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Ryanair - another bleak quarter on the books

Nicholas Hyett, Equity Analyst | 1 February 2021 | A A A
Ryanair - another bleak quarter on the books

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Ryanair Holdings Ordinary Shares EUR0.006

Sell: 16.82 | Buy: 16.86 | Change 0.28 (1.71%)
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Ryanair reported a €305.5m underlying loss in the third quarter, excluding €15.3m of exceptional items mostly related fuel and currency hedges.

Although visibility is "limited" management is expecting to fly between 26m and 30m passengers (likely toward the lower end of that range) in the current year - down from "up to 35m". The group is "cautiously" guiding for a full-year underlying loss of between €850m and €950m.

The shares were broadly flat following the announcement.

View the latest Ryanair share price and how to deal

Our view

With almost a year's worth of pandemic-related disruption behind us, huge losses in the airline sector no longer feel quite so shocking. Cost-saving efforts have limited the losses from dismal passenger numbers. But even the most frugal airline can't operate below capacity forever.

Fortunately Ryanair is no stranger to belt-tightening - it's per passenger unit costs are significantly lower than peers' and that's put it in a stronger positions as air travel collapsed. The group has more than halved its quarterly operating costs, but it still burned through nearly €900m in the third quarter. With €3.5 billion in available cash, Ryanair can comfortably navigate the latest round of lockdowns, but another stay at home summer could see the firm return to the market to drum up more financial support.

Long term, good cost control could offer an opportunity to leapfrog some competitors as travel resumes, but the group must balance the risk of a false start against the potential market share to be gained.

Management appears to be looking forward to a strong summer travel season. Select European routes are being expanded, as is the position at London Stanstead. The group expects to fill those extra slows with the first batch of new, more efficient, Boeing planes, with increased capacity and lower fuel usage.

None of that will matter, though, if people don't travel this summer. From our perspective, Ryanair is all-in on a busy summer season - and that could play to its advantage as some of its more cautious peers are hesitant to ramp up spending without confirmation that the pandemic is over. But there's also a risk management jumped the gun, sending cash out the door ahead of another lost travel season.

Ryanair has seen an increase in passengers willing to pay for reserved seats and priority booking, likely a pandemic-related shift as people are willing to shell out to distance themselves from fellow travellers. If this mentality sticks around post-COVID, it could hurt Ryanair's business model - packing people onto planes at ultra-low prices.

The economic winds are blowing against airlines right now. Even the low-cost airlines would suffer from an economic downturn and the industry will remain under pressure as long as travel restrictions are in place. Ryanair's bold optimism on the summer makes it a clear play on a rapid vaccine driven recovery, but the murky outlook for travel means the risks could well outweigh the rewards in our view.

Ryanair key facts

  • Price/Book ratio: 3.2
  • 10 year average Price/Book ratio: 3.0
  • Prospective dividend 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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Third Quarter Results

Revenue in the third quarter was down 82% to €341.2m, driven primarily by a 70% reduction in scheduled flights. The number of empty seats on each flight also rose to 30% from 4% in 2019. Passengers who did fly were more willing to pay for extras like reserved seating and priority boarding.

Management is still focused on cash preservation and operating costs declined to €673.6m compared to €1.8bn last year. Management is expecting training costs to rise in Q4 as the group prepares to take advantage of a recovery in travel demand over the summer

As of 31 December, net debt stood at €2bn. The group had €3.5bn in available cash, which it plans to use to repay over €1.5bn of maturing debt over the next six months.

Ryanair expects 'intra-European capacity to be significantly reduced for the next few years, which will create growth opportunities for Ryanair.' The group upped its order for B737-8200 aircraft to 210 from 75 in December, some of which will be delivered in Q4. Along with increased capacity in Paris, Naples, Venice, Verona, Bari and Shannon, the group extended it's low-cost growth deal in Stansted to 2028.

Due to Brexit rules, it's no longer possible for non-EU nationals, including UK nationals, to buy Ryanair shares. However, it's still possible to buy American Depository Receipts (ADRs), which represent an underlying stake in Ryanair shares but trade in the US.

Find out more about Ryanair shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.