Ryanair Should Buy EasyJet

| About: easyJet Plc (ESYJY)

Summary

Ryanair's acquisition of easyJet would yield the largest low-budget airline in Europe.

Synergies involving consolidated current airline routes would occur.

The acquisition would allow wider cachement area to increase revenues.

Ryanair (NASDAQ:RYAAY) and easyJet (OTC:EJTTF, OTCQX:ESYJY) are the two prominent low-cost airlines in Europe with the prior being headquartered in Dublin, and the latter being headquartered in London. Both are popular among US college students studying abroad and European teens and adolescents trying to go on "holiday" (vacation), but are being used more frequently by adults looking to save money.

Both airlines are notorious for having stringent rules and regulations mostly pertaining to luggage size and having boarding passes pre-printed, or having them readily available for a gate attendant to scan. I can personally attest to this as I studied abroad in Florence, readily using these airlines, and on many occasions I had an oversized suitcase, or neglected to print my boarding pass last minute (even though the technology exists to have it sent to your phone like most airlines these days), and I was charged between 50-100 Euros / Pounds in both instances. This is where the airlines generate a great deal of ancillary revenue. The seats are extremely close together, in many cases carry-ons are strictly limited, overhead space is tight, drinks and snacks are not usually served, and on Ryanair there is not even a seatback to house magazines or to store belongings. However, you really do get what you pay for, and it seems that customers are ok with that as revenues continue to climb.

These two carriers are also increasing the number of passengers transported each year. Both airlines have found a place in the top ten airlines (in terms of passengers carried) with Ryanair being number five and Easyjet number nine. What's more impressive is that thus far they only operate in Europe. Both airlines have begun expanding east into the Balkans, and even more recently the Baltics. This is increasing competition with Wizz Air, one of the major low-budget airlines in Eastern Europe. The potential to expand is tremendous.

Here is a look at the current airport bases for each business:

Ryanair has 191 destinations and over 70 bases in Europe

Easyjet has 134 destinations and over 20 bases in Europe

The merger of these two companies into the new Ryanair (or possibly "RyanJet") would yield the largest low-budget airline company in Europe.

With a market cap $23 billion dollars, Ryanair can easily afford to buy easyJet with a market cap of $10 Billion (both figures are roughly adjusted from euros and pounds to dollars). With interest rates still at extremely low levels, Ryanair can easily tap into the capital markets to raise money.

Ryanair usually provides cheaper flights then easyJet and covers a larger swath of Europe. However, easyJet focuses on some of the busiest airports in the European Union, specifically London, Amsterdam, Barcelona, and Rome. By absorbing easyJet, Ryanair will have basically created a monopoly on the low-budget airline business in Europe, and increased its presence in the busiest cities in Europe.

Both stocks have been good investments thus far and will likely continue to be.

Ryanair had an explosive 2015 and is powering through into 2016, up 26.5%. The company supports an attractive 4% dividend as well so it caters to the growth and DGI crowd of investors. Commodity prices staying lower for longer are going to help all airlines, and are projected to help Ryanair drop unit costs 4%. Also Ryanair's debt/equity ratio at 0.8 is lower compared to the industry's 1.1 figure. The company continues to add new flying routes, and recently added 40 new planes to its fleet which will allow it to fly more customers (which in the end means more revenue). At 13.69 X forward price-to-earnings multiple, Ryanair's stock is not overvalued when compared to its US peers. It doesn't hurt that Julian Robertson, the father of Hedge Funds who runs Tiger Management, has 97.287K shares in the company valued at $8.333 Million. RYAAY also trades on the NASDAQ and has ample liquidity.

easyJet traded flat in 2015, gaining only around 3%, but shareholders are rewarded with a 2.65% dividend yield. easyJet enjoyed explosive growth in the years leading up to 2015, and I believe that this year it will resume its upward trend, especially as commodity prices fall. It is important to note that easyJet mainly trades on the London Stock Exchange as the ticker [EZJ], but also trades Over The Counter (OTC) as an American Depository Receipt (ADR) which is the way one will probably want to invest in this company if you are: A) an American investor; B) not looking to get entangled in possible tax issues that arise by buying stocks on foreign exchanges, if you even have access to them; and C) interested in investing in the company.

Another way to invest in both companies, mitigate risk through diversification, and invest in the airline industry as a whole would be JETS (the U.S. Global Jets ETF). Ryanair Holdings PLC holds the number 23 spot and easyJet number 24 in the ETF's top 25 holdings.

Ryanair's acquisition of easyJet would yield numerous cost synergies as the company will then be able to simplify current flying routes and create new routes between cities that were previously unavailable simply because they were not profitable (due to competition between Ryanair and easyJet) or did not have bases/partnerships set up between the connecting cities. The newly formed entity could then begin to aggressively expand into the east, poaching routes and customers from other companies. The newly formed company would yield the most dominant low-budget airline in Europe and would be lucrative for both the shareholders and company alike. The merger would likely withstand EU regulators as Europe has hundreds of airlines that are able to compete. One should do their homework before investing in Ryanair, easyJet, or the JETS ETF as there are always unforeseen risks that unexpectedly emerge from time to time affecting the airline industry such as union strikes, unfortunate plane crashes and commodity price changes.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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