Investor An insider's guide to the marketRyanair and EasyJet dominate the low-cost airline market in Europe and both recently reported results for the quarter to end-June. Both sets of results were well received by the market, but the most notable feature is that both companies managed to grow their sales and profits, despite the ongoing rise in the price of oil.
Looking first at Ryanair, its revenues grew by one-third compared with the same period last year, whilst earnings per share (EPS) grew by 21.6 per cent. During the quarter, Ryanair carried 8.55 million passengers, at an average fare of just over €40.
Ancillary revenues from the sale of car hire, insurance etc also rose during the quarter and now account for 14 per cent of total revenues. Operating costs were kept under tight control and costs on a per-seat basis rose by 4.9 per cent, which was a very good outcome considering that fuel costs rose so sharply over the past year.
Ryanair would seem to have taken the view that oil prices are unlikely to fall at least in the short term, since management has hedged 90 per cent of its fuel requirements for the second half of the year. Since the quarterly results announcement, Ryanair released its July passenger numbers, which showed that the airline carried 3.2 million passengers in July. Airline management also stated that forward bookings were slightly ahead of the prior year level.
EasyJet also announced good traffic figures for July, when it carried 2.8 million passengers, representing a rise of 18 per cent over July 2004. EasyJet's load factor (passengers carried as a percentage of available seat capacity) was 88.4 per cent in July, which compared with Ryanair's 90 per cent.
EasyJet's fiscal year-end is September and analysts are forecasting a rise of 24 per cent in full-year revenue to £1.35 billion (€1.95 billion).
The continued strong underlying growth in European low-cost air traffic, and the ability of the larger low-cost carriers to translate that into profitable growth, has been reflected in the rising share prices of Ryanair and EasyJet.
In the past three months alone, Ryanair's shares have risen by 18 per cent and EasyJet's by 12 per cent. The ability of the low-cost carriers to thrive in a difficult environment seems to be a function of a number of factors.
The key one remains their efficient business models and their capacity to drive down unit costs (excluding fuel) on an ongoing basis.
The policy of many flag carriers to pass on higher fuel costs in the form of fare surcharges has further enhanced the relative competitiveness of the low-cost carriers.
The resultant higher airfares of the flag carriers means more customers switch to low-cost travel, making it easier for the low-cost carriers to increase the average fare per passenger.
Finally, the relentless rise in fuel costs has made life very tough for the smaller, weaker low-cost carriers, and many have already gone out of business. Therefore, for the strong airlines, high oil prices have brought a silver lining in the form of an easing of competitive pressures.
Ryanair and EasyJet dominate low-cost air travel in Europe. It is estimated that the low-cost carriers in aggregate now account for approximately 23 per cent of total air traffic in Europe. In the US, they are estimated to account for 30 per cent of all air traffic. Therefore, if the US experience is repeated in Europe, Ryanair and EasyJet still have plenty of scope to grow strongly over the medium term.
The strong run in the stock market performance of the sector over the past year leaves both stocks trading on similar price-earnings ratios - approximately 16 for Ryanair and 17 for EasyJet. Despite ongoing upward pressure on the oil price investment, analysts are forecasting solid EPS growth for both companies in coming years.
However, of the two companies, Investor continues to take the view that Ryanair offers better value, given its lower cost base and much higher underlying profitability.
