Few industries have been impacted more negatively by Covid-19 than the airline industry. The International Air Transport Association estimates revenue losses to the industry of $252bn globally. This is a 44% drop versus 2019 figures. The Ryanair (LSE:RYA) share price has reacted to this by dropping around 33% since the start of the year. I think whether the shares will take-off from this point depends on three critical factors.
Liquidity position
Big competitor easyJet has said that it could potentially run out of cash in August unless it scraps new plane orders. Ryanair, however, is much better placed. It currently has €4bn in cash. This is enough to last for 18 months, even if no planes fly. This definitely gives it some breathing room, however it’s needed. Some analysts have predicted that air traffic will not reach pre-crisis levels until mid-2021. Therefore, whilst I think it should have enough capital to survive, it might not be a comfortable journey.
Return of demand
The Ryanair share price is clearly linked to how quickly aviation demand returns. When this will happen is anyone’s guess. It is possible that there is a lot of pent-up demand, with most countries having spent months in lockdown. If oil prices stay low, this may also enhance the ability of the airlines to offer cheap flights. This is something Ryanair is very good at. In fact, the average fare has dropped from £47 in 2015, to £37 in 2019. Ryanair has also expanded its fleet by 50% since 2015 to around 450 planes (fourth largest in Europe). Therefore, it should be ready to take advantage of any potential demand uptake.
However, it is also possible that demand may return slowly, fuelled by coronavirus fears. This would clearly hurt RYA’s profits in the short-term and therefore the Ryanair share price.
Competitive advantage sustainability
If demand does return and Ryanair has survived this crisis, will it be able to maintain its competitive advantage? Ryanair’s strategy to date has been one of cost leadership. I believe that it will continue to pursue this, even after the crisis is over. All those extra bag charges and cramped seats may annoy customers, but this – along with a razor-sharp focus on expenses – has enabled its current capital position. Therefore, why would it change strategy? It has succeeded in a fiercely competitive market.
Additionally, if some its competitors do go out of business, it may lead to a less competitive market. This would help Ryanair sustain or increase its market share.
It is also worth noting that 32% of its €7.7bn of revenues comes from ancillary sources (hotel bookings, etc). I think this additional diversification should position it well post-crisis.
In conclusion, lift-off may be too strong of a phrase for the Ryanair share price, but in the long term I think it will have a safe landing. Additionally, at a price-to-earnings ratio of 10.3 (12 for the industry), it may be good value.
