Ryanair shares slow due to concerns over price war earnings

RYANAIR shares are underperforming in the market because there are concerns that its price war with rivals is holding back earnings.

According to independent stockbrokers Merrion Capital, the chief concerns holding back the growth are concerns over the current aggressive pricing environment, how long this is likely to persist, and whether it might further impact Ryanair’s profitability.

“Our view is that the current price war by Ryanair is a tactical move rather than a strategic gambit and so is not likely to affect its longer-term earnings growth profile,” Merrion analyst John Mattimoe said in a note yesterday.

“We believe that the longterm growth potential is intact and that the implications of slower near-term earnings growth is already factored into the rating,” he said.

He added that Ryanair shares are currently trading on 19 times historic earnings, which is well below the historic average of 26 times earnings.

On the issue of whether the low fares market is reaching saturation, Merrion says there is ample growth room.

The penetration rate of low fares airlines in Europe is still only 8%, compared to 25% in the US.

And Ryanair has further opportunities to grow domestic routes in Germany or Italy.

If a second independent terminal at Dublin Airport is constructed it is likely that the airline will open new routes out of this country.

Merrion also says that it is unlikely that Ryanair will launch an all price, which should ease concerns about yields, or fares.

“The current price war that Ryanair is conducting is broadly spread and, contrary to some suggestions, not aimed as a concerted attack on Easyjet.

“An all-out attack against Easyjet designed to cause it financial distress is unlikely, in our view, as Ryanair does not have enough overlap on the same city pairs/routes with Easyjet to be able to cause it serious financial pain.”

One positive point for the airline could come from aircraft costs with Ryanair benefiting from the introduction of further new efficient aircraft under the new agreement with Boeing.

Higher than anticipated ancillary revenue per passenger will also help the airline.

Ryanair will release first quarter profits next Tuesday.

Rival British Airways (BA) yesterday reported a first quarter loss of £45 million.

BA will record a loss for the current quarter following the industrial action by its staff at Heathrow two weeks ago.