Is Ryanair Holdings Plc A Better Buy Than International Consolidated Airlins Grp SA Or Flybe Group PLC?

Ryanair Holdings Plc (LON:RYA) is flying high, but are International Consoldiated Airlins Grp SA (LON:IAG) or Flybe Group PLC (LON:FLYB) a better bet for future growth?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ryanair Holdings (LSE: RYA) climbed 6% on Tuesday as the budget airline celebrated its 30th birthday by reporting a 66% increase in after-tax profits, which rose to €867m last year.

This surge in profits was driven by falling fuel costs and rising passenger numbers, which combined to lift Ryanair’s profit margin from 13% to 18%.

Investors were also impressed because seat utilisation rose by 5%, from 83% to 88%. The airline is targeting 90% this year, which could drive further improvement in profit margins.

Is Ryanair the best?

Ryanair founder Michael O’Leary’s promise to be nicer to his customers appears to be paying off.

The firm’s shares have risen by 61% over the last year. In today’s results, the airline’s management said it expects after-tax profit to rise by another 10% this year, to between €940m and €970m.

However, Ryanair isn’t the only carrier enjoying good times. British Airways owner International Consolidated Airlines Group (LSE: IAG) is also doing well. Profits at IAG, which also owns Spanish airline Iberia, recovered strongly last year and are expected to rise by around 55% in 2015 to €1,521m.

IAG is also thought to want to buy Aer Lingus, in which Ryanair has a 29.8% stake. Should Ryanair be forced to sell, enabling IAG to do a deal, then competitive pressure on Ryanair could rise on key routes.

Which airline is the better buy?

Both Ryanair and IAG offer potential for investors, but which airline looks the better buy today?

2015/16 forecast

Ryanair

IAG

P/E

15.9

10.6

Earnings per share growth

+16%

82%

PEG ratio

1.0

0.13

Based on these numbers, IAG looks a more appealing buy, but there are some other differences. Ryanair’s low cost structure means that its operating margin of 18% is more than three times IAG’s 5% margin.

All else being equal, this could mean Ryanair can generate more free cash flow than IAG and potentially offer greater shareholder returns, through dividends and share buybacks.

What’s more, both firms are targeting significant additional growth, but this sector is fiercely competitive. What’s more, Ryanair shares have risen by 180% over the last three years, while IAG has climbed 280% during the same period.

Is there another alternative with more untapped upside potential?

Enter Flybe

Flybe Group (LSE: FLYB) won’t be suitable for everyone. This loss-making £124m airline has issued a series of profit warnings which have seen its share price tank from a high of 150p in 2014 to just 56p today.

The airline has struggled to get rid of 14 surplus aircraft it cannot use that are costing a frightening £26m per year. However, solutions have now been found for seven of these aircraft and the firm raised £155m in a placing last year, so is well funded in the meantime.

Most of Flybe’s routes are short haul routes using small aircraft, where there is no alternative air service. This means that this company doesn’t necessarily face the same intense competition as carriers like Ryanair, IAG and easyJet.

When Flybe manages to resolve its legacy issues, underlying profits could to rise to around £19m, according to analysts’ forecasts for 2015/16. That breaks out as around 6.2p per share and equates to a forecast P/E of just 9.0.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »