Ryanair signals end of low cost era

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By :  ,  Financial Analyst


Ryanair investors got another reason to punish shares in Europe’s largest discount carrier after surprisingly weak quarterly earnings. If the group really is a bellwether though, rivals have just as much to fear.

Post rock-bottom fares

In many ways, it’s the end of the era for low-cost travel. The cheap-seats model is unlikely to evaporate entirely. But as pilots force higher wages, emboldening cabin crew to step up their own pay demands, there’s a fin de siècle feel around the discount sector. Ryanair is struggling to remain the cheapest by keeping costs down. Strikes could temporarily diminish the Dublin-based carrier’s advantage even further. Rising oil prices also contribute upward pressure on costs. Monday’s disgruntled 6% sell-off was perhaps inevitable.

Outlook intact

Ryanair doesn’t however operate in a vacuum. Aches today for the world’s fifth-largest could mean outright pain tomorrow for rivals, by historic pattern. Furthermore, only the most dominant operators can hope to match Ryanair’s aggressive ancillary revenue rise—up 25% in the first quarter—to offset price falls. Accordingly, profit guidance (€1.25bn-€1.35bn) remained intact.  Such a cushion is unlikely at, say, £2.6bn Whizz Air. As for the risk that a no-deal Brexit could force restricted voting rights on non-EU shareholders, that too applies across a handful of Europe-facing airlines.  

Cash climbs

Yet it is the Irish carrier that is the least unencumbered by long-term net debt. And, its operating margin is still 10 percentage points above the mean of profitable competitors. Ryanair has also been the best cash generator for most of the decade. In today’s money, free operating cash flow (FOCF) decelerated to €262.42m in Q3 2017, the lowest since a near €110m operating loss in Q4 2011. Despite persisting troubles though, FOCF crept higher in the five quarters that followed, culminating at €750m by end March 2018. EasyJet’s €228m for the comparable period shows how much ground it has to make up.

Thoughts on Ryanair’s technical price chart

Still, Ryanair shares on Monday crashed through a clean rising trend, the first transgression below since inception at the end of 2014. It’s a reflection of investors’ loss of confidence in the discount model and in Ryanair in particular. There’s a ‘breakdown’ feel as well, looking at declining trend line resistance since August 2017’s peak. Together with broken rising trend support, a symmetrical triangle was nixed. Symmetrical triangle breaks seem typically bullish, though theory does not exclude instances where the indication is negative. In all cases, confirmation is key. In the current one, destruction of the technical structure and loss of pivotal (in more ways than one) €14.92 support—valid since late 2015—could be decisive if sustained. With Relative Strength Index pointing lower, sustainment looks likely, strengthening the possibility that investors are witnessing the reversal of a longstanding winning trend. Further confirmation could come if the shares reached and broke through their 200-week moving average (200-WMA) in coming weeks. The 200-WMA closed at €13.83.

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