The Re-rise of Ryanair?
Europe’s disgraced airline keeps big investors onside after rocky 2017
Several institutional investors are backing Ryanair, putting it on track to bounce back from a pilot rostering mess-up and a decision to recognize unions that jolted confidence in Europe’s most profitable airline.
The mishandling of staff holidays caused thousands of flight cancellations, angered passengers and helped pilots secure union recognition for the first time in Ryanair’s 32-year history, sending its share price plummeting down by 9 percent in one single day in December.
The holiday rota errors were a rare serious slip-up by Chief Executive Michael O’Leary, whose formula of dirt cheap, no-frills travel has transformed the continent’s airline sector and handed his shareholders big returns.
O’Leary had said hell would freeze over before he would welcome unions into Ryanair. The company now says dialogue with organized labor will help the business.
Analysts say it will inflate its costs and could reduce the flexibility that helped it steal chunks of business from traditional airlines such as Lufthansa and Air France-KLM.
Loyal shareholders?
Amid Ryanair’s recovery from its schedule screw-up, top shareholder HSBC Global Asset Managers cut a quarter of its Ryanair stake, according to a filing released last month. HSBC declined to comment on the decision.
In contrast, other big Ryanair shareholders are maintaining or adding to their holdings.
“Because the share price has fallen, it has become, in our opinion, compellingly attractive,” said Rory Powe, who manages European growth stocks at Man GLG and added to his Ryanair holdings in December.
“I don’t see Ryanair’s cost advantage being eroded by anything more than an immaterial amount.”
Ryanair’s longer-term record as an investment may help explain why top shareholders appear reluctant to drop it.
The shares have gone up 150 percent over the last four years as it tackles a reputation of shoddy services and woos higher-paying business class passengers. Shares in its most successful rival, Easyjet, have barely moved in that time.
Analysts agree that upcoming union negotiations will be crucial, amid questions over whether O’Leary’s pugnacious management style is still appropriate for a company that was once an upstart challenger but now dominates European shorthaul air travel.
“A unionized Ryanair will still be profitable, cash generative and valuecreating in our view but will be a markedly different company,” HSBC analysts said last week, rating the shares “reduce.”
HSBC believes Ryanair unit costs could rise 20 percent by 2020, as a result of unionization and the localization of contracts.
The firm also believes that Ryanair’s talks with continental unions could be tough and that “airline strikes in these markets are commonplace.”
‘Category killer’
Other big Ryanair institutional investors acknowledge the challenges but believe that, with its cost base still below rivals, the firm can still make bumper profits as the eurozone economy picks up steam, industry capacity growth eases and prices recover.
Ryanair has said it does not expect its costs to increase significantly.
Jonathan Fearon, who runs the Aberdeen Standard European Growth fund, said the market seemed to be pricing in the idea that Ryanair’s cost advantage will disappear.
But he said that staff costs were only one of the many advantages in Ryanair’s broad “ultra-low-cost” business model.
Fearon indicated that Ryanair is still a favorite: It is a “category killer” in the short-haul group that stands to gain from Alitalia’s troubles and as industry capacity growth slows, boosting fares.
Tony Gibb, investment director at another Ryanair shareholder, Fidelity, said that the company’s significant cost advantage, even over EasyJet, was “sustainable” and last month’s share slump was “probably overplayed.”
“There is negative press and the share price has come off quite meaningfully but that is probably more of an opportunity than anything else,” said Gibb.