Ryanair Expects Higher Profits (NASDAQ:RYAAY)

Ryanair (NASDAQ:RYAAY) is a company that I have had a buy rating on for months and that has paid off with market outperforming returns. Overall, airlines are in a positive swing as strong demand is expected to continue and propels their numbers this earnings season beyond expectations. Ryanair is no exception and recently updated its guidance for Q3 and provided some light on Q4.

Why I Like Ryanair Stock

I don’t like Ryanair because it is such a glamorous company, because it really is not. I recently flew on their Boeing 737 MAX and while the interior is better than what they have on the Boeing 737-800 fleet, the airline managed to make the Boeing 737 MAX that comes with mood lighting feel somewhat subpar. However, the company knows it doesn’t offer a premium service and it also pretends it doesn’t as also becomes evident from their social media teams calling out people who pay €10 for a ticket and expect premium service.

I fly with Ryanair occasionally and the reason is simple: the price. I flew from Brussels Charleroi to my hometown in Romania which cost me €37 including priority boarding, fast track security and seat selection. The same flight operated with Lufthansa from Amsterdam and with a transfer in Munich cost me more than six times as much without fast track security, allowing me to walk through security within minutes. Obviously, Amsterdam is a more expensive airport to operate from and that is already one reason to like Ryanair because the company works with bases at which it has negotiated lower airport costs. Certainly, the experience at those airports is not comparable to what you get at Amsterdam but it does a lot to keep the costs down. So, its selection of secondary airports to operate from is a winning one for its low-cost structure.

Furthermore, the company operates a uniform fleet keeping scheduling and maintenance costs uniform and low and they have the Boeing 737 MAX on order and several in service keeping the fuel costs down. So, low-cost is in their DNA. The airline allows customers to pick and pay for the services they truly need and with that approach the company is able to offer low fares but also rake in significant additional revenues. A meal can cost around €10 on a Ryanair flight equivalent to the base fare. So, by adding meals, drinks, fast track security, seat selection and other items, the company is able to quickly expand its revenue per passenger via ancillary revenue streams. So, while Ryanair is not my favorite company, they certainly do know how to extract value while remaining ultra-competitive. The company also can be rather harsh reforming its network as I recently found out as they will halt flights to my hometown somewhere in the coming days, but also that is a prudent business decision as the company can deploy capacity elsewhere to generate more value. The fact that the low-cost carrier is not shying away from reforming its network for higher yields is not a bad thing ultimately.

Ryanair Guides Profit Up By 25%

With a strong Q3 quarter, Ryanair has provided a significant boost to its profit outlook for FY2023 increasing it from a range of €1 billion to €1.2 to €1.325 billion to €1.425 billion. Strong pent-up demand being released to the market in unconstrained fashion while capacity constraints continue to exist throughout the aerospace supply chain definitely play a big role in that and led to a strong Christmas/New Year traffic peak. The company maintains its traffic guidance for FY2023 at 168 million passengers, showing that the significant uptick in expected after-tax profit or PAT as the airline calls it to be driven primarily by the unit revenues possibly in combination with lower cost but certainly not driven by volume.

The guide also provides a higher expected profit compared to FY2019 which ends 31st of March and saw €885 million in after tax profit.

Ryanair also shed some light on Q4 where it expects to be loss making. The company cited that the absence of Easter in March was one of the reasons, but to be fair, the last time Easter was in March was in 2016 so I don’t see why Easter travel provides an explanation for the loss making Q4. Maybe I am missing something here. However, the company did point out on softening UK travel which of course explains why Q4 might not be profitable. So, that is certainly something to look at because Q4 unit revenues seem to soften. Whether that is a trend remains to be seen. I believe it is a seasonal item from top line and cost perspective. The first quarter of the year for many businesses and people starts slow and Ryanair is no exception to that coming out of a peak travel season. Furthermore, the slower quarter is often used by airlines to send aircraft for maintenance and redeliver aircraft to lessors which needs to be done in a certain maintenance state. So, the first quarter of the year and Q4 in Ryanair’s reporting period always is somewhat slow due to timing of travel demand and maintenance activities.

Conclusion: Ryanair Is Executing Well

I could write a long conclusion, but when it comes to Ryanair it is actually really simple at this point. Demand is high, the company is able to benefit from that and is not shying away from removing capacity somewhere to deploy it somewhere else more profitably and the company’s low-cost structure is certainly helping them capture the market, resulting in value for shareholders.