As Europe’s largest airline, Ryanair needs little by way of introduction. In FY 2020 (its financial year end is March), it had 149m scheduled passengers, equivalent to c.20% of the population of Europe. The Group has been a trailblazer in this continent, having significantly disrupted the industry. It has come through the severe hit from COVID-19 in much better shape than its competitors, having only had to tap shareholders for €400m from a 3% placing following the onset of the pandemic – a far cry from the massively dilutive fundraisings and failures seen across much of the industry. While the economic impacts from the Russian invasion of Ukraine are uncertain, I argue that: (i) its skew towards Western European markets; (ii) the financial constraints that many of its peers are subject to; and (iii) the kicker to come from fleet replacement, mean that we are looking at a new period of strong growth for Ryanair.
Ryanair released its Q3 results on 31 January. In it, the Group guided that passenger numbers will grow to 225m passengers by FY 2026. This is around 50% higher than the pre-COVID peak. For context, in FY 2006 RYA had 35m scheduled passengers and it had 106m in FY 2016. Supporting this growth, its fleet has grown from 103 at end-FY 2006 to 451 at end-FY 2021. RYA understands better than anyone else in the industry the importance of economies of scale. In FY 2006 its scheduled revenues per passenger were €41.19. In FY 2021 they were €37.67. Of course, this outcome is flattered by the success the Group has had in lifting ancillary revenues per passenger from €7.45 in FY 2006 to €21.81 in FY 2021.
This brings me to the first point about Ryanair – the macroeconomic picture. In FY 2020 (disregarding FY 2021 due to the COVID shock), it had revenues of €8.5bn. Of these, 21% (€1.8bn) came from the UK; 18% (€1.5bn) from Italy; 13% (€1.1bn) from Spain; 10% (€0.8bn) from Germany and 7% (€0.6bn) from Ireland. While Ryanair has a presence in Central and Eastern Europe, its skew to Western European markets leaves it relatively less exposed to the current situation than some of its rivals. Another macroeconomic point worth mentioning is the current focus on the cost of living. As households look to save money, it seems rational that many will look at the cheapest airline in Europe when considering their travel plans. More fundamentally, the collapse in travel associated with the COVID-19 pandemic has seen multiple airline failures in Europe, while many others have slashed capacity. It is too early to tell if the Ukraine crisis will lead to further changes to the industry structure.
The second point about Ryanair is its financial strength. Its net debt was €2.1bn at end-2021 (calendar year), down from €2.3bn on 31 March 2021 (i.e. the end of FY 2021) and management “plan to reduce this net debt to zero as quickly as possible over the next 2 years”. One help with this is the working capital profile where airlines are concerned. Ryanair (like everyone else) sells its tickets forward, allowing for strong operating cashflows when the market is growing (‘recovering’ is probably the better way to describe the current situation, given the rebuild in activity from the COVID shock). In October, Ryanair repaid its UK CCFF £600m loan five months ahead of schedule. Ryanair’s three biggest competitors in Western Europe are Lufthansa, IAG and Air France – KLM. Lufthansa had net debt of €9.0bn at end-2021. Air France-KLM’s net debt on the same date was €8.2bn. IAG’s net debt was €11.7bn at end-2021. While those carriers’ business models have different characteristics to that of Ryanair, I suspect that they are likely to show competitive discipline as they repair their balance sheets from the COVID impact.
The third point where RYA is concerned is fleet renewal. While many of its competitors have been paring capacity since the onset of the pandemic, RYA has been growing. At the end of 2021 RYA’s operating fleet comprised of 455 Boeing 737s (+27 y/y) and 29 Airbus A320 (unchanged y/y) aircraft. In September 2014 RYA agreed to purchase up to 200 (100 firm and 100 options) Boeing 737-8200 aircraft. It subsequently increased this order to 210 (135 firm, 75 options) and in December 2020 it made all of these into firm orders. The first 41 of these aircraft joined the fleet during 2021 and the remainder are due to be progressively delivered before end-March 2025. Ryanair refers to the 737-8200 aircraft as ‘Gamechangers’ – and with good reason. They offer 4% more seats, but burn 16% less fuel and reduce noise emissions by 40%. The enhanced fuel efficiency is important both in terms of ESG considerations and the carrier’s structural cost advantage over peers.
Ryanair will release its FY (to end-March) 2022 results in May. Management is guiding to just under 100m passengers and a net loss of €250-450m – a big improvement from the annus horribilis of FY 2021, where the carrier had only 27.5m scheduled passengers and posted a net loss of €1.0bn. To return to the earlier comments about scheduled and ancillary revenues per passenger, if RYA can (and I see no reason to doubt this) deliver on its 225m passenger target by FY 2026, this implies total income of (say) €60 (c.€40 fare and c.€20 ancillary) per passenger, giving Ryanair revenues of €13.5bn in that year. Ryanair’s operating margin averaged 16.7% between FY 2006 and FY 2020 (I am again ignoring FY 2021 due to COVID distortions). So, if RYA can achieve its average long-term operating margin (I’m disregarding the efficiency benefits from the Gamechanger aircraft here), this implies FY 2026 operating profits of €2.25bn. Ryanair has guided that it is headed to zero net debt, but for reasons of prudence let us assume net financing costs of €26m (again, in-line with the long-term annual average). And let us assume a 15% corporation tax rate (higher than the long term average, but this seems a fair assumption in the current political climate). This produces net income of €1.9bn or €1.67 per share. Ryanair’s share price closed at €13.71 in Dublin on Friday.
Another point to make is that RYA’s historic strong profitability has afforded management flexibility in terms of capital returns alongside ongoing strong investment in fleet expansion / renewal. Between FY 2006 and FY 2021 RYA returned €6.7bn to shareholders through share buybacks and dividends. On a fully diluted weighted average basis, the RYA share count has fallen from 1.54bn shares in FY 2006 to 1.1bn in FY 2021. On the 1st of March this year RYA had 1.1bn shares in issue. I would not be surprised to see the share count reduce again over the coming years, enhancing per-share earnings.
I appreciate that the price of oil is something of an “elephant in the room” where this commentary is concerned. I am, however, unconcerned about the oil price and its impact on RYA given that the carrier’s structural cost advantage over peers means that it will continue to be able to offer relatively lower fares than its rivals at any oil price point.
As a shareholder in Ryanair, I acknowledge that I’m no impartial observer. However, the above assumptions – a combination of company guidance and its long-term track record – suggest that RYA is trading on 8.2x FY 2026 earnings. To me, this is very inexpensive for a proven sector leader with a clear growth strategy. I’m a happy holder of this stock.
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