Ryanair is a rare beast.
There's an old joke which says that the best way to make millions is to start with a billion and then buy an airline!
Traditionally, the biggest problem faced by any profit-seeking European airline, asides from wildly fluctuating oil prices, is competition from the cartel of state-owned national airlines. These firms have a big share of the market, keep the best takeoff and landing slots for themselves and have been fairly unconcerned about making money because politicians like having a national airline to "fly the flag" and are happy to saddle their poor old taxpayers with their losses.
In recent years the European airline business has been disrupted by the entry of innovative low-cost carriers. These firms, unlike their incumbent competitors, aren't burdened with historic liabilities such as British Airways' (LSE: BAY) £3.7 billion pension scheme deficit. Furthermore they don't have to deal with troublesome trade unions.
One of the best-known low-cost carriers is Ireland's Ryanair (LSE: RYA), led by Michael O'Leary who is best known for his controversial statements, such as the classic "The best thing we can do with environmentalists is shoot them. These headbangers want to make air travel the preserve of the rich. They are Luddites marching us back to the 18th century."
Ryanair makes money for its shareholders and O'Leary and his team keep a firm hand on its costs and thus its profitability.
A Knack For Publicity
Ryanair provides no-frills flights to destinations all around Europe and, rather than bundle up its charges in a single price, makes a virtue of charging low fares and separately charging for almost everything else. You don't fly Ryanair if you want to be served champagne in first class; you fly Ryanair for its prices.
Passengers who fly from Britain to a European destination are charged a minimum of £10 in tax for the privilege and our authorities prefer that these taxes are obfuscated by being contained within a single ticket price. Naturally Ryanair sticks up the metaphorical two-fingers by separately displaying the taxes and a few years ago even ran adverts calling the departure tax "Gordon Brown's ridiculous tax."
Mr. O'Leary's remarks ensure that Ryanair gets plenty of free publicity which it reinforces with its humorous and controversial advertisements such as this, this and this.
Ryanair is an expert at turning a negative into a positive via its advertising. When it was ordered by a Brussels court to stop running adverts which used Brussels' best known symbol, the Manneken Pis, to attack Belgian's national airline Sabena and also to publish an apology in several Belgian newspapers, Ryanair retaliated with new adverts which apologised for having flights which were "up to 89% cheaper."
The Business
The low-cost airline model, like so many great business ideas, was pioneered in America, primarily by Pacific SouthWest Airlines and SouthWest Airlines and it was adopted by Ryanair when it was founded in 1985. Ryanair has expanded rapidly and has prospered by charging far less than the conventional carriers because it has stripped out many layers of costs and separately charging for what other airlines include in their ticket prices.
Ryanair's competitors include the other low-cost carriers like Easyjet (LSE: EZJ) and bmibaby, as well as other private airlines and the state-owned lossmakers.
Although Ryanair's operations are centred on Britain, it produces its accounts in Euros. Its last five years' figures are summarised in the table below (earnings per share (EPS) are in eurocents). Note that Ryanair does not pay a dividend.
| Year | 2008-09 | 2007-08 | 2006-07 | 2005-06 | 2004-05 |
|---|
| Adjusted diluted EPS | 7.08c | 31.53c | 25.77c | 19.53c | 35.19c |
| Headline diluted EPS | 11.44c loss | 25.62c | 27.97c | 19.87c | 34.91c |
| Total Revenues €m | 2,942 | 2,714 | 2,237 | 1,692 | 1,336 |
The adjusted eps figures ignore the effects of one-off exceptional items, in particular the €222 million write down in 2008-09 in respect of Ryanair's investment in Aer Lingus.
The 120% increase in total sales over the last five years is a clear indicator of Ryanair's increasing market share. It is not unusual for a business to experience relatively static profits growth during a period of high sales growth because it should be spending heavily during this period on infrastructure and advertising which translates into higher future earnings.
Ryanair's interim figures for 2009-10, covering the six months to September 2009, show that profits have rebounded strongly with adjusted eps up 81% to 26.13 euro cents. With Ryanair is expected to make a small loss for the second half of 2009-10, forecasts for the full year's earnings per share are in the region 16c to 21c. With the current share price of about €3.50 this puts Ryanair's prospective P/E ratio in the range from 16 to 22.
The Future
Ryanair has plenty of scope for expansion thanks to the European public's increasing demand for air travel and by taking additional market share from the inefficient loss-making national airlines. The increasing pressure upon most European nations' public finances will reduce the scope for politicians to continue to subsidise loss-making national airlines, particularly as more and more of their voters are using the low-cost carriers.
All airlines can expect to be hit with "carbon taxes" in the near-term due to environmental concerns but these are likely to have a far more severe effect upon Ryanair's less efficient competitors. I'd expect that the low-cost airlines will start to see more competition in the next decade from train operators, particularly when Germany's Deutsche Bahn starts running high-speed trains through the Channel Tunnel. Eurostar currently dominates the London-Paris and London-Brussels routes although its well-publicised problems during the pre-Christmas rush will have given the low-cost airlines a big boost!
Investors who are looking for an airline to invest in should have Ryanair somewhere close to the top of their list.
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