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Ryanair - more losses and lower guidance

Sophie Lund-Yates, Equity Analyst | 2 November 2020 | A A A
Ryanair - more losses and lower guidance

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Ryanair Holdings Ordinary Shares EUR0.006

Sell: 16.57 | Buy: 16.60 | Change -0.06 (-0.36%)
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Ryanair has reported a second quarter loss before exceptional items of EUR22.6m, compared with a EUR910.2m profit last year. Once exceptional items, which mainly relate to ineffective fuel hedges, are taken into account Ryanair's loss was EUR225.5m.

Ryanair has cut its winter capacity guidance from 60% to 40% of last year's level. The group is not providing detailed full year guidance.

The shares fell 1.3% 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 virtually cleared the skies of non-emergency flights between mid-March and the end of June, and after a stronger second quarter Europe looks to be entering another round of lockdowns.

Capacity is expected to be just 40% of 2019 levels over the winter. This isn't as severe a reduction as the group suffered at the peak of the crisis earlier this year, but it will delay a recovery. Furthermore, Ryanair isn't offering refunds to flyers wishing to cancel, and people must re-book instead. This may help keep some cash in the business, but it may also make people less willing to book in the first place. We don't know yet if the trade-off will be worth it.

Ryanair has a relatively strong balance sheet, so we're not worried about a short term crunch. However, there are upcoming debt maturities and the group really needs a profitable summer next year to reassure lenders and generate some cash. Our biggest concern is the potential for a third wave coinciding with next summer - which could pose a mortal threat.

If the group can weather the storm then investors brave enough to stick it out might be rewarded, although it's too soon to say conclusively that the worst is behind us.

Prior to today's update the shares changed hands for 2.6 times book value. While this seems high given the circumstances, it's lower than it has been in the past, reflecting the challenges facing the sector. However, book value could be written down if conditions deteriorate, so investors should exercise caution when using backward looking valuation metrics at such a turbulent time.

In our opinion, the prospects for Ryanair, or any other airline, hinge on the length of the disruption, speed of a recovery in demand and the absence of a third wave of infections. We think Ryanair is in a relatively strong position compared to some peers. But even the strongest airlines can't keep running below capacity forever.

Ryanair key facts

  • Price/Book Ratio: 2.6
  • Ten year average Price/Book ratio: 3.0
  • Prospective yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Second Quarter Results

Ryanair operated around 50% of its planned second quarter schedule, and about 72% of seats were filled. As a result scheduled revenue fell 69% to EUR690.1m, and ancillary revenue fell 58% to EUR360.9m. In total revenue fell 66% to EUR1.1bn.

Total operating costs fell 50% to EUR1.0bn, primarily reflecting a 58% fall in fuel costs to EUR334.1m, a 55% fall in airport costs to EUR151.6m and a 42% fall in staff costs to EUR166.2m. Ryanair therefore made a EUR10.8m operating profit in Q2, although this was someway behind EUR1.0bn profit last year.

Since the end of March net debt has risen from EUR403.2m to EUR1.1bn. Ryanair has around EUR4.5bn in cash and equivalents on the balance sheet, having raised new capital from investors in September. Ryanair has two upcoming debt maturities: £600m from the Bank of England's Covid Corporate Financing Facility in March and an EUR850m bond in June. The group suffered a free cash outflow of EUR1.0bn in the first half.

Find out more about Ryanair shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.