November 4, 2019 / 3:56 PM / 11 days ago

Breakingviews - Ryanair’s ascent could yet hit a 737 MAX ceiling

A Ryanair aircraft takes off at the aircraft builder's headquarters of Airbus in Colomiers near Toulouse, France, September 27, 2019.

LONDON (Reuters Breakingviews) - Ryanair still has a 737 MAX-shaped cloud on the horizon. Shares in the European budget airline are up more than 50% since hitting a near five-year low in August, mainly because a price war is proving less painful than feared. Yet outsize exposure to the grounded Boeing jet is crimping future passenger growth. Without the super-efficient plane in its fleet, costs will also be harder to control.

Ryanair’s results for the half year to September, released on Monday, provided more evidence of the cut-throat competition in Europe’s low-cost airfare market. Its average fare fell 5% to 44 euros, though Ryanair more than made up the shortfall with increased add-on charges. Payments for items like heavier hand luggage and priority booking jumped by 16% per passenger. Though the company still expects full-year net income of about 850 million euros, the shares jumped 7% to 13.34 euros on Monday morning, their highest in more than a year.

That’s still a long way from the 2 billion euros in net profit or 21 euro share price that Chief Executive Michael O’Leary needs to hit in order to pocket his controversial long-term bonus of 99 million euros. Without the 737 MAX, that target is even tougher.

The 14.5 billion euro airline has ordered 210 of the jets, which were grounded earlier this year after two fatal crashes. Assuming regulators clear them for takeoff, Ryanair expects to have 20 of them ready for next summer’s high season: a year ago it expected to have 58.

Even though the jets represent less than 5% of Ryanair’s 450-strong fleet, not getting them would deliver a double blow to earnings. Besides losing space for 4% more passengers, O’Leary will miss out on efficiency gains: the 737 MAX burns 16% less fuel than its older counterparts. Given that the company’s fuel bill rose 22% to 1.6 billion euros in the last six months, accounting for more than a third of operating costs, that’s painful.

Shares in easyJet have enjoyed a similar revival to Ryanair, climbing 54% in the last five months. It now trades at 15 times forecast net income for this year. After Monday’s jump Ryanair is valued at 17 times. Given easyJet’s lack of a Boeing headache, the two rivals could switch flight paths.

Breakingviews

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