Future still bright for Ryanair

Despite today’s disappointing update, Ryanair may still be an investment worth making.

Michael O’Leary, chief executive of Ryanair, is not the most loved person in the corporate world. With his brusque ‘take it or leave it’ attitude, he has, at one time or another, managed to irritate his customers, peers in the airline industry and politicians both in Ireland and at the EU Commission.

Still, it would be childish to engage in too much schadenfreude at today’s news that reduced booking levels at the budget airline will result in profits coming in below expectations of €645 million for the full-year. The new forecast is in the range €570-€600 million. The company said that it had seen a drop in booking levels for the autumn months, and it blamed the weakness of European economies.

Other airlines have been affected by today’s news as well, with Ryanair’s great rival easyJet down 6% and British Airways owner BA 3% lower. Ryanair has enjoyed an excellent performance over the past year, rising by around 40%, driven by expectations of good growth. Usually the company delivers on those expectations, so today’s news is much more of a shock.

Yet, we should ask whether the reaction today has been overdone. It is always disappointing when companies issue such warnings, but Ryanair’s business has been dealt a reverse, not a fatal, blow. Let us look back a day to Nokia and Microsoft’s deal. These are two companies that, in different ways, face major hurdles. Microsoft has really lacked a definite purpose for 20 years, while Nokia has only delayed the inevitable with the sale of its mobile division; the company’s fate still looks sealed.

Ryanair, on the other hand, along with its peer easyJet, can look forward to many more years of strong trading. Budget airlines did well out of the recession, as people traded down to their cheaper service. However annoying many of the features are, these customers will still often opt for the cheap flights (many of which do land at airports some distance from the actual city) rather than moving back to the flag carriers.

Both easyJet and Ryanair have seen their share prices take a beating of late; but they are large companies with big pockets. Ryanair has already announced a fresh wave of price cuts to entice people onto their flights. Fuel prices have put a dent in margins as well, but both firms are likely to weather the storm. If both return to form in coming months, recent weakness may well just look like a reasonable buying opportunity.

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