This Airline Stock Is Miles Ahead of Its Competitors
Airlines have taken a one-two punch, with the pandemic cutting global travel, and labor shortages and spiraling fuel costs crimping profits.
But Ryanair Holdings , Europe’s largest airline by passenger numbers, stands out from the pack, having hedged 80% of its fuel until early next year, protecting itself from price volatility. It also stuck with much of its workforce when others reduced head count to save costs. These moves put Ryanair in a strong position to benefit from a rebound in travel.
The stock (RYA.Ireland), which also has American depositary receipts trading on the Nasdaq, has plunged along with its peers, losing 21.45% over the past year to 12.79 euros ($12.85). The dip could be an excellent buying opportunity. The Stoxx Europe Total Market Airlines Index is down 23.4% over the same period.
Ryanair, like almost all of its rivals, saw travel fall off a cliff in the past two years due to Covid-related lockdowns. Just when passenger numbers were picking up, Russia invaded Ukraine and related sanctions reduced fuel supplies and disrupted Eastern European routes.
The industry has also suffered some self-inflicted pain. Airports and some airlines let too many workers go during the pandemic and now can’t recruit fast enough to handle the spike in demand.
Gerald Khoo, an analyst at broker Liberum, wrote in a note that Ryanair benefited from an early commitment to growth.
“It chose to keep flight crews and aircraft current and operational through the pandemic,” he wrote. “Not only did this mean its own staffing levels were in the right place for the surge in volumes that has come through, but also it gave its suppliers and partners the confidence to make similar commitments themselves.”
Others agree. Alexander Paterson, an analyst at Peel Hunt, has forecast the stock could increase 46.6% to €18, and says the business continues to increase its market share.
Ryanair is targeting 166.5 million passengers for 2023, an increase from 97.1 million recorded in the 2022 annual report. “We see recent weakness as an excellent buying opportunity for a group with solid growth potential,” Paterson wrote in a note. The Dublin-based airline has 90 bases in 36 countries, with a focus on Europe, and a market value of €14.1 billion. It flies 483 Boeing 737s and 29 Airbus A320s, with 137 Boeing 737s on order.
The company fetches a multiple of 11.6 times this year’s expected earnings and is valued at a 10% discount to its peers. Ryanair posted a pretax loss of €430 million for the year to March 2022, which was narrower than the €1.1 billion loss in 2021. Total 2022 revenue was €4.8 billion, significantly higher than €1.6 billion in 2021.
A Ryanair spokesperson told Barron’s that the company is operating a “full schedule of 3,000 daily flights this summer, unlike many other airlines that have failed to plan adequately for the return of travel post-Covid. We kept our pilots and cabin crew current throughout the pandemic, and as a result remain able to meet pent-up customer demand.”
Ryanair’s fuel hedge locked in a price around $65 a barrel for 80% of its needs until the first quarter of 2023. This not only sets it apart from its peers, it also presents an opportunity.
Liberum’s Khoo wrote: “Counterintuitively, higher fuel prices may cause Ryanair to add more capacity to exploit its strong fuel-hedging position...and anticipated capacity cuts by competitors.”
Ryanair also has a strong balance sheet, and in a high-interest-rate environment where other airlines are heavily leveraged, it doesn’t need to refinance forthcoming bond maturities because it has sufficient liquidity, Khoo said.