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Ryanair - group expects to ground majority of fleet

Sophie Lund-Yates, Equity Analyst | 16 March 2020 | A A A
Ryanair - group expects to ground majority of fleet

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Ryanair Holdings Ordinary Shares EUR0.006

Sell: 11.20 | Buy: 11.21 | Change -0.38 (-3.24%)
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Ryanair has said the spread of COVID-19 and subsequent travel restrictions has had a "significant and negative impact on the schedules of all Ryanair Group Airlines".

The travel restrictions mean the group expects to ground the majority of its fleet across Europe over the next 7 - 10 days, with seat capacity expected to be reduced by up to 80% over April and May. A full grounding of the fleet cannot be ruled out.

The shares fell 19.3% following the announcement.

View the latest Ryanair share price and how to deal

Our view

Ryanair is a strong player, but airlines are a tough industry to be in at the best of times, and this feels like it could be the worst of times.

The COVID-19 outbreak has severely reduced demand for flights, and many governments have also introduced travel restrictions. Ryanair is not alone in grounding its planes and looking to every available cost saving measure.

Since forming in the mid-80s it's kept costs in check by offering a no-frills service, but this approach is of little use when the fleet is grounded. Ryanair does have at least one advantage: it owns the majority of its planes outright, so lease payments are relatively limited.

The group also has relatively little debt, and currently has over €4bn of cash and cash equivalents. This liquidity buffer will be essential as the group deals with the coronavirus outbreak, but we don't know how low cash costs can go. It's therefore difficult to say with any certainty how long the group can sustain a prolonged shutdown for.

This lack of certainty is part of what has driven the group's shares down so far in recent weeks. If the group can weather the storm, then investors brave enough to stick it out might be rewarded, but it's too soon to call what will happen, and the price could fall further if things get worse.

Prior to today's update, the share's changed hands for 2.3 times book value, below the long run average. However, there's a chance book value could be written down in the near future, so investors should exercise caution when using backward looking valuation metrics at such a turbulent time.

Ryanair doesn't distribute a share of the profits through dividends, but has engaged in regular share buybacks. The ongoing €700m plan, of which €440m has been completed, has been deferred until further notice.

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COVID-19 update

Ryanair highlighted that over the last 7 days, Italy, Malta, Hungary, Czech Republic, Slovakia, Austria, Greece, Morocco, Spain, Portugal, Denmark, Poland, Norway and Cyprus have imposed flight bans of varying degrees. More recently, Poland and Norway have banned all international flights.

The group is taking immediate action to reduce operating costs and improve cash flows. This includes grounding surplus aircraft, deferring all capital expenditure and share buybacks. Recruitment will be frozen, discretionary spending scrapped, working hours reduced and voluntary leave options for staff will be introduced.

There has been a substantial decline in bookings over the last fortnight, and this is expected to continue for the foreseeable future. Further cuts to schedules will be made if needed.

Ryanair said it has strong liquidity, with cash and cash equivalents of over €4bn as at 12 March. The group is focused on completing as many scheduled flights as is permitted over the next week.

Michael O'Leary, CEO, said Ryanair is "adequately prepared for the return to normality, which will come about sooner rather than later as EU Governments take unprecedented action to restrict the spread of Covid-19".

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