Ryanair Holdings (LSE: RYA) climbed 6% on Tuesday as the budget airline celebrated its 30th birthday by reporting a 66% increase in after-tax profits, which rose to €867m last year.
This surge in profits was driven by falling fuel costs and rising passenger numbers, which combined to lift Ryanair’s profit margin from 13% to 18%.
Investors were also impressed because seat utilisation rose by 5%, from 83% to 88%. The airline is targeting 90% this year, which could drive further improvement in profit margins.
Is Ryanair the best?
Ryanair founder Michael O’Leary’s promise to be nicer to his customers appears to be paying off.
The firm’s shares have risen by 61% over the last year. In today’s results, the airline’s management said it expects after-tax profit to rise by another 10% this year, to between €940m and €970m.
However, Ryanair isn’t the only carrier enjoying good times. British Airways owner International Consolidated Airlines Group (LSE: IAG) is also doing well. Profits at IAG, which also owns Spanish airline Iberia, recovered strongly last year and are expected to rise by around 55% in 2015 to €1,521m.
IAG is also thought to want to buy Aer Lingus, in which Ryanair has a 29.8% stake. Should Ryanair be forced to sell, enabling IAG to do a deal, then competitive pressure on Ryanair could rise on key routes.
Which airline is the better buy?
Both Ryanair and IAG offer potential for investors, but which airline looks the better buy today?
|
2015/16 forecast |
Ryanair |
IAG |
|
P/E |
15.9 |
10.6 |
|
Earnings per share growth |
+16% |
82% |
|
PEG ratio |
1.0 |
0.13 |
Based on these numbers, IAG looks a more appealing buy, but there are some other differences. Ryanair’s low cost structure means that its operating margin of 18% is more than three times IAG’s 5% margin.
All else being equal, this could mean Ryanair can generate more free cash flow than IAG and potentially offer greater shareholder returns, through dividends and share buybacks.
What’s more, both firms are targeting significant additional growth, but this sector is fiercely competitive. What’s more, Ryanair shares have risen by 180% over the last three years, while IAG has climbed 280% during the same period.
Is there another alternative with more untapped upside potential?
Enter Flybe
Flybe Group (LSE: FLYB) won’t be suitable for everyone. This loss-making £124m airline has issued a series of profit warnings which have seen its share price tank from a high of 150p in 2014 to just 56p today.
The airline has struggled to get rid of 14 surplus aircraft it cannot use that are costing a frightening £26m per year. However, solutions have now been found for seven of these aircraft and the firm raised £155m in a placing last year, so is well funded in the meantime.
Most of Flybe’s routes are short haul routes using small aircraft, where there is no alternative air service. This means that this company doesn’t necessarily face the same intense competition as carriers like Ryanair, IAG and easyJet.
When Flybe manages to resolve its legacy issues, underlying profits could to rise to around £19m, according to analysts’ forecasts for 2015/16. That breaks out as around 6.2p per share and equates to a forecast P/E of just 9.0.
