Market saturation and increased route overlap with competing low-cost carriers to result in margin pressure for Ryanair Holdings

Business Strategy and Outlook

Ryanair is the largest European carrier based on passenger numbers. Since 2008, the company has grown at an annual rate of 9% from 51 million passengers in 2008 to 149 million passengers in 2020. This growth was achieved by deploying a rigid and focused low-cost strategy and passing on the savings by lowering fares to attract an underserved leisure passenger at the low end of the market. Market share growth coupled with a firm grasp on cost containment should drive double-digit profit growth over the medium term. A decade of air travel growth was brought to a grinding halt by the coronavirus pandemic. Short-haul, domestic leisure demand should see a speedier recovery, while long-haul, international and business flights face a prolonged recovery as a result of lingering international travel restrictions.

Ryanair’s short-haul, low-cost model and solid balance sheet with ample liquidity places the group in a favourable position to gain market share from weak and failing participants. The group was able to secure an additional 75 orders for the new Boeing 737 MAX, which brings total aircraft orders to 210. The new fuel-efficient plane will allow the group to achieve its target of 225 million passengers in five years’ time, while keeping operating costs low. It is forecasted that annualized revenue and EBIT growth of 7% and 12% to 2027, respectively, from pre-pandemic levels, with margins normalizing at the group’s long-term average of 18%.

To achieve its long-term growth targets, the group is deviating from its long-standing strategy of only serving secondary airports toward targeting higher-cost and slot-constrained primary airports. It is believed that the current downturn will allow the group to access slots and negotiate favourable rates with airports that are desperate for revenue. In time, these higher-cost airports could become a cost headwind for the group. Over the long term, market saturation and increased route overlap with competing low-cost carriers could result in greater price competition, resulting in margin pressure.

Financial Strength

As of Sept30,2021, Ryanair reported debt of EUR 5.7 billion and a cash balance of EUR 4.2 billion, equating to net debt of EUR 1.5 billion. At the onset of the COVID-19 pandemic, and the ensuing crisis that unfolded in the travel industry, Ryanair swiftly accessed the capital markets and raised EUR 400 million in equity to shore up its balance sheet. The group has repaid the EUR 670 million U.K. CCFF loan and a EUR 850 million bond, with no major maturities until 2023. It is believed the group has adequately restructured its cost base and put sufficient measures in place to stem cash outflows over winter and as it heads into 2022. Also, the group has sufficient liquidity to honour its capital and investment obligations. In addition to the EUR 4.2 billion liquidity it has available, the group’s fleet is largely unencumbered and is a source of additional liquidity, should the need arise. It is believed Ryanair is in a sound financial position.

Bulls Say’s

The group’s solid balance sheet and liquidity headroom will allow it to be opportunistic and capture greater market share from weak and failing peers.
The downturn allows the group to negotiate better terms with suppliers and labour, which will benefit the unit cost structure once air travel recovers.
Delivery of 210 new Boeing 737 MAX aircraft will transform the group’s fleet to a younger, more fuelefficient one.

Company Profile

Ryanair is the leading airline group by passenger numbers in Europe. The company employs a low-cost no-frills model to offer low fares to leisure customers on short-haul intra-European routes. In 2020, the most recent pre-pandemic fiscal year, the company carried 149 million passengers, utilizing a fleet of 467 Boeing 737 aircraft across its 1,800 routes. To keep costs low the company serves predominantly lower-cost secondary airports. The company generated sales of EUR 8.5 billion in fiscal 2020

(Source: MorningStar)

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