October 31, 2018

Ryanair – A Stark Warning for More Airline Failures

by Tajinder Dhillon.

Ryanair (RYA.I) reported 18Q3 earnings on October 22nd, showing a positive EPS and Revenue surprise of 4.6% and 2.4% which can be seen in Exhibit 1:

Exhibit 1: Ryanair 18Q3 Results

However, profits were down due to lower airfares, higher oil prices, and higher passenger compensation costs.   Key Performance Indicators (KPIs) appeared strong with an increase in traffic growth of 6% to 77 million passengers, an impressive load factor of 96%, and ancillary revenues up 27% (pre-booking seats, in-flight Wi-Fi, food and drink on-board).

Higher Costs due to Passenger Compensation

Part of the reason for lower profits was due to higher EU261 costs, which include passenger delays and compensation.  CEO Michael O’Leary expressed his frustration with delays being caused by Air Traffic Controllers (ATCs), “punctuality this summer has suffered meaningfully at the hands of European Air Traffic Control.  All airlines have suffered a very significant impact to their punctuality.  And in particular, we’ve suffered an impact to the increase in EU261 costs.  Because while we may not be responsible for ATC strikes or disruptions, EU261 obliged the airlines to pick up the right to care costs, reaccommodation and right to care.  And we are, by law, prohibited from recovering those costs from the ATC providers.  It has become a shamble.  Our punctuality in the half year has declined 11 percentage points from 86% to 75%. We’re still the most on-time airline in Europe, but 13 points of those 11 points is accounted for directly by air traffic control itself.”

Labour Strikes not a Concern?

For those who were caught in the middle of labour strikes which caused disruption across Europe, CEO Michael O’Leary suggests that the outages were not as bad as people make them out to be.  “I think there’s been far too much noise in the background about unions and labour issues.  We’ve had 8 days of strikes this year, but really, they’ve been reasonably small.  We had 5 days of strikes by 25% of our Irish pilots, we cancelled less than 20 flights out of 300 flights to and from Ireland; and 3 days of strikes by cabin crew across 5 countries in which we completed more than 90% of the scheduled flights in all of those cases.”

Lower Airfare Prices for Longer?

Some of Ryanair’s misery will be of benefit to consumers who should continue to see lower airfare prices, as airlines battle it out for wallet share.  O’Leary believes that declining airfare is a wider phenomenon impacting most airline providers and has made his intentions clear that they will lead the way towards low-cost fares if a price war was to occur. “It’s characterized by declining airfares, which we thought on the 1st of October was a kind of a Ryanair phenomenon. It was the lack of customer confidence because of a perceived threat to our reliability or union disruption. In actual fact, I think we now believe it’s a much wider industry phenomenon. Short-haul capacity in Europe is up around 8% this winter. Airfares across the piece seem to be our falling. It’s not related to Ryanair or unions. It’s related to excess capacity and certainly our willingness to continue to lower airfares into this winter. If there’s going to be a fare war, we want to lead it and win it.”

A Stark Warning for more Airline Failures

O’Leary gave a stark outlook on the wider Airline industry in Europe, who is facing higher fuel prices which will lead to more collapses in 2018.  “…Spot oil rising to $85 per barrel.  And already, we’ve seen the first wave of casualties across Europe.  Skyworks in Switzerland, VLM in Belgium, Small Planet and Azur Air in Germany, Cobalt in Greece last week and Primera Air in Scandinavia and in Stansted have all collapsed in the last 3 or 4 weeks.   We expect more failures this winter.   Mostly, we think 1 of the 2 Scandinavian airlines is likely to fail over the coming months, largely because they are unhedged on oil or essentially unhedged on oil.  And they couldn’t make money when oil was at $40 a barrel.   They’re certainly not going to make any money when oil is at $85 a barrel.”

Note: at the time of publication, Brent Oil has declined from $85 to $76 a barrel.

Analysts Revising European Airlines into the Red

If we look at Analyst sentiment for European Airlines according to the StarMine Analyst Revision Model, it would appear that some of O’Leary’s concerns are impacting how analysts view airlines.  Looking at Exhibit 2, we can see most European airlines are ranked in the bottom two deciles, including Ryanair (RYA.I), International Consolidated Airlines (ICAG.L), Deutsche Lufthansa (LHAG.DE), and EasyJet (EZJ.L).

Exhibit 2 – StarMine Analyst Revision Region Rank for Airlines

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