Ryanair is well known for the cheapness of its flights. But its shares are expensive and that remains true even after a 12 percent dive on Nov. 4.
The blow came as Europe’s largest no-frills airline served up its second profit warning in two months. Ryanair now expects net profit for the current year to fall by about 10 percent.
Ryanair has discovered the limitations of its long-standing strategy to offer ultra-cheap flights to airports in secondary or even tertiary locations. It blames Europe’s economic woes, the good weather in northern Europe and currency movements. But it is clear that rivals like easyJet and Germanwings, which are serving first-tier airports at marginally higher prices, are providing stiffer competition. Ryanair’s heavy-handed approach to customer service, which passengers have long tolerated as the price of a bargain, appears to be more off-putting. Moreover, unlike easyJet – its close rival that recently raised profit hopes – Ryanair is struggling to find appeal among business travellers.
In the context of its emerging difficulties, it is hard to see why Ryanair shares deserve to trade on a premium rating. It foresees stagnating traffic growth in the next 12 months and says it will rely on “aggressive seat sales to stimulate traffic.” It might achieve some earnings growth in the financial year starting in April 2014, but previous hopes that it would grow 20 percent look like a pipe dream.
Realistically, the best shareholders can hope for is that Ryanair will report earnings next year that are the same as in 2012. Even including pending share buybacks, this implies an above-industry average price-to-earnings multiple of 12.
It would be wrong to write off Ryanair. Its strong balance sheet and outstanding earnings track record suggest that it may bounce back. But confidence is leeching fast. Before buying, bargain hunters will need more reassurance that Ryanair is adapting to changing consumer tastes, or that its ultra-cheap strategy can find renewed popularity.
Since early July, Europe’s biggest low-cost airline has lost 28 percent of its market value. Stability may return most quickly if the company prunes its growth ambitions and focuses more on sustainable profit.