Ryanair's Earnings Soar

Aug. 9.06 | About: Ryanair Holdings (RYAAY)

Investopedia Advisor submits: It seems like the Easter bunny does exist after all. At least that might be one way to explain the sharply higher earnings recently reported by Europe’s leading budget air carrier - Ryanair (NASDAQ:RYAAY). Earnings soared 80% during the fiscal quarter ending June 30, as 25% higher traffic volumes during the active Easter-break period helped boost results.

However, despite this consensus-beating performance, management chose to put a damper on expectations by warning that rising fuel costs, which were up 52% in the quarter, could push profitability down during the balance of the year, producing a more modest 5-10% year-over-year gain in earnings.

While it’s difficult to argue with management’s logic in the face of yet another jump in oil prices, given the subsequent share performance it appears that Ryanair shareholders are paying scant attention to management’s warnings. Are they smarter than the guys actually running the business?

One possible explanation is that the market is betting we’ll see a replay of last year, when similar management warnings were subsequently followed by above-consensus results.

While such an outcome may still be possible, the unfolding trend in oil prices doesn’t make it likely.

But if the share price does come down to more attractive levels, there are good fundamental reasons to be a long-term buyer of this stock. At the top of the list is the fact that short-haul “no frills” air travel is a well-established reality in the European market and is still hugely attractive to consumers.

Paradoxically, one of the reasons for this is fuel costs. To illustrate the point, assume you live in London and you’re keen on heading up to Edinburgh this month to take in a few days at the Fringe Festival (a popular arts and culture event that brings in huge numbers of tourists from across Europe). Edinburgh is about 550 km from London, making it an 1100 km round trip.

With unleaded gas currently going for about one pound sterling per liter (that’s about US $7.25 a gallon), and assuming average automobile gas mileage of about 10 liters per 100 km, the fuel costs alone for the entire round trip come to about £110 sterling. If you add in meal costs, given that the trip time would be five to six hours each way, your trip costs would go even higher.

As an alternative, you could book an online flight with easyJet. Like Ryanair, they are another European discount carrier that just happens to serve the London to Edinburgh route. Booking an on-line return flight with them comes to approximately £103 pounds sterling, and you’d get to Edinburgh from London in about 1 ½ hours. While you’re not going to be getting in-flight meals or entertainment, bringing a sandwich and iPod with you on the flight would offset this.

With a fundamental cost and time advantage like this, the two- or three-day vacation getaway is now a fixture of European life. The fact that Europe has such incredible cultural diversity within such short distances is the other driver for this type of travel.

Further incentives for this type of “mini-vacation” came with the addition of new eastern European states into the European Union. Heretofore unknown destinations like Riga, Talinn and Krakow have quickly become A-list hot spots for savvy weekend travelers looking for top class food and lodging at rock bottom prices.

As the dominant operator in the European discount flight market, Ryanair is well-positioned continue to benefit from this growing trend in the European travel market – a trend which it may actually have helped start when it first launched its no frills air service. Now, the company is also harvesting the spin-off revenue streams from hotel bookings and car rentals. So long as this travel market continues to grow, so too should the company’s earnings.

RYAAY 1-year chart:

By Eugene Bukoveczky, Contributor - Investopedia Advisor

At the time of release Eugene Bukoveczky did not own any shares in any of the companies mentioned in this article.