Ryanair has reported an underlying net loss of EUR20m in its third quarter, as strong growth in ancillary revenues and an 8% rise in traffic, was more than offset by lower ticket price and higher fuel, staff and compensation costs.
The shares fell 3.1% following the news.
Ryanair is, per kilometre flown, the most profitable airline in Europe. We think that makes it one of the most attractive companies in the sector.
However, there's plenty of challenges around just now, and investors should remember airlines are pretty exposed to the economic cycle - they can be prone to more ups and downs than most.
Since forming in the mid-80s, Ryanair has employed a pile it high sell it cheap strategy. Enticing ticket prices ensure the group's planes set off with an impressive 96% seats filled. The plane full of punters is then charged for all the little extras from leg room to paninis, meaning around a third of revenue comes after the ticket has been sold.
It's proven a lucrative strategy, and with thousands of flights being added every year, we think the top line can keep growing for years to come.
The cost side of the equation is equally straightforward. While carriers like British Airways owner IAG employ extra staff to deliver a more premium service, Ryanair's no-frills approach keeps expenses down. It also flies from a mix of primary and less expensive secondary airports, and can use its size to negotiate favourable terms with airports.
Ryanair doesn't distribute a share of the profits through dividends, instead it's opted for share buybacks. In 2018 that equated to over 6% of the current market cap.
Of course, there are drawbacks to Ryanair's model. The cost base is more exposed to the fuel price than its upmarket competitors, and the group has had its fair share of run-ins with staff and air traffic controllers. In 2017/18 a very public feud with pilots led to strikes and thousands of cancellations. The company had to fork out on generous pay packages to settle the dispute.
There are other headwinds plaguing the sector too. While air travel is growing, the scramble for a slice of the action has led to an extremely competitive market. That's driving prices down, which is in turn hitting profits.
Ryanair says it will be able to outlast smaller, weaker rivals. Given it's size and strong balance sheet we're inclined to agree. But while it might be one of the last men standing, the shakeout's still not something Ryanair would enjoy.
The shares trade on 3 times book value and 11.6 times expected earnings, slightly below the longer term average on both measures.
Third quarter trading details
Third quarter underlying revenue rose 9% to EUR1.5bn, driven by a 26% rise in ancillary revenue, to EUR557m. Scheduled revenue increased 1% to EUR975m.
Operating expenses (excluding Laudamotion) rose 20%, or 12% on a per seat basis. That was driven by a 32% rise in fuel costs, to EUR571.7m, and higher staff and compensation costs, including the 20% pilot pay increases.
Over the first 9 months as a whole, Ryanair generated EUR556m in operating cash flow, down 45.9% on last year. Combined with a 15.3% increase in capital expenditure, to EUR1.2bn, this helped net debt rise from EUR856.6m last year to EUR1.5bn.
During the quarter, Ryanair acquired the outstanding 25% of Austrian airline Laudamotion. It is set to carry just over 4m customers in its first year, with exceptional start-up losses are EUR10m lower at EUR140m.
Looking ahead, Ryanair still expects to deliver net profits after tax of between EUR1bn and EUR1.1bn, down from EUR1.45bn last year as weak winter fares and fuel price increases continue to offset capacity growth.
The group has also said it doesn't share the recent optimistic outlook of some competitors that Summer 2019 airfares will rise. While contingency plans are being made, the group remains concerns about the risk of a 'no deal' Brexit.
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