Yahoo Finance 3 Reasons Why Ryanair Holdings plc (ADR) (RYAAY) Stock Is a Buy
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Michael O’Leary, CEO since 1994, has grown Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) into an undeniably formidable business in the airline industry, not just the budget vertical. Even after an impressive 33% run this year, RYAAY stock still has room to fly onward and upward.
Source: Aurelijus Valeiša via Flickr (Modified)
Ryanair’s cost advantage, self-perpetuating low-cost moat, and consistent profitability contribute to its being a bright spot in the airline industry.
Even as they reposition routes post-Brexit, the sky truly is the limit for RYAAY’s growth.
RYAAY Stock Reason #1: Ryanair’s Cost Advantage
Good luck trying to engage with RYAAY in a price war. Competitors like Virgin Express and KLM have come back licking their wounds. What they find is that Ryanair is able to profitably underprice their low-cost initiatives.
From the public standpoint, the focus on costs might be called maniacal bordering on the insane. From a business standpoint though, the unrelenting parsimony is good for margins and indicative of a company with a hawk eye over the entire business.
Examples abound, even if a portion do seem in bad taste. Take the time that Ryanair disallowed staff members from charging mobile phones on premises, citing “theft of its electricity.” And don’t forget, there was a time when Ryanair even charged an 18 GBP fee for wheelchair accommodation. (RYAAY lost the lawsuit that was subsequently brought against it.)
RYAAY Stock Reason #2: Flywheel Effects Effectively Carve Out Moat
The cost savings from choosing secondary airports with lower landing costs and decision to spend less on marketing (as a portion of revenue) get directly passed onto the customer in the form of lower ticket prices. This naturally leads to higher passenger volumes, as airline seats are ultimately a commodity.
Some will argue service, loyalty programs and comfort are differentiators, but a large portion of consumers that normally fly economy have spoken with their wallets by flying budget.
As more passengers flock to Ryanair, the company can then negotiate even better deals on landing fees and new aircraft. This leads to more favorable prices for consumers, and thus, ever lowering unit costs are perpetuated.
This has led to best-in-class (meaning lowest) cost per passenger ex. fuel figures: 29 euros in 2015 and 28 last year (PDF). Operating expenses fuel aside, also have decreased year-over-year on a per passenger basis—airport and handling charges, route changes, and staff costs are all down.
I believe these costs will continue to lower as competitors struggle to compete, and Ryanair will pick up market share as a result.
RYAAY Stock Reason #3: Profitability
Consistently profitable airlines are scarce as hen’s teeth. (An antiquated figure of speech for an industry that seems to operate in rather antiquated ways at times.) Ryanair generated profits consistently over the past several year and beyond. The cost advantage outlined above enables this profitability.
Last year alone, RYAAY increased profit after tax by 43% to 1,242 million euros (before an exceptional gain of 317.5 million euros on the sale of the stake in Aer Lingus), proving yet again that Ryanair deserves to be in your portfolio, even in increasingly competitive times.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
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