Southwest, Ryanair Set to Rule the Skies

In the past week, Southwest and Ryanair both released their financial results for the second quarter of 2008. To no one’s surprise, both discount carriers reported profits, even as the great majority of their competitors are drowning in red ink and scrambling to avert bankruptcy.

Their robust bottom lines are good for stockholders, to be sure. But that’s not all. As profitable airlines in an environment where other carriers are furiously shrinking to survive, Southwest and Ryanair are ideally situated to grow and consolidate their positions in the industry, capitalizing on their competitors’ weakness.

Here’s how Ryanair’s CEO Michael O’Leary assesses his airline’s situation:

The capacity reductions which will ensue from this winter’s wave of airline bankruptcies and consolidations will create more opportunities for Ryanair to grow. When oil prices fall significantly (as we believe they will over the medium term) then our earnings should rebound strongly. We have one of the strongest Balance Sheets in the industry and the business continues to be strongly cash generative with over 2.2 billion Euros in cash. With the lowest fares and lowest cost base in the industry Ryanair is the best positioned airline In Europe to take advantage of the opportunities that these very difficult trading conditions will create.

According to its just-released second quarter report, Ryanair carried 19 percent more passengers during this year’s April – June period than it did during the same time frame in 2007. And despite planned cutbacks at Dublin and Stansted airports, the airline expects growth overall for the year.

Southwest is already the largest U.S. airline, as measured by domestic flight departures (more than 3,400 per day) and the number of passengers flown (101.9 million in 2007). In relative terms, it is poised to get larger still.

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In its latest earnings report, Southwest suggested that it may not grow at all during 2009, concentrating instead on optimizing yield from its current operations. But with mainline carriers planning capacity cuts of as much as 20 percent, Southwest will be gaining market share simply by not shrinking.

So far, Southwest and Ryanair have largely confined themselves to short-haul flights. But consider the potential for expansion if they were to look further afield. It’s not hard to imagine Southwest launching its own flights to Europe or Latin America, or Ryanair flying to North America or Asia.

Then, take the hypothetical one step further. Imagine that current ownership restrictions are lifted, permitting non-U.S. companies full ownership of U.S. airlines. Ryanair buys Southwest, or vice versa, creating the world’s largest airline—a global discounter capable of going head-to-head with the most established carriers.

Even if there’s no worldwide mega-carrier in our future, Southwest and Ryanair have both the opportunity and the will to play an ever-growing role in commercial aviation.

Whatever happens, the outlook for air travel is more of what’s on offer from Southwest and Ryanair, whether we like it or not.