Ryanair Holdings plc’s (LON:RYA) share price is up some 25% in recent months supported by the capacity squeeze triggered by the high profile grounding of Boeing 737 Max aircraft, which has driven ticket prices higher.
Analysts at Berenberg today warn that investors may be complacent following the strong share price performance.
A rating upgrade from Berenberg, which moves to ‘hold’ from ‘sell’, is far from exuberant in its appraisal of Ryanair’s recent share price strength.
Whilst acknowledging a ‘goldilocks’ pricing environment for the budget airline, Berenberg’s Adrian Yanoshik, says the wider industry will struggle to maintain ticket prices going forward.
“We upgrade our rating to Hold to reflect continued pricing strength,” he said in a note.
“However, we continue to flag investor complacency about mounting 737 MAX unit cost inflation pressures going into 2021, similar to those that US airlines continue to struggle with.”
Yanoshik added: “European shorthaul capacity will inflect on the return of the 737 MAX, accelerating from c1% in 2020 to c6% in 2021.
“Given its fragmented nature, the industry will likely struggle to curtail growth and maintain pricing in this environment, putting the low-cost carriers (LCCs) at risk of a pricing and earnings reversal if growth accelerates.”
Zeroing in on the European bank’s view on Ryanair, following a recent guidance upgrade (net income estimate move to €950mln-1,050mln from €800mln-900mln), the analyst has adjusted its short term numbers.
Yanosik said the Berenberg team expects Ryanair to show a €6mln decline in net income in its third-quarter numbers. He noted though that the revenue performance is set to mark around 16% growth off of a 5% rise in passenger unit revenue and a 17% increase in ancillaries.
Cost per seat are meanwhile believed to be up 5% year-on-year in the quarter and similarly, Berenberg expects fuel costs per seat to be 4.5% higher.
Berenberg’s focus is now on 2021, particularly on unit cost trends.
“Our c€1,200mln net income estimate in the same period leaves us 5% below consensus – and is predicated on unit revenue (per seat) decelerating to 2% as industry capacity accelerates, and CPS excluding fuel hitting c3% on the back of c10% maintenance cost inflation,” the analyst said.
He also highlighted potential fleet cost risks. “Ryanair has kept its fleet young, benefiting from fuel efficiency and lower maintenance requirements.
“In the absence of the 737 MAX, the airline has supplemented aircraft deliveries by extending older 737-800 aircraft service lives and accelerating its Lauda subsidiary’s growth. Extending the life of its older fleet puts its unit costs at risk from expensive maintenance fees, while compensating with Lauda growth will have a negative mix impact on margins,” Yanosik said.