Low-cost airline Ryanair (LSE: RYA) made headlines this week with a multibillion dollar order for new planes. The airline is the first customer to order new Boeing 737 Max planes since the aircraft model was grounded. That grounding followed fatal crashes that did not involve Ryanair. This week’s purchase was a show of confidence in future passenger demand. The market liked that and Ryanair shares moved up.
Ryanair is a great business
Ryanair divides opinion among travellers. Many understandably love its cheap fares. But the company’s customer service is a sore point for some passengers, including myself. Whatever one thinks about Ryanair as an airline, however, there is little doubt about its merits as a business. It has perfected its model of cutting costs while generating additional revenue from customers. It made profit after tax of around €650m last year. That sounds good, but it was less than half the figure of two years before. The company is in a notoriously cyclical industry, but its track record of value creation is strong. Historically that has been good for Ryanair shares.
The latest purchase is a good example of that. Boeing’s 737 Max programme has been causing the manufacturer endless headaches. Last year it wrote off $4.9bn due to the 737 Max grounding. Getting a big customer to show its confidence in the programme with an order means a lot. I expect that Ryanair was able to negotiate a great deal on the pricing. It’s exactly the same smart move the airline made when aviation demand fell through the floor in late 2001. Repeating it now shows management’s long-term thinking.
Ryanair shares aren’t cheap
The company’s executives continues to back it with their own money – chief executive Michael O’Leary spent €16m on shares in September, when they were trading at €11.35. As usual, O’Leary made a canny investment. Some airline shares have soared recently. With the price currently standing at over €16, that purchase of Ryanair shares has increased by almost €7m in value in less than three months.
The current share price looks less attractive to me. It has more than doubled from its 2020 lows. After a jump in price it now hovers close to the year high it reached prior to the pandemic. But I think that suggests it’s priced for something close to perfection. The airline is a well-run business, but the pandemic has severely dented demand. It had cut its winter schedule by 40%. It has now reduced it further, with just 40% of its normal schedule likely to be in place.
In other words, the business continues to buckle up for severe turbulence. I expect it to survive and its latest aircraft order shows its own confidence. But that doesn’t take away from the fact that 2020 has been very tough for the company. Nor do I expect demand to return to normal levels early in 2021, even with a vaccine programme. The Ryanair share price recovery has got ahead of the business recovery. At this price, if I was looking for growth, I wouldn’t buy Ryanair shares.
