Ryanair INCREASE TARGET PRICE. 94% of seats cost 1.5x RYA fares 100% 94% % of seats - unit costs over 56. % of seats - unit costs over 50

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1 Europe/United Kingdom Equity Research Airlines The Ideas Engine series showcases Credit Suisse s unique insights and investment ideas. Research Analysts Neil Glynn, CFA neil.glynn@credit-suisse.com Arthur Truslove arthur.truslove@credit-suisse.com Julia Pennington julia.pennington@credit-suisse.com Tim Ramskill, CFA tim.ramskill@credit-suisse.com Ryanair INCREASE TARGET PRICE Market opportunity spells sustainable growth Controlled ascent increasing confidence drives a 25% uptick in our TP to 18.78; reiterate Outperform: We introduce the Credit Suisse Market Opportunity Model to quantify RYA's growth prospects. On the back of our extensive proprietary analysis, we raise our 2018E-2024E net income by 4-8% and increase our TP by 25% to (from 15.00) to reflect our increased confidence in RYA's future returns and cash flows, which we think should actually be enhanced by rising fuel prices. Credit Suisse Market Opportunity Model highlights c40% of competitors' seat costs (breakeven pricing point) are 3x RYA's 2018E average fare and c76% are at least 2x 5bn revenue opportunity: Our proprietary model analyses the cost structure of 14,000 routes and 900m seats operated by listed and non-listed players and indicates significant opportunity for RYA to take share at equivalent or higher margins with a fleet of up to 800 aircraft (585 planned by 2024). We expect RYA to seize these revenue opportunities via increasing volume, expanding its highly defensible cash generating network, and securing the sustainability of value-creating returns. We supplement the CS Market Opportunity Model with additional new differentiated analysis: (i) The Ryanair effect 'like a hot knife through butter': we highlight that as Ryanair has grown under its 'Always Getting Better' programme, competitors have retrenched, (ii) the case for price convergence in Europe to follow the US is growing: proprietary analysis of two years of fare data illustrate that as RYA has taken share in London, it has not had to discount to do so with passengers increasingly agnostic to carrier choice, keen cost control would provide a free option on structurally higher returns, and (iii) 'Amazon of travel' strategy to increase price competitiveness: ancillary revenue opportunities as RYA seeks to become the 'Amazon of travel' mean that each extra 1 per pax should allow RYA to discount fares by 2%, alongside plentiful airport opportunities to follow Frankfurt, making RYA increasingly competitive. Figure 1: 40% of competitor seat costs 3x RYA's E avg. fare; 76% at 2x a significant growth opportunity 100% 94% 94% of seats cost 1.5x RYA fares 82% 76% of seats cost 2x RYA fares 69% 57% 40% of seats cost 3x RYA fares 48% Source: Credit Suisse estimates (Credit Suisse Market Opportunity Model) DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Key charts Figure 2: 40% of competitor seats cost 3x RYA's 37 avg. fare; 76% at 2x significant growth opportunity Figure 3: Taking share from 5-10% of seats costing 2x RYA fares suggests room for aircraft % 94% 94% of seats cost 1.5x RYA fares 82% 76% of seats cost 2x RYA fares 69% 57% 40% of seats cost 3x RYA fares 48% Substituting RYA aircraft for 5% of seats costing 2x RYA fares Substituting RYA aircraft for 10% of seats costing 2x RYA fares Source: Credit Suisse estimates (Credit Suisse Market Opportunity Model) Source: Credit Suisse research (Credit Suisse Market Opportunity Model) Figure 4: As Ryanair grows, peers retrench, emphasising control Figure 5: No need for fare wars - aggressive London growth yet 2Y EZJ premium stable (parity at peak) 90% 80% Ryanair easyjet London-Belfast Ryanair Thomas Cook easyjet London -Glasgow Ryanair easyjet Monarch TAP Airlines Portugal London-Lisbon British Airways 70% 60% 50% Ryanair Flybe BA easyjet Virgin Atlantic (Little Red) London-Edinburgh Ryanair Aer Lingus Dublin-Amsterdam Ryanair Eurowings SunExpress Cologne-Berlin 40% 30% 20% 10% Ryanair Alitalia Vueling Rome - Barcelona Ryanair easyjet Brussels Airlines Brussels-Berlin Ryanair Vueling Brussels Alitalia Rome-Brussels 0% -10% Ryanair Thomas Brussels Vueling Cook Airlines Brussels-Barcelona TUI Ryanair Alitalia Blue Panorama Rome-Catania Vueling Ryanair Ellinair Aegean Athens-Thessaloniki Source: Diio Mi summer 2013-summer 2016 data, Credit Suisse research Source: Company data, Credit Suisse research Figure 6: RYA-FRA deal highlights appetite from major airports 16 of top 50 growing below 2x GDP Milan-Malpensa, IT Athens, GR Lisbon, PT London-Stansted, EN, GB Berlin-Tegel, DE Palma de Mallorca, ES Brussels, BE Manchester, EN, GB Duesseldorf, DE Stockholm-Arlanda, SE Vienna, AT Dublin, IE Oslo, NO Zurich, CH Copenhagen, DK Paris-Orly, FR London-Gatwick, EN, GB Rome-Da Vinci, IT Barcelona, ES Munich, DE Madrid, ES Amsterdam, NL Paris-De Gaulle, FR Frankfurt, DE London-Heathrow, EN, GB seats vs GDP growth Figure 7: Returns defensible as fleet grows 60% - HOLT suggests 34% upside warranted by stability 40% 35% 30% 25% 20% 15% 10% 5% 0% 1999A 2001A 2003A 2005A 2007A 2009A 2011A 2013A 2015A 2017E 2019E 2021E 2023E ROCE (lease adjusted) ROIC (lease adjusted) Source: Diio Mi data, Credit Suisse research Source: Company data, Credit Suisse estimates, Credit Suisse HOLT Ryanair 2

3 Table of contents Key charts 2 Investment summary: lots of runway left 4 Factoring opportunity into forecasts 7 Existing network value suggests the market is paying little for future growth 10 Ryanair 14 Credit Suisse Market Opportunity Model 16 The Ryanair effect like a hot knife through butter 22 New insights on competitive dynamics building pricing power means opportunity 30 Ryanair Labs can make RYA more price-competitive 39 Airport opportunities becoming super-sized 49 Room for more RYA aircraft by FY24E 51 Ryanair 3

4 Investment summary: lots of runway left At a time when the market is increasingly concerned about European airline return prospects given macro uncertainty, excess supply and full orderbooks at Boeing and Airbus, we illustrate the scale of a compelling market opportunity for Ryanair, which suggests the stock is significantly undervalued today. The Credit Suisse Market Opportunity Model highlights that c40% of competitor European short haul seat costs (breakeven pricing point) are 3x RYA's 2018E average fare of 37, with c76% at least double RYA fares: With all airports ex Heathrow (ahead of the construction of a third runway) potentially open for Ryanair to expand, as demonstrated by Frankfurt's willingness to discount to attract Ryanair, we provide new insight into RYA's true market opportunity. We introduce the Credit Suisse Market Opportunity Model, a unique tool that analyses the competitive structure of 14,000 routes and 900m seats in Europe, in tandem with a deep-dive analysis of the cost base of each significant listed and non-listed airline in Europe. This allows us to quantify RYA's opportunity on a route, country and total market level to help frame return prospects on incremental capacity. RYA should generate fare revenue of 4.9bn and total revenue of 6.7bn in FY17E and plans to grow volume by 68% by 2024, but taking a 5-10% share of the most expensive tier of the market (where seat costs are at least 2x RYA fares) would suggest a 5bn revenue opportunity. History demonstrates that when Ryanair grows in a market, competitors tend to retreat: Since Ryanair launched its 'Always Getting Better' (AGB) programme in late 2013, it has continued to aggressively pursue a market share strategy. However, we highlight that where Ryanair grows, competitors typically hold fire or even retrench, allowing RYA to grow unimpeded. This dynamic may sound intuitive as a low-cost carrier (LCC) seeks to increase competition for price-sensitive passengers; however, easyjet's experience over the past three years has been markedly different from that of Ryanair, emphasising the degree of control Ryanair has over the execution of its strategy given the strength of its cost base and balance sheet and track record of fierce competition when necessary. We think this general lack of competitive response suggests Ryanair will be allowed to successfully develop routes in the future. Two years of proprietary fare data illustrate that Ryanair does not need to discount more aggressively to take share, strengthening the argument for long-term fare convergence: We have been tracking fare data on competing routes from London the most important air travel market in Europe at Ryanair, easyjet and British Airways. Despite RYA's aggressive growth in London over the past three years under its AGB programme (average annual seat growth of 11%), EZJ's fare premium to RYA has remained broadly stable at 25%, while we have observed pricing parity on key routes such as Barcelona, Madrid, Milan and Lisbon, as well as in peak seasons for air travel. The data suggest that passengers are becoming increasingly agnostic to the choice between Ryanair and its competitors, and we see parallels with the convergence of pricing points in the US domestic market, where comparable Southwest, JetBlue, American, Delta and United pricing suggests that passengers are unwilling to pay much of a premium for one carrier's product over another. Long-term price convergence in Europe, as legacies commoditise their products and LCCs target business travellers, would prove very lucrative for those with the keenest cost control. 'Amazon of travel' strategy should make fares even more competitive mediumterm fare pressure key to long-term margin prospects: We think Ryanair's market opportunity is about to get even bigger as it executes the next leg of its ancillary revenue strategy, designed to produce the 'Amazon of travel' in Europe on the back of work in Ryanair Labs via initiatives including myryanair, Ryanair Rooms and Ryanair Car Hire. We think Ryanair Labs has the potential to: (i) increase investor confidence in revenue and earnings, increasing resilience despite industry oversupply and potentially support RYA's Ryanair 4

5 multiple; (ii) stimulate additional passengers by engendering additional loyalty via my Ryanair, with each 1% increase in pax numbers worth 36m to net income; and (iii) improve conversion rates in hotels and car hire, with each additional 1 of ancillary revenue per passenger worth c 180m to 2024E net income. While most investors will focus on the ancillary revenue opportunity on a standalone basis, we see the real opportunity in Ryanair discounting fares even more aggressively to build market share (in November 2016,CEO Michael O'Leary has highlighted his "vision that in the next 5-10Y that the air fares on Ryanair will be free, in which case the flights will be full, and we will be making our money out of sharing the airport revenues."), with each 1 in ancillaries enabling a 2% discount in fares while protecting revenue this would secure its future via an increasingly defensible, cash flow generative market position. If RYA succeeds in maintaining price pressure on competitors over the medium term, gaining attractive share in the process, we see the opportunity for it to ultimately raise fares to optimise margins, having gained more pricing power in the distant future with a 20-30% market share (potentially helped by feeder arrangements with long haul carriers). Conversely, were RYA to focus on raising fares now, we think it would damage its longterm prospects by easing pressure on competitors. FY18E-FY24E net income estimates up 4-8% We increase our revenue forecasts by 1-4% over FY18E-FY24E, via a 0.5 percentage point uptick in load factor from FY18E, with ancillary per pax growth of 2% in FY18E building to 5% in FY19E and unchanged fare assumptions (FY18E -9%). We supplement this with 1% annual ex fuel unit cost savings over FY18E-FY24E (1.6% in FY18E given GBP tailwinds), which produces a net income uplift of 4% to 1,382m in 2018E whereas our estimates rise by 2-8% to bn over 2019E-2024E (versus market expectations of 2bn over 2017E-2018E pre-brexit) despite modelling jet fuel at $550/mt versus $500/mt previously. Market is paying for RYA's existing network, ascribing limited value to compelling growth potential target price increased to on cash flow confidence We raise our target price by 25% to to reflect improving confidence in RYA's longterm returns and cash flow generation prospects based on our in-depth analysis of RYA's market opportunity and competitive threats. Further, successful execution on its 'Amazon of travel' strategy would deepen the moat around the current network and raises the prospect of new capacity generating commensurate returns. Our forecasts reflect a stable return on assets of 10-11% to 2024E, whereas using the Credit Suisse HOLT Flex tool with flat EBITDA margins to this point would suggest 34% upside potential to the implied warranted value in this scenario. Our analysis leads us to think about RYA's competitive positioning as resembling a castle surrounded by a moat its current network should prove self-sustaining given the difficulties for competitors in taking share (and an apparent lack of appetite to attempt to do so) and their inability to sustainably price lower than RYA. Valuing the cash flows produced by the business currently (without growth capex) would imply the current network may be worth 16bn, or 13 per share, suggesting only 7% of the market cap reflects the future growth potential for a business that should grow pax volumes by 68% by FY24 by investing c 7bn in capex (for assets worth closer to 11bn). Ryanair 5

6 Figure 8: The lower the better the virtuous circle of lower fares Source: Company data, Credit Suisse research We think RYA could comfortably operate as many as 800 aircraft by 2024, versus its current plan of 585, up from 358 at September Figure 9: Existing RYA fleet plan for 585 units by 2024 we see scope for Planned number of aircraft at period end to 2024 Source: Company data, Credit Suisse research Ryanair 6

7 Factoring opportunity into forecasts Our work on Ryanair's market opportunity, in combination with clear commercial momentum from Ryanair Labs, improves our confidence that Ryanair's margins can be protected at 2017E levels in 2018E, followed by gradual expansion until 2024E. We expect further modest improvement in load factors in 2018E, despite RYA achieving 94% in 2017E. 1Q17A and 4Q17E loads of 94% and 93% compared to 2Q17A and 3Q17E loads of 96% and 95%, respectively, and we expect these loads to be improved on as RYA looks to maximise volume in executing its ancillary revenue strategy. We increase our previous 2018E load factor forecast of 94.4% to 94.9%, with the 0.5 percentage point uptick driven by moving 1Q18E and 4Q18E up from 94% and 93% to 95% and 94%, respectively. We continue to forecast Ryanair's FY18E average fares down 9% yoy to 37, and expect RYA to be able to boost loads without requiring a greater level of fare discounting than this. Our fare forecast represents an 8% decline at constant currency. Upgraded ancillary revenue targets, with ancillaries expected to account for 30% of revenues by Q17 was the first quarter since 3Q15 in which ancillary revenues per passenger showed yoy growth, suggesting momentum. We now forecast ancillary revenue per pax growth of 2% in 2018E, building to 5% in 2019E. Airport opportunities, in combination with upgraded volume targets, lead us to reduce our ex fuel unit cost forecasts by 0.5% to model a 1.6% yoy decline in 2018E. This represents a 1% decline at constant currency, which should be eminently achievable with pax volume growth of 10%. We expect ex fuel unit cost savings to be achieved at similar run rates annually going forward. We raise our 2018E net income by 4% to 1,382m, while our estimates rise by 2-8% to bn. Note: Pre-Brexit, the market had seen 2bn net income as achievable in 2017E-2018E. Ryanair 7

8 Figure 10: RYA 2012A-2024E profit & loss account estimate changes Actual Actual Actual Actual Actual New Change New Change New Change New Change New Change New Change New Change New Change m 2012A 2013A 2014A 2015A 2016A 2017E % 2018E % 2019E % 2020E % 2021E % 2022E % 2023E % 2024E % Operating revenues Scheduled revenues 3,439 3,820 3,790 4,260 4,967 4,906 0% 4,913 1% 5,405 2% 5,672 2% 6,008 2% 6,424 2% 6,868 2% 7,208 2% Ancillary revenues 886 1,064 1,247 1,394 1,569 1,762 1% 1,976 3% 2,283 6% 2,492 7% 2,747 8% 3,056 8% 3,399 8% 3,711 8% Total operating revenues 4,325 4,884 5,037 5,654 6,536 6,668 0% 6,890 1% 7,688 3% 8,164 3% 8,755 4% 9,479 4% 10,267 4% 10,919 4% Operating expenses Staff costs % 686 1% 739 1% 767 1% 803 1% 850 1% 899 1% 933 1% Depreciation and amortisation % 543 0% 584 0% 625 0% 668 0% 711 0% 755 0% 800 0% Fuel & oil 1,594 1,886 2,013 1,992 2,071 1,887 1% 1,779 1% 2,198 8% 2,307 8% 2,444 8% 2,613 8% 2,794 8% 2,933 8% Maintenance, materials and repairs % 158 0% 172 0% 177 0% 184 0% 192 0% 201 0% 207 0% Aircraft rentals % 103 1% 118 0% 125-4% 134-9% % % % Route charges % 712 0% 799 0% 863 0% 942 0% 1,038 0% 1,143 0% 1,236 0% Airport and handling charges % 929 1% 994 1% 1,052 1% 1,124 1% 1,213 1% 1,308 1% 1,385 1% Other operating expense % 361-1% 389-1% 392-1% 398-1% 408-1% 419-1% 422-1% Operating profit before exceptional items ,043 1,460 1,551-1% 1,620 4% 1,695 2% 1,856 4% 2,057 6% 2,309 6% 2,590 7% 2,837 8% Exceptionals Operating profit after exceptional items ,043 1,778 1,551-1% 1,620 4% 1,695 2% 1,856 4% 2,057 6% 2,309 6% 2,590 7% 2,837 8% Total other income/(expenses) (50) (68) (69) (61) (56) (75) (71) (71) (71) (71) (71) (71) (71) Profit before taxation ,722 1,476-1% 1,549 4% 1,624 2% 1,785 4% 1,987 6% 2,238 7% 2,520 7% 2,766 8% Tax on profit on ordinary activities (73) (82) (72) (116) (163) (159) -1% (167) 4% (175) 2% (193) 4% (214) 6% (241) 7% (272) 7% (298) 8% Profit for the period ,559 1,317-1% 1,382 4% 1,449 2% 1,593 4% 1,772 6% 1,997 7% 2,248 7% 2,467 8% Underlying profit for the period ,242 1,317-1% 1,382 4% 1,449 2% 1,593 4% 1,772 6% 1,997 7% 2,248 7% 2,467 8% Adjusted earnings per ordinary share - Basic % % % % % % % % - Diluted % % % % % % % % EBITDAR margin 23.5% 23.5% 22.1% 27.1% 30.6% 32.0% -0.3% 32.9% 0.5% 31.2% -0.4% 31.9% -0.2% 32.7% 0.0% 33.4% 0.1% 34.1% 0.1% 34.8% 0.1% EBIT margin 14.3% 14.7% 13.1% 18.4% 22.3% 23.3% -0.3% 23.5% 0.6% 22.0% -0.1% 22.7% 0.2% 23.5% 0.5% 24.4% 0.7% 25.2% 0.8% 26.0% 1.0% Net margin 11.6% 11.7% 10.3% 15.3% 19.0% 19.7% -0.2% 20.1% 0.5% 18.8% -0.1% 19.5% 0.2% 20.2% 0.5% 21.1% 0.6% 21.9% 0.7% 22.6% 0.9% Passengers % % % % % % % % Growth % 5% 4% 3% 11% 17% 13% 10% 10% 6% 7% 8% 8% 6% Seats % % % % % % % % Growth % 5% 5% 2% 4% 12% 11% 9% 10% 6% 7% 8% 8% 6% Load factor 82.4% 82.1% 83.0% 88.5% 92.9% 94.4% 0.0% 94.9% 0.5% 94.9% 0.5% 94.9% 0.5% 94.9% 0.5% 94.9% 0.5% 94.9% 0.5% 94.9% 0.5% Growth pts -0.6% -0.3% 0.9% 5.5% 4.3% 1.6% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Average fares % % % % % % % % Growth % 16% 6% -4% 1% -1% -12% -9% 0% -1% -1% -1% -1% -1% Ancillary spend per passenger % % % % % % % % Growth % 5% 15% 14% 1% -4% 0% 2% 5% 3% 3% 3% 3% 3% Revenue per passenger % % % % % % % % Growth % 13% 8% 0% 1% -2% -9% -6% 1% 0% 0% 0% 0% 0% Revenue per seat % % % % % % % % Growth % 12% 8% 1% 8% 3% -8% -5% 1% 0% 0% 0% 0% 0% Total cost per passenger % % % % % % % % Growth % 13% 7% 2% -5% -6% -10% -6% 3% -1% -1% -1% -1% -1% Fuel cost per passenger % % % % % % % % Growth % 23% 13% 4% -11% -11% -19% -14% 12% -1% -1% -1% -1% -1% Ex-fuel cost per passenger % % % % % % % % Growth % 7% 3% 1% 0% -2% -4% -2% -1% -1% -1% -1% -1% -1% Sector length grow th 6% -1% 5% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Source: Company data, Credit Suisse estimates We now forecast 2017E's 20% net income margin to be maintained in 2018E before rising modestly to 23% by 2024E. In net income per seat terms, we model 2016A's falling to in 2017E and 9.98 in 2018E, before rising towards 12 by 2024E given what we discern as a wealth of opportunity from scheduled as well as ancillary revenues. Ryanair 8

9 Figure 11: Net income per seat has plenty of upside potential despite re-setting A 2002A 2004A 2006A 2008A 2010A 2012A 2014A 2016A 2018E 2020E 2022E 2024E Source: Company data, Credit Suisse estimates We remain highly focused on the returns on capital deployed by Ryanair. In our view, RYA should achieve a return on assets or capital employed of 12% in 2017E, up from 11% in 2016A, which translates to a ROIC of 31% (flat yoy) given the strength of its balance sheet. The key to Ryanair's future will be its ability to continue to produce this quality of returns from new aircraft deployed, as well as those retained within the current fleet. We model a ROA/ROCE of 10-11% over 2017E-2024E, which quantifies our view that RYA can continue to grow its network at equivalent (or higher) levels of profitability given our analysis of its market opportunity. Figure 12: RYA returns 1999A-2024E 40% 35% 30% 25% 20% 15% 10% 5% 0% 1999A 2001A 2003A 2005A 2007A 2009A 2011A 2013A 2015A 2017E 2019E 2021E 2023E ROCE (lease adjusted) ROIC (lease adjusted) Source: Company data, Credit Suisse estimates As we discuss below, our analysis indicates that RYA's current share price reflects the current network's value, ascribing no value to RYA's compelling growth prospects. Ryanair 9

10 Existing network value suggests the market is paying little for future growth We find the existing network is worth 13 per share, versus the current stock price as of 17 January 2017 of In our view, Ryanair has built the market positioning and scale, coupled with sustainable unit cost advantages, to warrant treatment of its existing network as a stable cash generator, fortified by a moat of competitive advantage, throwing off sustainable annual FCF yields of 15-20%. Separating the business into two parts, we highlight our view that: The existing RYA network fares can be increased to boost returns (based on our fare analysis); and RYA's growth capacity should be able to achieve comparable returns. We see RYA's current network as a fortress that will be very difficult for competitors to sustainably penetrate given its cost base and balance sheet. Valuing this existing network as a perpetuity, we use 2017E FCF adjusted for working capital movements, reflecting a normalised tax rate, and excluding growth capex. This approach suggests RYA's existing network (on an ex growth basis) is worth 16bn, versus RYA's current market cap of 17bn, at an 8.5% WACC. Figure 13: RYA's existing network value is 16bn m Long term performance 2018E revenue 6,890 EBIT margin 23.5% EBIT 1,619 Depreciation 543 Operating cashflow (pre-w orking capital) 2,162 Taxation at Irish CT rate of 12.5% (270) Capex in line w ith depreciation (543) Free cashflow (pre WC/financing costs) 1,349 Perpetuity value 15,868 Per share WACC 8.5% Source: Credit Suisse estimates Simply protecting margins would produce a value of 21 per share by 2024 As such, the market is implying that of the cumulative 7bn of investment Ryanair will make in new aircraft over 2018E-2024E which will be closer to 20bn in aircraft market value given RYA's attractive discount from Boeing should be valued at only 2bn today. Based on our analysis of RYA's market opportunity, we believe the company can achieve returns from new aircraft equivalent to those in its current fleet. This suggests that expanding RYA's network by 68% by 2024E should see an equivalent expansion in FCF. Valuing RYA's 2024E network as a perpetuity would suggest a market cap of 25bn, or 21 per share (before adjusting for potential future share buybacks). Ryanair 10

11 Figure 14: Blue sky scenario RYA's 2024E network could be worth 25bn if margins can be protected m Long term performance 2024E revenue 10,919 EBIT margin 23.5% EBIT 2,566 Depreciation 800 Operating cashflow (pre-w orking capital) 3,366 Taxation at Irish CT rate of 12.5% (421) Capex in line w ith depreciation (800) Free cashflow (pre WC/financing costs) 2,145 Perpetuity value 25,237 Per share Source: Credit Suisse estimates Our Grey Sky scenario uses a long-term EBIT margin of 14% in our DCF model, consistent with 2011A-2014A, and annual capex of 1bn over the long term, to reach a fair value of Target price up 25% to on cash flow prospects We raise our target price from to to reflect improving long-term cash flow generation potential our TP represents a 50/50 blend of 2018E multiples, returning a fair value of 16.75, and the result of our DCF model, which suggests a fair value of Our TP suggests 26% upside potential before cash distributions, including the recently announced 468m share buyback. Figure 15: Target price up from to WACC 8.5% Historical multiple-derived fair value DCF-derived multiple Target price (average) Current price as at 17 January Upside/dow nside 26% 2018E FCF yield 4% Source: Thomson Reuters, Credit Suisse estimates Ryanair 11

12 Figure 16: Ryanair DCF model fair value Stage 1 m 2018E 2019E 2020E 2021E 2022E Long term performance Terminal value Revenue 6,890 7,688 8,164 8,755 9,479 9,764 EBIT margin 24.4% 23.0% 23.7% 24.4% 25.3% 23.5% 34,391 EBIT 1,678 1,767 1,931 2,137 2,394 2,295 Depreciation Terminal Operating cashflow (pre-w orking capital) 2,222 2,351 2,557 2,805 3,106 3,027 grow th Taxation (201) (209) (229) (253) (282) (291) rate Capex (1,200) (1,050) (1,144) (1,163) (1,182) (900) Disposals % Other Free cashflow (pre WC/financing costs) 821 1,092 1,184 1,389 1,641 1,836 PV of FCFs ,003 1,092 Sensitivity Analysis: WACC NPV Stage 1 4, % 8.0% 8.5% 9.0% 9.5% Midcycle performance NPV 21, % Terminal 4.0% Enterprise value 25,785 Growth 3.0% % Net cash (debt) at March 2017E % Sensitivity Analysis: EBIT margin Equity value 25, % 23.0% 23.5% 24.0% 24.5% 5.0% Fair value per share ( ) Terminal 4.0% Grow th 3.0% % % WACC 8.5% -10.2% -9.7% -9.2% -8.7% -8.2% Net capex as % of revenue Source: Company data, Credit Suisse estimates Figure 17: Ryanair multiples-based fair value of EV/IC methodology ( ) adj EV/EBITDAR methodology ( ) FY18E invested capital 5,630 FY18E EBITDAR (m) 2,324 Midcycle multiple 3.5 Midcycle multiple 9.0 FY18E adj enterprise value (m) 19,704 FY18E adj enterprise value (m) 20,920 FY18E net cash (debt) (m) 918 FY18E net cash (debt) (m) 918 FY18E capitalised leases (m) (822) FY18E capitalised leases (m) (822) Equity value (m) 19,800 Equity value (m) 21,016 Equity value per share Equity value per share Average Source: Credit Suisse estimates Ryanair 12

13 Credit Suisse HOLT We supplement our analysis with a view from Credit Suisse HOLT 's Flex tool. Using this tool, we sensitise our valuation by holding EBITDA margins flat to 2023 (RYA's FY24) on sales growth in line with volume growth beyond RYA's FY18E. This scenario suggests a warranted price of 19.89, or 34% potential upside to the current share price. Figure 18: Credit Suisse HOLT suggests 34% warranted upside at flat margins to FY24E Source: Credit Suisse HOLT Ryanair 13

14 Europe/Republic of Ireland Airlines Ryanair (RYA.I) Rating OUTPERFORM Price (17 Jan 17, ) Target price ( ) (from 15.00) Market Cap ( m) 18,236.7 Enterprise value ( m) 18,211.2 Target price is for 12 months. Research Analysts Share price performance Neil Glynn, CFA neil.glynn@credit-suisse.com Arthur Truslove arthur.truslove@credit-suisse.com Julia Pennington julia.pennington@credit-suisse.com Tim Ramskill, CFA tim.ramskill@credit-suisse.com The price relative chart measures performance against the ISEQ OVERALL IDX which closed at on 17/01/17 On 17/01/17 the spot exchange rate was 1/Eu 1.- Eu.93/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Market opportunity suggests sustainable growth Plenty of runway left to capitalise on competitor inefficiency Credit Suisse Market Opportunity Model quantifies RYA's advantage: In our view, following three strong years of commercial momentum under its Always Getting Better (AGB) programme, RYA's investment case is centred on the future returns opportunity from deploying an additional 227+ aircraft into Europe, where low-cost carriers already hold a 35% share (on par with the US). The Credit Suisse Market Opportunity Model highlights c40% of competitor seat costs are 3x RYA 2018E fares, whereas c76% are 2x, illustrating compelling scope to continue to gain attractive market share as its opportunity expands, with all airports seemingly open for business. Detailed analysis of competitor scheduling and pricing behaviour illustrates RYA's market power but keeping fares low key to quality: (i) The Ryanair effect 'like a hot knife through butter': we highlight that as Ryanair has grown under its AGB programme, competitors have retrenched. (ii) The case for price convergence in Europe to follow the US is growing: 2Y of proprietary analysis of fare data illustrates that as RYA has taken share in London, it has not had to discount to do so with passengers increasingly agnostic to carrier choice, keen cost control would provide a free option on structurally higher returns. (iii) We expect RYA's 'Amazon of travel' strategy to result in increasingly competitive fares, complementing its efficiency advantage to secure growth prospects and establishing an increasingly highquality, sustainable competitive position complete with cash generation. Catalysts and Risks: (i) 3Q17 results on 6 February; (ii) each 1% movement in average fares means 44m to earnings (3% of our 2018E net income), which represents a key risk to both the upside and downside. Outperform with a target price of (up from 15.00): Our TP is based on a blend of 2018E multiples and a DCF. RYA trades on a 2018E P/E multiple of 13x versus a 7Y post-gfc historical average of 14.4x, whereas its EV/EBITDAR multiple of 7.7x compares to a 7Y historical average of 8.1x. Financial and valuation metrics Year 3/16A 3/17E 3/18E 3/19E Revenue ( m) 6, , , ,687.6 EBITDA ( m) 1, , , ,351.1 Adjusted net income ( m) 1, , , , CS EPS (adj.) ( ) Prev. EPS ( ) ROIC (%) P/E (adj.) (x) P/E rel. (%) EV/EBITDA (x) Dividend (03/17E, ) 0.00 Net debt/equity (03/17E,%) -0.6 Dividend yield (03/17E,%) 0.0 Net debt (03/17E, m) BV/share (03/17E, ) 3.5 IC (03/17E, m) 4,266.3 Free float (%) EV/IC (03/17E, (x) 4.3 Source: Company data, Thomson Reuters, Credit Suisse estimates Ryanair 14

15 Ryanair (RYA.I) Price (17 Jan 2017): ; Rating: OUTPERFORM; Target Price: (from 15.00) 18.78; Analyst: Neil Glynn Income statement ( m) 3/16A 3/17E 3/18E 3/19E Revenue 6,536 6,668 6,890 7,688 EBITDA 1,887 2,074 2,222 2,351 Depr. & amort. (427) (496) (543) (584) EBIT 1,460 1,578 1,678 1,767 Net interest exp. (53) (73) (71) (71) Associates PBT 1,404 1,503 1,608 1,696 Income taxes (163) (162) (173) (183) Profit after tax 1,242 1,341 1,434 1,513 Minorities Preferred dividends Associates & other Net profit 1,242 1,341 1,434 1,513 Other NPAT adjustments Reported net income 1,559 1,341 1,434 1,513 Cash flow ( m) 3/16A 3/17E 3/18E 3/19E EBIT 1,460 1,578 1,678 1,767 Net interest (51) (65) (62) (62) Cash taxes paid (128) (179) (201) (209) Change in working capital Other cash and non-cash items Cash flow from operations 1,845 1,960 2,093 2,228 CAPEX (1,218) (1,225) (1,200) (1,050) Free cashflow to the firm ,178 Acquisitions Divestments Other investment/(outflows) Cash flow from investments (820) (1,225) (1,200) (1,050) Net share issue/(repurchase) (705) (1,018) 0 0 Dividends paid (398) Issuance (retirement) of debt Cashflow from financing (1,103) (1,018) 0 0 Changes in net cash/debt (53) (286) 893 1,178 Net debt at start (364) (312) (25) (918) Change in net debt (893) (1,178) Net debt at end (312) (25) (918) (2,096) Balance sheet ( m) 3/16A 3/17E 3/18E 3/19E Assets Total current assets 4,822 4,301 5,185 6,354 Total assets 11,218 11,402 12,943 14,577 Liabilities Total current liabilities 3,370 3,047 3,354 3,476 Total liabilities 7,622 7,110 7,217 7,338 Total equity and liabilities 11,218 11,402 12,943 14,577 Per share 3/16A 3/17E 3/18E 3/19E No. of shares (wtd avg.) (mn) 1,348 1,246 1,219 1,219 CS EPS (adj.) ( ) Dividend ( ) Free cash flow per share ( ) Key ratios and valuation 3/16A 3/17E 3/18E 3/19E Growth/Margin (%) Sales growth (%) EBIT growth (%) Net income growth (%) EPS growth (%) EBITDA margin (%) EBIT margin (%) Pretax profit margin (%) Net income margin (%) Valuation 3/16A 3/17E 3/18E 3/19E EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Dividend yield (%) P/E (x) Credit ratios (%) 3/16A 3/17E 3/18E 3/19E Net debt/equity (%) (8.7) (0.6) (16.0) (29.0) Net debt to EBITDA (x) (0.2) (0.0) (0.4) (0.9) Interest coverage ratio (x) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates Company Background Ryanair Holdings plc (Ryanair Holdings) is the holding company for Ryanair Limited (Ryanair). Ryanair operates a low-fares, scheduled passenger airline serving short-haul, point-to-point routes between Ireland, UK, Continental Europe and Morocco. Blue/Grey Sky Scenario Our Blue Sky Scenario ( ) (from 18.95) Blue Sky fair value of based on our DCF model using a long term EBIT margin assumption of 23.5% (23.3% in 2017E) with long term capex matching D/A. Our Grey Sky Scenario ( ) 9.46 Grey Sky fair value of 9.46 based on our DCF model using a long term EBIT margin assumption of 14% (23.3% in 2017E) in line with 2011A-2014A, with long term capex of 1bn pa. Share price performance The price relative chart measures performance against the ISEQ OVERALL IDX which closed at on 17/01/17 On 17/01/17 the spot exchange rate was 1/Eu 1.- Eu.93/US$1 Ryanair 15

16 Credit Suisse Market Opportunity Model We consider Ryanair to be mostly immune to and potentially well served by the current macro malaise. Its strongest-in-industry competitive position should enable it to take attractive share from the rest of the market without relying on market growth, and what is likely to be a challenging 2017 owing to rising fuel prices should help it firm its grip on market share gains. Having taken delivery of 400 B s over March 1999 to March 2016, RYA plans to grow its fleet from 358 at September 2016 to 585 by March 2024, but we find that it should be able to place new aircraft including the conversion of 100 B737-MAX-200 options. Our Market Opportunity Model highlights that 40% of the European market's seats are produced at costs 3x RYA's 2018E average fare of 37, with 76% at 2x: Our new model illustrates significant opportunity for RYA to take share at equivalent or higher margins compared with its existing network. We expect RYA to seize these revenue opportunities via increasing volume, expanding its highly defensible network to beat competitors to the punch on market growth and producing an increasingly protectable higher-margin model by virtue of its scale, customer proposition and bargaining power with suppliers. This model produces a new framework for investors to consider the market's ability to absorb RYA's growth plans and is likely to ease investors' concerns regarding LCC penetration levels in Europe: European LCC penetration could rise to 50%, overriding concerns on current penetration levels RYA to lead the chase: Investor concerns focus on what may be perceived as a saturated European LCC penetration level of 35%, in line with the US. However, our analysis suggests that 50% penetration is possible in Europe by 2024, with Ryanair's market share growing towards 20% based on current fleet plans. In the 2Q17 results call, Ryanair's management noted that it expects to reach a 20%+ market share. We highlight the fare disparity in Europe as a key differentiator to the US, where near parity exists between Southwest, JetBlue and the three US majors: American, Delta and United this "catch-up" opportunity for RYA in particular emphasises the scope for LCC and RYA penetration levels to rise from here. Room for another Ryanair aircraft by FY24; opportunity for Ryanair to super-size volume as peers remain under pressure: Our model allows us to calculate that, for example, Germany could absorb a further Ryanair aircraft should RYA simply take a 5-10% share of the competitor seats produced at costs 2x its fares, illustrating plentiful scope for Ryanair to grow market share across Europe. As such, we see scope for Ryanair to add a further aircraft to its current fleet of 358 planes (versus current plans of 227) to capitalise on this market opportunity. With increasing volume likely to prompt lower unit costs from airports (while from MAX-200 aircraft deliver with 4% more seats to 197 and 18% fuel efficiency gains) and higher ancillary revenues (see Ryanair Labs section), we expect Ryanair to drive ever-lower fares to fortify its market position. Higher share should translate into higher margins over time. Introducing the Credit Suisse Market Opportunity Model We introduce a new model to uniquely quantify Ryanair's opportunity while calculating the amount of 'low-hanging fruit' available to all LCCs in the market. We have analysed in detail the cost structure of each of the 14,000 European short haul routes in the market, encompassing 900m seats (Ryanair holds a 13% share with 125m seats in the 12 months to March 2017) as part of a proprietary model that allows route, airport, country and total market-level analysis of competitive dynamics. Our interactive model illustrates the competitive positioning of each European carrier and the opportunities and threats they face today and in the future. Ryanair 16

17 Our work is focussed on the economics of each route, driven by the cost base of each carrier sharing each route and their respective strategies. We highlight the range of efficiency levels on intra-european routes for listed and non-listed European short haul operators below. Figure 19: CS Market Opportunity Model uses extensive cost base analysis to produce a holistic picture of the European short haul competitive landscape (including listed and non-listed players) CityJet Flybe Air France KLM short haul Lufthansa short haul Ex-fuel CASK ( c) LOT Aegean Eurowings BA short haul Brussels SAS Vueling easyjet Alitalia Air Berlin Aer Lingus Norwegian Transavia Jet2 TAP Monarch Finnair Iberia TUI Thomas Cook Condor 2.00 Ryanair Wizz Air ,000 1,500 2,000 2,500 3,000 3,500 4,000 Sector length (km) Source: Company data (2015), Credit Suisse estimates Note: We recognise that carriers such as Eurowings and Transavia will continue to pursue cost efficiencies as they gain scale to fulfil ambitions to cover capital costs over time (2018 targeted by EW excluding potential restructuring costs). We highlight the allocation of seats across Europe as follows: Figure 20: Airline seats by European market, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% UK Spain Germany Italy France Greece Norway Netherlands Switzerland Portugal Sweden Denmark Poland Belgium Ryanair easyjet Lufthansa Group Air France KLM IAG Norwegian Wizz Air Tour operators Other legacy incumbent Source: Diio Mi data, Credit Suisse research Ryanair 17

18 40% of the market operates at a cost structure 3x RYA fares: Our model highlights that 300m seats in the European short haul market, or c40% of the market excluding Ryanair, are being operated at costs treble Ryanair's average fare of 37 per our 2018E numbers; i.e. an inability to sustainably price below breakeven illustrates that without significant structural change to cost bases, competitor pricing points must be pitched at or above this level. Around 76% of the market ex RYA operates with a cost structure double RYA's average fare, with 94% of the market operating at costs at least 1.5x RYA fare levels. Figure 21: 40% of ex RYA European market seats cost more than 3x RYA's E average fare; 76% of seats cost more than 2x RYA fares 100% 94% 94% of seats cost 1.5x RYA fares 82% 76% of seats cost 2x RYA fares 69% 57% 40% of seats cost 3x RYA fares 48% Source: Credit Suisse estimates (Credit Suisse Market Opportunity Model) Note: We factor in carrier cost bases and sector lengths outlined above in Figure 17 to produce like-for-like seat costs for each carrier on a sector-length adjusted basis, consistent with Ryanair's average sector length of 1,261km in 2016A. We also use RYA's FY19E fuel cost per seat for each carrier to ensure a consistent fuel cost for each seat (notwithstanding the fact that RYA will be top tier in terms of fuel efficiency). Breaking our analysis down by country across Europe's top five air travel markets, we highlight the following: UK market - 45% of competitor seats produced at costs 3x RYA fares, 78% at 2x France market - 56% of competitor seat costs 3x RYA fares, 77% at 2x Germany market - 39% of competitor seat costs 3x RYA fares, 86% at 2x Spain market - 30% of competitor seat costs 3x RYA fares, 78% at 2x Italy market - 52% of competitor seat costs 3x RYA fares, 75% at 2x Outside of the largest five markets in Europe, our analysis suggests the most opportunity for RYA exists in Eastern Europe, the Nordics and Lufthansa's home markets of Switzerland and Austria, but we find plentiful scope for further profitable Ryanair development in almost all markets. Ryanair 18

19 Figure 22: Share of European short haul seats operated at costs 2-3x RYA 37 avg fares country by country ample opportunities across the market 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2x 3x Source: Credit Suisse estimates (Credit Suisse Market Opportunity Model) Germany has been one of Ryanair's most public areas of focus over recent years and we use our model to delve more deeply into Ryanair's opportunity there. RYA has said it aims to take its market share in Germany from 8% currently towards 15-20%, and has made a clear statement of intent with its announced entry into Frankfurt airport from 2Q17. Figure 23: Germany 2Q17 short haul market structure Thomas Cook / Condor 2% TUI 3% Transavia 1% Air France KLM 3% Other 16% Lufthansa group ex-ew 36% Air Berlin 13% easyjet 4% Ryanair 8% Eurowings 14% Source: Diio Mi 2Q17 seat data, Credit Suisse research In Germany we find similar dynamics to the rest of Europe, with 39% of competitor seats costing more than 3x Ryanair average fares (Lufthansa, Air France KLM) and 86% of seats costing more than 2x (Eurowings, Air Berlin, TUI, Thomas Cook/Condor). Lufthansa is striving to compete effectively with RYA at FRA (growing on the four routes where RYA has established services) and it has grown Eurowings to 160 aircraft with the acquisition of Brussels Airlines and the wet lease of 38 aircraft from Air Berlin, with plans to considerably reduce the medium term (per Eurowings Expert Session in June 2016, LHA plans to reduce EW unit costs by 28% by 2020 without the benefits of M&A). Ryanair 19

20 However, while there may be scope the cost gap to RYA to narrow, the cost dynamics within the market suggest a compelling opportunity for Ryanair over time, helped by efficiencies across its broad network if necessary. Figure 24: In Germany, 39% of competitor seats cost more than 3x RYA's E average fare; 86% of seats cost more than 2x RYA fares 100% 95% 95% of seats cost 1.5x RYA fares 89% 86% of seats cost 2x RYA fares 83% 73% 61% 39% of seats cost 3x RYA fares Source: Credit Suisse estimates (Credit Suisse Market Opportunity Model) Our model allows us to highlight the competitive landscape at four of the largest German airports, Frankfurt, Munich, Dusseldorf and Berlin Schoenefeld (although Tegel is larger) as follows: Figure 25: Four key German airports provide a vignette on airport-level opportunities 100% of seats cost 1.5x RYA fares 100% 100% 100% 96% of seats cost 2x RYA fares 93% 88% 85% 78% of seats cost 3x RYA fares 100% of seats cost 1.5x RYA fares 100% 100% 96% 93% of seats cost 2x RYA fares 90% 81% 57% of seats cost 3x RYA fares 68% unit costs ov er 37 unit costs ov er 50 unit costs ov er 56 unit costs ov er 65 unit costs ov er 74 Frankfurt unit costs ov er 80 unit costs ov er 90 unit costs ov er 100 unit costs ov er 110 unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er Munich 100% of seats cost 1.5x RYA fares 100% 100% 100% 96% of seats cost 2x RYA fares 95% 84% 24% of seats cost 3x RYA fares 68% 100% 97% 97% of seats cost 1.5x RYA fares 34% 23% of seats cost 2x RYA fares 13% 13% 13% 10% of seatscost 3x RYA fares unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er Dusseldorf unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er unit costs ov er Berlin Schoenefeld Source: Credit Suisse estimates (Credit Suisse Market Opportunity Model) Ryanair 20

21 New business models Eurowings and Transavia (low-cost subsidiaries of Lufthansa and Air France-KLM, respectively) are gaining scale, with Eurowings boosted by the wet lease of 38 aircraft from Air Berlin and the acquisition of Brussels Airlines. But while they have ambitions to be cost competitive, weak profitability at Transavia, Norwegian, and Eurowings in particular illustrates their vulnerability to RYA's efforts to take share. Figure 26: Wide range of margins illustrate reported efficiency levels do not provide the full picture 1, % 1,400 1, % 1, % % % % -200 Transavia (FY15A) easyjet (FY15A) Wizz Air (FY16A) Norwegian (FY15A) Ryanair (FY16A) Vueling (FY15A) Eurowings (FY15A) -5.0% EBIT ( m) EBIT margin Source: Company data, Credit Suisse research Ryanair's most recent base launches have been: Prague (#84) announced in April 2016 to launch with two aircraft on 30 October Sofia (#83) announced in March 2016 to launch with three aircraft from 30 October Vilnius (#82) announced in March 2016 to launch with two aircraft from 30 October Bucharest (#81) announced in February 2016 to launch with three aircraft from 30 October Hamburg (#80) announced in February 2016 to launch with two aircraft from 1 November Nuremburg (#79) announced in February 2016 to launch with one aircraft from 1 November Timisoara (#78) announced in February 2016 to launch with one aircraft from November Belfast (#77) announced in January 2016 to launch with one aircraft from March building to three from October Ibiza (#76) announced in October 2015 to launch with one aircraft from March Corfu (#75) announced in October 2015 to launch with one aircraft from April Milan Malpensa (#74) announced in September 2015 to launch with one aircraft from December Ryanair 21

22 The Ryanair effect like a hot knife through butter When Ryanair enters a new market, competitors stand aside: While Ryanair is the lowest-cost provider in the European market, its brand means different things to different potential passengers. Meanwhile competitors tend to profess comfort in competing with Ryanair, citing factors such as: (a) perceived brand superiority (all airlines consider their brands most appropriate for their target customer base, with their convictions reinforced by loyalty in the form of repeat bookings or plan membership); (b) modest like-for-like economic cost base differentials (a factor cited by easyjet, Eurowings, Norwegian and Wizz Air); (c) RYA operates from secondary or tertiary airports, targeting a different customer base (cited by Air France, BA, EasyJet and Lufthansa); or (d) RYA targets the price-sensitive leisure market rather than the higher-quality end of the leisure or corporate market (Iberia). We have analysed the top 50 new RYA routes introduced over the past two years, representing the most aggressive growth routes for the airline, to understand how competitor comfort with RYA as a threat tallies with capacity decisions at the route level. We think there is clear evidence that competitors are reluctant to match RYA's growth ambitions to maintain market share on routes where RYA decides to invest, while in many cases there has been a dramatic scale-back of capacity on a given route in response to RYA's entry/growth, potentially as route economics have deteriorated. Ryanair 22

23 Figure 27: Ryanair's top 50 summer 2013-summer 2016 growth routes Origin Name Destination Name Summer 2016 seats vs summer Athens, GR Thessaloniki, GR 212,436 2 Catania, IT Rome-Da Vinci, IT 207,522 3 Barcelona, ES Rome-Da Vinci, IT 172,935 4 Palermo, IT Rome-Da Vinci, IT 172,935 5 Edinburgh, SC, GB London-Stansted, EN, GB 152,712 6 Berlin-Schoenefeld, DE Cologne-Bonn, DE 148,365 7 Belfast, NI, GB London-Gatwick, EN, GB 138,348 8 Amsterdam, NL Dublin, IE 138,013 9 Copenhagen, DK London-Luton, EN, GB 137, Glasgow, SC, GB London-Stansted, EN, GB 128, Barcelona, ES Brussels, BE 126, London-Stansted, EN, GB Warsaw Modlin, PL 117, Bari, IT Rome-Da Vinci, IT 103, Lisbon, PT Porto, PT 103, Brussels, BE Rome-Da Vinci, IT 103, Berlin-Schoenefeld, DE Brussels, BE 101, Athens, GR Chania, Crete, GR 100, Lisbon, PT London-Stansted, EN, GB 100, Dublin, IE Glasgow, SC, GB 97, Berlin-Schoenefeld, DE London-Stansted, EN, GB 91, Goteborg, SE London-Stansted, EN, GB 89, Dublin, IE London-Gatwick, EN, GB 86, Cologne-Bonn, DE London-Stansted, EN, GB 84, Brussels, BE Dublin, IE 82, Dublin, IE Manchester, EN, GB 78, Athens, GR Rhodes, GR 75, Birmingham, EN, GB Dublin, IE 72, London-Stansted, EN, GB Madrid, ES 71, Athens, GR London-Stansted, EN, GB 70, Bologna, IT Catania, IT 69, Athens, GR Rome-Ciampino, IT 69, Athens, GR Santorini, GR 69, Barcelona, ES Berlin-Schoenefeld, DE 69, Barcelona, ES Manchester, EN, GB 69, Berlin-Schoenefeld, DE Rome-Ciampino, IT 69, Brindisi, IT Rome-Da Vinci, IT 69, Brussels, BE Lisbon, PT 69, Bucharest, RO London-Stansted, EN, GB 69, Lamezia Terme, IT Rome-Da Vinci, IT 69, Lisbon, PT Rome-Ciampino, IT 69, London-Stansted, EN, GB Milan-Malpensa, IT 69, Nowy Dwor Mazowiecki, PL Wroclaw, PL 69, London-Stansted, EN, GB Prague, CZ 68, Barcelona, ES London-Stansted, EN, GB 65, London-Stansted, EN, GB Rome-Ciampino, IT 64, Brussels, BE Copenhagen, DK 64, Copenhagen, DK Milan-Orio Serio, IT 64, Gdansk, PL Nowy Dwor Mazowiecki, PL 64, Lisbon, PT Ponta Delgada, PT 64, Cologne-Bonn, DE Milan-Orio Serio, IT 63,315 Source: Diio Mi data, Credit Suisse research Ryanair 23

24 We highlight below that while Ryanair added 2.5m seats on its top 20 growth routes over a three-year period to summer 2016, this has not elicited much of a competitive response. On these routes we have seen modest growth from TUI, Norwegian and Meridiana, which has been almost offset by retrenchment by Alitalia, Virgin Atlantic, and Air Berlin. Figure 28: RYA seat growth on its top 20 summer 2013-summer 2016 growth routes vs peers 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 (500,000) Source: Company data, Credit Suisse research Using some of Ryanair's key growth routes since the launch of its 'Always Getting Better' programme in late 2013, we find a persistent dynamic of competitors largely either allowing RYA to gain share or even getting out of its way as it develops a route. We show some key illustrative examples in Figure 29. Ryanair 24

25 Ryanair 25 Figure 29: The Ryanair effect through the life of 'Always Getting Better' RYA grows; competitors tend not to react Ryanair Flybe BA easyjet Virgin Atlantic (Little Red) Ryanair Ryanair London-Edinburgh Ryanair Alitalia Vueling Rome - Barcelona Thomas Cook London-Belfast Brussels Airlines Brussels-Barcelona easyjet Vueling Source: Diio Mi data summer 2013-summer 2016 seat growth, Credit Suisse research TUI Ryanair Thomas Cook easyjet Ryanair London -Glasgow Aer Lingus Dublin-Amsterdam Ryanair easyjet Brussels Airlines Brussels-Berlin Ryanair Alitalia Blue Panorama Rome-Catania Vueling Ryanair easyjet Monarch Airlines London-Lisbon Ryanair Eurowings SunExpress Cologne-Berlin Ryanair Vueling Brussels Alitalia Rome-Brussels Ryanair Ellinair Aegean Athens-Thessaloniki TAP Portugal British Airways

26 Clear rewards for patience: This analysis suggests that future Ryanair growth, potentially at ever-lower fares, may well be relatively unopposed. This would suggest that RYA pricing risk in the future may prove to be more a function of lead time to stimulate market share growth than sustained competitor pricing responses, framing RYA's investment case as a question of mechanically taking share while market service levels homogenise. However, we highlight that competitive reactions will naturally ebb and flow, with Lufthansa reacting to Ryanair's recent announcement of a Frankfurt base launch by adding to existing capacity on RYA's new Alicante, Faro, Malaga and Palma routes. Figure 30: RYA vs LHA growth on RYA's new Frankfurt routes 2Q17 vs 2Q16 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Alicante Faro Malaga Palma RYA LHA Source: Company data, Credit Suisse research Ryanair 26

27 We compare this to EasyJet, highlighting its top 50 growth routes over in Figure 31. Figure 31: easyjet's top 50 summer 2013-summer 2016 growth routes Origin Name Destination Name Summer 2016 growth vs Summer London-Luton, EN, GB Copenhagen, DK 95,340 2 London-Gatwick, EN, GB Jersey, CI, GB 86,364 3 London-Gatwick, EN, GB Paris-De Gaulle, FR 76,524 4 London-Gatwick, EN, GB Amsterdam, NL 65,514 5 London-Gatwick, EN, GB Milan-Linate, IT 55,704 6 Paris-De Gaulle, FR Milan-Linate, IT 52,776 7 Geneva, CH Porto, PT 44,076 8 London-Gatwick, EN, GB Stuttgart, DE 40,872 9 Manchester, EN, GB Amsterdam, NL 40, London-Gatwick, EN, GB Nantes, FR 40, Geneva, CH Barcelona, ES 37, Milan-Malpensa, IT Munich, DE 37, London-Gatwick, EN, GB Bordeaux, FR 36, London-Gatwick, EN, GB Milan-Malpensa, IT 32, London-Gatwick, EN, GB Inverness, SC, GB 31, London-Gatwick, EN, GB Venice, IT 31, London-Luton, EN, GB Amsterdam, NL 31, Hamburg, DE Palma de Mallorca, ES 30, Amsterdam, NL Bordeaux, FR 29, Naples, IT Catania, IT 29, Paris-De Gaulle, FR Naples, IT 28, London-Luton, EN, GB Basel/Mulhouse, CH 28, London-Gatwick, EN, GB Athens, GR 28, London-Gatwick, EN, GB Valencia, ES 27, Amsterdam, NL Milan-Linate, IT 27, Basel/Mulhouse, CH Amsterdam, NL 27, Amsterdam, NL Venice, IT 27, Milan-Malpensa, IT Hamburg, DE 26, Paris-Orly, FR Hamburg, DE 26, Amsterdam, NL Hamburg, DE 26, Berlin-Schoenefeld, DE Amsterdam, NL 26, Hamburg, DE Salzburg, AT 26, Basel/Mulhouse, CH Hamburg, DE 26, Berlin-Schoenefeld, DE Vienna, AT 26, Milan-Malpensa, IT Stuttgart, DE 25, London-Gatwick, EN, GB Naples, IT 25, Amsterdam, NL Nice, FR 25, London-Luton, EN, GB Lyon, FR 25, Paris-De Gaulle, FR Manchester, EN, GB 25, Lyon, FR Porto, PT 24, Amsterdam, NL Naples, IT 24, Bordeaux, FR Marseille, FR 24, Amsterdam, NL Vienna, AT 24, London-Gatwick, EN, GB Lisbon, PT 23, Lyon, FR Nantes, FR 23, Paris-De Gaulle, FR Tel Aviv-Yafo, IL 23, London-Luton, EN, GB Barcelona, ES 22, Rome-Da Vinci, IT Nice, FR 22, Milan-Malpensa, IT Manchester, EN, GB 22, London-Luton, EN, GB Munich, DE 21,828 Source: Diio Mi data, Credit Suisse research Ryanair 27

28 While EZJ added 1m seats on its top 20 routes over this period, versus RYA's 2.5m, it has seen a greater competitive response on these routes; in particular from Ryanair, followed by BA and IAG's Vueling. Figure 32: EZJ seat growth on its top 20 growth routes vs peers (summer summer 2016) 1,100, , , , , ,000 (100,000) (300,000) (500,000) Source: Diio Mi data, Credit Suisse research As EZJ develops a route, competitors appear more willing to match it, as suggested by dynamics on key EZJ growth routes over We include some key illustrative examples in Figure 33. Ryanair 28

29 Ryanair 29 Figure 33: The easyjet effect EZJ grows; competitors more willing to match it easyjet Flybe KLM Cityhopper Manchester-Amsterdam KLM easyjet BA/Vueling CityJet Air France KLM London - Amsterdam easyjet BA Flybe London - Jersey easyjet Ryanair BA Alitalia London - Milan Source: Diio Mi data summer 2013-summer 2016 seat growth, Credit Suisse research easyjet BA Germanwings London-Stuttgart easyjet Ryanair Germanwings & Eurowings Hamburg to Mallorca easyjet BA/Vueling Air France KLM London - Paris easyjet Vueling Air France KLM Paris - Milan Ryanair Air Berlin CityJet/VLM Alitalia easyjet Ryanair BA Alitalia easyjet easyjet Vueling SWISS easyjet Milan-London Lufthansa Air Italy Group Milan-Munich Portugalia Airlines Barcelona-Geneva SWISS Geneva - Porto BMI TAP Portugal

30 New insights on competitive dynamics building pricing power means opportunity We introduce two years of new fare analysis, which highlights that Ryanair is increasingly able to satisfy its aggressive growth ambitions without aggressive fare discounting. Our analysis indicates that passengers are becoming increasingly agnostic to carrier choice and suggests a compelling revenue opportunity for Ryanair as it continues to implement its 'Always Getting Better' programme. London is the most important air travel market in Europe, with 10% of Ryanair seats departing from London, double the number of Ryanair's next most important market, Dublin (100% of BA seats fly to/from London, EZJ 35%). Figure 34: RYA key cities by seat count in ,400,000 12% 1,200,000 1,000, , , , ,000 10% 8% 6% 4% 2% 0 London Dublin Milan Barcelona Brussels Rome Madrid Berlin Palma Malaga 0% Seats (LHS) % of departing seats (RHS) Source: Diio Mi data, Credit Suisse research For two years we have been tracking competing fares over the four weeks to flight date on short haul routes from London to UK and Continental European destinations to better understand: The oligopolistic qualities of the London market, as the three major carriers (BA, EZJ and RYA) compete from airports with their own segmented catchment areas with some significant overlap. Can all three of these powerful carriers succeed in this environment? As Ryanair grows strongly from Stansted in particular, will it be forced to discount aggressively to fill plentiful additional seats or will the benefits of Ryanair's 'Always Getting Better' (AGB) programme mean that RYA can grow market share without relying on lower pricing as a blunt tool? Has it become more difficult for EZJ to portray itself as the clear carrier of choice for value-focused consumers as RYA reduces or eliminates some of the passenger ill will caused by excessive penalties and restrictive hand baggage policies? How will pricing competition between BA, easyjet and Ryanair develop as BA seeks to gradually implement low-cost carrier principles on short haul to bring its short haul business to cover its cost of capital? Ryanair 30

31 How is price competition evolving in peak seasons versus low seasons, and on traditional leisure versus business routes? Is there evidence that leisure and business passengers (or their company travel policy decision makers) are becoming increasingly agnostic to carrier choice as carrier service levels become increasingly homogenised? Since December 2014 we have been tracking fares monthly on 10 routes where EZJ and RYA compete directly, 17 routes where EZJ and BA compete directly and 16 routes where BA and Ryanair overlap. Our extensive analysis of competing fares highlights the following: Aggressive growth in market share achieved without aggressive discounting: Ryanair has been growing aggressively from London over recent years. However, the average EZJ price premium to RYA of c25% has broadly held up through the period, which illustrates that RYA has not had to discount aggressively to fill incremental capacity. This achievement is all the more impressive given RYA's network-wide load factor improvement from 83% in FY14A to a guided 94% in FY17. Figure 35: RYA has grown seats by an average of 11% yoy monthly since Dec14 25% 20% 15% 10% 5% 0% -5% RYA seat growth yoy EZJ seat growth yoy BA seat growth yoy Source: Diio Mi data, Credit Suisse research Price compression in the peak: Peak travel periods such as Easter, July, August and December typically see fares converge, with EZJ's premium to RYA compressing to single-digit levels (or even negative levels on occasion). Ryanair 31

32 Figure 36: EZJ premium to RYA has averaged 25% but little premium in peak months 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% Source: Company data, Credit Suisse research Peak travel periods see EZJ's fare premium halve despite RYA growth: Whereas EZJ's premium to RYA has averaged 25% over the past 2Y, in peak travel periods such as the summer months, Easter and Christmas, this premium has fallen to below 10%; i.e. less than half of the 'normal' level (39%). Indeed in March 2015, July 2015, and December 2015, EZJ's premium to RYA averaged 5% and in July 2016 Ryanair achieved a premium to EZJ. Figure 37: Peak months illustrate pax can be agnostic to carriers 35% 30% 25% 20% 15% 10% 5% 0% -5% Source: Company data, Credit Suisse research Milan, Barcelona, Madrid and Lisbon show Ryanair traction: Routes such as Milan, Barcelona, Madrid and Lisbon have seen premia unwind and other routes show little evidence of RYA having to change its pricing strategy relative to EZJ to gain share, for example on well-publicised growth in Edinburgh and Glasgow. Ryanair 32

33 Figure 38: Barcelona EZJ premium to RYA has unwound 100% 80% 60% 40% 20% 0% -20% -40% Source: Company data, Credit Suisse research Figure 39: Milan EZJ premium to RYA has unwound 100% 80% 60% 40% 20% 0% -20% -40% Source: Company data, Credit Suisse research Ryanair 33

34 Figure 40: Edinburgh (and Glasgow) RYA hasn t had to discount more than usual to gain share 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Source: Company website data, Credit Suisse research (London-Glasgow not shown) BA continues to price its short haul seats at levels comfortably more than 2x EZJ: BA's operations to markets with weak long haul links such as Milan, Berlin and Copenhagen enjoy the highest premia, whereas BA seems to need to be most competitive on leisure-dominated routes such as Malaga, Barcelona and Rome albeit most routes see BA's pricing point at 2x EZJ. Figure 41: BA premium to EZJ has averaged c150% 300% 250% 200% 150% 100% 50% 0% Source: Company data, Credit Suisse research BA fares remain c3x those of RYA on competing routes: Again, leisureoriented routes such as Malaga, Barcelona and Rome are most competitive, with BA's price point at times only 30% above RYA; however, markets such as Berlin, Copenhagen and Milan see BA pricing 4x RYA. Interestingly, the level of price convergence in peak seasons is more modest when comparing BA and EZJ fares, which we attribute to a less seasonal business at EZJ than at Ryanair. Ryanair 34

35 Figure 42: BA premium to RYA has averaged 200%+ 600% 500% 400% 300% 200% 100% 0% Source: Company data, Credit Suisse research We draw the following key conclusions from our extensive proprietary fare analysis: The 'Big Three' should all succeed in London we see no need for battles of attrition in a strong market (despite Brexit), but RYA should gain further share: While market focus on the 'battle' between RYA and EZJ remains strong, driven by RYA's continued advertisement of market share gains over EZJ, the fact that competitive pricing dynamics in the London market have not changed much in the past two years (despite RYA's resurgent growth) suggests to us that RYA, EZJ and BA can all succeed in a strong London market. We expect all three carriers to continue to take share from weaker competitors. Figure 43: London-UK/Europe scheduled market structure, 2016 Other 29% IAG 31% Ryanair 18% easyjet 22% Source: Diio Mi 2016 scheduled seat data, Credit Suisse research RYA has actually increased pricing while targeting volume opportunity to shift gears on pricing with load factors optimised: Passenger acceptance of Ryanair's AGB programme across Europe has been clearly demonstrated by the strength of load factor gains and improving revenue per seat (RPS). While load factors have climbed by 11 points from 83% to a forecast 94% in the three years to March 2017E, RYA's constant currency revenue per seat has risen by 4% in Ryanair 35

36 this period versus a 9% decline at EZJ. Before fuel prices, terrorism and Brexit softened pricing in FY17E, RYA saw an 8% constant currency RPS gain over 2015A-2016A while loads rose by 10 points. A powerful #3 in London given its competitive cost base: Despite having a lower share of the London market than BA and EZJ, rendering it #3 in the market Figure 44: RYA market share and market position in its top 10 cities 60% 50% #1 40% 30% 20% #3% #1 #2 #1 #1 #2 #2 #2 #2 10% 0% London Dublin Milan Barcelona Brussels Rome Madrid Berlin Palma Malaga Source: Diio Mi seat data, Credit Suisse research RYA has arguably managed to act like a market leader, outperforming key competitor easyjet since a tough FY14 for RYA. Figure 45: EZJ vs RYA revenue per seat yoy at constant currency 15% 10% 5% 0% -5% -10% 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E EZJ revenue per seat at CC RYA revenue per seat at CC (FY+1) Source: Company data, Credit Suisse estimates Further, having achieved so much so early in the life of 'Always Getting Better' (AGB; launched in late 2013), there may be scope for its fare discount to EZJ to reduce further as a near-optimised load factor at 94% provides a platform to optimise pricing further. Ryanair 36

37 Figure 46: RYA load factor and revenue per seat yoy 2008A-2017E 96% 93% 90% 87% 15% 10% 5% 84% 81% 78% 75% 72% 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016A 2017E 0% -5% -10% RYA load factor (LHS) RYA revenue per seat at CC (RHS) Source: Company data, Credit Suisse estimates for constant currency revenue per seat development New era of healthy passenger perception just getting started myryanair key to the future and narrowing the perceived value gap to EZJ/competitor fares: RYA's early success in gaining market share should secure its long-term success, but it also suggests pax perception of its brand and service quality relative to easyjet has changed somewhat. EZJ has historically benefitted from relatively unfavourable market perceptions of Ryanair from certain passenger segments, which prompted the development of the AGB programme. With the carriers arguably now competing on a more even footing, it will be interesting to observe how progressive penetration of Ryanair Labs (with all pax required to sign up for myryanair to book flights by end-2017) positions RYA with its potential customer base versus EasyJet, which continues to develop its own digital offering via Flight Club (albeit limited to frequent flyers), easyjet Plus (which costs 170 per year) and its partnership with SAP Hybris from However, we think with pax increasingly agnostic to the RYA vs EZJ question, momentum seems to be in RYA's favour as it optimises myryanair. Peak season pricing illustrates RYA can price in line with peers, drawing comparisons with parallel pricing across the big five carriers in the US: Our proprietary data suggest that in peak periods, pax become more carrier-agnostic. As a result, we think that when capacity is tight and fares across the market are higher as a result, the lowest-cost producer has more to gain as passengers seek to limit requirements to increase spending as demonstrated by RYA fare discounts to EZJ narrowing around Easter, in peak summer months and in the run-up to Christmas. This suggests that ultimate market consolidation in Europe, and resultant tighter capacity, would bring Ryanair's pricing point closer to peers, as has happened in the US. However, we do not see it as being in RYA's interest for this to happen over the medium term rather, we expect it to maintain pressure on fares, helped by proceeds from ancillary momentum, to build an increasingly defensible market-leading position. Ryanair 37

38 Figure 47: Top five US domestic players all pricing within $23 Source: Spirit investor presentation 2Q16 Ryanair 38

39 Ryanair Labs can make RYA more pricecompetitive Ryanair Labs has the opportunity to structurally boost earnings and cash flow over time. It can do this by disrupting the traditional supply/demand equation for revenue generation by lowering Ryanair's average fares to dramatically improve competitiveness at the market's most competitive airline, while simultaneously increasing the resilience of the business to changing market conditions by taking on OTA-like characteristics. At 2Q17 results, Ryanair announced a plan to increase its ancillary revenues to 30% of total revenues by March 2020 (from 24% in 2016A). Without a firm revenue target, this goal does not set an absolute ancillary revenue benchmark; however, directionally it is clear that RYA management expects more from the ancillary revenue line as a variety of Ryanair Labs initiatives mature and new initiatives emerge. We see the benefits from Ryanair Labs as including: 1. Increased investor confidence in revenue and earnings resilience: Post- Brexit, investors' top-line concerns are elevated, albeit more so around RYA's competitors. Increased confidence in the strategic direction and revenuegeneration capability of Ryanair Labs would likely reinvigorate market confidence in the company's revenue momentum, while successful execution would also likely help with potentially higher future oil prices. (RYA struggled with oil at $100/bbl, despite its lowest-in-market cost base.) 2. Volume upside potential myryanair should drive additional passengers: Ryanair will soon require passengers to sign up to myryanair to book a flight, beginning with Irish pax and rounding out the entire network by the end of Registration will improve RYA's targeting of pax with personalised offers, while it will also make the booking experience more user friendly, which should provide at least some stimulus to demand. Each incremental 1% in passenger numbers attracted by Ryanair Labs is worth c 36m, or 3% to 2017E net income, on our estimates (assuming airport/ground handling costs are fully variable). 3. Opportunity to sell more ancillary products upside potential for conversion rates from improved brand image and pax loyalty: Before considering potential new revenue streams down the line, simply improving current conversion rates from RYA's existing portfolio of ancillary products from allocated seats to hotel rooms could provide a powerful boost to earnings. Each 1 per pax in additional revenue from ancillary services, on 200m pax targeted by 2024, would be worth close to 180m in additional earnings (15% of 2017E net income). Introducing Ryanair Labs As part of its Always Getting Better (AGB) programme, Ryanair launched Ryanair Labs in 2014 as a digital and innovation hub with a lofty aspiration to "change the world of online travel". To execute the plan, Ryanair hired Chief Technology Officer John Turley and c300 other digital/it employees. Ryanair Labs is focussed on the following key areas: Ancillary cross-selling Usage of data assets Product optimisation Mobile Support for RYA's low-cost marketing approach Ryanair 39

40 RYA Labs is designed to, first and foremost, increase conversion rates for existing products offered (e.g. RYA saw a 15% increase in Germany and CEE under AGB) we explore the prospects for key products below. It has introduced several initiatives, including (i) myryanair, (ii) Ryanair Rooms, and (iii) Ryanair Car Hire. myryanair central to commercial strategy We see myryanair as Ryanair's version of a loyalty plan/frequent flyer programme, offered in an efficient manner to provide some of the benefits of traditional loyalty plans while avoiding expensive administration. As of November 2016, Ryanair had 15m signups to myryanair, versus 11m in mid-summer 2016, having doubled this level in one year. It is targeting 25m by the end of Per RYA, 70% of Ryanair customers are returning customers versus 75% at easyjet, although this may be partially explained by Ryanair's growth outpacing EZJ. We think myryanair could improve this figure. 65% of Ryanair's 15m app bookers buy ancillaries, while 45% of myryanair users book the same ancillaries again and again. RYA may auto load ancillary services to pax, which would likely raise conversion rates. Planned vouchers for future flights are expected to act as a loyalty reward to increase the relevance of myryanair and close the gap to traditional frequent flyer programmes. Ryanair has historically eschewed frequent flyer programmes on the basis that its lowest fares are a natural driver of loyalty; however, we see the potential for myryanair to help Ryanair's commercial performance as Avios does for IAG. This would make it easier for RYA to ultimately raise fares without hurting loyalty. My Ryanair enhances the collection and usage of customer data All customers were fully segmented by November 2016 with 12 segmentation groups and utilising gold, silver and bronze tiering based on travel frequency, similar to a traditional loyalty plan. This will help in various aspects of the business including tailoring promotions more effectively to individual passenger segments on distinct routes/markets. Ryanair sends 60m marketing s per month, up from 10m prior to AGB and standard s have been customised to 1,000 types. 29% of s are actually read versus a global standard of 15%, while Ryanair has an impressive uptake rate of 35%. Mobile strategy effectiveness powered by My Ryanair: App installations rose from 5m in September 2015 to 15m one year later. Ryanair expects to double mobile booking rates from 35% presently to 70% eventually, and with mobile bookings worth more than non-mobile bookings, this suggests a secular tailwind for Ryanair's top line, as we outline below. The carrier enjoys a 20% better performance of priority boarding take-up on the app than on the website (a lot of priority boarding transactions are done at the airport), illustrating ancillary revenue opportunities from mobile on top of simple volume stimulation. Priority boarding transactions were up 128% yoy in September Ryanair Rooms and Ryanair Car Hire, two new initiatives introduced by Ryanair Labs, illustrate Ryanair's strategy of increasingly acting as an aggregator of OTA content. Ryanair 40

41 Ryanair Rooms Ryanair soft-launched Ryanair Rooms on 1 October The service offers passengers a wide range of accommodation options (including hotels, hostels, B&Bs, villas and homestay options). It currently has two suppliers on the platform (Hotels.com and Hotelopia) and targets five to six by mid The venture is aimed at "disrupting" the travel industry via low-priced accommodation options, in line with RYA's airfare proposition. We see this move as giving RYA greater control over a broader inventory, while building consumer confidence in the integrity of the value inherent in RYA's non-flight offerings to improve passenger utility and conversion ratios. The key focus for Ryanair is likely to be on building trust in the quality and value of its content, given a legacy customer concern that booking via RYA may prove more expensive than via an online travel agency (OTA) or direct channels. At 2Q17 results, RYA management described a broader "reputational issue" that it is seeking to address. Ryanair had worked with booking.com under an exclusive deal, but is now targeting partnerships with aggregators such as Airbnb, Booking.com, Hotels.com, Homestay and Hostel World. Over time, it expects to add hotel chains to the platform. RYA will keep commissions low as it builds out Ryanair Rooms, focussing on scale and share. Based on our analysis of OTA economics (Priceline/booking.com, Expedia), we expect Ryanair to be able to earn 50c per booking from Ryanair Rooms, suggesting in the region of 60m in revenue were the platform live through FY17E with c1.5% of RYA pax booking a hotel stay. Increasing conversion rates could become increasingly powerful as RYA builds more and more scale, meaning at 200m pax (versus 119m in FY17E) the existing c1.5% conversion rate would add a further c 42m to revenue while each 25bps of conversion improvement would be worth a further 20m i.e. 2% of 200m pax booking hotel stays at 50c per booking would produce 140m in revenue versus c 60m today, which would drop straight through to PBT. Figure 48: Ryanair Rooms revenue potential Average revpar for Europe ex-uk ( ) - August Average revpar for UK ( ) - August Average revpar for Europe ( ) - August Average leisure stay length 4 Average European hotel booking value 458 Average booking.com commission value per stay - 15% of hotel stay value 69 Average pass through to Ryanair 50% Commission paid to RYA per booking ( ) 34 Ryanair passenger numbers (m) 119 Average penetration - transactions/booking 1.5% RYA pax paying for hotel stays (m) 1.79 Commission paid to RYA ( m) 61 Source: Credit Suisse estimates Ryanair 41

42 Ryanair Car Hire Ryanair teamed up with Car Trawler in September 2015 to offer more of an OTA-type car hire portal in Ryanair Car Hire, in a deviation from its historical relationship with soleprovider Hertz. It offers a comparison of over 1,500 suppliers including top brands Hertz, Sixt, Budget, Goldcar, Thirfty and Firefly. Hertz terminated its contract with Ryanair in July 2015 following RYA's move to use Global Distribution Systems (GDSs) which meant bookings on GDS portals bypassing RYA websites. Based on our analysis of car rental economics (Hertz, Europcar), we expect Ryanair to be able to earn 50c per booking from Ryanair Car Hire (equivalent disclosed by Ryanair until FY09), suggesting in the region of 60m in revenue for FY17E with c5% of RYA pax booking a car. Increasing conversion rates would become increasingly powerful as RYA builds more and more scale, meaning at 200m pax (versus 119m in FY17E) the existing 5% conversion rate would add a further c 40m to revenue while each 50bps of conversion improvement would be worth a further 6m i.e. 6% of 200m pax booking car hire at 50c per booking would produce 113m in revenue versus c 60m today. Figure 49: Ryanair Car Hire revenue potential Average Europcar transaction value rental day volume revenue per day ( ) average duration (days) 5.7 Average transaction revenue ( ) Average commission rate paid to Ryanair (3-5% vs 10% to airports) 5% Commission paid to RYA per booking ( ) 9.4 Ryanair passenger numbers (m) 119 Average penetration - transactions/booking 5.0% RYA pax paying for car hire (m) 5.95 Commission paid to RYA ( m) 56.0 Source: Credit Suisse estimates Commercial help from competitiveness We think the market is incorrectly focused on revenue growth prospects as Ryanair Labs boosts the ancillary revenue pie for the airline. Conversely, we believe that burgeoning ancillaries and the opportunities brought by 70% greater scale over 7Y should allow RYA to reduce fares, while still driving earnings and ROIC growth from In a global market where business models and pricing points are gradually converging, this would help RYA avoid some of the challenges faced by Southwest, which has seen its cost base inflate significantly since Ryanair 42

43 Figure 50: Southwest cost base inflation % 8% 6% 4% 2% 0% -2% -4% -6% Ex-fuel unit costs yoy Source: Company data, Credit Suisse research Over , Southwest enjoyed only a very modest EBITDAR margin gap to legacy peers American, Delta and United, although 2015 saw this gap widen. Figure 51: Southwest-US majors EBITDAR margin gap development 40% 35% 30% 25% 20% 15% 10% 5% 0% AAL DAL UAL LUV SAVE ALGT 2007A 2010A 2015A Source: Company data, Credit Suisse research Between 2005A and 2009A, Ryanair averaged 10% annual ancillary revenue per pax growth, helped by: Card fee increases; and The introduction of bag charges in A-2014A saw a resurgence post-crisis. However, this development has stalled in 2015A-2017E under Always Getting Better due to lower excess baggage fees, penalty fees, and the loss of the Hertz car hire contract in Ryanair 43

44 Figure 52: RYA 2003A-2024E ancillary revenue spend per pax growth A 2005A 2007A 2009A 2011A 2013A 2015A 2017E 2019E 2021E 2023E 20% 15% 10% 5% 0% -5% -10% Ancillary spend per pax ( ) YOY growth Source: Company data, Credit Suisse estimates Ryanair is currently ranked sixth globally in terms of ancillary revenue generation (per IdeaWorks). Figure 53: IdeaWorks top 10 global airlines in terms of ancillary revenues Source: IdeaWorks With ancillary revenues as a percentage of total revenues at 24%, Ryanair ranks fifth globally, down from second before the 2008 financial crisis. However, this development is influenced by accounting measures as well as commercial initiatives (including reduced penalties and bundling for business travellers). Ryanair 44

45 Figure 54: IdeaWorks top 10 global airlines in terms of ancillary revenues Source: IdeaWorks It does not feature in the top 10 airlines in terms of ancillary revenue per pax, with ($16) in FY16A. Figure 55: IdeaWorks top 10 global airlines in terms of ancillary revenues per pax Source: IdeaWorks RYA provides an ancillary revenue breakdown in its 20F, albeit with limited disclosure. Its 1.3bn non-flight scheduled revenue bucket in FY16 included revenues from excess baggage charges, administration/card fees, sales of rail and bus tickets, priority boarding, reserved seating, accommodation, travel insurance and car rentals. Ryanair 45

46 Figure 56: Ryanair reported ancillary revenue breakdown Source: Company data We estimate a breakdown of non-flight scheduled ancillary revenues below: Figure 57: 1.3bn non-flight scheduled ancillary revenue breakdown Allocated seating 16% Credit card fees 8% Priority boarding 7% Car hire 5-10% Hotels 5-10% Administration fees 55% Excess baggage fees 4% Source: Credit Suisse estimates 'Amazon of travel' ambition virtuous circle Ryanair is the world's ninth-most visited travel platform, and enjoys well over half a billion visits per annum (46m in September 2016). With that, the company has continued to reiterate its plan to become the "Amazon of travel" in Europe by expanding its offering beyond seats and its traditional ancillary revenue streams. Ryanair Labs seeks to establish as a platform that not only sells flights, but as a marketplace selling additional products and services. Ryanair has already tried unsuccessfully to provide a farecompare.com-type platform and is doing similar things with Ryanair Rooms and Ryanair Car Hire. By 2024: Ryanair plans to carry 200m pax per annum, equivalent to the populations of the UK, Germany and Spain combined; and will process c100m transactions annually. This would suggest an increasingly virtuous circle enabling better deals with suppliers (hotels, car hire, etc) and a broader supplier base that should increase conversion from a larger customer base while increasing competitive tension between suppliers. Digital strength, including producing an app that can service most traveller needs from flight to hotel to destination activities, would increase customer traction and revenues. Ryanair 46