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Ryanair - guidance lifted on strong Christmas

Nicholas Hyett | 10 January 2020 | A A A
Ryanair - guidance lifted on strong Christmas

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Ryanair Holdings Ordinary Shares EUR0.006

Sell: 11.85 | Buy: 11.88 | Change 0.00 (0.00%)
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In an unscheduled trading update Ryanair has raised profit guidance for the full year from €800m-€900m to €950m-€1,050m.

The group attributes this to better than expected late bookings in the Christmas and New Year period. Bookings for the January to April period are also running 1% ahead of last year.

Ryanair's small Austrian subsidiary, Laudamotion, has continued to do poorly in a price war with Lufthansa. It is now expected to generate a net loss of around €90m (previously around €80m).

The shares rose 9% on the news.

View the latest Ryanair share price and how to deal

Our view

Ryanair is a strong player, but 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, we think the group has a couple of trump cards.

It owns the majority of its planes outright, has relatively little debt, and the balance sheet looks strong. But perhaps its biggest strength is the cost base - Ryanair has the lowest per seat costs in Europe.

Since forming in the mid-80s it's kept costs 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 competition remains intense and the race to the bottom on prices is painful, we think Ryanair should be able to outlast smaller rivals. The shares traded on 3.3 times book value, prior to the profit upgrade, above the longer term average of 2.9.

Ryanair doesn't distribute a share of the profits through dividends, but has engaged in regular share buybacks. The ongoing €700m plan, of which a little over €250m has been completed, represents around 4% of its market cap.

Register for updates on Ryanair

Third quarter trading update (04/11/2019)

Ryanair saw revenue rise 11.4% in the first half, to €5.4bn, however increased costs meant profit after tax was broadly flat year-on-year, at €1.2bn. A recent share buyback program drove earnings per share up 3% to €1.02.

Ryanair carried 85.7m passengers in the first half of this year, 11% higher than in the same period last year. However, thanks to a competitive environment and some overcapacity, passenger revenues only rose 5% offset by a 28% increase in ancillary revenues as more passengers chose priority boarding.

Fuel costs rose 22% reflecting both higher oil prices and the growth in traffic. Unit costs excluding fuel rose 2%, mainly due to higher staff costs. As a result overall operating costs rose 16% to €4.1bn. Further delays to deliveries of new Boeing 737 Max planes means only 20 are now expected for 2020. Associated cost savings are not expected until 2021.

So far just over €250m of a €700m buyback program has been completed, and the group is retaining the flexibility to repurchase more shares under a "hard Brexit" scenario. Net debt currently stands at €460m.

Find out more about Ryanair shares including how to invest

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