Ryanair 2010 Annual Report Download - page 50

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Risks Related to the Airline Industry
Volcanic Ash Emissions Could Affect the Company and Have a Material Adverse Effect on the
Company’s Results of Operations. Between April 17 and April 22, 2010, the majority of the airspace over
northern Europe was closed by authorities as a result of safety concerns presented by emissions of ash from an
Icelandic volcano. This closure forced Ryanair to cancel 7,855 flights. Since then, there have been periodic
closures of parts of the European airspace due to further emissions of ash from the same volcano, which have
resulted in the cancellation of a further 1,635 flights.
Under the terms of Regulation (EC) No. 261/2004, described below, Ryanair has certain duties to
passengers whose flights are cancelled. In particular, Ryanair is required to reimburse passengers who have had
their flights cancelled for certain reasonable, documented expenses – primarily for accommodation and food. As
of the date hereof, the Company is uncertain as to the number of claims it will receive or the amount it will have
to reimburse passengers in respect of these claims, but the Company expects that the amount will be significant.
The Company estimates that the non-recoverable fixed costs associated with the cancellations, the repositioning
costs for aircraft, and other costs associated with cancellations, as well as the aforementioned reimbursement
claims for the initial 6.5 days of closure of European aerospace will amount to approximately 16 million per
day, or approximately 140m for such initial period of closure. Based on the latest information available, the
Company estimates that the cumulative costs in respect of volcanic ash disruptions experienced to date,
excluding taxation credits, will amount to approximately 150 million. The Company has re-accommodated or
refunded fares to approximately 1.5 million passengers due to flight cancellations.
Volcanic emissions may continue for some time and could lead to further flight cancellation costs
which could have a material adverse impact on the Company’s financial condition and results of operations.
Furthermore, volcanic emissions (whether from current or new sources) or similar atmospheric disturbances and
resulting cancellations due to the closure of airports could also have a material adverse affect on the Company’s
financial performance indirectly, as a consequence of changes in the public’s willingness to travel within Europe
due to the risk of flight disruptions.
The Airline Industry Is Particularly Sensitive to Changes in Economic Conditions; A Continued
Recessionary Environment Would Negatively Impact Ryanair’s Result of Operations. Ryanair’s operations and
the airline industry in general are sensitive to changes in economic conditions. Unfavorable economic conditions
such as high unemployment rates, constrained credit markets and increased business operating costs lead to
reduced spending by both leisure and business passengers. Unfavorable economic conditions, such as the
conditions persisting as of the date hereof, also tend to impact Ryanair’s ability to raise fares to counteract
increased fuel and other operating costs. Total demand for European air travel has weakened between the period
of the latter half of 2008 and the first half of 2010, which Ryanair believes can be primarily attributed to the
crisis experienced in the worldwide credit markets, high oil prices and the global recession. A continued
recessionary environment, combined with austerity measures by European governments, will likely negatively
impact Ryanair’s operating results. It could also restrict the Company’s ability to grow passenger volumes,
secure new airports and launch new routes and bases, and could have a material adverse impact on its financial
results. Furthermore, demand for air travel could be impacted by emissions of volcanic ash, as noted above.
The Introduction of Government Taxes on Travel Could Damage Ryanair’s Ability to Grow and Could
Have a Material Adverse Impact on Operations. The U.K. government levies an Air Passenger Duty (APD) of
£11 per passenger. The tax was previously set at £5 per passenger, but it was increased to £10 per passenger in
2007 and £11 in 2009. The increase in this tax is thought to have had a negative impact on Ryanair’s operating
performance, both in terms of average fares paid and growth in passenger volumes. In 2008, the Dutch
government introduced a travel tax ranging from 111 on short-haul flights to 145 on long-haul flights. On March
30, 2009, the Irish government also introduced a 110 Air Travel Tax on all passengers departing from Irish
airports on routes longer than 300 kilometers.
Both the Belgian and Greek governments planned to introduce similar taxes; however, they have now
cancelled plans to introduce these taxes. The Dutch government withdrew its travel tax with effect from July 1,
2009. The introduction of government taxes on travel has had a negative impact on passenger volumes,
particularly given the current period of decreased economic activity. The German government has also
announced that it plans to introduce a passenger tax in 2010 for all departing passengers, however to date, no
details on the amount of this charge have been published. The introduction of further government taxes on travel
across Europe, such as that proposed by the German government in June 2010, could have a material negative
impact on Ryanair’s results of operations as a result of price-sensitive passengers being less likely to travel.