Ryanair trims earnings forecast, but gives a vote of confidence in Boeing

It’s been a mixed open for European stocks on Monday, as the FTSE 100 is higher, but the Eurostoxx index has slipped. Europe’s flagship no frills carrier Ryanair saw its share price slip after it announced earnings on Monday. It reported a lower full year profit forecast of EUR 1.85 – EUR 1.95bn, previously this was EUR 1.85- EUR 2.05bn, after a series of setbacks including aircraft delays from Boeing and higher fuel costs, they have also seen their cost base rise on the back of higher staff costs. Ryanair’s guidance is conditional upon avoiding ‘unforeseen adverse events’, which is a keen reminder that airlines are not only a play on the economic cycle and the strength of the consumer, but also a play on the highly volatile commodity market.

Costs surge, but could pay off down the line

Airlines are highly cyclical and dependent on multiple factors, some of which are outside of their control. This is the case for Ryanair. Although its traffic grew by 7%, and revenue per passenger was up by 9% in the previous quarter, fuel costs were higher by 35%, and Christmas and New Year were softer than expected, after Ryanair cut the price of some flights. The increase in fuel costs was down to an increase in sectors flown, and its larger fleet of aircraft also pushed up its staff costs by 30%. Ryanair said that it expects further consolidation in Europe’s short haul airline sector, which could benefit the Irish carrier just as it expands its fleet. However, Ryanair is also dependent on the trend for consumers spending on ‘experiences and travel to continue to boost profits.

Ryanair gives Boeing a boost

Ahead of this earnings report, analysts expected an upbeat profit outlook, which was not the case, instead forward guidance was trimmed. However, one area where Ryanair was upbeat was Boeing. It is confident that it will receive 50 aircraft from Boeing later this year. It said that it does not expect the problems with the Max-9 aircraft grounding to impact the Max 8 fleet, or the certification of the Max 10. It also said that it has noted improvement in quality and safety from its recent B737 deliveries, and it said that it would absorb any cancelled Boeing aircraft orders as it wants to expand its fleet further. Overall, this is a rare vote of confidence in Boeing, which has been under pressure from its other customers in recent weeks. We will be watching to see if Ryanair’s words can lift Boeing’s share price later on Monday, its stock price is lower by a fifth since the incident on the Alaskan airlines jet earlier this month.

Ryanair still at the mercy of commodity markets

Uncertainty around commodity prices has grown since Russia invaded Ukraine, and this can play havoc with airlines profitability. Ryanair does better than most in this regard. It also announced that it has hedged 65% of its fuel costs for the next year at $79 per barrel. This is a sensible move, but it still means that the airline is exposed for 35% of its fuel costs in future.

Overall, Ryanair is expecting a bumper summer season, and although demand for travel remains high, capacity is constrained as competitors ground their Airbus 320 aircraft for engine checks. It didn’t explicitly mention that it is also suffering from its own capacity constraints, which could be a theme for European air travel this year.

Lackluster earnings report

It’s never a dull moment for Ryanair, but these results were certainly less lustrous than what we have come to expect. The Ryanair share price is down 6% so far this year, largely because of its association with Boeing. However, today’s results are unlikely to give the share price a meaningful boost as we move towards the end of January, and its stock price could come under further pressure later today when the US market opens.

Europe outshines the US, for once

European stock markets massively outperformed US indices last week. The Eurostoxx index rose by 3.77% and the FTSE 100 was higher by 2.32%. The S&P 500 was up by less than half of the FTSE 100’s gain at 1.06%, the Nasdaq rose by 0.94%. The S&P 500 is still up 12 weeks out of the last 13, but there was a significant shift in the leaderboard. The US tech sector underperformed more cyclical sectors of the economy and American Express and Airbnb were the best performing US blue chip stocks at the end of last week. If this theme continues, then we may see a broadening of the stock market rally with an increase in market breadth, and it could support European stock outperformance, as European stocks tend to be more cyclical.

A big week for earnings

Ryanair has kicked off earnings reports for Europe this week and there are plenty more to come. In the UK we get Diageo and GSK, Shell and BT. In Europe, a raft of banks will report 2023 results, including Santander, ING and BNP Paribas. In the US, we get Pfizer, Microsoft, Starbucks, Alphabet, Boeing, Mastercard, Royal Caribbean cruises, Apple, Meta and Amazon. This is a huge amount of corporate news to digest, and it could determine the next leg higher or lower in stock markets.