- Ryanair’s results include a prediction of airfares perhaps 10% higher this summer
- This could be taken to be bullish for the competition as well as Ryanair
- So, bullish for Wizz Air, Easyjet, IAG?
- British Airways Owner IAG Shares Plummeted on Q1 Results
Ryanair (Euro: RYA) shares are down a couple of percent on their announcement of results. Profits improved – or at least the loss shrank – but revenue missed expectations. The important part though is, of course, the indications for the future here. The most important of those being a prediction from Michael O’Leary, the CEO, that fares will rise 10% this summer.
Revenue forecasting is, of course, an imprecise art but by this stage in the year, an airline will have a good idea of what bookings for the peak season will be looking like. If there’s a vast surge in demand then more ‘planes will be put on routes. But if there’s a more modest increase – say, a bounceback from lockdown – then the increase in demand turns up as an increase in ticket prices. This is important for airlines as the marginal cost of flying the extra person is between minimal and near nothing. But the marginal revenue is substantial, near all of which flows through to the bottom line.
So, an increase in demand which leads to not expanding supply of flights but only to an increase in ticket pricing is something that feeds through direct to the profits of those airlines. Which is exactly what O’Leary is predicting here. That 10% rise in ticket prices should – not entirely but largely enough – flow through direct to those profits.
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The big implication of this is actually what it means for Wizz Air (LON: Wizz), Easyjet (LON: EZJ) and International Airlines (LON: IAG) (what we all still think of as BA or British Airways). Each of the four is a little different so the impact of what Ryanair says it sees happening will be a little different across the other three.
Easyjet, for example, largely flies from and to the same sorts of places as Ryanair. It models itself as being a little more upmarket and so on but it is largely connection NW Europe with S and SE Europe. Wizz Air does things a little differently, largely connecting Central Europe with the rest of it. IAG has short haul routes but the major profit engine is business class in long haul. It is not logically or even obviously true that an increase in demand – and thus pricing – on Ryanair’s routes and pathways will therefore affect the other three equally. The closest would probably be Easyjet through IAG the least connected.
It is, of course, only a prediction that O’Leary has offered. But it’s also true that for some decades now he’s been the best prognosticator about the European airline markets. The conclusion from what he’s just said should be to be bullish on the European airlines. Assuming he’s actually correct there’s an increase in margins, thus profits, just around the corner.