Ryanair bounces back as first quarter profit doubles after rivals falter

Ryanair’s ascent from the profit and reputational depths to which it plumbed last year was confirmed this morning (28th July) after it reported first-quarter net profit more than doubled to €197mn from €157mn in Q1 last year.

Europe’s largest budget airline by market capitalisation also upgraded its profit forecast for the full year to March 2015 to be between €620mn to €650mn, compared with between €580mn and €620mn as expected previously. Ryanair said it saw a 5% jump to 86mn in total passengers carried during the whole financial year.

Revenues were 11% higher to a little under €1.5bn even though passenger numbers only rose 4% on the year to the first quarter. The airline said revenues were buoyed by a 9% rise in average fare.  An additional boost on the results overall came from Easter falling later than usual, Ryanair said.

Ryanair’s ‘hug a passenger’ campaign puts it ahead of troubled sector

Ryanair’s turnaround in fortunes comes a year after it launched a campaign to woo back disgruntled air travellers, dubbed by the media as a ‘hug-a-passenger’ drive.  It involved removing many of the airline’s unpopular terms and conditions related to baggage weight, amongst other restrictions, the breach of which would lead to punitive fees.  Whilst clearly targeted at improving Ryanair’s PR image with passengers, the changes came swiftly after the airline was forced to make two profit warnings within a couple of months in the second half of last year.

Today’s profits bounce places the Dublin-based carrier out in front against rivals like easyJet, Air France-KLM and Lufthansa which have recently made profit warnings. In a further sign of strength compared to the wider airline sector, Ryanair said on Monday that it would pay a special dividend of €520mn in total in its fiscal fourth quarter, in line with its commitment to return €1bn to shareholders. The dividend comes on top of its recently-completed €482mn share buyback programme.

Elsewhere in the P&L table, non-fuel costs for the full year are set to rise 4%, one percentage point better than initially forecast, Ryanair said.

Ryanair stock remained aloft throughout Monday’s trading session, reaching around 4% higher at its best before closing 2.7% higher to €7.09.

So long ‘no frills’?

On the face of it, investors might well be tempted to take a second look at the airline as it effectively moves to loosen its uncompromising, but ultimately unpopular ‘no-frills’ policy by, for instance, attempting to lure more business travellers who are willing to pay more. The airline will now accept credit card payments from American Express. The new focus on business customers was likely to result in an 8% increase in winter capacity, Ryanair said.

It appears the Irish airline has decided not to follow competitors any further in a race to bottom, leaving rivals like easyJet with potentially cheaper offerings but also, more stressed margins. On the other hand, this ‘soft-switch’ in focus by Ryanair may not save it from an overarching increase in competition in the sector overall, with many low-cost carriers, most notably Norwegian Air Shuttle, planning to increase capacity.

Ryanair itself said it would “aggressively raise capacity” by 8% in its winter schedule, which begins in October, when the first of the 180 new Boeing 737s it has ordered will arrive.

Ryanair not immune to new sector uncertainties

Adding to the quite new uncertainties Ryanair faces, despite its plans to dramatically increase capacity, Ryanair’s CEO Michael O’Leary cautioned that he had “zero visibility” on how yields will develop during the second half of this year. The second half was likely to “to be characterised by a much softer pricing environment as many competitors are lowering fares, partly in response to Ryanair’s strong forward bookings,” O’Leary added.

There is something of a gamble in Ryanair’s strategy of increasing capacity at the same time as it continues to raise average fares, in the face of new low-cost competition and in the hope that economic conditions in its main European markets have already seen their worst conditions after a recent slowdown in Europe.

Other headwinds faced are at least better defined: Ryanair was last week ordered by the European Commission to repay almost €10mn provided by France in a deal in return for which Ryanair was tasked to help improve services in three regional airports. The EC has now said the aid was illegal, despite new more flexible European rules adopted in February 2014.

Ryanair said it would appeal the decisions, adding that in its view the commission had “mistakenly suggested that the airports’ agreements with Ryanair did not fully comply with the EU State aid rules.”

In any case, the payments would only amount to a moderate and clearly quantifiable, if not negligible impact on revenues, for investors to factor in, if the airline loses its appeal.

Debt rises as stock price drifts from highs

Also, worth noting, Ryanair today announced it intended to raise an unspecified amount of debt within the next 12-18 months. Without much to go on as regards the direct use (if there will be one) of the fresh cash the airline will bring, it’s interesting in the context of the commitment to return €1bn. Taking on debt can actually magnify the returns for shareholders and improve stock performance, reducing overall cost of capital. Debt offerings often go hand in hand with share buybacks, although of course there can be no certainty that Ryanair will extend its current buyback beyond the extent already announced.

Investors may also speculate that the raised cash might be used for acquisitions, which are another risk in the medium term for Ryanair, despite CEO O’Leary saying on Monday the airline was not particularly interested in acquiring troubled Cypriot carrier Cyprus Airways, which he said had huge legacy issues. He is downplaying Ryanair’s interest although the Irish airline was among nearly 20 companies, which last week submitted a non-binding expression of interest in Cyprus Airways, now controlled by the Cypriot government. The process is a preliminary step towards any eventual binding offer by any bidder.

Ryanair may not offer traders much to go for in the short term as it continues to scrape five-year highs. The London listing of the stock (which is denominated in euros) reached €7.70 in April of this year and is 9% off that with today’s close at €7.09.