Ryanair's FY2019 results: a warning to Europe's airlines
Ryanair Group's results for FY2019 (year to Mar-2019), although expected, sound a warning to the European airline industry.
Europe's highest margin airline group reported its lowest profits in five years and suffered a 10ppt drop in its consolidated operating margin as average fares fell by 6%. Moreover, Ryanair expects further declines in ticket prices and another year of falling margins in FY2020.
However, Ryanair is well placed to weather storms of this nature. In spite of the precipitous drop in its profits last year, it still had the highest operating margin of Europe's big five airline groups, ahead of IAG, easyJet, Lufthansa Group and Air France-KLM. Moreover, strong growth in its ancillary revenues helps to offset weakness in fares.
More ominously for others, falling fares are a deliberate ploy by the ultra LCC to maintain its industry-leading load factors, taking traffic from higher cost airlines less able to cope with price competition.
As the European airline industry moves through a downturn in the profit cycle, this approach should ensure that Ryanair is a beneficiary of the resultant consolidation. IAG, easyJet, Lufthansa Group and Air France-KLM are also likely to benefit, but Ryanair's superior profitability gives it more headroom to navigate the increasing downward pressure on margins.
- Ryanair passenger numbers increased by 7%, to 139 million, in FY2019 (142 million with Lauda).
- Ryanair has an industry leading load factor of 96%, vs 81% to 92% for other top five European airline groups.
- Ryanair's FY2019 net profit was its lowest in five years, but even in a bad year Ryanair still has the highest margins of Europe's big five airline groups.
Ryanair carried 139.1 million passengers in FY2019 – a year-on-year increase of 6.8%.
Its new Lauda subsidiary, wholly acquired in Dec-2018 after Ryanair originally took a minority stake in the start-up at its launch in Mar-2018, carried 2.9 million passengers. (The full name of this subsidiary, Laudamotion, has been abbreviated to Lauda).
This gave the group a total of 142.0 million passengers, which was 9.0% above the previous year.
Ryanair passenger numbers and load factor: FY2004 to FY2019
Ryanair has an industry leading load factor
Its load factor has exceeded 90% in every month of the year in each of the past three financial years. Its annual load factor has risen by 14ppts since FY2014 and has been above 90% for each of the past four years.
This results from its 'load factor active/yield passive' policy, whereby it achieves a high target load factor by adjusting fares accordingly. This often means that yields fall, and its average fare dropped by 6% in FY2019.
Passenger load factor for Europe's five leading airline groups: 2018*
Ryanair's FY2019 net profit was its lowest in five years
Ryanair's FY2019 net profit was EUR885 million – a fall of 39% from the previous year.
This included a EUR140 million net loss from Lauda, a result that Ryanair is treating as exceptional to reflect the start-up nature of its Austrian subsidiary. From next year, when Lauda is expected to be profitable, only consolidated group results will be reported.
Excluding the Lauda loss, the result was a net profit of EUR1,025 million, which was 29% below the result from the previous year on a like for like basis and the lowest result for five years.
Total revenue grew by 8%, to EUR7,697 million, and pre-Lauda revenue grew by 6%, to EUR7,563 million. Total operating profit fell by 39%, to EUR1,016 million, and operating profit excluding Lauda fell by 29% to EUR1,189 million.
Ryanair's overall operating margin was 13.2% (a fall of 10.1ppts year-on-year) and 15.7% before the Lauda losses (a fall of 7.6ppts). This underlying operating margin was Ryanair's lowest for five years, since it reported a 13.1% operating margin in FY2014.
Ryanair operating profit* and net profit*: FY2004 to FY2019 (EUR millions)
Ryanair suffered from falling unit revenue and rising unit cost
The deterioration in Ryanair's operating margin was the result of falling revenue per passenger and rising cost per passenger.
Total revenue per passenger fell by 1%, with a 6% fall in average fares to EUR37 partly offset by an 11% increase in ancillary revenue per passenger to EUR17 (ancillaries were 31.7% of revenue, Ryanair's highest ever proportion and 3.5ppts up from 28.2% in FY2018).
Total cost per passenger grew by 15%, with ex fuel cost per passenger up by 5% – mainly due to 20% higher pilot salaries resulting from strike-backed wage claims and increased EU261 compensation costs. Fuel costs per passenger increased by 34%.
Based on reported annual results for the nearest financial year to 2018, Ryanair's operating margin of 15.7% compares with 13.2% for IAG, 10.0% for easyJet, 7.7% for Lufthansa Group and 7.4% for Air France-KLM.
Even if the Lauda losses are included in Ryanair's result, its operating margin of 13.2% is still joint top of the league alongside IAG. The difference between them, however, is that this result was IAG's best ever margin, whereas it was a disappointing one for Ryanair.
(Note that Europe's second highest margin among all airline groups in recent years has been achieved by Wizz Air, which reported an operating margin of 15.0% in FY2018 (year to Mar-2018). Its FY2019 results are due on 31-May-2019, with analyst consensus forecasts expecting a margin of 12.7%).
Outlook: another margin decline for Ryanair is a further signal of a downturn
It hopes to take delivery of its first five (delayed) Boeing 737MAX-8s in the coming winter season, but meaningful cost benefits will not be gained until FY2021.
In FY2020 Ryanair is guiding to "broadly flat" Group net profit, based on expected growth in revenue per passenger of 3%, but has given a range of EUR750 million to EUR850 million (with a corresponding revenue per passenger growth range of 2% to 4%).
This expectation of higher revenue per passenger suggests Ryanair is confident that any fall in ticket prices will be more than offset by increased ancillary revenue per passenger.
However, Ryanair's guidance of flat profit on higher revenue implies a further fall in its profit margins.
Risks to the outlook that are highlighted by Ryanair include ATC disruption, security events, Brexit developments and yield development. This is, in fact, a useful summary of the risks facing European airlines in general.
Historically, Ryanair has reported better margins than the rest of Europe's big five airline groups, even when its margins have fallen sharply. Ryanair's profit guidance is a further signal of a downturn in airline profitability.