Ryanair's ancillary profits much bigger than appreciated, Deutsche says

Deutsche Bank upgraded Ryanair to a 'buy' rating from its previous 'hold' as it forecasts the budget airline's ability to drive more profits than the market expects from ancillary revenue streams.

Ancillary revenues - including excess bag charges, priority boarding and reserved seating, ongoing travel bookings, travel insurance, in-flight food, drink and merchandise - are reported by Ryanair but not margins and Deutsche said its "business model is significantly more geared to ancillary revenues than many in the market realise".

The bank's analysts calculated ancillary margins are at least 65%, which is though to be conservative, meaning last year's ancillary revenues of €1.57bn delivered just over €1bn ancillary EBIT, or 70% of reported group EBIT.

"Therefore whilst ticket profitability is clearly relevant, it is the tail to the ancillary dog."

Not only that, but good ancillary delivery is also seen as creating a virtuous circle, where they drive the profits that can enable cross subsidization of lower fares that in turn leads to more passengers to whom the company can sell ancillary items.

"As such, should the Ryanair ancillary machine continue apace, we see its competitive position in the market as being reinforced."
By the 2020 financial year, Ryanair's ancillary net operating profit after tax is estimated to equal the current consensus for group net income alone.

"In our view Ryanair is a structural winner, can return 8% of its market cap in the next two years, and has consensus expectations that are too low."

A €17.60 price target accompanied the new rating.