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Ryanair - Demand expected to take 'at least two years' to recover

Sophie Lund-Yates, Equity Analyst | 1 May 2020 | A A A
Ryanair - Demand expected to take 'at least two years' to recover

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Ryanair Holdings Ordinary Shares EUR0.006

Sell: 11.22 | Buy: 11.23 | Change -0.35 (-3.02%)
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Ryanair has hit out at what it considers to be "unlawful and discriminatory" state aid given by EU nations to rival airlines. Ryanair calculates that €31bn of state aid has been requested by or granted to its rivals, and argues that this will distort competition when flights resume in Europe. Ryanair plans to challenge this aid in the European Courts.

Ryanair expects to report a €100m loss in the first quarter, and further losses in the second quarter over the peak summer season.

Ryanair also thinks it will take at "at least two years, until summer 2022, at the earliest" for demand for flights to fully recover. The group is therefore proposing a restructuring programme that is expected to result in up to 3,000 job losses.

The group is also negotiating to reduce the number of aircraft deliveries over the next two years, in order to reduce its capital expenditure commitments.

The shares fell 3.6% 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 virtually cleared the skies of non-emergency flights. 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, last we heard, had over €3.8bn 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 period of low demand 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 shares 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 €00m plan, of which €440m has been completed, has been suspended until further notice.

In our opinion, the prospects of Ryanair, or any other airline, hinges on the length of the travel restrictions and the speed of a recovery in demand. This is going to be a really tough period for the group, and it remains to be seen how profitable it can be when running a reduced service. We think Ryanair is in a relatively strong position compared to some peers, although management is complaining that rivals are getting unfair state aid. Even the strongest airlines can't keep running below capacity forever.

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COVID-19 update

First quarter passenger numbers of less than 150,000 are 99.5% less than the group's budgeted 42.4m. The group expects to operate just 1% of its planned schedule in April, May and June. In the second quarter, the group expects to fly 50% of the planned schedule at the most. For the full year ending March 2021 the group expects to carry around 100m passengers, compared with a prior target of 154m.

The group's restructuring efforts will likely see a 20% wage cut and some unpaid leave for employees, alongside job losses. CEO Michael O'Leary has agreed to extend his 50% pay cut until the end of the group's 2021 financial year. Ryanair will notify its unions and enter into consultations shortly.

Ryanair is not providing detailed guidance this year.

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