Ryanair focuses on customer service

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1 Ryanair focuses on customer service Whoever argued that airlines are a bad investment clearly hadn t seen the long-term performance of Ryanair. In 1998 the shares were trading as low as 0.5 but today are over 14. Ryanair plans to double the number of passengers carried by 2024 and has a new focus on improving customer service. The creation of the European Union (EU) in 1958 has provided a significant opportunity for European companies. The 28 EU member countries have a combined population of 508m people versus 1.4bn in China and 1.25bn in India. The 10 countries that were admitted to the EU in 2004 formed the largest single expansion in terms of population size. They were followed by Bulgaria and Romania in 2007 and then Croatia in The free movement of people inside the European Union has seen significant relocations of the working age population. This has generally been towards nations with higher incomes per head and resilient labour market. For holidaymakers the legal safeguards of the European Union have made it an attractive area to take vacations. This contrasts to trips outside of the EU to countries in North Africa or the Middle East. EU growth and population in 2015: a large market Source: European Union

2 Turning to the European airline industry and the 1990s saw a process of liberalisation as the EU pursued the goal of a single market. This means that national flag carriers are no longer able to receive regulatory or financial support. In 1993 measures were adopted that gave greater access to intra-eu international routes. In 1997 liberalisation was extended to the domestic routes of members of the European Economic Area. The Wizz Air IPO Prospectus (February 2015) states that: This changed the nature of competition in European aviation and paved the way for the growth of low-cost carriers. Liberalisation has also been ongoing between the EU and third-party nations with a number of countries signing open skies agreements. These include Israel, the Balkan States, Georgia and Moldova. The backdrop helps explain the long-term growth of budget airlines like Ryanair and easyjet. Both companies have benefited from EU expansion and the creation of a level playing field for competition. Rising income per person also translates into increased airline travel as people take more holidays. Ryanair is 30 years old this year while easyjet is 20 years old and both companies have significant medium-term expansion plans. Ryanair in focus Ryanair is the largest budget airline in the European Union and enjoys the largest market share in Ireland, Portugal, Italy, Belgium and Spain. However, the group only has a 5% market share in Germany and a 7% position in France. In the winter 2015/16 the group is planning to increase its capacity in Germany by 51% while the UK is set to see 12% growth. This expansion could see Ryanair overtake easyjet as the UK s largest budget airline.

3 Ryanair s market position Source: Ryanair investor presentation Ryanair passenger growth In the year to March 2015 Ryanair carried 90.6m and plans to double this to 180m passengers by The game-changer Boeing 737 Max will be delivered from 2020 with its fuel efficiency allowing for further fare reductions. Passenger growth in the near-term will be supported by cuts to air fares as the airlines pass on the benefit from lower fuel prices. An ongoing issue, though, is that airline companies have tended to invest in too much in capacity growth. Ryanair has downplayed this risk by stating that its competitors are running scared on its routes i.e. withdrawing capacity. While there is some evidence of this the other European budget airlines also have significant expansion plans.

4 Ryanair wants to double in size over 10 years Source: Ryanair investor presentation Customer service and market position Ryanair s has been infamous for annoying passengers with this causing a number of poor trading updates in The focus since then has been catching up with rivals through the group s Always Getting Better programme. The company introduced a new website in October 2015 and back in December 2013 allowed a 2 nd small carry on bag. Airport bag fees have been cut and a booking grace period was introduced. In March 2015 the CEO of Ryanair, Michael O Leary stated that: AGB (Always Getting Better) has attracted millions of new customers to Ryanair. In terms of fares and Ryanair claims to be the cheapest in Europe with only Wizz Air coming close. The group also claims to have the lowest costs per passenger (excluding fuel) but this may reflect an emphasis on secondary airports. Ryanair s financial performance Turning to the financial results and the summer of 2015 saw everything move in the right direction for European airlines. Adverse weather in Northern Europe, the strength of sterling, flat capacity and savings on fuel all provided a boost.

5 The net result was that traffic carried by Ryanair was up 13% on a year ago at 58.1m in the six months to September The load factor improved by 4% to 93% and the average fare (including baggage) rose by 2% to 56. Revenue increased by 15%, the net profit margin improved by 4% to 27% and the net profit figure increased by 37% to 1.088bn. Earnings per share saw an impressive 39% increase to 0.8. The near-term financial performance will be boosted by low prices provided that this isn t fully offset by lower fares. For the 2015 financial year the group was 95% hedged at US$950 per metric tone but this is set to fall to US$622 in Ryanair enjoyed a net cash position of 976m at the end of September but this was before a 400m cash return to investors. Further share buy-backs or capital returns are unlikely until the new financial year to March Summary and valuation The airline sector is also notoriously volatile with Ryanair s share price falling by nearly 70% during the financial crisis. The strong conditions seen this summer in the European airline industry are also unlikely to be repeated anytime soon. There are also the risks associated with airlines that the recent events in Egypt highlight. However, despite a number of downturns since 2000, and events such as September 11, we have seen air travel increase. In terms of economic downturns and budget airlines are better able to weather difficult conditions than legacy carriers. Assertive unions in companies like Air France and Lufthansa have made it hard for the flag carriers to lower costs. Ryanair is the largest European budget airline and appears to lead the pack in terms of its cost structure and the fares charged. Improving the customer service proposition will further boost the company s competitive position. For the year to March 2016 the forecast P/E is 16X but this falls to 13.8X in the following year and then 12.8X in the year to March Profit growth will be supported by passenger growth, market share gains and economies of scale. This report was produced by Fat Prophets Senior Analyst Andrew Latto

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