Could Ryanair be snatching defeat from the jaws of victory? Earnings at Europe’s largest airline rose 12% in the last three months of last year to €106m, €5m above forecasts, despite disruptions like mass cancellations and the potential impact on bookings of a dispute with pilot. That keeps the group on track to meet full-year profit guidance of €1.4bn-€1.45bn. Ryanair also announced a £750m stock buyback. True, Ryanair has not stood down sober warnings about Europe’s saturated airline ticket market. But the group has been sounding the alarm on ticket-price risk for the industry for at least six months now, leaving investors long enough to price it in. Furthermore revenues from optional extras rose 12% in its third quarter to £440m, comprising 45% of total revenues. That was already well ahead of a target to secure 30% of revenues from ‘ancillary services’ like pre-booked flights and extra bags by 2020.
Despite positives, shares fell as much as 3% on Monday. We think CEO Dermot O’Leary’s signal that peace has yet to break out between Ryanair and pilot unions didn’t help. Whilst widespread Christmas strikes were averted after the airline recognized unions for the first time in its 32-year history, on Monday Leary dubbed conditions demanded by pilots as “laughable”. The dispute is very much alive; hence the spectre of strikes remains, making investors uncomfortable. On the other hand, accord could still threaten the airline’s fabled stripped-to-the-bone cost structure. Worst-case scenarios for potential pilot wage rises are for a rise of 20%. That implies an €100m bottom-line hit in FY 2019. That, will come whilst fuel costs may also be trending higher after crude oil rose to $70 a barrel recently. Slowing passenger growth is another worry. Ryanair carried 6% more passengers in the quarter compared to a 16% rise in the same quarter of the year before.
It’s worth remembering though that Ryanair’s fuel costs are 70% hedged at the equivalent of crude at $55/bbl. Most of the final quarter of Ryanair’s current year is hedged at $49/bbl. As for fares, Ryanair’s are already the lowest compared to the two key rivals mentioned above, allowing it to stay competitive even as costs rise. A new cost basis for Ryanair also sets a new basis for its shares. They rose just 4% in 2017. The buyback will improve 2018’s performance. But with profit for the airline’s 2018 financial year on track and forward costs better defined, questions of cost now revert outside of the low-cost air space. For instance, to Lufthansa, shares of which rose 150% last year.
From a technical chart basis, having spent most of the last six months grinding lower, shares kicked higher in December at €14.22 validating their pretty clean rising trend since October 2014 and potentially reestablishing support at €15.51 which gave way in December. The weight of sentiment under the stock’s 200-day moving average has capped the bounce. Note the reversal off that threshold at the end of January. The balance of probabilities points to another test below €15.51, though the rising trend has better support.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.