Ryanair shares poised for growth as capacity slows
Published 02/07/2010 | 05:00
RYANAIR'S share price could be poised for strong growth in the medium term as the carrier's returns improve, while higher fuel costs, coupled with pressure on its market share within Europe, significantly slow capacity growth, according to a new report on the low-cost carrier from Goodbody Stockbrokers.
The report, compiled by analysts Marina Devitt, Eamonn Highes and Ken Darmody, said the comparisons between the growth pattern of US low-cost carrier Southwest Airlines during the '90s and Ryanair now were striking and predicted a rise in the Irish airline's shares as returns improve. Goodbody has now pencilled in a €5.35 price target for the airline. It was trading at €3.61 yesterday.
The analysts added that any aircraft deal Ryanair eventually strikes with Boeing is likely to reflect "more modest growth aspirations" for the airline.
Ryanair terminated negotiations with Boeing last December to order up to 200 new aircraft with a list price of about $14bn after the pair failed to agree on terms. Ryanair had been seeking a deep discount.
The collapse of the talks effectively put Ryanair's longer-term expansion plans on hold.
The airline confirmed last month that it would pay a €500m dividend to shareholders -- its first ever -- in October as its cash pile continues to grow.
It plans to make another €500m distribution to shareholders in 2013 if it has not inked an aircraft order by then.
The Goodbody report added that a slowdown in capacity growth at Southwest in the middle of the '90s allowed the airline to deliver higher returns on assets and returns on equity.
It noted that a large capacity drop at the US carrier in 1997, coupled with still positive yield progression, triggered a substantial widening of margins at Southwest for a four-year period between 1997 and 2000.
That drove returns on assets from between 10pc and 11pc to a high of 16.5pc in 2000.
Goodbody's analysis shows that Southwest's shareprice started to react strongly for the first half of that period between 1997 and 1998, outperforming the S&P as the market rewarded the stock for improving returns.
"In our view, the strong correlation between share price performance and returns provides a powerful guide for the potential at Ryanair in the coming years," said Goodbody, which added that the last decade of investment by the airline has been "structurally dilutive" for returns.
Over that time, the share price has tended to underperform in the periods of strongest capacity growth, the report added.