Ryanair – Born to run
May 2024 (€17.2)
Ryanair’s share price and the odd financial metric suggest to some we are nearing the end of its profit recovery. We disagree. A reference point of future profitability Ryanair’s management gave investors a year or so ago was to make €10 of net profit per passenger (NPPP). Slavishly, all analysts made this output a crutch for their profit recovery forecasts. With a net profit per passenger in the period just reported (March 24) of €10.43, many seemingly assume this is the end of Ryan’s recovery. As the company also guides for slower growth in passenger fares this summer does this all suggest such investor caution might be warranted? In a word.. No!
Core thesis. Unchanged and room to run
Our long-term bullish thesis on Ryanair was never predicated on any short-term profit recovery. It was driven by our admiration for its super low unit-cost model and the long-term earnings power we saw deriving from it. In Ryan’s case its lowest unit cost model we concluded was powerful for two reasons:
- It had almost no EU competitors to threaten it
- The model was being implemented by a talented, decisive and highly aligned owner manager. As we enter the pay-off stage in Ryan’s story we want to repeat a mantra we used a lot a few years back for fear readers may have forgotten it: Operate, Generate, Allocate. We want the companies/managers we invest alongside to excel at all these traits. Our c.10years study of Michael O’Leary (MOL) not only suggests he excels, but we conclude he is likely one of the best CEOs we have ever come across.
Before considering todays outlook for Ryanair shares some of these core assumptions are worth reflecting on:
Competitors and investment phases
Maybe a key difference between our assessment of Ryanair and that of other investors derives from the work we did on the industry long before Covid arrived. For years we had heard MOL talk of wanting to ‘kill off’ competitors. We even wrote a research piece entitled “To hell with yields”. This being a quote from MOL as he actively sought to depress pricing year after year to inflict pain on competitors and thus gain market share. This is why Ryan’s average fare fell from €46-48 in 2012-2014 to €37-39 in 2017-9. Inflation in those five years was not the level it is today, but costs were still rising. Anyone that has built an airline profit model and moved fares (in true isolation) up, or down by c.25% knows the impact of such a move. It is either Nirvana or Armageddon. Crucially, in western Europe Ryanair has almost no true low-cost competitors. This means that the decision to trash fares as it did to fill its planes and win share was a self-imposed investment phase. It was not a function of wider market behaviour as occurred in the US airline industry. During this period Ryan’s profits still grew but did so due to very low unit costs and full planes at low fares. Meanwhile its competitors suffered severely, gradually failing one by one.
Then Covid hit… Then interest rates rose. The result of which has been to turbo charge this entire capital cycle process. I.e. airline competitors that were struggling went bust quickly (Norwegian). Airlines with cost bases that were uneconomic (Al Italia, TAP Portugal) went bust a little more slowly. Most others curtailed growth (easyJet) or sought bailouts to survive (Lufthansa). As we observed in Holland Views: Ryanair – Second order thinking, May 2020 slower growth means higher unit-costs and bailouts come with conditions (i.e. no job losses or pay cuts). If you are flying 21% more passengers than you were before Covid, as Ryan is, then some cost inflation can be offset by scale (i.e. unit costs can be controlled). If like Lufthansa you are flying 18% less passengers in 2023 than you were pre-Covid, any cost inflation makes your unit economics even worse.
The above is a sample of a more recent research report we have written for our subscribers. For more information get in touch.
Disclaimer
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