Description

*numbers in header reflect consensus, FY ends March*

Summary: Ryanair is Europe’s dominant short-haul ultra-low cost carrier. We expect pricing upside to summer fares, enabled by sharp reductions in competitive capacity throughout RYA’s route network. RYA has de-rated to all-time lows, in line with global ULCCs - we are ~7% higher vs cons NTM revenue (pricing driven), which translates to ~40% EPS upside, or a quick double using a conservative 10x P/E

Consensus Overview

Upside / (Downside) – We expect a ~7% beat to unit revenues (~12-13% passenger fare increase) this summer, which translates to a 40% EPS & FCF beat vs. consensus driven by an exodus of competitive capacity from RYA’s markets.

LCCs have uniformly de-rated worldwide – pre-covid the group traded in the ~10-14x NTM/NTM+1 forward earnings (vs 7-9x Network Airlines). The group has recently de-rated to all time lows uniformly reflecting (valid) concerns re: structural changes in the US market, however Ryanair has been thrown out with the bathwater – we expect a large yield beat and capital return this summer (as explained below)

Ex. 1: Pre-Covid ULCC Peer Multiples

10x multiple is still a discount to peers, many of whom are burning cash, highly levered or generally broken as demonstrated in the table below. We expect that CEO Michael O’ Leary is eager to deploy excess cash toward buybacks at current depressed levels.

Note: Figures are in this exhibit are in USD. Purple is BBG Consensus

Why are ULCCs so hated?

(1)    US specific: we believe US network carriers have deliberately broken the model of US ULCC by aggressively deploying Basic Economy fares and cornering the market for pilots (growth) that ULCCs require to retain their low unit costs (undercut). The flipside is likely oversupply from US legacies (despite talking about constraints, schedules are still accelerating in domestic US through summer)

(2)    Supplier/fleet specific: while clearly delivery delays, supply bottlenecks and quality issues are impacting both Airbus and Boeing, it is substantially more practically impactful to GTF NEO operators who will see large portions of their fleet grounded for then next 2+ years

Why is Ryanair’s situation different?

Thesis Pt. 1: In short-haul Europe, competitive dynamics improved for ULCC vs Network Carriers

o   The intra-Europe market is more suitable to the ULCCs product, due to leisure-driven demand, the breadth of cheap secondary airports (vs mega-hubs) and mostly short-haul trips (cabin experience is less critical)

o   Intra-Europe supply is still below ‘2019 levels

o   LCCs (particularly Wizz and Ryanair) drove the recovery and gained substantial share) 

o   Meanwhile, legacies carries have shrunk and refocused on higher margin long-haul and business travel, rather than risk their precarious liquidity chasing leisure 

Thesis Pt. 2 – GTF grounding is forcing Ryanair’s ULCC competitors to cede long-battled overlap markets – allowing Ryanair to solidify network dominance

(1)    GTF inspections have put a substantial portion of NEOs on the ground going into peak summer leisure season in Europe

(2)    Estimated 250-300 day service intervals mean this will be a headwind to competitive supply well into 2026

(3)    This is particularly impactful to Wizz Air, Ryanair’s fiercest competitor. While Ryanair’s growth plans and cost-advantage were impaired waiting for the MAX to be recertified, Wizz continued their aggressive NEO-driven expansion tripling their fleet since 2015. Now the tables have turned and Ryanair’s Max’s have arrived, while 20% Wizz’s fleet is grounded

(4)    Across Ryanair’s network, competitive capacity is declining sharply – setting up a better summer supply outlook for Intra-Europe than anytime in recent memory

Thesis Pt. 3 – Competitive overlap sharply lower this summer enabling Ryanair to capture modest price increases in the strong summer period

(1)    Capacity rationality/discipline, especially in markets where ULCCs overlap, is the primary driver of pricing power – competitive routes are declining sharply and we are seeing indications of very strong forward fares across a number of our independent tracking sources. We estimate that Ryanair has gained 15% capacity share y/y in their top 30 routes weighted by revenue

Risks and Mitigants

-          Fuel / FX / Macro: Ryanair hedges the bulk of their fuel and FX exposure, its still a high beta name with a lot of macro sensitivity and sensitive to European consumer (we don’t model incremental demand strength beyond seasonality)

-          Fleet: Ryanair is substantially a Boeing-exclusive operation, we think current delivery constraints are fairly modest (arguably exaggerated as cover to raise fares & get more Boeing discounts)

-          Regulatory/Labor/War: Regulatory risks around climate policy, strikes and air traffic control disruptions, various war impacts are persistent but tolerable risks at this price   

Catalyst

- Unit price upside realized

- Commentary on capital returns