Ryanair shares slide after latest forecast stunt falls flat

Ryanair continued its run of headline grabbing forecast upgrades this morning, its third in three months, but the stunt hasn’t had the desired effect this time, with the shares opening with a loss.

Europe’s largest airline by passenger numbers said it expects to make a profit of between €840m and €850m for the year ending in March, up from a previous forecast of €810m to €830m.

Ryanair originally expected annual profit of as much as €650m, but following unexpectedly strong half-year results in November, fuelled by big improvements in customer service, the carrier was able to edge fare prices higher, and passenger numbers rose.

“Cautionary Outlook”, but is it really all down to hedging?

However it looks like Ryanair’s strong recent news flow is not offsetting one piece of negative news placed at the end of its third-quarter statement.

Under the sub-heading “Cautionary Outlook”, the airline said it “would counsel shareholders and analysts to temper expectations for FY16. While we are still finalising our budget, we believe that any growth in profits will be modest as our fuel is hedged at $92 per barrel whereas some competitors (whose weak balance sheets rendered them unable to hedge forward) will be significant beneficiaries of lower oil prices and this may lead to downward pressure on airfares in 2015/16.”

Whilst unable to resist a dig against ‘weaker competitors’, the fact remains that the airline admitted it has been wrong-footed by the nosedive of crude oil prices since last summer—indeed something which some of the ‘weaker’ rivals it refers to have managed to take advantage of whilst it has not

Obviously, Ryanair is in good company in having a hedge backfire due to the unforeseen oil price fall.

It said on Monday it hedged 35% of full-year 2017 fuel needs at a much lower $68 per barrel

However, the market might well be making its displeasure at Ryanair’s gamble on 2015/16 having gone wrong.

Perhaps more pertinently, I may not be alone in wondering if Ryanair’s sums add up, in predicating expected softer profit on a missed opportunity in low fuel prices, due to hedging higher.

Whilst Ryanair is as opaque as most airlines about its fuel costs and hedging, its earnings (and I suggest in turn its share price) showed little appreciable correlation to the price of Brent crude oil before January 2012, when the stock began to rise above its 10-year range, on a value basis, whilst Brent was still trading between $100-$125bbl.

It’s just as likely that the cost, passenger-yield and margin mix will reach a crunch point at the time at which Ryanair expects profit to soften, on a relative basis.

Traffic estimates up, fares down 

That view is underscored by the fact the airline said it expects traffic to grow by 25% in the three months to the end of March, up from a prior estimate of 20%, although fares would fall by 6-8%.

Unit costs for the full year are likely to fall by 5% due to lower oil prices.

Passengers will experience the benefit of much, but not all of its anticipated 8% fall in fuel cost per passenger.

This suggests no let up and perhaps incremental intensification of a price war between all European airlines, and it might be the real reason why Ryanair shares are losing more than 4.2% as this assessment goes online.

Ryanair passenger yields remain unbeaten

With all that said, current slackening off in the shares certainly needs to be seen in the context of nearby all-time highs, including a near-60% gain in the last 52 weeks.

I would expect the shares to bounce from current levels fairly soon, especially in view of a new share buyback programme that was also announced this morning.

Ryanair said it would purchase as much as €400m worth of shares between 12th February and 14th August, although of course that’s just a fraction of the airlines circa €14.5bn market cap.

Aside from that, Ryanair’s near-best in class operating metrics will continue to stand it in good stead in this year during which margins are likely to be crunched further.

Ryanair’s load factor was at 91%, in September 2014, against easyJet on 89.7% (December 2014) and International Consolidated Airline’s 78.9% (June 2014).

Traders playing the turbulence

For the moment though, traders of City Index’s Daily Funded Trade in Ryanair’s London Stock Exchange listing, on a half-hourly basis, appear content to keep up a pattern that was established last week—selling the title down to a clear support line around 1025, whenever it re-approaches the equivalent of all-time highs in the stock.

Our attached MACD Fast Line/Zero Cross System had already flashed another sell signal late last week, and momentum pushed the trade out of the band I identified above down to levels at which support and resistance was frequently seen last month.

The stock’s daily chart, in which buying momentum, defined by MACD and percentage oscillator, appears to be slipping below the balance into a more selling-weighted tone, suggests traders will be able to exploit further bouts of stock weakness, whenever it gets too close to all-time highs, at least for the near term.

This image shows the balance of sentiment on Ryanair Daily Funded Trade (LSE) in City Index’s Connect app.

This snapshot was taken at 1020 AM on Monday 2nd February.