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Ryanair - profits fall as conditions remain tough

George Salmon | 20 May 2019 | A A A
Ryanair - profits fall as conditions remain tough

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Ryanair Holdings Ordinary Shares EUR0.006

Sell: 16.98 | Buy: 17.02 | Change 0.65 (3.94%)
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Ryanair's underlying post-tax profit has fallen 29% to EUR1bn, on account of lower fares, and higher fuel and staff costs. Reported profits, which include EUR139.5m of losses from recently acquired Lauda operations, were down 39% to EUR885m.

And looking ahead, the group remains cautious on pricing and expects costs to keep rising in 2020.

The shares fell 5.7% on the news.

The group also announced a new EUR700m share buyback, to be completed in the next 9-12 months.

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Our view

Ryanair is a strong player, but is unfortunately stuck in a tough industry. Economic conditions and fuel prices can be your friend one minute, but bring headaches the next. At the moment, fuel costs are impacting the cost base, and Ryanair's cutting prices to cope with intense competition.

However, Ryanair has a couple of trump cards.

It owns the majority of its planes outright and has relatively little debt meaning the balance sheet looks strong in our opinion. But perhaps its biggest strength is the cost base. Ryanair has the lowest per seat cost base in Europe, and the gap to competitors continues to widen.

Since forming in the mid-80s it's kept cost in check by offering a no-frills service. It also flies from a mix of primary and less expensive secondary airports, using its size to negotiate favourable terms.

The current challenges have brought about the demise of several smaller competitors, but we think Ryanair's cost leadership should help it remain robustly profitable. It could even emerge in a stronger competitive position.

Running a tight ship means the group can offer enticing ticket prices. And with price the sole driver for many holiday-makers, the group's planes set off an impressive 96% full. Each 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.

Of course, there are drawbacks to Ryanair's model. The cost base is more exposed to fuel prices than its upmarket competitors, and the group has had its fair share of run-ins with staff and air traffic controllers. A very public feud with pilots led to strikes and thousands of cancellations and Ryanair had to up its pay packages to settle the dispute.

While we think Ryanair should be able to outlast smaller rivals, competition remains intense and the race to the bottom on prices is painful. This, and the fact Brexit uncertainties linger, means the shares trade on 2.8 times book value and 11.4 times expected earnings, below the longer term average on both measures.

Ryanair doesn't distribute a share of the profits through dividends, but has engaged in regular share buybacks. The current EUR700m plan represents almost 6% of its market cap.

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Full year results

The new routes and the acquisition of Lauda, plus an improvement in load factor (a measure of how full each plane is) from 95% to 96% helped customer numbers rise 9% to 142m over the year.

That passenger growth, plus a 19% rise in ancillary revenues, ensured total revenue rose 7.6% to EUR7.7bn despite the average ticket price falling 6% to EUR37.

Excluding the Lauda losses, operating costs rose 16%, with fuel costs up 23% to EUR2.3bn and staff costs up 28% to EUR945m following a 20% pay rise for pilots.

Net debts rose from EUR282.9m to EUR449.5m, as the EUR2bn net cash from operations was more than offset by EUR1.5bn of capital expenditure on aircraft, simulators, engines & hangars, the repayment of EUR422.8m of debt principal and the return of EUR560m to shareholders in share buybacks.

Looking ahead, Ryanair expects traffic to grow by 8% to 153m, and profits to fall in the range of EUR750m to EUR950m, assuming there is no significant disruption or negative Brexit developments.

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