Ryanair Holdings PLC (RYAAY, Financial) is an Irish airline operator serving over 1,800 routes across Europe, offering short flights to 223 airports at ridiculously low prices. For example, a quick trip from Dublin to London in September is less than $65 on Ryanair right now. That would cost a passenger double for the same hour-long flight from Washington, D.C., to New York City here in the U.S. It isn’t the biggest airline, but since it manages a single fleet of aircraft, the company can and has priced many out of competition.
Thanks to the global rise in wealth, more people can travel for leisure. Every time I open up Instagram and look my feed of influencers, they’re traveling or enjoying the fruits of travel.
In fact, the travel and tourism industry’s total contribution to global GDP is estimated at $8.2 trillion with a direct contribution of $2.57 trillion. A big part of that is airfare, and Warren Buffett (Trades, Portfolio) made waves earlier this year when he told CNBC’s Becky Quick that he wouldn't rule out buying an entire airline.
Buffett had been building positions in airlines Delta (DAL, Financial), Southwest (LUV, Financial), American (AAL, Financial) and United Continental (UAL, Financial) for the past couple of years. In fact, he added to Berkshire Hathaway (BRK.A, Financial)'s position in both Delta and Southwest during the latest quarterly 13F release. Now, Berkshire has close to 10% in each of its airline holdings. Investors should absolutely take this as an endorsement for the industry.
After producing a net loss for the first 100 years, airlines seems to finally be getting the consumer traction and technology they need to remain profitable. Ryanair does not rely on travel agents and requires passengers to make reservations and acquire tickets directly through its own system, primarily advertising in regional media outlets across Europe, but the U.K. accounts for approximately one-third of its total revenue.
Ryanair is known for both low fares and penny-pinching culture, which has had negative effects. Earlier this month, Ryanair pilots across Europe staged a coordinated 24-hour strike to push demands for higher pay and better working conditions. This followed strikes in July by cockpit and cabin crew, which disrupted 600 flights in Belgium, Ireland, Italy, Portugal and Spain, affecting 100,000 travelers.
Before the strikes, Ryanair reported traffic rose 4% to 13.1 million passengers in July and rolling annual traffic grew 7% to 133.5 million passengers. That also included 1,000 flight cancelations, which now that the agreements are in place shouldn’t happen again for a while. Only time will tell whether the deal and consumer disruption will hurt the company’s bottom line, but now’s the time to get in.
The company is expected to continue earnings per share and book value growth. Ryanair has done a great job in the last decade containing capital spending while buying back stock to increase book value from 11.20 to 22.85 and earnings per share from a net loss of 0.59 euro cents to a gain of 5.74 euros per share profit in the last 23 months.
With the stock just over $100 a share, Ryanair looks to remain profitable with estimates of $6.57 per share in 2019 and $6.96 in 2020 at the current euro-dollar exchange rate. If that rate rises back to historical levels of $1.30 to $1.40 per euro, then by 2020, the per-share number could be north of $8.00 per share.
The question is, when will the current stock market bubble burst? The first domino hasn’t fallen yet, but the long running bull is making plenty of analysts and investors worried. No matter what happens, people will still travel, and while other carriers will be forced to slash prices and lose money. Ryanair will be in a good position, as it may be one of the few airlines to remain profitable.
Disclosure: I am not long/short any stock mentioned in this article.
