Ryanair Holdings PLC’s (LON:RYA) faces higher labour costs after agreeing to recognise pilot unions in a bid to avert strikes in the run-up to Christmas, according to Credit Suisse.
Credit Suisse downgraded the stock to ‘neutral’ from ‘outperform’, citing concerns that staff costs will rise “significantly beyond the company’s guidance of a €100mln uplift in fiscal years 2018 and 2019” and the risk that labour issues will "continue to dominate the investment case for an extended period”.
READ: Ryanair Holdings shares drop as it opens door to pilot unions
Shares in Ryanair fell 3.27% to 14.50p in morning trading.
The airline on Friday announced it would recognise pilot unions for the first time in its 32-year history. The company has previously insisted on pay negotiations through company-controlled representative committees at individual bases.
Chief executive Michael O’Leary had once said he would rather cut off his own hand than recognise unions and has frequently dismissed pilots’ complaints.
However, he’s had a change of heart after a shortage of pilots led to the cancellation of thousands of flights earlier this year.
O’Leary wrote to pilots in October to offer them better pay and conditions.
Ryanair to meet with unions to avert strike
Ryanair has agreed to meet with the Impact union, which represents the company's Irish-based pilots, on Tuesday. The union said: “Impact has this evening suspended a planned one-day strike of Ryanair pilots next Wednesday after company management agreed to recognise the union as the representative of Irish-based pilots."
Ryanair will meet the German pilots' union for talks on Wednesday.
“We expect the market to question whether RYA unit staff costs converge with those of easyJet, from a position c40% lower based on our pre-existing FY19E forecast, which already incorporates a guided €100m uplift,” Credit Suisse said.
“We model 26% inflation at RYA over 2018E-2021E and think the onus is on the company to reassure the market on its ability to protect its unit staff cost advantage.”
Credit Suisse cut its estimates for 2019 net income by 2% to €1.41bn and lowered its 2020 forecast by 6% to €1.49bn. The new estimates include 5% staff cost inflation in 2020-21 following 7.5% and 6% in 2018 and 2019.
Ryanair still a 'structural winner'
The broker still sees Ryanair as a “structural winner”, views its cost structure as diversified and thinks it will take further action to absorb higher inflation.
Deutsche Bank left its rating at ‘buy’, saying: “Although momentum is likely to be challenging in the near-term, we think the current share price offers a very attractive entry point for a business that is fundamentally still a winner, and generates over 75% of profits from ancillary revenues rather than fares.”
The bank said the market has understandably reacted badly to the news of pilot union recognition given what it may mean for the airline’s costs and business model.
It expects an incremental €150mln of costs and cut 9.4% from its annual net profit forecasts.
“In context though, the incremental CASK (cents to operate each seat kilometre) increase would barely dent Ryanair's cost advantage over its major European peers,” Deutsche Bank added.