Budget carrier Ryanair Holdings (LSE: RYA) has given investors a bumpy ride over the last couple of years, with the share price down roughly a third. However, it’s up more than 5% today after reporting an 11% rise in first-half traffic to more than 86m passengers, or ‘guests’ as it calls them.
The MAX factor
That’s a surprisingly upbeat market response, given today’s release showed net profit unchanged at €1.15bn, and narrowed down its full-year profit guidance as passenger growth will be hit by delays to its new Boeing 737 MAX planes.
The aircraft may not land until March at the earliest, while “the risk of further delay is rising.” Ryanair expects to receive only 20 MAX-200s, down from 58 previously, which will reduce full-year 2021 guest numbers from 162m to 157m. It still claims these could be “gamechanger” aircraft, adding 4% more seats, while burning 16% less fuel, but investors will have to be patient here.
Ryanair also narrowed its guidance for full-year profit after tax to €800m-€900m, down from €750m-€950m.
Cautious outlook
The FTSE 100 listed group said its outlook for the remainder of the year “remains cautious,” as it tries to avoid the “unreliable optimism of some competitors.” Full-year traffic should grow 8% to 153m, with a slightly better fare environment than last winter, but remains sensitive to a no-deal Brexit.
Ryanair earns a growing chunk of its income from ‘ancillary revenues’ such as reserved seating, priority boarding, food, and car hire, and these are expected to outpace traffic growth, supporting full-year revenue per guest growth of 2-3%.
I’m slightly surprised by how positive investors are today, given Ryanair’s stock has dropped by a third over the last couple of years. But it still isn’t cheap, trading at 16.1 times earnings.
Travel is a tough sector, just look at Thomas Cook, while Brexit, a pilot’s strike, overcapacity, and waning pricing power have caused headwinds.
Ryanair posted a 1% increase in revenue per guest, as higher ancillary revenues offset lower fares, while opening five new bases in Bordeaux, Marseille, Toulouse, Southend and Berlin. It has also returned €250m to shareholders under its €700m 2011 buyback programme, and may repurchase more shares if they get hit by a “hard Brexit scenario.” Net debt stands at just €460m.
Will the travel climate change?
I don’t totally share the market’s enthusiasm for Ryanair today, given the challenges, and the fact that key issues, such as fuel prices and terror attacks, are out of its hands. It will be interesting to see if the climate change campaign knocks demand for short-haul flights and city breaks, although we haven’t seen much sign so far.
Here at least, Ryanair is positioning itself as the good guy, claiming it will cut carbon emissions by 10% and noise emissions by 40% over the next decade, because it has “the youngest fleet, the highest load factors, and newest most fuel-efficient engines.”
Its earnings forecast to leap 32% in 2021, so maybe that’s when stock holders will start to see a return on their investment. Be warned, you get precious little in dividends while you wait.