As the global vaccination programme against coronavirus continues, investors are buying into the reopening trade. Shares in businesses such as Carnival, TUI and IAG have jumped as investors start to price in a recovery. However, I’m not particularly excited about these companies. I’ve been focusing my attention on the Ryanair (LSE: RYA) share price.
I firmly believe that the best way to generate the most significant investment returns is to concentrate on the market’s best companies. I think Ryanair falls into this basket.
While the company may have attracted a lot of criticism over the years, investors cannot criticise its growth. The group has revolutionised the market for low-cost airline travel. Customers flock to the business for low prices and efficiency, even if they have to put up with lousy customer service.
Even though the airline industry is viciously competitive, Ryanair has succeeded by offering customers a no-frills service at the lowest cost. It’s a highly efficient operation, with no excess waste. This helps it offer customers the lowest possible fares.
As we come out of the pandemic, I think the group is well-positioned to capitalise on the rebound in consumer spending. This could translate into a higher Ryanair share price. The company gets customers from A to B, and that’s all airlines need to do. It also has a widely-diversified route network, which is what consumers want. Consumers are unlikely to want to pay extra to go on the service like British Airways to receive a similar level of service.
That said, as we come out of the crisis and airlines start fighting for business, Ryanair may face stiff competition from competitors such as British Airways. This could slow its recovery.
However, I don’t think the competition will last indefinitely. Ryanair has been built around the principle of low prices. I believe this will give it an edge in a fares war.
Ryanair share price risks
It’s unlikely to be plain sailing for the group over the next few years. As I mentioned above, the airline industry is fiercely competitive. This is only likely to increase, which could hurt profit margins.
What’s more, due to travel restrictions, the company expects to report underlying losses of €800m-€850m for its last financial year. It burned through €900m in cash during the third quarter. This money has to come from somewhere. And if travel restrictions continue, shareholders could be asked to foot the bill.
Despite these risks, I think the Ryanair share price has a bright future. That’s not just for the year ahead, but over the long term. That’s why I’d buy the stock for my portfolio as a recovery play. I’m only willing to invest £3k as I think this will allow me to profit from the firm’s recovery while limiting potential losses if things don’t go to plan.
Unfortunately, it’s no longer possible for non-EU nationals to buy London-listed Ryanair shares due to Brexit rules. However, it’s possible to buy the American Depository Receipts (ADRs), and that’s how I plan to invest in this leading European airline group.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.