Ryanair shares fall over fears it cannot recoup operating costs
Published 28/02/2012 | 05:00
Shares in Ryanair fell yesterday after Merrion Stockbrokers downgraded the stock over concerns it won't be able to recoup high fuel and other operating costs.
Analyst Gerard Moore said he believed the market was "overestimating" Ryanair's ability to recover cost inflation at a time when European unemployment would hinder demand and the carrier prepares to enter an ex-growth phase as it received the last of its aircraft orders from Boeing.
Mr Moore downgraded the stock from 'hold' to 'sell' with a price target of €3.70. That's 7pc below the price it was trading at yesterday afternoon in Dublin.
He expects Ryanair's annual fuel bill per passenger will double by March 2014 compared to 2010 to nearly €28.
Mr Moore said that while the consensus view was that Ryanair would be able to recover 97pc of its additional costs during 2014, he believed the figure would be closer to 90pc.
To secure the consensus figure, Ryanair would need to achieve an 8pc hike in its yields both next year and the following year.
"With Ryanair offering a commodity service and holding just 11pc market share in Europe, we remain cautious on its underlying pricing power," said Mr Moore.
He also pointed out that Ryanair's fares were now at a decade high, having risen faster than its peers.
Neither Boeing nor Airbus, which have both reported bulging order books, is likely to cut Ryanair any cheap deals if the carrier entered negotiations.
Ryanair and Boeing failed to reach agreement a couple of years ago on a new aircraft order, while the Irish carrier has recently aligned itself with nascent Chinese manufacturer Comac.
However, even if it did eventually do a deal with Comac to buy aircraft, it would be a number of years before they would come into service.
The remaining aircraft from Ryanair's outstanding order with Boeing will be delivered this year.
This new phase of activity for Ryanair -- where it has no stream of additional aircraft coming into its fleet -- could prompt a rise in non-fuel inflation costs, according to Mr Moore.
He thinks that wage costs will continue to edge ahead, while other costs could also encroach.
He added that while about 64pc of Ryanair's non-fuel costs are linked to increased sector lengths, or average route distances, others such as administrative costs have no relationship to them.
Airport charges, marketing and wages are just some of the costs that will rise.
Ryanair's profit growth depended on two factors, Mr Moore said -- passenger growth and profit per passenger, with the latter now being the "critical factor".
The budget airline's stock closed closed down six cent, or 1.41pc, at €4.04.