What's the idea?
- We expect Ryanair to be a major beneficiary of the ongoing recovery of the air travel industry in Europe.
- Ryanair has established itself as one of Europe’s largest airlines thanks to its continuous improvement and the expansion of services provided at low fares.
- With annual passenger traffic expected to reach 300 million customers, Ryanair could take 20% to 25% of Europe’s short-haul air travel market.
- Although the European air travel industry still lags behind the 2019 performance levels, Ryanair already surpassed its pre-pandemic results in FY 2023.
- Ryanair is one of two major airlines with negative net debt. In addition, the firm has the best margins in the industry.
- According to the Wall Street consensus, the stock has more than 40% upside potential.
- Ryanair Depositary Receipts are also available in USD under the RYAAY.US ticker.
About Company
Ryanair Holdings (RY4C.EU) is a low-cost airline which operates scheduled passenger flights in Ireland, the UK, Italy, Spain, and other international destinations. Ryanair’s fleet includes 530 Boeing 737s and 28 leased Airbus A320s. The company operates more than 3,000 short-haul flights per day and serves approximately 230 airports in Europe and North Africa. Ryanair was founded in 1984 and is headquartered in Swords, Ireland.
Why do we like Ryanair Holdings PLC?
Reason 1. Positive trends in the target market
The Covid-19 pandemic has dealt a devastating blow to the European Union’s aviation industry. According to Statista, in 2020, the number of air passengers in the EU fell by 76%, from 1.15 billion to 276.8 million. Massive lockdowns that persisted throughout the following year continued to put pressure on the affected industry: In 2021, air traffic did not reach even 50% of the pre-pandemic level.
However, 2022 was a year of rapid recovery. According to Airports Council International (ACI), the air passenger traffic in all European airports reached 1.94 billion people in 2022, up 98% from a year earlier. The passenger traffic of the EU airports increased by 122% in 2022 compared to the previous year. The recovery was particularly impressive in countries where travel restrictions were the most stringent during 2021, such as the UK (+249%), Ireland (+235%) and Finland (+187%).
Passenger traffic across the European airport network
Despite the record annual growth, passenger traffic in both the EU and the rest of Europe was still 21% below pre-pandemic levels. Only 27% of European airports have fully recovered to 2019 levels. The airports of Greece (-1.9%), Portugal (-5.8%), and Luxembourg (-6.9%) were closest to the full recovery of passenger traffic. However, the largest markets in which Ryanair has a presence continued to lag. Thus, the best results were delivered by Spain’s airports (-11.4%), followed by Italy (-17.9%) and France (-18.8%), as well as the UK (-24.8%) and Germany (-34.9%).
The trends continued into 2023. Despite macroeconomic headwinds, tourism recovery in Europe continues. According to the European Tourism Commission (ETC), the region’s air traffic has already reached 93% of the 2019 levels. International revenue passenger kilometers (RPK) also showed an ongoing recovery, reaching 90.8% of the pre-pandemic levels in April.
Air traffic in Europe compared to 2019
Airport data confirmed the encouraging trend. In April, European airports' passenger traffic narrowed the gap with the pre-pandemic figure to 8%, according to ACI estimates. Nearly half of the European airports have recovered to the 2019 levels. Especially strong trends are observed in those airports that serve low-cost airlines, suggesting the strength of low-cost carriers, including Ryanair.
International air passenger growth
We expect the industry to continue its recovery momentum. First, its current performance remains below the pre-pandemic levels, suggesting continued growth potential. Second, consumer sentiment remains strong. Almost a third (31%) of travelers said they intend to spend more on travel this year than they did in 2022, according to a recent report by the World Travel and Tourism Council and booking site Trip.com. Given that low-cost airlines are showing the strongest momentum, Ryanair is likely to be a major beneficiary of the air travel industry recovery in Europe.
Reason 2. Strong market position
Ryanair has established itself as one of Europe’s largest airlines thanks to its continuous improvement and the expansion of services provided at low fares. Ryanair offers the best fares in the market while maintaining a constant focus on cost and operational efficiency. The company’s strategy is aimed at maximizing the load "at any cost" with an extremely rigid system of cost management. The key elements of Ryanair's long-term strategy are:
Low fares. Ryanair aims to stimulate demand from fare-sensitive tourists and business travelers who might otherwise use alternative modes of transport. The company is selling one-way seats, thereby eliminating minimum stay requirements for all scheduled flights.
Customer service. As with any low-cost airline, Ryanair's range of related client services is extremely limited. However, the company strives to provide the best service among peers and, due to its scale, succeeds in this. For example, Ryanair has the best punctuality record in the industry and has canceled significantly fewer flights (less than 1%) this year compared to peers.
Frequent point-to-point flights on short-haul routes. In FY 2023, the average Ryanair route length was about 766 miles (~1,233 km), while the average flight duration was about 2.2 hours. Short routes allow Ryanair to offer low fares while eliminating the need to provide extras such as free meals and in-flight movies. Direct flights, unlike transit flights, help to avoid the cost of through-passenger services, including baggage transfer and transit assistance.
Low operating costs. Ryanair's operating costs are among the lowest among scheduled passenger airlines. The company seeks to reduce or control four major cost items: 1) aircraft equipment and finance costs; 2) personnel costs; 3) customer service costs; and 4) airport access and handling costs.
Focus on efficiency, coupled with the scale of operations, allows Ryanair to demonstrate the lowest costs among European airlines. As a result, the air company offers the best prices while maintaining top-notch margins.
Ryanair costs compared to competitors
Focus on efficiency and impressive operational performance helped Ryanair to finish FY23 with 115% of its 2019 capacity. Ryanair has become the only major EU airline to increase its capacity from the pre-pandemic levels. The most significant increase — from 26% to 40% — was recorded in Italy, the figure increased from 27% to 38% in Poland, from 49% to 58% in Ireland and from 21% to 23% in Spain. The result is particularly impressive given that Ryanair's capacity utilization has surpassed pre-pandemic levels while the industry as a whole continues to lag behind 2019 numbers.
Reason 3. Expected fleet renewal
In May 2023, after 18 months of negotiations, Ryanair signed a deal with Boeing to supply the airline with 300 new Boeing 737-MAX-10 aircraft worth about $40 billion. Subject to shareholder approval, the aircraft will be delivered between 2027 and 2033. The new Boeing 737-MAX-10s will upgrade Ryanair’s fleet and replace older B737NGs, which is expected to be an important growth driver for the company.
Ryanair fleet renewal
The new Boeing 737-MAX-10s have 21% more seats than the current Ryanair aircraft: 228 versus 189. They also consume 20% less fuel and produce 50% less noise. The company's management believes that the cost of operating one new aircraft will be about 10% lower than the current planes, which will strengthen Ryanair's cost leadership among European airlines.
Approximately half of the new aircraft are intended to replace old planes, while the rest will provide a net increase in capacity. Boeing 737-MAX-10s are expected to boost Ryanair's annual traffic from 169 million customers in FY 2023 to 300 million by FY 2034.
Ryanair expected annual traffic
We believe that fleet renewal is an important growth driver for Ryanair, as it will not only increase customer loyalty, but also improve the company’s operational efficiency. In addition, the capacity growth will help Ryanair to increase its market share. The company’s management estimates that if Ryanair achieves annual traffic of 300 million customers, it could take 20% to 25% of the European short-haul air travel market.
Financial performance
Although Europe’s air travel industry still lags behind its 2019 levels, Ryanair already surpassed its pre-pandemic performance in FY 2023. The average booked passenger fare was €41.12 versus €37.46 in FY 2020 (the calendar year 2019), total revenue per booked passenger increased from €57.17 to €63.93, the break-even load factor decreased from 83% to 81%, and the operating margin returned to previous levels of 13%.
Ryanair’s selected operating data
Ryanair's trailing 12 months' (TTM) financial performance can be summarized as follows:
- Revenue amounted to €11.82 billion, up 9.7% from FY 2023.
- Operating profit increased from €1.44 billion to €1.91 billion. Operating margin rose from 13.39% to 16.19%.
- Net profit amounted to €1.85 billion against €1.31 billion at the end of the year. Net margin increased from 12.19% to 15.66%.
Dynamics of the company's financial results
Company margin dynamics
Operating performance continued to recover in Q1 FY 2024. The number of passengers increased by 11% in the quarter, from 45.5 million to 50.4 million, while the load factor increased by 3 percentage points, from 92% to 95%.
Ryanair’s selected operating data
- Ryanair’s financial results in Q1 FY 2024 are presented below:
- Revenue grew by 40.3% YoY, from €2.60 billion to €3.65 billion.
- Operating income was €711.2 million versus €239.6 million a year earlier. Operating margin increased from 9.21% to 19.49%.
- Net profit amounted to €740.7 million compared to $203.0 million a year earlier. Net margin increased from 7.80% to 20.30%.
Dynamics of the company's financial results
We expect Ryanair to continue its operational and financial growth as the industry continues to recover. The company has hedged 83% of its fuel consumption for FY 2024, which will support operating leverage even in the event of significant increases in energy prices.
Ryanair’s hedge summary
Ryanair generates solid cash flows. Operating cash flow for the last 12 months amounted to €3.73 billion versus $3.89 billion for the year. Free cash flow decreased from €1.98 billion to €1.17 billion over the same period. The decrease was driven by an increase in net working capital and higher capital expenditures in Q1 FY 2024.
Company’s cash flow
Ryanair has a strong balance sheet with total debt of €3.66 billion, cash equivalents, and short-term investments of €4.84 billion, and deeply negative net debt of -€1.18 billion.
Stock valuation
Ryanair trades at a premium to major European and North American airlines: EV/Sales — 1.46x, EV/EBITDA — 6.29x, FWD EV/EBITDA — 5.34x, P/Cash flow — 4.95x, P/E — 10.73 x, FWD P/E — 9.36x. However, we believe that the premium valuation is justified, as Ryanair is one of only two air companies with negative net debt. The firm also boasts the best profitability in the sector, with the closest competitor, United Airlines Holdings, showing a net margin of 5.24%, down 10.42 percentage points compared to Ryanair's.
Comparable valuation
The minimum price target from investment banks set by BNP Paribas is €21 per share, while Goodbody Stockbroker estimates Ryanair at €32 per share. According to the Wall Street consensus, the stock’s fair market value is €23, implying a 44.7% upside potential.
Price targets of investment banks
Key risks
- Ryanair operates in a highly cyclical industry. Although we believe that the expected recession is priced in at the current price, there is a possibility that the deterioration in consumer sentiment will have a greater impact than we think. In this case, the Ryanair stock may remain under pressure for an extended period.
- Although we believe that the recovery momentum will continue, there is a possibility that the recovery potential will be exhausted in the short term. In this case, the Ryanair stock may come under pressure as the expected upside has been partially priced in at the current price.