By Eamon Quinn
Ryanair has posted a sharp rise in costs and a 20% drop in profits after facing some of the worst financial turbulence in its history, but analysts say its low-cost business model isn’t broken.
The airline has predicted a winter of attrition when weaker rivals are forced out of business. Its shares ended almost 7% lower.
The earnings report for its fiscal first quarter covers the three months to the end of June, which was marked by an extraordinary raft of challenges that included strikes by French air traffic control; a soaring wages’ bill after its pilots won the battle for union recognition; higher fuel costs as Opec pushed up the price of global oil; lower margins; as well as tough conditions in Germany — a key market the airline has pledged to crack to secure future growth.
Pre-tax profits dropped 20% to €319m in the quarter from a year earlier and its net margin fell 6% even as operating revenues climbed 9% to almost €2.08bn.
However, those revenues included a 25% surge in so-called ancillary or non-fare revenues, to almost €625m, while “scheduled revenues” rose 3% to €1.45bn.
The World Cup and the heatwave in northern Europe which is keeping holidaymakers at home; continuing tough competition in Germany; and strikes by its own staff, add up to weaker pricing power for the airline in the summer months, its most profitable second quarter to the end of September.
Irish Customer Update: pic.twitter.com/05AJIkugOZ— Ryanair (@Ryanair) July 23, 2018
For the first quarter to the end of June, double-digit growth in costs included price rises for fuel, up 23% to almost €631m as the airline flew more routes and global fuel costs rose; a 34% rise in wage costs to almost €245m following pay increases to pilots and other staff; a 29% increase in marketing and other costs to €129.7m amid a sharp rise in passenger claims for the air traffic disruption; and a rise in depreciation costs which were up 13% to over €157m as the airline expanded its fleet.
It also said LaudaMotion, the airline in which it will own a 75% stake once EU approval is secured, will lose €150m in its first year and break even after three years.
Amid the headwinds, Ryanair cut its forecast and projected only an increase of 1% in fares this summer but is still aiming for its full-year profits goal of €1.25bn to €1.35bn.
Chief financial officer Neil Sorahan said the fallout from strikes by pilots in Dublin today was under control: “We have managed the disruptions very well to date,” he told Bloomberg Television. Analysts at Goodbody and Davy said the airline’s low-cost model wasn’t in danger.
“While Ryanair continues to face some tough issues, fundamentally the model is not broken, and we see this period of weakness as a buying opportunity for investors with a medium-term investment horizon,” said Goodbody.
“Despite the noise, [the] business model endures,” said Davy, which has a price target of €18 on the shares.
“Ryanair is not prepared to compromise either its low fares or its highly efficient model; if strikes continue in certain countries, it will review its winter schedule in those markets,” the broker said.
Merrion’s Darren McKinley, disagreed on the outlook: “Shareholders are not taking the result or guidance positively. We reduce our target price to €15.50 following Q1 2019 results and struggle to see any reason to own [the shares] in the short term,” said Mr McKinley.