In early January I wrote a positive article about Southwest Airlines (NYSE:LUV), arguably America's favorite airline. Down almost 4% year-to-date as of April 10, I'm leery recommending another airline. Nonetheless, I'm going to step off the curve here, providing investors with three reasons they should own Ryanair Holdings (Nasdaq:RYAAY), arguably Europe's favorite airline.
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Like all airlines, Ryanair is doing its best to counteract higher fuel prices, and, so far, it seems to be working. In the first nine months of fiscal 2012, despite a 31% jump in fuel costs, the airline managed to increase operating profits by 32% to $880.6 million. Through a combination of factors including reduced seating capacity, longer flights, and higher competitor fares and fuel surcharges (Ryanair has no fuel surcharge), it was able to generate a 17% increase in the average fare charged customers in the third quarter. At 40 euros, Ryanair's average fare is still significantly cheaper than either EasyJet (44% less) or Aer Lingus (58% less). Despite the rising fare, RYAAY revenues in the third quarter increased 13% to $1.1 billion and by 21.5% to $4.6 billion in the first nine months of the year. Business is so good that Ryanair raised its full-year after-tax earnings to $640 million on revenues of approximately $5.8 billion. Most impressive is the fact its operating margins are three times larger than Southwest's.
Ryanair Holdings and Peers
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Airlines in general had a poor year in 2011, averaging a total return of negative 25.3%. Ryanair managed to lose 9.4% this past year, but in the first four months of 2012 it has made up all of its downside in 2011 and then some, gaining 30% year-to-date as of April 10. Ryanair is a disciplined operator that's managed to lower its costs (other than fuel), is adding new routes and bases in Europe that are performing well and continues to win market share from other more expensive competitors. If you look at the company's five-year chart, you'll notice that it's spent the better part of the past five years around $30. As of April 10, it's trading at $36.12 and looks as if it's moving upward to challenge its all-time high of $49.5, reached in October 2007. With another big hit (approximately $455 million) coming from fuel in fiscal 2013, Ryanair will be hard pressed to improve earnings as much as it did in 2012. Nonetheless, it should still be able to move the needle in the right direction. I'd look for near-$50 in the next 18-24 months.
Brighter Planet is an organization dedicated to helping businesses operate more efficiently while also reducing their carbon footprints. In 2011, it did a study of the world's largest airlines and found that Ryanair was the most efficient, using one-third the fuel to transport its average passenger a single mile compared to the worst offender, American Eagle. In Brighter Planet's study, Ryanair was at the top of the heap for load factor, seating density and aircraft model. Its average plane, the 737-800, is three years old, which makes Ryanair's fleet one of the newest in the airline industry. Ryanair also gets more people into every plane it flies, which helps keep costs low while also aiding the environment. When you consider that it took 20% less fuel in 2010 to transport the average passenger a single mile than in 2000, Ryanair's ability to deliver the goods for less is beneficial for shareholders and the environment. That's a win-win situation.
The Bottom Line
Ryanair's enterprise value is 8.85 times EBITDA, which is almost double Southwest's. I think this stock is worth it.