Ryanair analysts supportive amid turbulence - for now

Ryanair’s 20% fall in first-quarter profit left analysts largely supportive. Most kept faith with the budget airline, arguing its low-cost, high volume model would emerge intact from turbulence as in the past. But others thought they detected signs of more fundamental problems for the Dublin-based company's business.

Jarrod Castle at UBS’s initial take was sanguine. In a brief note to clients he said:

“How would we expect investors to react? A: Results and outlook broadly in line so don’t expect material share price reaction.”

Gerald Khoo at Liberum was also supportive but noted that the prospect of air-crew strikes would make investors wary.

“We see consensus estimates changing little but with the balance of risks to the downside. Strike action is bad for sentiment and creates short-term risks to earnings, but should not impact Ryanair’s long-term competitive position, cost leadership, financial strength or cash generation.

“We anticipate further industrial action as Ryanair attempts to reach agreements for the first time with trade unions in each of the countries it has operating bases in … Industrial action is clearly unwelcome but it does not dilute Ryanair’s sound and attractive long-term fundamentals.”

Russ Mould, investment director at AJ Bell, said Ryanair boss Michael O’Leary may need to dust down some of his headline-grabbing proposals to cut costs such as making passengers load their own baggage.

“Ryanair has also previously talked about potentially offering event tickets, restaurant bookings and other travel-related services. The airline has certainly done a very good job so far at sweating its assets and making money from passengers beyond the price of an airline ticket. Yet first quarter results would suggest it needs to do more to cope with higher oil prices, higher pilot costs and yet another bout of strikes.

“Steps are already being taken by ordering new aircraft which have more seats and lower fuel costs, although they aren’t due for delivery for another few years. EasyJet recently made plans to bulk up its package holidays business in order to capitalise on its strong brand and squeeze more money out of its customers. Ryanair also has a holiday business albeit not one it talks about much – perhaps this situation may change if EasyJet makes progress with its proposition.”

Neil Wilson, chief market analyst at Markets.com, also noted Ryanair was feeling the squeeze from pressure to improve pay and conditions for its historically non-union workers.

“Some sense from reading these results that the expected dent to the low-cost model from unionisation etc is already feeding through to the bottom line, although it may be unwise to read too much into a single quarter’s numbers. We note that FY profit guidance remains unchanged … although this remains on the whims of French air traffic controllers, its own staff talks, Brexit and close-in Q2 fares.

'Nevertheless, costs have jumped significantly higher. Unionisation on the one hand and higher oil prices on the other have combined to destroy margins … Striking ATC [air traffic control] workers are a perennial bugbear for Ryanair, but these days it’s facing staffing trouble far closer to home.

"Of course higher oil prices are not just a Ryanair problem and management says European airlines are suffering ‘a significant cash flow squeeze and/or are close to breaching debt covenants’. Ryanair suggests this will lead to further airline failures and consolidation this winter, a trend that we would agree with. As consistently argued, Ryanair is exceptionally well placed to take advantage of long overdue consolidation in Europe."