Ryanair Holdings (LSE: RYA) was a market darling until it hit turbulence in mid-August. After the shares rose by a third between the beginning of the year and August 15, reaching the peak of €19.35, they’ve since fallen back, losing nearly 15% in recent weeks.
The company’s problems revolve around its pilots. First of all, the airline had to cancel thousands of flights following a mistake with their holiday schedule. Then threats of a possible strike emerged with pilots branding the company a “disgrace” after missing a deadline to respond to their demands for improved employment terms. Hundreds of thousands more flights have now been canceled as the company tried to solve staffing problems by taking actions that would slow growth, but analysts are expecting disruption to continue for some time.
These problems seem to be a direct result of the company’s explosive growth.
According to industry sources, if the company wants to continue to expand the way it is planning, the firm will need to hire at least 1,000 pilots every year, a quarter of its workforce. Not helping the matter is staff turnover. The so-called pilot attrition rate indicates that around 10% to 15% of Ryanair’s pilots and first officers are leaving each year.
However, despite these problems, I believe that Ryanair can continue to grow.
Building the business
Ryanair has completely disrupted the airline industry. The company virtually invented no-frills flying and now airlines all over the world have adopted this approach… even British Airways is doing so on short-haul flights.
As the rest of the industry takes part in a race to the bottom, Ryanair has only benefitted. With prices falling across the board, and airlines cutting perks to remain relevant, tickets have become commoditised and customers only care about the price.
This is why, despite treating its customers like cattle, Ryanair will continue to prosper.
Rapid growth
Despite increasing competition from other low-cost operators, last year Ryanair reported a 13% increase in the number of travellers on its routes to 120m. Meanwhile, average fares fell 13% to €41 (the lowest in Europe) and thanks to improved economies of scale, the group’s net profit margin rose 1% to 20%. Customers will find it hard to turn down Ryanair’s low-cost offering and as the group grows, costs should fall further allowing for yet more cost reductions.
Customers are benefitting through lower fares and investors are profiting through the company’s effective cash returns policy. Including the €600m share buyback announced at the end of May, since 2008 the airline has returned over €5.4bn, just under a third of the current market cap.
Business as usual
Overall, even though Ryanair’s pilot problems have been a PR disaster for the firm, I believe its low-cost flights will continue to pull in customers. Compensation might dent profits this year, but with the fleet still growing and profit margins expanding earnings should return to normal during 2018.
After recent declines, the shares are trading at a 2019 P/E of 12.2, 35% below the five-year average of 16.2.
