Budget airline Ryanair (LSE: RYA) has just posted a 21% drop in first-quarter profit after tax to €243m. But with analysts expecting worse, this was seen as good news and the stock climbed more than 3.5% in early trading.
Taking the Michael
This was in line with earlier guidance with chief executive Michael O’Leary blaming the slump on “lower fares, higher fuel and staff costs.”
Average fares fell 6%, although this was offset by a 14% rise in ancillary revenues due to strong sales of priority boarding and preferred seats (Ryanair’s annoying extras now account for around a third of its earnings). Overall, revenue per “guest” was flat at €55.
Traffic grew 11% to 42m, which helped drive a healthy 11% rise in revenues to €2.31bn. However, costs rose 19%, largely due to a 24% increase in the fuel bill, and spending on recent acquisition Laudamotion.
The FTSE 100 group continues to expand, launching 239 new routes plus four new bases in Bordeaux, Marseille, Southend and Berlin, and buying Malta Air.
Cloudy skies
The Ryanair share price has fallen sharply since peaking at around €19 two years ago, and currently trades at just over €10. That might tempt many, with City analysts predicting earnings will grow 30% in 2021. The group claims its “balance sheet is one of the strongest in the industry with over 60% of our fleet debt free,” while passenger load is an impressive 96%.
Ryanair remains the ultimate low-cost airline but the model has come under pressure, and the push towards a no-deal Brexit may create turbulence, as could the slowing global economy. The group also faces the twin dangers of overcapacity and waning pricing power.
As a customer, Ryanair may be difficult to like, but there’s plenty to attract investors. In May, it’s board approved a €700m share buyback programme, returning almost €100m to shareholders in Q1.
Ups and downs
You can’t ignore Ryanair but investors have a habit of overlooking FTSE 100-listed rival International Consolidated Airlines Group (LSE: IAG), despite a roster of big brand airlines including Iberia, British Airways and Aer Lingus.
IAG boss Willie Walsh also recently reported headwinds from rising fuel costs in the most recent quarter, worsened by unfavourable exchange rate movements and cheaper ticket prices, which have offset strong growth in passenger numbers.
The £8.70bn group has seen its share price plummet by more than a third, from 690p one year ago today to 438p. So maybe investors were right to overlook this one.
Think long
However, the lower IAG share price leaves it trading at a meagre valuation of four times earnings, while the forecast yield is a whopping 7.1%, with decent cover of 3.4. IAG has wider exposure to the global economy than Ryanair, looking beyond Europe to the US, Canada, Asia, Middle East and Africa. This offers a greater shield against Brexit and a European slowdown.
Both groups operate in a risky sector but may be due a rebound after recent share price slippage, especially if you remain bullish on the global economy. The ride may be bumpier than a Cash ISA, but I reckon it will be more rewarding over the long haul.
