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Ryanair - a strong third quarter

Emilie Stevens, Equity Analyst | 3 February 2020 | A A A
Ryanair - a strong third quarter

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Ryanair Holdings Ordinary Shares EUR0.006

Sell: 11.15 | Buy: 11.18 | Change -0.33 (-2.81%)
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Ryanair reported a third quarter profit of EUR88m compared to a EUR66m loss in the same period last year.

The group expects full year profit after tax to be in the middle of the EUR950m-EUR1,050m range.

The shares rose 4% following the announcement.

View the latest Ryanair share price and how to deal

Our view

Ryanair is a strong player, but it's in a tough industry. Economic conditions and fuel prices can be your friend one minute, but bring headaches the next.

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.

Recent 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, as the same number of passengers chase fewer seats.

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.

The delays to the group's new Boeing 737-MAX planes are unfortunate, but there's not much Ryanair can do about it. In the long run the new planes should mean even lower costs and better fuel efficiency.

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 trade on 3.2 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 EUR700m plan, of which EUR440m has been completed, has been extended to the end of July.

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Third quarter results

Passenger numbers rose 6% to 35.9m and fares were 9% higher, meaning scheduled revenue was up 16% to EUR1.2bn. Ancillary revenue, which includes things like priority boarding and reserved seating, was up 21% to EUR720m. As a result, Ryanair's total third quarter revenue rose 21% to EUR1.9bn.

Fuel costs rose 15% to EUR686m due to higher prices and 8% increase in flight hours. Non fuel costs per seat rose 1% due to higher staff and maintenance costs.

The group's Boeing 737-MAX planes have been delayed until late 2020, meaning any associated cost savings will not materialise until late 2021. As a result, Ryanair is delaying its 200m passengers per year target by one or two years to 2025 or 2026.

So far EUR440m of a EUR700m buyback program has been completed, and the group has extended the program until the end of July due to the 373-MAX delays. Net debt is currently just over EUR700m.

Ryanair expects full year revenue per passenger to grow between 3 - 4%, with passenger numbers expected to rise 8% to 154m and ancillary revenues also expected to grow, but at a slower rate.

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