Ryanair: Strong Signs Of Growing Recovery
Summary
- Ryanair passenger numbers are still well below pre-pandemic levels, but they are recovering fast, and it might break even this year.
- Its recovery showcases how well run the airline is, and that could help positive momentum on the shares continue.
- I think it is fairly valued so remain neutral even though the price could bubble up on good traffic figures.
European budget airline Ryanair (NASDAQ:RYAAY) has had strong passenger numbers lately compared to before vaccination campaigns in Europe geared up. My investment thesis is that the recovery is already priced in. But I think there may be some positive momentum for the shares as the wider market recognises the recovery and also the fact that it isn't just about market recovery, but a further reminder of Ryanair's world class quality as a low cost airline operator.
Reopening in Key European Markets is set to Keep Improving Traffic
Ryanair is benefitting from the increased demand for passenger aviation in Europe as countries open up to more international travel, albeit at different rates. The company carried 9.3m passengers last month, which is substantially higher than both what it managed the prior month (5.3m) and July last year (4.4m). It is still only 63% of the passenger total for July 2019, before the pandemic, but it is still much closer to normal levels. This builds on an already strong recovery in the April- June quarter:
Source: company Q1 results
While there may be bumps along the way, the trend in Europe is now to reopening. Travel restrictions have been loosening in many countries as vaccination rates have increased, and I expect that to continue. There are risks that that could reverse, for example if there are fears of some new variant leading to restrictions being reintroduced. But if one adopts the simple analytical concept that the higher the vaccination rate, the lower the restrictions on movement, then the direction of travel is very clear. Another risk is that some passengers will not travel even if they are able to, for example because they are nervous or have discovered the joys of holidays closer to home (although having seen the price gouging in the hospitality sector here in the U.K. lately, I suspect that travel the domestic tourism industry in the long-term may do worse not better as many people have remembered why they chose to start traveling to southern Europe for their holidays in the first place). While this remains a risk, it is unquantifiable for now and the latest passenger numbers suggest that many people are indeed happy or at least willing to get back on a plane at the drop of a hat. Additionally, Ryanair has proven capability in filling seats. It is a past master of price promotions, eye-catching marketing techniques and cramming passengers into planes plowing between secondary cities. On that basis, even if demand is somewhat dented by an increased number of people who do not want to fly, I expect Ryanair to be less affected by this than some competitors.
Full Year Could See Breakeven
The chief executive said at the time of first quarter results that the company expected August traffic to top 10m, as long as there are no more Covid restrictions in its markets. The company is focussed on filling planes rather than filling them at its ideal pricing, as he made clear:
We will continue our load active/yield passive strategy as we recover load factors over the course of FY22.
Ryanair is actively trying to get people flying again, so it can carry lots of passengers and hopefully optimise its pricing over time. That is on purpose. It reckons there is lower capacity in the European aviation industry which it expects to continue for the foreseeable future. It hopes to mop up much of this demand. The company is taking delivery of 210 new 737 planes, so this is more than idle talk.
The company forecasts a strong recovery in demand by its October - March period and beyond, pointing to precedent for this in the U.S. airline industry.
It narrowed its passenger forecast for the current financial year from 80m-120m to 90m-100m. It is now forecasting either breakeven or a small loss for the year. In other words, Ryanair is roaring back and expects to continue making strong progress in its recovery.
Positive Momentum Could Support the Share Price
Since I last covered the company in January in Ryanair: No Obvious Upside Drivers From Here, the shares are up 6%.
Trading on a P/E ratio of 21x using even pre-pandemic 2019 earnings - which the company won't meet this year and quite possibly not next year either - I don't think Ryanair is cheap. I do think it's a very high quality company in terms of its business model and capability (though as a passenger I think it's appalling and won't fly it), but I don't think a P/E in the twenties is good value on that basis.
However, I do see a possible positive momentum driver for Ryanair, which is that the post-pandemic recovery will remind investors of just what a quality operation Ryanair is. At a time when many competitors went to the wall, Ryanair ran a very tight ship, signed up for lots more planes at presumably excellent prices and is now showing signs of a very strong recovery. In June, for example, rival easyJet (OTCQX:EJTTF) carried 17% of the passengers it did in June 2019, at a load factor of 71.8%. Ryanair, by contrast, carried 37% of the passengers it did in June 2019 at the same load factor as easyJet (72%). I expect this strong performance relative to peers to continue, as Ryanair is aggressive, nimble and always very hungry for business. As European aviation demand continues to recover in the current half, I expect investors to credit Ryanair for this strong performance and - while I think it is fairly valued for now - further positive news of recovery could lead to a share price boost.
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