might have gotten a better deal had it bought the planes in 2021, when it walked away from negotiations.

The third way Covid has helped Ryanair is that rise in inflation after covid has driven up competitors’ costs more than Ryanair’s. The following chart shows Ryanair’s cost per passenger relative to peers. Note the difference between Ryanair and the OG low-cost airline, South Western.

The plan is for this Boeing deal to widen the gap even further.