The cost of flying has been on a sharp downward trajectory over the past year driven by overcapacity and a price war among the discount carriers, such as Ryanair PLC (LON:RYA),
Ironically, however, although this has been good news for the traveller, it has been even better news for Ryanair’s earnings.
The Irish airline reported record annual results today as a 13% drop in its average fares to just €41 a trip was balanced by a 13% rise in passenger traffic to 120mln customers, with load factors - how full its planes are – rising to an industry leading 94%.
READ: Ryanair posts record annual profits despite sharp falls in average fares
The Dublin and London-listed group expects air fares to fall again this year due to a weaker pound and continuing excess capacity in Europe, although the 5% to 7% decline predicted would be exceeded by Ryanair’s forecast for 8% passenger growth to 130mln.
Jordan Hiscott, chief trader at ayondo markets said: “The low cost airline knows its segment of the market extremely well, stipulating that fares should fall between 5%-7% in 2018, but still expects to see profitability through record passenger numbers.“
However, Neil Wilson, senior market analyst at ETX Capital, said: “Digging down a bit, the numbers arguably look a little less impressive with revenues lower. Total revenue per seat was 8% lower, while revenues per passenger were down a tenth.”
“Cutting cost and slashing prices have paid a dividend”, says analyst
Ryanair has also been ruthlessly cutting unit costs, which fell by 11% in the year to March 31 2017, helped by lower fuel prices, although excluding fuel costs were still down by 5%.
Naeem Aslam, chief market analyst at Think Markets UK Ltd, said: “Cutting cost and slashing prices have paid a dividend by undercutting rivals and it helped the firm to maintain its market share given the glut of capacity we have on European routes. “
But Aslam pointed out: “We do expect that demand will soon catch up with supply and that could inflate it’s earning in fiscal 2018. Ryanair needs to make sure that it takes full advantage of an opportunity which is due to the restructuring of Air Berlin Plz and Alitalia Spa.”
The analyst added that the airline should strengthen its position in Italy, Germany, Poland and Romania.
Ryanair pivoting away from the UK towards Europe
ETX’s Wilson also noted that “Ryanair is pivoting away from the UK towards Europe, where (there) is significant potential this summer for growth.”
He added: “The airline remains pretty cautious but there is a chance to gain market share this summer as legacy carriers restructure.”
Brexit headwinds may continue to make Ryanair boss Michael O’Leary jittery, with the airline’s chief executive saying investors “should be wary of the risk of negative Brexit developments, or any repeat of last year’s security events at European cities, which could damage consumer confidence, close-in bookings and this FY18 guidance.”
But although the airline’s share price dipped in response to that caution – down 0.3%, or €0.05 to €17.96 in late morning trading – commentators seemed pretty sanguine.
Ayondo Markets’s Hiscott said: “Shares were already trading near their all-time high of €17.98 last week, and coupled with today’s figures, this high demand among investors doesn’t surprise me.”
And Cantor Fitzgerald analyst Robin Byde noted: “The stock has had a strong run, along with the rest of the sector. Given these inline results, an unattractive valuation and cautious statements on the outlook, we expect some profit taking”.