To The Moon

$Ryanair Holdings PLC(RYAAY)$

I generally don't like investing in airlines because the industry is highly competitive, and there are limited opportunities for new entries. When things go wrong, airline stocks tend to crash. However, there's one company that has somewhat defied this trend. Ryanair, like other airlines, took a hit in 2020, but since then, its stock has more than doubled. While other companies emerged from the pandemic with heavy debt and significant issues, Ryanair has managed to recover successfully. Let's dive into Ryanair’s story and see if it’s worth considering.

Ryanair operates all across Europe, but its model stands out. It's a low-cost airline, and unlike other carriers that fly directly to major airports, Ryanair typically flies to secondary airports located farther from city centers. This strategy allows them to save a lot of money. The average Ryanair fare is just €52, which shows how cost-efficient they are. They boast a 95% load factor, which is significantly higher than United Airlines’ 85%. While a 10% difference may seem small, it has a big impact on profitability.

Not only has Ryanair managed to maintain this efficiency, but they’ve also been generous with returning cash to shareholders, buying back €700 million worth of shares (now up to €800 million). Their revenues have nearly tripled since 2014—an impressive feat for an airline company. Ryanair didn’t steal market share from competitors; instead, they created a new market. Previously, a trip from Paris to Berlin would cost you €300, but Ryanair made it affordable to fly for as little as €50, making short weekend trips more accessible.

During the pandemic, like many other airlines, Ryanair’s revenue dropped significantly, but they rebounded quickly. Unlike other airlines, they didn’t issue new shares to raise capital. Instead, they took on around €2 billion in debt, which they’ve been aggressively paying down. Their low operating costs allowed them to weather the storm better than most. Ryanair doesn’t have as many fixed costs—such as large crews and reserved airport slots—so when flights aren’t operating, they still don’t have the same overhead as other airlines.

Risk & Challenges

However, Ryanair’s business model isn’t without weaknesses. Their entire business depends on passengers wanting those €50 tickets. If the company can’t offer these low fares, they risk losing customers. The CEO recently mentioned they would raise ticket prices by 30%, which could be a problem. A €10 increase on a €50 ticket represents a significant percentage increase, and passengers may seek alternatives from other low-cost carriers. The airline industry is highly competitive, and every cent counts when it comes to pricing. While Ryanair might need to raise prices due to increased costs, this could hurt their customer base and market share.

Despite the challenges, Ryanair has managed to stay ahead in terms of growth. However, its operating income has stalled and has yet to return to pre-pandemic levels. If Ryanair wants to regain its growth trajectory, they’ll likely have to raise prices, but that risks alienating customers, especially with so many competitive low-cost airlines on the market.

The business faces long-term cost pressures, including labor, fuel, and airport fees. Some markets, like Germany, have introduced new fees that made it unprofitable for Ryanair to continue operating there. These rising costs—such as higher taxes, fees, and inflation—could limit future growth.

Market sentiment

Market sentiment around Ryanair will likely remain mixed in the near future. On one hand, the strong recovery in travel demand and Ryanair’s low-cost business model position it well for future growth. On the other hand, rising operating costs, price sensitivity among customers, regulatory pressures, and fierce competition in the airline industry may lead to volatility and uncertainty.

Growth or Recession: If the economy is growing, consumer spending increases, which benefits travel and airlines like Ryanair. Conversely, during a recession, travel demand might decrease, leading to lower revenues and stock price declines.

Interest Rates: Rising interest rates typically signal a less favorable environment for equities, as borrowing costs increase and consumers may spend less. Higher rates could also hurt high-debt industries, though Ryanair has been proactive in reducing debt.

Inflation: Inflation affects the cost of operating an airline (fuel, labor, airport fees). If inflation continues to rise, Ryanair's low-cost model could face challenges, especially with wages and operational costs.

Free Cash Flow

Ryanair's free cash flow for 2024 is estimated at around €1.2 billion. To project 2025, we can factor in a conservative growth rate.

Growth rate assumption: Given Ryanair's historical performance and market conditions, a 5-6% annual growth in free cash flow seems reasonable, though this could vary based on cost pressures, fuel prices, and competitive dynamics. So, let’s assume a 5% growth in FCF from 2024 to 2025: Projected FCF for 2025: €1.2 billion × (1 + 0.05) = €1.26 billion

Valuation

Looking at Ryanair’s valuation, the company’s free cash flow is around €1.2 billion, giving it a multiple of 18, which is not particularly low. While the company is returning cash to shareholders, the dividend is modest, around 60 cents per share. If Ryanair were to grow at 10% per year, that would be optimistic. In reality, I see the company growing at 5-6% annually, with 2-3% from share buybacks. Given the rise in operating costs and the competitive nature of the airline industry, it’s unlikely they can sustain high growth for much longer.

Entry price range for Ryanair’s stock in 2025: $23, $26, $30.

Conclusion

While Ryanair is a solid company and offers decent returns, I don’t see it as a great investment right now. I’d only consider owning it at a significantly lower price. It’s not a stock I’m particularly keen on adding to my portfolio, and I wouldn’t have bought it during the pandemic either, as it wasn’t cheap enough. For me, Ryanair is a pass—though it might be a good option for someone looking for a more short-term investment. What are your thoughts on it?

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