US Edition Ryanair
€3.359 -0.221c
Questor says BUY
Despite the headwinds, Questor still thinks that Ryanair is the airline to own.
The group said it would cut its winter capacity for the first time in its history, as higher fuel costs hit the profitability of some routes. This is what spooked investors. From October, 80 of the company's fleet of 300 aircraft will be left on the runway.
"It's the first time ever that we'll go negative on traffic," said Michael O'Leary, chief executive, as he delivered the annual results yesterday. "We take delivery of 50 aircraft this winter so instead of running around trying to open up new bases and routes in November and December we'll sit them on the ground. With higher oil prices it makes no sense [to fly them]."
However, the company will also increase flight prices by about 12pc, which management reckons will keep profits flat and in the current year passenger numbers should still grow by 4pc – albeit half of the previous financial year's growth in numbers. It will be the slowest year ever for passenger number growth – but it is important to recognise that this year will be very challenging, so this result will actually be quite respectable.
Operating costs are expected to rise 13pc this year – mainly boosted by rises in the price of kerosene.
Some of yesterday's share price fall was caused by headlines about the new volcanic eruption in Iceland. Ash from the Grimsvotn volcano is forecast to enter UK airspace today and is expected to hit operations at Heathrow by the end of the week. Hopefully, lessons have been learned from last year's similar event and disruption won't be as bad.
Ryanair's results for its last year were good. In the 12 months to March 31, revenues rose 21pc to €3.6bn (£3.1bn) and pre-tax profits were up 23pc at €420.9m. The numbers were ahead of analysts' expectations, although there will be sharp cuts to the current-year forecast after this statement.
There was no dividend after the company paid a 34 cents a share special dividend on October 1, representing a one-off yield of 10pc. It will be a few years before another payment is made, but because the company has put its capital expenditure plans on the back burner its cash balances are likely to swell.
Last year, the company carried a very impressive 72.1m passengers – an 8pc year-on-year rise. This was despite the fact that the company had to cancel 14,000 flights because of the Icelandic volcano disruption last year and air traffic controller strikes as well as the increased popularity of "staycations" because of the global financial crisis.
Ryanair used rising oil prices to have a characteristic dig at its rivals. "Higher oil prices will force competitors to continue to increase fares and fuel surcharges which makes Ryanair's lower fares even more attractive," the airline said. It concluded that higher oil prices would lead to further consolidations, increased competitor losses, and more airlines going broke.
"This creates further growth opportunities for Ryanair because we operate the most fuel-efficient aircraft, have the lowest operating costs, and the strongest balance sheet," Ryanair said. Ryanair is trading at a price-to-earnings ratio of 10.6 for the year to March 2011, falling to 9.3 next year.
The shares were first recommended at €2.84 on November 3, 2009 and they are up 18pc since then compared with a FTSE 100 up 16pc. They have, however, been tipped as high as €3.98.
Despite some turbulence, Questor still rates the shares as a buy.