Many years ago, back in the mists of time, The Armchair Trader remembers the launch of Ryanair as a young and pushy discount challenge on European routes in and out of Ireland. It was a cause for concern among the more established airlines – notably British Airways – as they never liked smaller players coming into the space and messing with their carefully calibrated pricing strategies.
These days Ryanair seems like it is one of the older kids and is in a tussle to maintain its primacy in the discount airline space. With the announcement that British Airways is buying Air Europa, once again speculation is entering the market as to what is going to happen to some of the larger and more expensive players out there.
Ryanair shares have other headwinds to worry about
There are other headwinds to for Ryanair to worry about, like Brexit it, but the airline’s latest numbers show that it is getting better at selling extras like speedy boarding with ancillary revenue up 28%. First half revenue grew 11% to EUR 1.15 billion but fares were down 5% due to weak consumer demand in the UK – yes, Brexit – and overcapacity in Germany and Austria. Other issues include lower fares, higher fuel bills and rising staff costs.
Let’s take the fuel bill, which rose 22% to EUR 1.59 billion. This was on 11% traffic growth. This is decidedly expensive for the airline that prided itself on being the bucket shop to end all bucket shops. Ex-fuel unit costs are also up, largely because of higher staff costs, increased pilot pay and higher than expected crew ratios. Ryanair must be looking at how it can make savings and that means more stories about poor customer treatment and likely more disputes with its personnel, which always grab headlines and always drive prices lower.
“Rapidly rising fuel and staff costs, overcapacity issues and Brexit-related uncertainty are all combining to make life very difficult for travel operators,” explains Adam Vettese, analyst at eToro. “[Ryanair] has been particularly affected by the grounding of the troubled Boeing 737 MAX-200 on safety issues.”
Investors should tread carefully before picking up Ryanair shares as the outlook remains cautious on this one, despite the pick up in the share price in the last few days. Full year traffic is expected to grow 8% to 153 million with the management claiming a slightly better fare environment than last winter. We’re not sure where they are getting that from, but let’s see. They are also claiming ancillary revenues will grow ahead of traffic growth, supporting full year revenue per ‘guest’ growth of 2-3%. The full year fuel bill is expected to rise by EUR 450 million.
Issues with Ryanair expansion plans
There are also issues with expansion plans. Ryanair admitted it would not be receiving delivery of the Boeing 737 MAX aircraft it was expecting until March or April of next year – the airline will get half the MAX plans they thought they would get which means projected traffic growth numbers for next summer will need to be slashed. All this amidst projected further trouble with the other kids on the block in short haul, discount travel.
Investors seem to still be bullish on the prospects for Ryan Air, with the share price picking up dramatically on Friday from EUR 12.26 to to trade closer to the EUR 13.20-13.60 range. This is a dramatic jump from the EUR 8.50 you could have bought Ryan Air shares for in the depths of the summer when all the bad news about pilot strikes had driven the stock into the basement. It could go further as Ryanair hit a five year high of more than EUR 18 in the summer of 2017.
Our prognosis is this: we remain very cautious on the European short haul sector. There may be idle speculation that another big player will be looking to snap up Ryanair, just like British Airways bought Air Europa. Fundamentally, there does not look like there is much to drive this excitement so it could be that the cheap price of the stock has attracted some substantial buying on a strategic level. But if you weren’t in Ryanair shares at EUR 8-10, you are unlikely to see an awful lot of upside now.