Optionality on €25 per share - Ryanair | Investor Relations · 9/8/2016 · PBT 1721.9 1581.6...

See the end of this report for important disclosures and analyst certification. All authors are Research Analysts unless otherwise stated.

Ryanair Holdings Closing price:1275c

Mkt. Cap (€ m) 16466.8

OUTPERFORM Issued 07/12/09

Previously NEUTRAL Issued 02/11/09

September 8 2016, 06:30 IST/BST

Stephen Furlong [email protected] / +353 1 6148924

Ross Harvey [email protected] / +353 1 6149145

Allan Smylie CFA [email protected] / +353 1 6148701

Transport, Distribution and Logistics Team Stephen Furlong, Ross Harvey, Allan Smylie

[email protected]

Share Price Performance

Key financials (€m)

Year End Mar16 Mar17E Mar18E

Revenue 6535.8 6749.6 6911.3

EBITDAR 2002.5 2230.4 2397.2

PBT 1721.9 1581.6 1701.8

EPS Basic 116.3 111.8 120.8

EPS Diluted (Adj) 92.1 111.1 120.1

Cash EPS (Diluted) 123.8 150.9 166.2

Dividend 0.0 0.0 0.0

NBV 268.2 360.2 482.5

Valuation

P/E 13.8 11.5 10.6

FCF Yield (pre div) (%) 4.2 4.5 6.7

Dividend Yield (%) 0.0 0.0 0.0

Price / Book 4.8 3.5 2.6

EV / EBITDAR 8.4 7.1 6.2

Group Int. Cover (x) 27.4 37.2 86.1

Debt / EBITDAR (x) N/A N/A N/A

Financial Data

Ryanair Holdings :Financial model and valuation analysis

Low cost airlines Sector Review

Optionality on €25 per share

We are raising our 12-month target price for Ryanair to €16.

However, in this report, we outline three catalysts which could

justify a share price of €25, almost double the current level. A

step-up in ancillary revenues, the game-changing economics of

MAX deliveries and potentially more than €5.5bn in cash

returns to shareholders over five years underpin a compelling

medium-term investment case. The next catalyst is likely to be

the lifting of the ancillary revenue target in November,

followed by a distribution of more than €1bn in February 2017.

On a risk-reward basis, Ryanair is our top pick in the sector.

Through-the-cycle multiple and growth profile justify €16 PT

While we believe that pricing is, and will remain, soft across the low-cost carrier space

through winter (we expect 7.7% capacity growth this winter), we think that Ryanair’s

yield guidance captures much of the downside risk. Strong cost momentum and easier

ancillary comparisons in H2 provide support to full-year guidance and we remain

comfortable with our €1,408m FY 2017 net income forecast. We therefore think that the

stock’s 22% discount to its long-term P/E multiple of 14.6x (currently 11.4x) is

unjustified. We also believe that Ryanair’s growth and earnings profile (16% EPS CAGR

from FY 2005 to FY 2016) makes it comparable to a high-growth consumer stock in

everything but its multiple. A 14.5x P/E suggests a fair value of €16.

Three potential catalysts provide optionality on €25 per share

In this report, we highlight three potential catalysts of long-term value creation that offer

upside towards a €25 share price. Firstly, having trended sideways at €15 per pax since

FY 2014, we think that the next leg of the ‘Always Getting Better’ programme can drive

a further €2 per pax of ancillary monetisation. This implies an extra €2.3 on the share

price. Secondly, we believe that the attractive economics of the MAX aircraft can add

more than €300m net income on full delivery; that is worth another €3.0 per share.

Finally, we expect the company to generate €5.7bn of distributable free cash over the

next five years, which is equivalent to €3.7 per share when discounted.

Deflationary yield environment remains the key risk

The key risk to our positive investment thesis on Ryanair is an aggressively deflationary

yield environment in the coming years. Our backlog analysis suggests that capacity

growth will remain elevated in the 5-7% a year range out to 2020. In addition, customer

offerings in the low-cost space are converging and there is increasing overlap amongst

low-cost carriers. However, we would point out that our forecast Q4 average fare for

Ryanair (€28.5) would be the lowest on record while network adjustments since 2013

(similar number of routes but with 30% more frequency, tertiary airport exposure down

10pp) should lessen mid-term yield volatility.

mailto:[email protected]




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Ryanair Holdings

2

Figure 1: Ryanair has a sustainable 15-50% cost advantage relative to its LCC peers

Source: Davy Research; company reports

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Figure 2: In a deflationary yield environment, this provides competitive benefit


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Figure 3: We believe the stock’s 22% discount to its average historic P/E is unwarranted

Source: Davy Research; FactSet

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Figure 4: We view ancillaries as a potential pillar of long-term value creation


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As a sign of sensitivity, based on:i) current yield estimates and; ii) 90-100% ancillary drop-through; ...increasing RYA's ancillary exposure to 30% of revenuesby FY2020 would increase net income by 15%

Ryanair Holdings

3

Figure 7: Operating a similar number of routes, Ryanair has added almost 30% more frequency; loads have increased 11pp


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RYA will operate marginally lessroutes in CY16 vs CY13, but it has it

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Figure 8: The network mix has shifted towards primary airports where demand is more stable


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Figure 5: We expect Ryanair to generate €5.7bn of distributable free cash from FY 2018-22 (38% of current market cap)



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From FY18-22, we expect Ryanairto generate €5.7bn of distributable free-cash (c. 38% of current market cap.), much of which will be distributed to shareholders

Figure 6: Our forecast Q4 yield (€28.5) will be the lowest on record

Source: Davy Research

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Ryanair Holdings

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Business model strong in face of weaker pricing Pricing weak across LCC space but volumes reacting to stimulation In Q2, while the European low-cost carrier (LCC) space continued to see strong volume

growth of 11% (broadly in line with the previous ten quarters at 10-15% growth) and

modest load factor improvement (+1.0pp), this required the highest level of price

stimulation since Q1 2014, with unit revenues down 6% on average (in constant

currency terms), compared with broadly flat in 2015.

We see no signs that pricing backdrop has improved since Q2. Although some of the Q2

decline was due to network disruptions like air traffic control (ATC) strikes and adverse

weather which have eased somewhat in Q3, concerns on demand as a result of recent

terrorist attacks and Brexit, and difficult comparisons, are notable headwinds in Q3.

Across the space, we see peak summer (Q3) unit revenues down in the range of 4% on

average (constant currency).

For Ryanair, we think our -6% yield forecast for fiscal Q2 has downside risk of 1-2

percentage points, implying H1 yields of -9% compared to -8% guidance. However,

load factors continue to surprise positively and are tracking 1pp better than our flat

forecast (we review Ryanair’s loads relative to LCCs globally below). Supported by good

momentum and a currency tailwind on costs, we are comfortable with our Q2 FY 2017

net income forecast of €952m.

More generally, it is notable that Ryanair’s unit revenue has outperformed its LCC peers

by c.5pp on average over the past two years. Although technically driven by load factor

improvements, we believe that improving demand for the Ryanair product was

underpinned by digital and customer service enhancements, and network adjustments

(see below). For winter (fiscal Q3/Q4), we expect yield declines of 10%, within guidance

of 10-12% declines. Interestingly, Wizz Air recently maintained its guidance of mid-

single-digit RASK declines through winter despite its airport-pair overlap with Ryanair

itself increasing to 12% from this winter (5% in 2014). It is unlikely in our view that

both sets of guidance prove correct given the overlap – something has to give.

We see no signs that pricing

backdrop has improved since Q2.

It is notable that Ryanair’s unit

revenue has outperformed its LCC

peers by c.5pp on average over the

past two years.

Figure 9: Peak summer pricing expected to be soft at LCCs


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Unit revenue performances(ccy, average from Q2 '14 to Q2 '16):1. RYA: +3.2% 4. VY: -2.0%2. EZJ: -0.7% 5. NAS: -3.4%3. WIZZ: -0.7%

Q2 '16 run-rate:1. VY: -3.9% 4. WIZZ: -6.1%2. RYA: -5.0% 5. EZJ: -8.3%3. NAS: -5.0%

Forecasts

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Figure 10: Ryanair's long-term pricing advantage vs. LCC peers


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Ryanair Holdings

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FY 2017 guidance looks achievable with costs/loads offsetting weaker yields Ryanair carries strong cost momentum into the second half of the year, providing

support to full-year guidance (cost guidance is 1% reduction in ex-fuel costs per pax). In

its first fiscal quarter, Ryanair achieved a reduction in ex-fuel cost per passenger of 3.5%

(c.1.7% in constant currency). Even on a per-seat basis, ex-fuel costs were flat in

constant currency terms compared with increases at all other LCCs. In our view, this cost

performance in a quarter that saw heightened disruption highlights Ryanair’s relative

ability to deal with network problems: on-time performance was still 87% (-4pp yoy)

compared to 74% at easyJet (-5pp yoy) and 79% at Norwegian (-4pp yoy).

While growth comparisons slow in the winter, this should be compensated for by an

increase in the GBP tailwind on costs from about 1.5-2.0pp in Q1 to 2.0-3.0pp over the

rest of the fiscal year. Although pricing is and is likely to remain weak, loads and costs

can offset the negative impact and we remain comfortable with our FY 2017 net

income forecast of €1,408m (guidance €1,375-1,425m), up 12% year-on-year and 39%

CAGR since FY 2014.

Ryanair carries strong cost

momentum into the second half of

the year, providing support to full-

year guidance.

Figure 11: Ryanair carries cost momentum into H2 …


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Company-preferred unit cost metric(ccy, average from Q2 '14 to Q2 '16):1. RYA: -3.7% 4. WIZZ: +1.9%2. NAS: -1.4% 5. VY: +2.0%3. EZJ: +1.8%

Q2 '16 run-rate:1. RYA: -1.7% 4. WIZZ: +3.3%2. EZJ: +0.1% 5. VY: +8.5%3. NAS: +1.9%

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Figure 12: … And maintains LFL cost advantage of 15-50%


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Ryanair Holdings

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Consumer growth stock without the rating Provided Ryanair can achieve its FY 2017 guidance, we believe that its current multiple

presents an attractive entry point for a proven industry winner. Ryanair currently trades

at 11.4x FY 2017 P/E and 7.2x EV/EBITDAR, which is on our numbers a 5-15% premium

to its European LCC peers (9.9x P/E and 6.9x EV/EBITDAR respectively).

Table 1: Ryanair valuation compared to peers against earnings growth

Based on Davy P/E EV/EBITDAR FCF yield Divi yield Earnings record

estimates (nearest FY) 2016 2017 2016 2017 2016 2017 2016 2017 Past 2FY Next 2FY Curr. FY

Ryanair 11.4 10.6 7.2 6.2 4.6% 6.9% 0.0% 0.0% 54% 10% 13%

easyJet 11.1 9.4 6.3 5.7 2.4% 2.7% 4.5% 5.4% 20% -6% -26%

Norwegian 8.5 9.9 8.1 10.0 -52.0% -124.3% 0.0% 0.0% 36% 27% 54%

Wizz 10.2 8.9 6.3 5.6 5.8% 7.3% 0.0% 0.0% 60% 11% 9%

Average 9.9 9.4 6.9 7.1 -14.6% -38.1% 1.5% 1.8% 38.6% 10.4% 12.6%


P/E of 11.4x is 22% lower than historic average, but little has changed Ryanair de-rated in line with the sector year-to-date (18% on average for the LCC

sector), and we struggle to justify the steep discount of its multiple to its historic

average. Its P/E (11.4x in FY 2017) is 22% lower than its historic average (14.6x).

Although there are some unique risks in the current environment – the increased

terrorist threat, uncertainty on Brexit – nothing has fundamentally changed in our view

to diminish the earnings power of Ryanair’s high-growth model and this gap should

close. Possible catalysts are an easing in negative sentiment to the sector and likely

further capital distributions in early 2017. Restoring a 14.5x P/E and 8.5x EV/EBITDAR

implies a base target price of €16.

Provided Ryanair can achieve its FY

2017 guidance, we believe that its

current multiple presents an

attractive entry point.

Nothing has fundamentally

changed in our view to diminish

the earnings power of Ryanair’s

high-growth model and this gap

should close.

Figure 13: De-rating across the LCC sector year-to-date


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by 18% YTD

Figure 14: RYA currently at 22% discount to historic average


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Ryanair Holdings

7

Financial characteristics of high-growth consumer stock More broadly, while recognising that market structures vary by sector and the airline

space is particularly fragmented and competitive, we believe that Ryanair’s continued

growth in excess of the market and earnings record (16% EPS CAGR from FY 2005-16)

make it comparable to a high-growth consumer stock in everything but its multiple. In

addition, its FCF generation (high-single-digit yield) compares favourably.

Will these characteristics persist? Firstly, in terms of growth, over the past 12 years

(2004-16), Ryanair has grown in seating capacity terms at 12.0% CAGR, about four

times the rate of the rest of the European market (3.0% CAGR). It now has a share of

13% of seating capacity in Europe although given the differential in load factor (Ryanair

93%, European market c.82%, according to IATA), we estimate that it has a 14.7%

share of passengers – that is about two-thirds of Southwest’s market share in the US of

21.2%. Looking forward, this growth will not ease. The airline’s stated passenger

targets are 180m by FY 2024, though depending on aircraft disposals and residual

values, we think that a more realistic target is 200m.

On earnings potential, we believe Ryanair’s cost advantage is sustainable. Its pricing

stimulates traffic – helping also to underpin continued market share gains – and there

are avenues to further earnings upside through increased ancillaries penetration and the

Boeing MAX deal in particular. In addition, the company’s efforts on data analytics will

lessen any disintermediation threats while its scale should improve its bargaining power

– consider as an example its dual-airport strategy for a variety of European cities.

Priced solely on today’s earnings, we believe that €16 per share is the fair value for

Ryanair. However, we see three additional options which when discounted to present

value justify a share price of €25, almost double current levels.

We believe that Ryanair’s

continued growth in excess of the

market and earnings record make

it comparable to a high-growth

consumer stock in everything but

its multiple.

On earnings potential, we believe

Ryanair’s cost advantage is

sustainable.

Figure 15: Ryanair historic record of growth versus the market


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Figure 16: Ryanair passenger growth targets out to FY2024


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Ryanair Holdings

8

Long-term optionality 1 – Ancillaries Analytics the key to unlocking ancillary opportunity We see increasing ancillary penetration as a significant value opportunity for Ryanair. At

its recent analyst day, the company made a credible case that extensive data mining of

its customer base could allow it to improve the personalisation of its product and

facilitate better uptake of ancillary products, and cross- and up-selling.

To try to quantify the opportunity, we outline here what we learned at the analyst day,

what we expect will happen from here and what the financial impact might be. Note

however that the company will provide more detail at its H1 results in November.

What we learned at the analyst day Customer retention: Ryanair estimates that 70% of passengers are returning, up 2-

3pp over past few years. By way of comparison, easyJet suggests this figure is around

75%. This implies that Ryanair has no fundamental issue with customer loyalty or

attachment.

Marketing spend: Ryanair notes that it spends €0.16 per passenger on marketing. It

says this compares to around 70p at easyJet; that is about half of what we estimate

are total ‘selling and marketing expenses’ at easyJet. Applying similar ratios to

‘distribution and marketing expenses’ at Wizz Air and Norwegian crudely implies

marketing spend of €0.59 and €1.35 respectively.

Customer breakdown: 117m passengers in FY 2017 is equivalent to 43m bookings

and 36m ‘customers’.

CRM engagement: Ryanair previously sent 10m emails per month of 10-15 different

types; that has risen to 60m per month of around 1,000 personalised types. This has

also coincided with a material increase in open rates (now 29% versus 15% for the

industry on average).

Multi-platform access: 55% of visits to Ryanair’s inventory now come from mobile

(desktop 45%) following enhancements to the mobile platform since 2014. Although

the company did not scale this, there is also increasing conversion on mobile and

desktop. Additionally, 93% of these visits are direct.

Extensive data mining of its

customer base could allow it to

improve the personalisation of its

product and facilitate better

uptake of ancillary products, and

cross- and up-selling.

Figure 17: Wide base of customer offers opportunities


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Figure 18: Email open rate broadly points to good engagement


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Ryanair Holdings

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What to expect from here Customer segmentation: Ryanair suggested that it would have each of its 36m

customers segmented by end-September. Once this happens, we believe that the

company will look to engage with customers on an increasingly personalised basis

with e-mails based initially on attributes like age and traveller type, and eventually on

perceived travel preferences. Provided that content becomes more relevant to

customers, we believe that engagement will become stronger and e-mail open rates

will remain high. This increased segmentation should facilitate a better ability to sell

targeted products.

Increase in data from MyRyanair: MyRyanair currently encompasses 11m

customers. We see this increasing to 15m by the end of FY 2017 and the company

has implied that thereafter it could be compulsory for making a booking.

Ancillary product take-up: With better understanding of its customers and the

ability to tailor offers, we believe Ryanair will eventually be able to offer personalised

pricing (a form of price discrimination) to stimulate ancillary take-up dependent on an

individual customer’s demand for the product. For example, the airline will be able to

offer a 10% discount on Business Plus to selected customers depending on their travel

patterns and if they do not take it up, offer a higher discount until a customer pays his

or her highest acceptable price.

What the financial impact might be Ancillary revenues have trended broadly sideways at €15 per passenger for the last three

years. This reflects initial business model changes from the ‘Always Getter Better’

programme which led to a huge uplift in load factor. In recent quarters, on-board sales

have been performing strongly, offset by lower commissions from insurance products

and no car hire partner in H2 FY 2016.

Below, we outline the basic sensitivities to increased up-take on ancillary products, and

increased ancillary penetration overall (as a percentage of revenue).

Ancillary products: Take the new Leisure Plus product as an example (includes

priority boarding, allocated seating and 20kg checked-in baggage) where pricing will

begin at €52. A 1% increase in the take-up of this product would drive c.€60m of

incremental revenues (assuming pricing remains at €52) on Ryanair’s 117m

passengers. Operating leverage would be significant (assume 95% drop-down) and

with regular tax, the increased uptake would imply c.€50m of incremental net income

(3.5% of current year-estimates).

Ancillaries as a percentage of total revenue: In FY 2016, ancillaries were

equivalent to 24% of revenues, ahead of Ryanair’s long-held target of 20%. In FY

2017, we expect ancillaries to be 25.7% of revenues but each 1% increase in this

would be worth c.€80-85m of incremental net profit (all else being equal) or 6% of

current-year estimates. We believe that Ryanair could increase the long-term ancillary

penetration target to 30%; if this was achieved in FY 2020, we estimate this could

add an incremental 15% to net income in FY 2020.

In summary, we think that the next leg of ‘Always Getting Better’ could drive

monetisation of ancillaries of at least €2 per pax. This should be reflected in a rise of the

long-term ancillaries target to at least 30% of total revenues by 2020. We also think

that in time Ryanair’s digital strategy and scale will replicate some of the features of the

leading OTAs and aggregators. At a 14.5x multiple, this suggests upside of €2.3 per

share (18% of current share price).

We think that the next leg of

‘Always Getting Better’ could drive

monetisation of ancillaries of at

least €2 per pax.

Ryanair Holdings

10

Long-term optionality 2 – MAX aircraft ‘Game-changer’ aircraft provides cost and revenue benefits We have previously outlined the potentially game-changing economics of the Boeing

MAX aircraft for Ryanair. The 197-seater aircraft (4% more than the current 737-8

model) can reduce unit fuel consumption by 18%. The benefits – when incremental

revenue is also considered – could total more than €300m of additional net income by

FY 2024 (assuming full exercise of options). On a 14.5x multiple, this is equivalent to

€3.0 per share (24% of current share price).

Table 2: Upside potential from 200 MAX aircraft by FY 2024 (assumes full exercising of options)

€m

200 aircraft revenue potential 187.9

- assumed seats 197

- assumed LF 93.3%

- assumed flights per day 6

200 aircraft cost benefit 196.5

- assumed fuel efficiency 18%

- assumed net efficiencies per pax 2.4

Total revenue/cost upside 384.4

Post-tax 336.4


The benefits – when incremental

revenue is also considered – could

total more than €300m of

additional net income by FY 2024.

Figure 19: Peer comparisons suggest upside potential


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Ancillaries/pax in 12m to June-16 (EUR):Wizz: 26.9EZJ: circa 19 (estimate)RYA: 14.7NAS: 13.9VY: 9 (estimate)

Figure 20: Ancillaries as 30% of revenues would add 15% to net income in FY 2020


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As a sign of sensitivity, based on:i) current yield estimates and; ii) 90-100% ancillary drop-through; ...increasing RYA's ancillary exposure to 30% of revenuesby FY2020 would increase net income by 15%

Ryanair Holdings

11

Long-term optionality 3 – Share buybacks €5.7bn of distributable free cash by FY 2020, 38% of market capitalisation Since 2008, Ryanair has returned over €4.2bn to shareholders. Despite net capex of

€6.9bn from FY 2018-22, we expect the company to generate FCF of €5.7bn, testament

to the outstanding strength of its business model. We expect the bulk of this to be

returned to shareholders, equivalent to c.38% of the current market capitalisation. In

share price terms, this is equivalent to €3.7. The recent EGM gave the board discretion

to buy back a further 10% of the issued share capital.

Since 2008, Ryanair has returned

over €4.2bn to shareholders.

Figure 21: Potential for €5.7bn of capital returns by FY 2022


Figure xx: Ryanair buyback potential


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Figure 22: Ryanair’s balance sheet stands out amongst peers


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Wizz Ryanair easyJet Norwegian

Ryanair Holdings

12

Deflationary yield environment the key risk In our view, the key risk to our positive investment thesis on Ryanair is an aggressively

deflationary yield environment in the coming years. On first view, these concerns are

justified: we expect capacity growth in the European short-haul sector to stay in the 5-

7% range out to 2020 (2016: 7.2%), a tough bar for demand in a weak European

market, while customer offerings in the low-cost space are converging and there is

increasing overlap amongst LCCs.

However, while these structural headwinds will limit the prospect of sustainable pricing

improvements, we believe that the downside risk is somewhat overstated. LCC demand

is still in positive territory in the short term, Ryanair’s projected yields this winter are at

trough levels and we believe that its network adjustments in recent years, which

occurred in tandem with the significant uplift in load factors, should lessen yield

volatility in the mid-term. In addition, Ryanair’s meaningful cost advantage versus peers

and first-mover advantage in many of its key markets discourage competitors from

moving further onto its core network. Increasing overlap between Ryanair and other

LCCs looks inevitable, but this will mainly be driven by Ryanair moving further onto its

peers’ networks, where it has a pricing advantage (its load-active, yield-passive strategy

ensures volume stimulation). We examine a number of these drivers below.

Short-haul capacity growth to remain elevated through winter Based on published airline schedules, we expect capacity growth of around 7-8%

through the coming winter. This represents a slight acceleration from the 6.4% capacity

growth through this summer but is broadly in line with growth last winter (7.1%). Given

that incremental capacity growth is at an oil cost of $45 per barrel (meaning a lower

break-even load factor), the market is naturally reacting by adding more capacity. This is

particularly the case in winter when fleet utilisation is seasonally lowest and there is

greatest ‘slack’ to add/restore capacity.

The key risk to our positive

investment thesis on Ryanair is an

aggressively deflationary yield

environment in the coming years.

However, while these structural

headwinds will limit the prospect

of sustainable pricing

improvements, we believe that the

downside risk is somewhat

overstated.

We expect capacity growth of

around 7-8% through the coming

winter.

Figure 23: Short-haul capacity growth to remain high through winter (7-8%)

Source: Davy Research; Flightglobal

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Short-haul intra-EU capacity growth (seats, y/y, %)

CAGR 2004-08: +6.8% CAGR 2012-16: +4.3%CAGR 2008-12: +0.3%

Capacity growth has accelerated by 1.5-2.0pp each year since capacity

was flat in 2012; 2016 will see capacity growth of c. 7.2%

This winter, we expect capacity growth of 7-8% versus 6.4% in summer '16

Ryanair Holdings

13

Southern Europe again likely to see largest capacity increases During summer 2016, a number of LCCs noted that relatively strong demand into sun

destinations in Southern Europe was being offset by increased capacity as tour operators

in particular focussed on the area instead of North Africa. Our analysis suggests that this

is likely to continue into winter, which will limit the prospect of strong demand in these

areas translating into firmer pricing. In particular, Spain, Portugal and Greece will see

double-digit growth. In light of Ryanair’s commitment to further growth in Italy as the

country reverses a planned passenger tax increase, Norway is the only European country

to see reduced capacity following the introduction of a NOK80 (roughly €8.70) air

passenger tax earlier this year.

Also of interest in this context is that the non-LCC segment of the market (mainly

network and regional airlines) is contributing slightly more to overall growth. In 2015,

non-LCCs grew 3% (32% of total incremental seats), but this increased to 5% growth

in 2016 (44% of incremental seats). We think that this too reflects the greater ‘slack’ in

these airlines, enabling them to add capacity by increasing aircraft utilisation. We

estimate that European LCCs are on average achieving 11-11.5 hours of aircraft

utilisation daily versus 8.5-9 hours for European legacy carriers (short-haul fleets), a

c.30% premium.

Relatively strong demand into sun

destinations in Southern Europe

was being offset by increased

capacity as tour operators in

particular focussed on the area

instead of North Africa.

Figure 24: Summer capacity focussed on Southern Europe


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Summer '16 capacity growth by country (yoy, %)

Intra-European capacity growth was 6.4% in summer 2016; growth in Europe's 4 main markets (UK, Ger,

Spa, Ita) was broadly in line with this

Figure 25: This trend will likely continue through winter

Source: Davy Resarch; Flightglobal

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Winter 2016/17 capacity growth by country (yoy, %)

In winter 2016/17, capacity growth of 7.7% will be heavily-weighted towards

southern Europe, with Spain and Portugal both likely to see double-digit growth

Ryanair Holdings

14

LCC demand still seemingly positive in short term In isolation, the continuation of strong growth in the short-haul market and tough

pricing comparisons, particularly in October, makes it difficult to be constructive on the

winter yield environment. However, we believe that material further downside risk to

our yield forecasts for Ryanair (-10% through winter versus -10-12% guidance) is

limited as analysis suggests that demand is still net positive for the LCC product.

Consider that in Q2, LCCs grew capacity by 10% and unit revenues fell, down 6% in

constant currency (-8% excluding ancillaries). This crudely suggests that LCC demand

was up c.2-4%. In Q3, we expect LCC capacity growth of 10% and 4% unit revenue

declines (constant currency, -6% excluding ancillaries), implying demand growth of 4-

6%. Assuming that LCC demand continues at mid-single-digits into winter – which is

itself uncertain given that winter breaks traffic tends to be highly discretionary – LCC

capacity growth of 12% will result in unit revenue declines of c.7% (constant currency,

c. -9% excluding ancillaries). Assuming then that Ryanair performs in line with this –

although it has outperformed peers on unit revenues by c.5pp over the past two years –

our -10% forecast for its winter yields look robust (-7% including ancillaries),

accounting for a 2-3pp FX headwind from lower GBP.

Long-term capacity outlook remains in 5-7% range In an earlier report (see Playing the Trump card, issued January 25th), we saw short-haul

capacity growth in the 5-7% range out to 2020 based on our analysis of the aircraft

backlog into Europe. This remains our view on the basis of an updated backlog analysis.

The short-haul backlog (1,660 aircraft) remains at about half of the current installed

fleet (3,470 aircraft) and out to 2020, gross fleet growth is 6.7% before aircraft

disposals or lease returns. Assuming a 30-60% replacement rate (30% is the global

average since 1970 and Airbus/Boeing expect c.50% in Europe over the next 20 years)

implies net fleet growth of 3-5% a year to 2020. Assuming an up-gauging factor of 2pp

(average of 2.3% over past decade) implies 5-7% capacity growth, in line with previous

estimates. In our view, there could be attrition of this backlog through Norwegian

leasing out more than the 12 aircraft to which it has already committed or using aircraft

for long-haul, consolidation across the sector (Air Berlin seeming like a realistic

candidate), and airlines like easyJet coming under pressure to ease growth plans (in its

case, 7-8% capacity CAGR) given unit revenue issues.

We believe that material further

downside risk to our yield

forecasts for Ryanair is limited as

analysis suggests that demand is

still net positive for the LCC

product.

We see short-haul capacity growth

in the 5-7% range out to 2020.

Figure 26: Non-LCCs contributing more to growth


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Although LCC growth is stable

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growth

Figure 27: But growth is still led by LCCs


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Winter '16/'17 short-haul capacity growth by airline group (y/y, %)

https://www.davy.ie/research/private/printPdf.htm?id=davyonairlines20160125_22012016.htm

Ryanair Holdings

15

Table 3: Short-haul aircraft order backlog into Europe

Airline Current

Fleet

Rest

of

2016

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Total % of current

Fleet

Air Europa 23 1 3 2 6 26%

Air France-KLM Group 246 5 6 6 17 7%

- Air France 120 3 3 3%

- KLM 55 0 0%

- Transavia 71 2 6 6 14 20%

Air Serbia 14 4 1 5 10 71%

airBaltic 1 7 3 3 5 2 20 2000%

airberlin 1 2 2 200%

Atlantic Airways 3 1 1 33%

Croatia Airlines 6 1 3 4 67%

easyJet 256 32 38 24 32 31 10 167 65%

Enter Air 19 1 1 1 1 4 21%

Finnair 32 4 4 13%

Germania 25 10 5 10 25 100%

Icelandair 26 3 6 5 2 16 62%

IAG 375 3 8 23 24 20 26 5 109 29%

- British Airways 158 9 10 4 11 1 35 22%

- Iberia 64 2 4 5 5 4 20 31%

- Vueling 112 3 8 12 10 11 10 54 48%

- Aer Lingus 41 0 0%

Jet2 61 5 10 15 30 49%

Lufthansa Group 342 13 32 26 18 13 15 12 10 9 3 4 2 157 46%

- Lufthansa 164 4 13 16 14 9 11 9 10 9 3 4 2 104 63%

- SWISS 38 7 11 10 4 4 4 3 43 113%

- Austrian 31 0 0%

- germanwings 62 0 0%

- Eurowings 18 2 8 10 56%

- Brussels Airlines 29 0 0%

Monarch Airlines 35 5 13 12 30 86%

Norwegian 118 5 25 18 38 49 36 27 19 3 220 186%

Novair 2 2 1 3 150%

Pegasus 65 2 13 11 14 13 11 13 77 118%

Ryanair 354 14 95 6 14 21 17 17 31 215 61%

SAS 106 4 11 7 8 30 28%

SunExpress 39 2 3 5 12 12 4 38 97%

TAP Portugal 43 2 10 11 5 5 5 1 39 91%

Thomson Airways 60 10 11 10 9 7 47 78%

Travel Service Airlines 23 3 9 5 2 19 83%

TUI Travel PLC 49 10 13 23 47%

Turkish Airlines (THY) 199 4 5 36 37 69 21 172 86%

Wizz Air 71 5 23 4 18 18 19 18 18 19 142 200%

WOW Air 8 2 4 6 75%

Other 865 4 4 7 6 2 23 3%

Total 3467 78 281 236 271 305 210 138 96 32 3 4 2 1656 48%


Ryanair Holdings

16

LCCs increasingly competing with one another We also previously noted the emergence of a relatively new trend in the LCC space. As

these carriers continue to grow ahead of the market and large markets like the UK and

Spain exceed 50% LCC penetration, the LCCs are inevitably beginning to increasingly

compete against one another. We expect this trend to continue, particularly as LCCs

have c.60% of the backlog compared to c.30% of the fleet currently and the aircraft on

order (B737-8s/MAXs, A320s/neos) are larger than the current average in Europe (c.140

seats), pointing to further share gains.

In 2015, Ryanair saw increased airport and city-pair overlaps against all the main

European LCCs. Overlap with easyJet for example increased 25% on an airport-pair

basis (from 3.5% to 4.4%), driven by increased growth in Brussels (BRU) and

Copenhagen. The largest overlap is with Vueling, where airport-pair overlap was up

from 7.0% to 8.5%, driven by more head-to-head competition at Rome (FCO),

Barcelona and Brussels (BRU).

At the beginning of this year, Ryanair announced eight new bases, six of which are

served by Wizz Air (Prague, Sofia, Vilnius, Bucharest, Nuremberg and Timisoara). As a

result, we believe that the two could compete on 37 routes by the time these new bases

open.

Table 4: LCC overlaps on Ryanair network

Ryanair network easyJet Norwegian Wizz Vueling Transavia Wings Simple avg.

2014 By airport-pair 3.5% 0.5% 0.5% 7.0% 0.4% 0.3% 2.0%

2015 By airport-pair 4.4% 1.2% 1.0% 8.5% 0.5% 1.0% 2.8%

Chg (abs) 0.9pt 0.7pt 0.5pt 1.5pt 0.1pt 0.7pt 0.7pt

Chg (%) 25.4% 140.8% 91.1% 21.2% 24.3% 242.6% 35.7%

Ryanair network easyJet Norwegian Wizz Vueling Transavia Wings Simple avg.

2014 By city-pair 19.5% 5.9% 2.6% 13.2% 2.0% 0.8% 7.3%

2015 By city-pair 20.5% 6.5% 3.5% 15.1% 2.5% 1.6% 8.3%

Chg (abs) 1.0pt 0.7pt 0.9pt 2.0pt 0.5pt 0.8pt 1.0pt

Chg (%) 4.9% 11.5% 35.3% 14.8% 24.6% 106.4% 13.2%


We expect this intra-LCC

competition trend to continue.

Figure 28: Short-haul capacity growth w/out up-gauge impact


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Figure 29: Capacity growth inc. 2pt impact from up-gauging


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IATA f/cast demand growth in Europe: 3%

Over-capacity

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Ryanair Holdings

17

We think that increased competition in the LCC space, where customer propositions are

increasingly similar, will limit price improvements given that any such moves, however

modest, would mean sacrificing volumes to a LCC competitor that has a similar product

at a lower price. This is based on our view that brand differentiation is weak within the

LCC space, price being the primary differentiator. In theory, this gives Ryanair a

competitive advantage, given its lower pricing point. As it grows relentlessly, this puts

pressure on competitors and we would look for signs of pull-back amongst them. A

recent example is Rome Fiumicino, where Ryanair, easyJet and Vueling all established as

a base; the base was an underperformer for easyJet and it re-allocated resources to

Venice.

Ryanair Q4 yields to be at near-trough levels Offsetting these pricing headwinds, we note that Ryanair’s fiscal Q4 yield of €28.5

(-10% year-on-year) would be the lowest quarterly reading on record. Even in Q4 FY

2009 and Q3 FY 2010, average fares only fell to €29.6 and €29.5 respectively. We

believe that this limits downside risk in the medium term on Ryanair’s winter yields

although equally it is worth noting that current Q2 yields (at €62.2) are amongst the

highest the company has ever achieved.

Network adjustments should lessen yield volatility When Ryanair launched its ‘Always Getting Better’ programme after two profit warnings

in late-2013, it targeted an improved customer and digital offering, including for

business passengers. It accompanied the improvements with a better balanced network

and earlier loading of schedules, to build load quicker for better close-in yield

management. There have been two particularly pronounced impacts of these changes:

Greater exposure to primary/secondary airports: In calendar 2013, 42% of

Ryanair’s capacity was allocated to tertiary airports. Ryanair had no direct competition

at many of these airports, and as a result, when we reviewed the network in 2013 we

estimated that 70% of its capacity faced no direct competition. However, these routes

were much thinner and understandably, when Ryanair added capacity to them, it had

to stimulate traffic with pricing. Since then, the tertiary element of the network has

decreased to 32%. Concurrently, exposure to primary airports has increased to 44%

We think that increased

competition in the LCC space will

limit price improvements given

that any such moves would mean

sacrificing volumes to a LCC

competitor that has a similar

product at a lower price.

We note that Ryanair’s fiscal Q4

yield of €28.5 (-10% year-on-year)

would be the lowest quarterly

reading in the past decade,

Figure 30: Ryanair Q4 yield will be the lowest in the past decade


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Ryanair Holdings

18

of capacity from 32% in 2013 (accounting for Stansted as a primary airport brings this

to 53% and 40% respectively). Ryanair has recently indicated that its primary airports

are achieving broadly similar margins to the tertiary ones (higher fares, higher costs)

but we expect to see an additional benefit in terms of lower yield volatility.

Existing routes are higher density: While Ryanair will operate marginally fewer

routes in 2016 (3,010) versus 2013 (3,030), it has densified its network and frequency

is now 27% higher. One of the initial benefits of this is that the airline builds up a

better presence on its existing routes and such frequencies are friendlier to business

passengers.

The effect of tightening the network has been particularly pronounced on Ryanair’s load

factors. On a rolling 12-month average basis, its load factor is now c.9pp above its LCC

peers globally. Additionally, despite a very limited sample set, we note that the

annualised volatility of the company’s yields has fallen by about one-third from 21% in

FY 2004-14 to 14% in FY 2015-17.

Ryanair’s load factor is now c.9pp

above its LCC peers globally.

Figure 33: Ryanair trailing 12-month load factor relative to LCCs globally


60%

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Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16

Ryanair easyJet Norwegian Wizz Vueling

Southwest Spirit GOL Linhas JetBlue Westjet

Ryanair's trailing load factor is c. 9pp ahead of the average of its global LCC peers

Figure 31: Ryanair has added density to its network since 2013


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Figure 32: The network mix has shifted towards primary airports, where demand is more stable


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Ryanair Holdings

19

Ryanair summary financials

Table 5: Ryanair quarterly KPIs and income statement

KPIs (March ear-end, €m) 2015 Q1 16 Q2 16 Q3 16 Q4 16 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017F 2018F 2019F 2020F

Average Fare (€) 47.1 44.6 66.2 39.7 31.7 46.7 40.0 62.2 35.7 28.5 42.8 40.2 39.4 39.4

- y/y % 1% -4% 7% -1% -7% -1% -10% -6% -10% -10% -8% -6% -2% 0%

Ancillary rev per pax (€) 15.4 14.5 13.1 13.8 18.2 14.7 14.3 13.3 13.9 18.4 14.8 14.9 14.9 14.9

- y/y % 1% -5% -4% -4% -6% -4% -1% 1% 1% 1% 0% 1% 0% 0%

Total revenue per pax (€) 62.5 59.0 79.3 53.4 49.9 61.4 54.3 75.5 49.6 46.9 57.6 55.1 54.3 54.3

- y/y % 1% -4% 5% -2% -7% -2% -8% -5% -7% -6% -6% -4% -1% 0%

Passengers (m) 90.5 28.0 30.1 24.9 23.4 106.4 31.1 33.4 27.1 25.5 117.1 125.3 135.4 140.1

- y/y % 11% 15% 11% 20% 27% 17% 11% 11% 9% 9% 10% 7% 8% 4%

Load Factor 88.3% 92.0% 94.7% 92.8% 91.7% 92.9% 93.7% 94.7% 92.8% 91.7% 93.3% 93.3% 93.3% 93.3%

No. of aircraft (at FY-end) 308 340 380 401 419 450

Fuel unit cost per pax 22.0 20.0 19.8 19.5 18.4 19.5 16.7 16.4 15.4 15.2 16.0 14.0 14.1 13.8

- y/y % -11% -14% -12% -10% -8% -11% -17% -17% -21% -17% -18% -13% 0% -2%

Ex-fuel operating cost per pax 28.9 28.7 27.2 28.9 28.4 28.2 27.7 26.8 28.6 28.2 27.8 27.4 27.5 27.7

- y/y % 0% 0% 0% -2% -9% -2% -3% -1% -1% -1% -2% -1% 0% 1%

Income Statement (Mar y/e, €m) 2015 Q1 16 Q2 16 Q3 16 Q4 16 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017F 2018F 2019F 2020F

Scheduled revenues 4260 1248 1992 987 740 4967 1244 2079 969 726 5018 5041 5335 5522

Ancillary Services 1394 405 396 342 426 1569 443 443 377 469 1732 1871 2020 2091

Total Revenues 5654 1653 2387 1330 1166 6536 1687 2522 1345 1195 6750 6911 7355 7613

Operating expenses ex fuel 2619 804 818 718 663 3004 862 895 776 718 3252 3436 3725 3880

Fuel and oil 1992 560 597 485 429 2071 518 549 419 386 1873 1753 1903 1939

Operating profit 1039 288 972 126 74 1775 307 1077 150 91 1625 1722 1728 1794

Net Income 867 245 1161 103 51 1559 256 952 127 74 1408 1515 1538 1615

Diluted Adj EPS (c) 62.4 17.8 61.9 7.7 3.8 92.1 19.9 75.4 10.0 5.8 111.2 120.1 121.9 128.0


Table 6: Ryanair summary annual cash flow and balance sheet

Cash flow (Mar y/e €m) 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F

Group EBITDA 638 789 927 1048 1010 1421 1887 2130 2304 2374 2509 2727 2965 3180 3382

Change in Working Capital 250 71 102 67 133 407 142 79 60 164 95 197 211 193 205

Operating Cash Flow 887 860 1029 1115 1143 1828 2029 2209 2364 2538 2604 2923 3175 3374 3587

Net interest and taxes -2 -2 -15 -98 -33 -78 -127 -217 -207 -190 -180 -177 -176 -189 -202

Net Capex -909 -897 -290 -311 -506 -789 -1218 -1251 -1061 -1077 -1592 -1514 -1699 -1210 -484

Free Cash Flow -23 -40 724 706 604 961 684 740 1096 1271 832 1232 1300 1975 2901

FCF % of sales -1% -1% 17% 14% 12% 17% 10% 11% 16% 17% 11% 15% 15% 21% 30%

Balance sheet (Mar y/e €m) 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F

Net debt (cash) 143 709 110 -61 -158 -364 -312 -584 -1680 -2951 -3783 -5015 -6315 -8290 -11191

Adj net debt (cash) 811 1375 745 627 552 402 494 120 -1030 -2417 -3300 -4618 -6033 -8118 -11136

Adj net debt (cash) / EBITDAR 1.1 1.6 0.7 0.5 0.5 0.3 0.2 0.1 (0.4) (1.0) (1.3) (1.7) (2.0) (2.5) (3.3)


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Important Disclosures

Analyst certification Each research analyst primarily responsible for the content of this research report certifies that: (1) the views expressed in this research report accurately reflect his or her personal views about any or all of the subject securities or issuers referred to in this report and (2) no part of his or her compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this report.

Price performance (% change) Stock 2011 2012 2013 2014 2015

RYANAIR HOLDINGS -3.8 30.3 32.5 56.5 52.6

Source: Datastream

WARNING: Past performance is not a reliable guide to future performance

Investment ratings Ryanair Holdings rating: Outperform Issued: 07/12/09 Previous: Neutral Issued: 02/11/09

Investment ratings definitions

Davy ratings are indicators of the expected performance of the stock relative to its sector index (FTSE E300) over the next 12 months. At times, the performance might fall outside the general ranges stated below due to near-term events, market conditions, stock volatility or – in some cases – company-specific issues. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor's decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance.

Our ratings are based on the following parameters:

Outperform: Outperforms the relevant E300 sector by 10% or more over the next 12 months.

Neutral: Performs in-line with the relevant E300 sector (+/-10%) over the next 12 months.

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Under Review: Rating is actively under review.

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Restricted: The rating has been removed in accordance with Davy policy and/or applicable law and regulations where Davy is engaged in an investment banking transaction and in certain other circumstances.

Distribution of ratings/investment banking relationships

Investment banking services/Past 12 months

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Outperform 71 53 29 74

Neutral 38 28 4 10

Underperform 12 9 0 0

Under Review 3 2 2 5

Suspended 5 3 0 0

Restricted 4 3 4 10

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21

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Optionality on €25 per share - Ryanair | Investor Relations · 9/8/2016 · PBT 1721.9 1581.6...

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