BUY - RyanairNew strategy and primary airports sets virtuous circle in motion Ryanair’s enhanced product offering should drive LF higher, reduce unit costs, facilitate price leadership

03 March 2015

Readers in all geographies please refer to important disclosures and disclaimers starting on page 56 In the United Kingdom this document is a MARKETING COMMUNICATION. It has not been prepared in accordance with the rules in the FCA Conduct of Business Sourcebook designed to promote the independence of research and is also not subject to any prohibition on dealing ahead of the dissemination of research. The global contacts include: Andrew Fitchie (EU) and Leon van Heerden (SA). Full analyst and global contact details are shown on the back page.

Robert Murphy, CFA +353 1 421 0465

[email protected]

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Ryanair (RYA.I)

Ryanair (Buy - TP: €13.00)

Ireland | Travel & Leisure

Buy

Big wheel keeps on turning

€10.1 €13.00

We reinitiate coverage with a Buy recommendation and TP of €13.00. Ryanair’s

recent transformation should drive higher load factor (LF), reduce unit costs,

facilitate price leadership and drive share gains. A virtuous circle has been set

in motion and momentum is building. The arrival of the MAX in FY20 will

further reinforce a best in class unit cost platform. Valuation is undemanding

relative to recent history, trading at 14.4x FY16E P/E and 8.7x FY16E Adj

EV/EBITDAR. Our returns based DCF TP of €13.00 implies a TSR of 32%.

Robert Murphy +353 1 421 0465

[email protected]

Virtuous circle of unit costs: We see an industry increasingly characterised

by a more homogeneous product offering. Against this backdrop, we view the

industry price leader in pole position to take sizeable market share. Ryanair’s

enhanced product offering should drive LF higher, reduce unit costs, facilitate

price leadership and drive market share gains. We are 5% above consensus for

FY16E net profit and 5m ahead of long term passenger guidance.

Enter the MAX: We see the arrival of the MAX creating a unit cost tailwind.

Increased fuel efficiency, greater seat density and reduced operating costs of

18% per seat underscore the most competitive cost platform in the industry.

Moreover, we see the potential for Ryanair to generate substantial profit – PV of

€0.37/share, from the sale of aircraft as part of its fleet rollover programme.

Fortress Stansted (STN): Anchored by STN we see good airport deals laying

the groundwork for future primary expansion. We also believe STN could be

developed as a hub, driving circa. 1m additional passengers and incremental

profit of €40m per annum.

Step up in ROCE: We forecast lease adjusted ROCE increasing from 23.6% in

FY15E to 30.8% in FY24E, driven primarily by greater LF and improved

revenue per aircraft. Ryanair trades at 14.4x FY16E P/E and 8.7x FY16E Adj

EV/EBITDAR, inexpensive against recent history. Our returns based DCF target

price of €13.00 implies a TSR of 32% driving our Buy recommendation.

Financials and valuation Year end: 31 March Price Performance

Source: Company accounts/Investec Securities estimates Source: FactSet

BUY

Price: €10.13

Target: €13.00 (prev: €8.15)

Forecast Total Return: 32.0%

Market Cap: €14bn

EV: €14bn

Average daily volume: 2.2m

2013A 2014A 2015E 2016E 2017E

Revenue (€m) 4,884.0 5,036.7 5,679.2 6,236.7 6,297.5

EBITDA (€m) 1,047.8 1,010.4 1,400.6 1,595.6 1,787.4

EBITA (€m) 718.2 658.6 1,028.6 1,156.2 1,313.7

PBT (normalised) (€m) 650.9 591.4 967.5 1,103.2 1,272.5

Net Income (normalised) (€m) 569.3 522.8 846.6 965.3 1,113.4

EPS (norm. cont.) – FD (c) 39.4 37.0 61.6 70.2 80.5

FCFPS - FD (c) 45.4 35.4 59.7 42.2 43.6

DPS (c) 34.0 0.0 37.6 37.6 37.6

PE (normalised) (x) 25.7 27.4 16.5 14.4 12.6

EV/sales (x) 2.9 2.8 2.5 2.2 2.2

EV/EBITDA (x) 13.3 13.8 10.0 8.7 7.8

FCF yield (%) 4.5 3.5 5.9 4.2 4.3

Dividend yield (%) 3.4 0.0 3.7 3.7 3.7

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

Mar-14 Jun-14 Sep-14 Dec-14 Mar-15

1m 3m 12m

____________________________Price 2.1 16.2 41.1

____________________________Price rel to FTSE All Share (3.8) 3.0 19.8

Page 2 | 03 March 2015| Ryanair

Ryanair at a glance Figure 1: Sales by region FY14 Figure 2: Network seat capacity by country, February 2015

Source: Company reports Source: Innovata

Figure 3: 12 month LF step change narrows the gap vs peers Figure 4: EBIT per passenger to eclipse pre-crisis levels, €

Source: Company reports Source: Company reports, Investec Securities Estimates

Figure 5: Step up in ROCE Figure 6: Higher quality revenue generation

Source: Investec Securities estimates Source: Investec Securities estimates

Ireland, 11%

United Kingdom,

25%

Other European countries,

65%

Italy22.9%

UK19.5%

Spain14.8%

Ireland7.8%

Poland4.8%

France4.7%

Germany4.6%

Belgium4.3%

Portugal3.4%

Greece2.8%

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2004

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2015

E

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2018

E

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E

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E

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Ryanair investment thesis

Move to the centre plays to RYA’s strengths

The fundamentals underlying the intra-European commercial passenger market are

undergoing significant structural change. The low cost carrier (LCC) platform is

evolving with both an improved product offering and service level perception. In

parallel, competitive pressure has resulted in product unbundling by legacy carriers.

We see the end result as an increasingly homogenised marketplace. With less

product differentiation, we believe the price leader stands to take significant share.

The opportunity space is large with too many operators in Europe. Step forward

Ryanair. Armed with a significant cost of production advantage, we see the carrier

as positioned to benefit substantially from the industry shift.

Figure 7: An increasingly homogenous marketplace

Source: Investec Securities estimates

New strategy and primary airports sets virtuous circle in motion

Ryanair’s enhanced product offering should drive LF higher, reduce unit costs,

facilitate price leadership and drive market share gains. A virtuous circle has been

set in motion and momentum is gaining.

Figure 8: Higher LF spin the wheel of unit costs


At the heart of Ryanair’s transition is a move into the last bastion of European

legacy carriers - the primary airport. We estimate that the carrier already operates

BA SH

Ryanair

Finnair SH

AF/KLM SH

Easyjet

LH SH

Air Berlin

SASNorwegian

Price point

Product offering /service level

A move to the centre

A more homogeneous product offering

lends itself to the price leader

Primary airport growth to drive both

volume and LF driving lower unit costs

- Primary airports to provide a

3.2% yield uplift

- Yield upside to be reinvested in

the market in pursuit of volume

- A virtuous circle of unit costs

has begun


from half of Europe’s primary airports representing 60% of Ryanair’s current seat

capacity, a figure we see reaching 80% by FY20E. Assuming primary airports merit

an average fare uplift of €10, group average revenue per passenger could be

boosted by 3.2% - upside that we believe Ryanair will reinvest in the market for

share gain and higher LF.

Max will reinforce Ryanair’s competitive position

We estimate Ryanair’s ex-fuel unit costs per passenger to be 28% below that of its

closest rivals. From this position, we see the arrival of the MAX in FY20 providing

opportunities for Ryanair to widen the gap vs. competition. Costs stand to benefit

from an increase in seat density of 4.2%, an 18% improvement in fuel burn per seat

and importantly a potential 1.1% delta over NEO customers in terms of fuel

efficiency. Moreover, we forecast that a 6% delta in depreciation costs vs. peers will

widen the ownership cost gap. We see the potential for Ryanair to generate €519m

in profit from the sale of assets as part of its upcoming fleet rollover programme,

with a PV per share of €0.37. To cap it all off, the MAX offers incremental annual

revenue with an estimated PV/share of €0.09.

Building out fortress Stansted

Ryanair’s airport strategy, centred on Stansted, should allow the carrier to enhance

its competitive position while maintaining cost discipline. Airport charges are backed

by good deals at airfields, with an estimated 25% of network capacity locked in at

declining rates. We view existing deals driving an estimated cumulative network

wide 2% per passenger saving through FY24E, laying the groundwork for future

primary airport expansion. Industry consolidation and opportunistic deals should

further underscore unit cost performance. Furthermore, Ryanair may look to turn

Stansted into a hub, which would connect network traffic flows, driving higher

volume and LF. We think such a move could result in an initial 785k additional

passenger, 0.7pts of LF and €40m EBIT per annum.

LF to the fore

We believe that the changes at Ryanair will allow the company to drive sustainably

higher LF, while also providing greater revenue per seat potential. Traffic data

indicates that the strategy is already working with rolling 12 month LF +3pts to 86%

and Q3:15 +6.4pts to 88.4%. While consensus is bullish, we see further upside to

Ryanair’s traffic and subsequent LF performance.

Table 1: Summary Ryanair forecasts

Operational statistics 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Investec passenger numbers (m) 90.3 100.6 107.0 115.2 122.4 131.3 139.8 148.2 156.4 165.0

Guided passenger numbers (m) 90.0 100.0 106.0 114.0 120.0 128.0 136.0 143.0 150.0 160.0

Delta 0.3% 0.6% 0.9% 1.1% 2.0% 2.6% 2.8% 3.7% 4.3% 3.1%

Investec capacity growth 3.9% 11.3% 6.0% 7.0% 6.0% 7.0% 6.0% 5.0% 5.0% 5.0%

Investec LF 88.3% 88.4% 88.7% 89.3% 89.5% 89.7% 90.1% 91.0% 91.4% 91.8%

Investec ex fuel unit costs 0.4% -0.7% -0.4% -0.2% -0.5% 0.7% -0.8% -0.5% -0.2% -0.3%

Source: Company presentations, Investec Securities estimates

We forecast a 10 year CAGR in volume growth of 7.3% vs. company guidance of

6.9%, driving materially higher LF and unit cost gains. We estimate annualised LF

peaking at 91.8% in FY24 vs. a FY15E LF of 88.3%, outstripping the broader

market LF growth by 1.3pp. In parallel, ex-fuel unit costs are forecast to decline by

2.9% between FY15E and FY24E, driven by higher LF and new aircraft technology.

…..We estimate that a 1% increase in LF is worth 4% in FY16E EPS.

MAX to generate a unit cost tailwind. We

see:

- 4.2% seat density improvement

- 18% fuel burn improvement

- Potential 1.1% fuel efficiency

delta vs. peers

- 6% delta in ownership costs

- Aftermarket sales offer upside

of €0.37 per share

Fortress Stansted – to anchor the network

- STN as a hub could drive 785k

passengers, 0.7pts of LF and

€40m in annual EBIT

Market share and LF gains to be

prioritised with unit costs the beneficiary

- A 1% increase in LF is worth 4%

in FY16 EPS


Leading the LCC model does not equate to low ROCE

Ryanair continues to show that the LCC model does not equate to a low return on

capital employed (ROCE). Continued execution of the group’s commercial strategy,

underscored by a sustainable unit cost position, will allow volumes and LF to drive

improved profitability. Ryanair has historically generated robust ROCE, averaging

15.5% since FY04. We forecast lease adjusted ROCE increasing from 23.6% in

FY15E to 30.8% in FY24E, driven primarily by greater LF and improved revenue per

aircraft. We outline our lease adj ROCE calculation in the appendix (p. 51). Over our

10 year forecast horizon, we expect the capital base to grow by a CAGR of 5.9%,

which should be more than offset by an EBIT CAGR of 13.3% on our forecasts.

Figure 9: Ryanair ROCE FY04A-FY24E Figure 10: More profitable revenue from the capital base


Undemanding valuation

In our view Ryanair’s valuation is undemanding against its own history as well as

relative to that of its closest peer, Easyjet (Not Rated). On a 12 month forward price

to earnings multiple, Ryanair trades on 14.4x, a 3% premium to its 3 year average

and in line with its 10 year average. Assessed alongside Easyjet, Ryanair trades on

a relative premium of 19% versus a 3 year average premium of 18% and a 10 year

average premium of 9%.

Figure 11: Ryanair 1 year forward P/E, trading above 3 year average Figure 12: RYA relative premium to EZJ below its 3 year average

Source: Bloomberg Source: Bloomberg

TP of €13.00 implies 32% upside

We value Ryanair on a returns-driven 10 year DCF basis (page 43). Our DCF maps

an improving return outlook to a target price of €13.00, implying 28% capital upside

from current levels on a 12 month view. With the strong possibility of further capital

returns in FY16E, Ryanair shares look attractive in our view. On our forecasts

Ryanair is trading at 14.4x FY16E and 8.7x Adj EV/EBITDAR. Under new analyst

coverage, we reinitiate with a retained positive stance– BUY.

0%

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RYA fwd P/E 3 yr avg 10 yr avg

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Move to the centre plays to RYA’s strengths

We believe the fundamentals underlying the intra-European commercial passenger

market are undergoing significant structural change. The Low cast carrier (LCC)

platform is evolving, with both an improved product offering and service level

perception. Legacy carriers continue their retrenchment, with service attributes

being stripped back to better align cost of production to an increasingly competitive

operating environment. We see the end result as an increasingly homogenised

marketplace. With less product differentiation, the price leader should take

significant share. The opportunity space is large with too many operators in Europe.

Step forward Ryanair. Armed with a significant cost of production advantage the

carrier is positioned to substantially benefit from the industry shift.

Figure 13: An increasingly homogenous marketplace


LCCs pressure forcing legacy unbundling

Ryanair was arguably not the first European LCC to recognise the benefits of an

enhanced product line and brand image. Several players such as Easyjet and Wizz

Air have made product upgrades, albeit less dramatic than Ryanair. We view the

trend as now widespread across the LCC space, accelerating a move to a more

homogeneous marketplace. In parallel to the LCC product upgrades, the European

short haul P2P market has witnessed flag carriers unbundling and scaling back

premium product offerings in an attempt to reduce costs and remain competitive.

Most notably, table 2 below highlights several recent moves taken by legacy

carriers in order to better align the cost competitiveness of their short haul

operations in the face of continued LCC pressure.

Table 2: European carriers adjusting short haul operations to remain competitive

Carrier Year(s) Changes

Air France / KLM 2013-2015 P2P short haul growth through LCC arm Transavia as opposed to mainline

British Airways 2014/2015 Short haul business seat pitch reduced from 34 to 30 inches

British Airways 2013 Lowest lead in short haul fare no longer includes a checked bag

Lufthansa 2013-2015 P2P short haul transitioning to LCC arm Germanwings

Lufthansa 2014/2015 Business class seat pitch moves down from 34 to 32

Lufthansa 2014/2015 Economy seat pitch moves down to 29 from 30

Source: Company reports

BA SH

Ryanair

Finnair SH

AF/KLM SH

Easyjet

LH SH

Air Berlin

SASNorwegian

Price point

Product offering /service level

A move to the centre

A more homogeneous product offering

lends itself to the price leader

LCC competitive pressure has seen

product unbundling by legacy carriers


A crowded middle with price as the key variable

The below table provides a snapshot of the intra-European P2P short haul market-

increasingly homogeneous in its core offering, both in economy and business.

Table 3: An equivalent P2P short haul product offering

Business Class Economy Class

Carrier Allocated seating Seat Pitch (inches) Seat Pitch (inches)

Ryanair Yes 30 30

BA short haul Yes 30 30

Lufthansa short haul (Germanwings) Yes 29 29

Norwegian Yes 30 30

Easyjet Yes 29 29

Vueling Yes 30 30

Wizz Yes 30 30

Source: SeatGuru

Following the parallel moves from Ryanair, LCCs and legacy carriers, we view the

product offering as broadly equivalent. Logically, a market with less differentiation

places price to the fore. In this environment, we expect Ryanair to be even more

successful in gaining market share.

European P2P short haul now

commoditised, placing a greater

emphasis on price


Ryanair is eradicating the value perception gap In our view, a series of strategic initiatives by Ryanair - under the auspice of the

‘Always Getting Better’ program – are eradicating the value perception gap that had

existed in the marketplace. In doing so, Ryanair increases its addressable market,

places increased competitive pressure on incumbent legacy carriers and facilitates

traffic and share growth.

A move to primary airports: We estimate that the carrier already operates

from half of Europe’s primary airports and that these airports account for 60%

of Ryanair’s seat capacity. Based on the company’s growth guidance, we

forecast that this exposure will increase to 80% by FY20E. Assuming primary

airports merit an average fare uplift of €10 group average revenue per

passenger could be boosted by 3.2%, with upside reinvested in the market in

pursuit of share gain and higher LF. We see Amsterdam Schiphol (AMS),

Dusseldorf (DUS), Munich (MUC), Oslo (OSL) and Zurich (ZRH) as the logical

next steps for Ryanair expansion.

Increasing frequency and schedule quality: Ryanair continues to place

competitive pressure on peers, both LCC and legacy incumbents, through

enhancing its network with increased frequencies on core business routes. The

carrier’s most recent February schedule sees Ryanair seat capacity +13% with

the number of routes served declining by 1%. As a result, route thickness (total

seats per route) increases 14%. Ryanair’s summer 2015 schedule highlights

the continuation of this trend.

Expanded product offering: Allocated seating, fast track access, and

business products are some of the headline product improvements rolled out

by the carrier in 2014. The overhaul of legacy revenue management strategies

has resulted in a linear yield curve favouring far out booking accumulation and

supporting higher LF performance.

Brand and distribution overhaul: Beginning with its shop window -

Ryanair.com - the carrier has refreshed its product positioning. The revamped

website and increased social media interaction represent a step change in

marketing and brand awareness activities. We see further scope for the carrier

to narrow the brand perception gap through a cabin interior refit coinciding with

the arrival of 40 new aircraft in FY16.

Is the strategy working? The proof is in the LF

Brand surveys suggest this change is well received by customers with Ryanair

ranking at the top of the recent YouGov airline brand improvement survey.

Ryanair.com is now the most searched for airline website in the UK. The end

result is clearly visible, with rolling 12 month LF performance +4pp yoy and

rolling 3 month performance +8.7pp yoy.

Primary airport capacity rising from 60%

to 80% by FY20E to drive 3.2% uplift in

average revenue per passenger

LF highlights a strategy gaining

momentum:

- Rolling 12 month LF +4pp yoy

- Rolling 3 month LF +8.7pp yoy


Primary airports – growing the addressable market

The Winter 2014/2015 schedule saw Ryanair build out frequencies at Dublin (DUB),

STN and a host of other central airports. Ryanair has effectively continued its

expansion into the last bastion of European legacy carriers - the primary airport.

This trend is set to continue with 50% of summer capacity growth guided by

management for primary airports. By changing its network and frequency, Ryanair

is eradicating the value perception gap thereby creating a more homogeneous

marketplace. The endgame is to fulfil ambitious growth plans by increasing the

addressable market size. Primary airports appear attractive; they offer higher

yielding passengers, reduce seasonality of traffic flows and provide economies of

scale (marketing, support costs etc.).

Significant progress already made

We believe that Ryanair is already deep into its program of changing its network

footprint. Primary airports that have or will soon hear the arrival jingle from a

Ryanair Boeing 737 aircraft include: Athens (ATH), Brussels (BRU), Copenhagen

(CPH), Lisbon (LIS), Rome Fiumicino (FCO), as well as more central level 2 airports

such as Cologne (CGN), Glasgow Intl (GLA) and Gdansk (GDN). The carrier

already has greater than 50% coverage at primary airports, a fact that we believe is

underappreciated by the market. While much debate persists over the definition of a

primary airport, we adopt IATA’s definition of a Level 3 airport to be a primary

airport. According to the following classification:

Level 3 (Fully Coordinated Airport): Demand for the airport infrastructure

significantly exceeds the airport’s capacity. We view IATA level 3 airports as

primary airports.

Level 2 (Schedules Facilitated Airport): Demand exceeds supply only during

certain time periods. We view IATA level 2 airports as secondary airports.

Level 1 (Non-Coordinated): The capacity of the airport is sufficiently

adequate to meet demand at all times. We view IATA level 1 airports as

secondary airports.

We highlight below Ryanair’s presence at Level 3 (primary) and Level 2 airports.

Table 4: Snapshot of Ryanair’s primary airport coverage

Classification Number RYA coverage Examples

Level 3 100 50% DUB, BRU and STN

Level 2 74 42% Edinburgh (EDI), GLA, and Budapest (BUD)

Source: IATA

Wasting no time, more new routes than any other airline

No other global carrier launched more routes in 2014 than Ryanair, with 134 routes

launched - 50 more routes than its closest peer, Germanwings. Germanwings - the

LCC subsidiary of Deutsche Lufthansa - can attribute the majority of its 2014 route

launches to the legacy parent retrenching from intra-European point to point (P2P)

flying. This legacy retrenchment echoes the move to the centre and a more

homogeneous product environment.

50% of summer2015 capacity growth is

guided for Primary Airports

Supply and demand imbalances highlight

primary airports


Figure 14: Top airline for new route launches in 2014

Source: Anna Aero

What is left on the table?

Management has recently stated that Charles De Gaulle (CDG) and Frankfurt Main

(FRA), both Level 3 primary airports, are off the table for future Ryanair operations.

We see 48 Level 3 airports in contention and highlight below the primary European

airports, with both the greatest passenger throughput and Ryanair operations in

2014.

Table 5: Current and potential primary airports for Ryanair

Current primary airports Ryanair operate from Potential primary airports Ryanair could move to

Airport IATA Code 2014 Passenger volume (m) yoy growth Airport IATA Code 2014 Passenger volume (m) yoy growth

Madrid MAD 41.8 5.3% Heathrow LHR 73.3 1.4%

Gatwick LGW 38.1 7.4% Amsterdam AMS 55.0 4.6%

Rome Fiumicino FCO 38.0 5.1% Munich MUC 40.0 3.5%

Barcelona BCN 37.6 6.7% Paris Orly ORY 28.9 2.1%

Copenhagen CPH 25.6 6.5% Zurich ZRH 25.4 2.5%

Palma Majorca PMI 23.1 1.5% Oslo OSL 24.3 4.8%

Brussels BRU 22.0 15.2% Stockholm Arlanda ARN 22.5 8.9%

Dublin DUB 21.7 7.7% Vienna VIE 22.5 2.3%

Stansted STN 19.9 11.6% Dusseldorf DUS 22.0 3.6%

Lisbon LIS 17.9 11.9% Berlin Tegel TXL 20.8 6.4%

Malaga AGP 13.7 6.4% Helsinki HEL 15.9 4.4%

Source: Anna Aero, IATA

Where next for Ryanair?

We see the logical next steps for Ryanair in its primary airport build out as AMS,

DUS, MUC, ZRH and OSL. We also view a partial move from Paris Beauvais

(BVA) to Paris Orly (ORY) as a reasonable step for the carrier. However ORY - a

level 3 airport - is highly slot constrained, with existing operators such as Easyjet

reportedly waiting in the wings should slots materialise. Finally, LHR remains in

play as management has stated that it “would look at LHR if slots became

available, however a 25 min turnaround would be hard”.

28

28

28

29

33

33

36

41

43

46

50

58

68

80

83

84

134

0 20 40 60 80 100 120 140

Germania

Jetairfly

Volaris

Meridiana

Aegean

Delta

Flybe

United

Norwegian

SAS

Wizz Air

Southwest

Frontier

Vueling

Easyjet

Germanwings

Ryanair

2014 Route launches

Several key primary airports in the mix for

future expansion

With the exception of CDG and FRA, all

Primary airports are in play. We see AMS,

MUC, ZRH, and OSL as the next steps.


Table 6: Recent commentary on primary airport growth

Market(s) Airport Recent Announcements

The Netherlands, Ireland, UK & Europe AMS Ryanair intends to increase its Dutch market share, estimated at 4%. Signalling future operations at AMS linking both DUB and STN builds out the primary airport footprint. A new secondary airport leisure base at

Leystadt (LEY) has been flagged and we believe this compliments existing Eindhoven operations.

Italy FCO Ryanair grows Italian presence at Rome FCO with destinations doubling from 5 to 10 for Summer 2015. In

contrast Vueling are reducing domestic Italian services and increasing its international FCO operations.

Belgium & Ireland BRU Ryanair indicates that they have secured ca. 50% market share on the key primary airport business route

within 3 months of the inaugural service

UK LHR Ryanair indicates that it would look at London Heathrow (LHR) slots should they become available. The

carrier states that it would not however conform to its 25 minute turn business model.

Source: Company presentations

Primary airports yield uplift - a snapshot

Primary airports are characterised by passengers with a lower price elasticity of

demand, a higher proportion of business travellers, less seasonality in the traffic

flows and ultimately a passenger mix that has a higher propensity to book later in

the booking cycle.

In table 7 below, we highlight average fares and yield per passenger kilometre on

two intra-European P2P routes from London. While a health warning should be

placed on the below example, the findings highlight that even in an increasingly

homogenised market, passengers are willing to pay a €60 premium to fly from LHR

and LCY compared to STN. We see the continued move by Ryanair to primary

airports providing yield uplift for the carrier, which will be reinvested in the market as

the airline pursues its market share ambitions.

Table 7: Yield analysis from London metro area to Amsterdam (AMS) and Geneva (GVA)

London airport

AMS GVA

Code Fare Yield Fare Yield

London Heathrow LHR €108.80 €0.30 €149.60 €0.20

London Gatwick LGW €64.80 €0.18 €61.60 €0.09

London Stansted STN €42.40 €0.14 €53.60 €0.07

London Luton LTN €43.20 €0.12 €56.00 €0.07

London City LCY €104.80 €0.30 €155.20 €0.21

Source: IATA

While primary airports will bring obvious

yield uplift, we view near term gains as

being reinvested in the market


Increased frequencies backfill an already strong network

Ryanair continues to place competitive pressure on peers through enhancing its

network with increased frequencies on core business routes. The carrier’s February

2015 schedule sees its seat capacity rising +13% with the number of routes served

declining -1%. As a result route thickness (total seats per route) increases +14%.

Table 8: Ryanair winter frequency build out

Winter 13/14 Winter 14/15 Variance

Seat capacity 5,719,896 6,451,326 13%

Routes 1,649 1,635 -1%

Thickness 3,469 3,946 14%

Source: Innovata

Ryanair’s summer 2015 schedule highlights the build out of frequency at primary

airports. Figure 9 below highlights the airports benefitting from a flexing of frequency

with weekly departures driving a 6.2% increase in seat capacity for the summer

2015 season.

Figure 15: Increase in weekly departures on Ryanair’s network, August’15 vs. August’14

Source: Anna Aero

24

24

25

28

38

39

44

54

58

58

63

65

75

99

127

0 20 40 60 80 100 120 140

Porto (OPO)

Berlin (SXF)

Edinburgh (EDI)

Copenhagen (CPH)

Barcelona (BCN)

Milan (BGY)

Colgone (CGN)

Glasgow (GLA)

Lisbon (LIS)

Warsaw (WMI)

Rome (FCO)

Dublin (DUB)

Athens (ATH)

Madrid (MAD)

London (STN)

Route thickness increased 13% in winter

14/15 and summer schedules indicate

further build out.


Legacy carrier P2P operations at primary airports under pressure

With an increased primary airport mix and a thickening of route frequencies

Ryanair’s competitive presence on traditional primary P2P routes is growing.

Utilising its cost of production advantage, the carrier can ‘price for growth’. The fare

gap between LCC and legacy airlines is evident on traditional routes linking two

primary airports, for example Rome and Brussels. Here we see Ryanair 75% and

82% cheaper on leisure and corporate fares respectively.

Table 9: Rome Fiumicino (FCO) to Brussels Zaventum (BRU) market

Ryanair

Vueling

Depart Arrive Depart Arrive

Depart Arrive Depart Arrive

07:35 09:50 10:15 12:20

08:00 10:15 10:50 12:50

18:30 20:50 15:40 17:55

18:05 20:20 21:00 23:00

Lead in fare €98.98

Lead in €87.00

Business Plus €199.98

Excellence Fare €309.98

Alitalia

Brussels Airlines

08:20 10:35 11:25 13:30

06:30 08:40 07:50 09:50

15:00 17:15 18:15 20:20

10:30 12:40 15:05 17:10

17:55 20:00 20:40 22:40

Lead in €399.72

Lead in €338.72

Business Basic €1,085.72

Flex & Fast €498.72

Source: Airline direct websites. Date of travel 26/2/2015. Date of capture 27/1/2015

Fare structure gap is striking on a key

European P2P city pair


Expanded product line, enhanced brand

Under the auspice of the ‘Always Getting Better’ program, Ryanair has also rolled

out a series of radical improvements to eradicate the product differentiation gap in

the intra-European short haul market. By refreshing its brand and expanding its

product portfolio, the carrier is seeking to increase its addressable market by

appealing to a wider consumer base. We see the end result as an airline that no

longer pushes away subsets of the corporate and leisure market. Early indications

in both brand perception and LF performance indicate the strategy is working.

Figure 16:Ryanair ‘Always Getting Better’

Source: Company presentation

Scope to narrow the gap further, an accelerated cabin refresh

The above chart summarises product enhancements already announced by

Ryanair. We see potential for further improvements. For example, we see scope for

a cabin refresh to begin in Q116, some 16 quarters earlier than guided by

management. The Boeing Sky Interior concept, highlighted in Fig.10 below, is

currently scheduled to form part of Ryanair’s MAX200 delivery with the first aircraft

scheduled for arrival in FY20. Our view is that management will look for an

accelerated roll out of the upgraded cabin appearance as part of their 3 year

‘Always Getting Better’ program. By doing so Ryanair could further narrow the

product perception gap currently present in the European marketplace thereby

growing its addressable market potential.

Figure 17: Current Ryanair cabin interior Figure 18: Future Ryanair sky interior cabin

Source: SeatGuru Source: Boeing

Brand refresh and expanded product line

targets a larger traffic base

Digital improvements drive conversion

factors, traffic volumes and LF


Broadening distribution reach

Historically distributing 100% of its tickets via the direct channel, Ryanair.com, the

company maintained complete control over its fares while keeping costs of

distribution to a minimum. In March 2014 Ryanair moved away from this model by

providing its fares and related products through the global distribution system (GDS)

Travelport. The GDS market is the traditional market for distribution of airline tickets

and one in which travel agents and corporate booking portals still conduct the bulk

of their business. Ryanair has incorporated the GDS channel to both increase its

addressable market and to facilitate share gains in the corporate traveller space.

With deals inked with Amadeus, Travelport and Sabre, the airline now has 100%

visibility across the GDS platform.

Changing the booking curve

Presently, Ryanair’s revenue performance per seat measures 12% below the

immediate peer group average. When Ryanair’s revenue performance is measured

on a per passenger basis, this differential widens to 16%.

Figure 19: Ryanair and peers revenue per seat (FY14) Figure 20: Ryanair vs. peers revenue per passenger (FY14)

Source: Company reports Source: Company reports

The end of the ‘Nike Swoosh’ yield curve

Ryanair historically filed fares 7 months in advance of the flight’s departure date.

Initial fares acted solely as placeholders, with revenue management unconcerned

with far out bookings. Yield managers started focusing on the flight circa. three

months before the departure date. The Ryanair machine of aggressive discounting

and demand stimulation would then begin. The end goal was a higher target LF,

with average yield playing second fiddle. This resulted in what management has

termed the ‘Nike Swoosh’ yield curve.

Distributing fares earlier

The carrier now distributes its fares on average 3 months earlier at 10 months pre

departure. Initial fares represent discounted lead in rates aimed at stimulating far

out demand. Armed with an aircraft closer to target LF farther out Ryanair’s revenue

managers can focus on extracting maximum yield from the close in bookings. The

end result is a move away from the historical ‘Nike Swoosh’ to a linear upward

sloping yield ‘curve’. The linear pricing model is a system operated by legacy

incumbents and again, in our view, represents the accelerated move to the centre

by Ryanair.

€0

€10

€20

€30

€40

€50

€60

€70

€80

€90

Ryanair Easyjet Wizz Vueling Norwegian

Revenue per seat (€)

€0

€10

€20

€30

€40

€50

€60

€70

€80

€90

Ryanair Easyjet Wizz Vueling Norwegian

Revenue per passenger (€)

Ryanair has finally embraced the GDS

platform

We do not see a cultural revolution in

Ryanair’s revenue generation strategy

Fares now distributed on average 3

months earlier

- LF upside

- Close in yield capture


Figure 21: Reshaping the yield curve (illustrative)


Incorporating modular product offering

The introduction of a modular product offering allows Ryanair to maintain its

industry leading fares, preserve its linear pricing model and increase the size of its

target market through the introduction of Business Plus, Family Extra and allocated

seating.

By allowing passengers to customise their travel experience Ryanair’s revenue

managers are effectively price discriminating a linear curve, increasing yield capture

and most importantly facilitating higher LF. We see LF moving to the fore as a result

of: 1) fares distributed earlier allowing for a longer booking window, 2) a linear

pricing curve favouring LF capture and 3) an expanded product portfolio increasing

the addressable market size.

Figure 22: Modular product offering


10 9 8 7 6 5 4 3 2 1

Linear Pricing Model Historic Nike Swoosh

Months pre departure

Extended distribution period

Business Plus/ Fast Track

Allocated Seating

Baggage

Air Ticket

Linear pricing model resembles that of

legacy competition highlighting the

‘move to the centre’

Modular product offering protects lead in

airfare and allows product customisation


Is Ryanair’s brand strategy working?

Early indications suggest that Ryanair’s brand strategy is starting to work. Public

perception in the UK indicates that Ryanair’s brand improvement is outpacing that

of its airline industry peers. The change in brand perception results in table 10

below are based on the YouGov Brand Index Buzz Tracker survey which asks

respondents, “If you’ve heard anything about the brand in the last two weeks was it

positive or negative? Ryanair’s brand perception improved by a measure of 5 index

points between Jan-Jun 2014.

Table 10: Change in brand perception, (Jan–Jun’14 vs. Jan-Jun’13)

Rank Brand Improvement Jan-Jun'14 Score Jan-Jun'13 Score

1 Ryanair 5.0 -15.4 -20.4

2 Easyjet 3.9 2.8 -1.1

3 British Airways 2.8 8.9 6.2

4 Flybe 1.5 0.8 -0.7

5 Jet2.com 1.0 0. 1.1

Source: CAPA

Brand perception gaining momentum

In a broader contect, the Ryanair brand improvement is gaining traction, with an

improvement of 10.6 index points at the time of the FY14 results (Table 11).

Table 11: FY:14 Change in brand perception, YouGov Brand Index Buzz Tracker (2014-2013)

Rank Brand Improvement

1 Lidl 11.6

2 Ryanair 10.6

3 Aldi 10.0

4 Findus 9.8

5 HMV 7.5

Source: Company presentation

Increased addressable market driving higher LF

Ryanair’s UK website visit ranking has been transformed moving from 3rd

to 1st, on

Hitwise data, further evidence that the brand transformation is gaining traction.

Importantly, Ryanair’s efforts are translating into a clear pick up in passenger

volumes and LF since its recent transformation.

Figure 23:UK’s most searched airline websites Dec13-Sep14 Figure 24: Ryanair LF Performance (% change)

Source: Company presentation Source: Company reports

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0%

1%

2%

3%

4%

5%

6%

7%

8% Load Factor (LHS) Capacity (RHS)

Brand Depth: Ryanair value change

starting to resonate with the public.

LF transformation

- Rolling 12 month LF + 4pp yoy

- Rolling 3 month LF +8.7pp yoy


New strategy sets virtuous circle in motion

Ryanair growth was historically perpetuated on the basis of its lowest cost base,

permitting it to discount fares aggressively and stimulate demand to secondary

airports that European consumers would previously have not considered.

Figure 25: Unit costs per passenger, € (FY14) Figure 26: Ex fuel unit costs per passenger, € (FY14)


Contrary to popular belief, we do not now see a cultural revolution underway at the

carrier. Ryanair is playing to its strengths as the lowest unit cost producer in an

increasingly homogeneous market (P2P intra-European air travel) allowing it a price

advantage over legacy and LCC carriers alike (average fares estimated at 26%

below that of closest peer, Easyjet). Ryanair can push its unit costs down even

farther, reinforcing its structural advantage, by driving increased traffic and higher

LF. Armed with a reinforced cost position, the carrier is positioned to ‘price for

growth’. We see this as a ‘virtuous circle’ of unit costs.

Figure 27: Ryanair’s virtuous circle of unit costs


0

10

20

30

40

50

60

70

80

Ryanair Wizz Easyjet Vueling

0

10

20

30

40

50

60

Ryanair Wizz Easyjet Vueling

Ex fuel unit cost per passenger 28% below

that of rivals

Higher LF and passenger growth spins the

wheel of unit costs


Higher LF

We believe that the changes at Ryanair will allow the company to drive sustainably

higher LF while also providing greater revenue per seat potential.

Figure 28: Ryanair LF Progression Figure 29: Industry LF Performance Snapshot (%)


Fig 29 above shows a Ryanair lagging peer improvements over recent years before

a change in strategic direction transformed LF performance. Traffic data indicates

that the strategy is already working with rolling 12 month LF+3pts to 86% and Q3:15

+6.4pts to 88.4%. While consensus is bullish, we see further upside to Ryanair’s

traffic and subsequent LF performance. Fig. 30 below shows Ryanair closing the

monthly LF performance gap vs. Easyjet at an impressive rate. With momentum

behind Ryanair and a comercial department favouring LF over yield. We see asset

utilisation levels eclipsing that of Easyjet. We forecast annualised LF peaking at

91.8%, outstripping broad market LF growth by almost 3pp.

Figure 30: RYA and EZJ year on year LF performance (LHS) and monthly LF spread (RHS)


Raising the bar on traffic

Ryanair is on course to achieve 10.5% passenger growth in FY15 and the carrier

has guided to passenger growth of between 5% and 11% per annum out through

FY24. This clear growth strategy will see passengers carried move from 81.7m in

FY14 to a company guided 160m in FY24. Fig. 31 below outlines company guided

traffic against implied seat capacity growth from the fleet delivery pipeline. We

believe that with seat capacity in its arsenal the company is well poised to raise the

bar on traffic forecast.

60%

65%

70%

75%

80%

85%

90%

95%

20

03

20

03

20

04

20

04

20

05

20

05

20

06

20

07

20

07

20

08

20

08

20

09

20

10

20

10

20

11

20

11

20

12

20

12

20

13

20

14

20

14

Ryanair Monthly Load Factor

70%

75%

80%

85%

90%

2006 07 08 09 10 11 12 13 2014

Ryanair

Easyjet

Wizz Air

Vueling

BA

Norwegian

Transavia

LF

0%

2%

4%

6%

8%

10%

12%

14%

16%

0%

1%

2%

3%

4%

5%

6%

7%

8% RYA EZJ EZJ vs. RYA (RHS)

Fuller, more profitable planes operating

on Ryanair’s growing network

Closing the gap on the league leaders of

LF in just 12 months


Figure 31: Guided passenger growth vs. aircraft delivery implied seat growth

Source: Company presentations

We estimate a 10 year CAGR of 5.3% in terms of seat capacity growth based on

the fleet evolution profile out through FY24. We believe that not only will Ryanair fill

its additional capacity, but that it will outstrip capacity growth with traffic growth.

Table 9: Fleet evolution highlights capacity outlook

Fleet development 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Beginning Fleet 300 308 342 370 402 420 474 483 497 512

737NG Deliveries 11 40 50 50 29 0 0 0 0 0

MAX 200 Deliveries 0 0 0 0 0 62 34 42 40 22

737NG Exits (3) (6) (22) (18) (11) (8) (25) (28) (25) (14)

Ending Fleet 308 342 370 402 420 474 483 497 512 520

Additional seat capacity (millions)

737NG 2.5 10.6 8.7 9.9 5.6 (2.5) (7.8) (8.7) (7.8) (4.3)

MAX200 0.0 0.0 0.0 0.0 0.0 20.1 11.0 13.6 12.9 7.1

Net seat change 2.5 10.6 8.7 9.9 5.6 17.6 3.2 4.9 5.2 2.8

Total network seats 102.3 112.9 121.5 131.5 137.1 154.6 157.9 162.8 168.0 170.7

% change in seats

10.3% 7.7% 8.2% 4.2% 12.8% 2.1% 3.1% 3.2% 1.7%

% change in fleet units

11.0% 8.2% 8.6% 4.5% 12.9% 1.9% 2.9% 3.0% 1.6%


Unit costs to benefit from higher traffic and LF

With renewed emphasis on traffic, share growth and increased seat occupancy, we

see higher LF performance driving yet lower unit costs per seat. Flexing our LF

assumptions drives healthy drop-through margins. We estimate that for every 1%

increase in LF, unit costs decrease by 0.8%. All else being equal, as a result of a

1% increase in our FY16E LF assumption, EPS receives a 4% uplift.

0%

2%

4%

6%

8%

10%

12%

14%

0%

2%

4%

6%

8%

10%

12%

14%

2015E 2016E 2017E 2018E 2019E 2020E 2012E 2022E 2023E 2024E

Guided passenger growth Implied seat capacity growth

Passenger and capacity growth

underscored by fleet evolution

A 1% increase in LF results in a 4%

increase in FY16E EPS.


Greater market share, a fragmented market ripe for consolidation

While questions have been raised on how Ryanair will deliver passenger growth

amounting to a 10year CAGR of 5.9%, we believe there remains a significant

opportunity for Ryanair to grab market share in Europe. The European commercial

aviation market is fragmented with a total of 34 carriers holding 80% of intra-

European seat capacity. In contrast, the domestic U.S. market currently has 4

carriers providing 80% of seat domestic capacity. We see both an aggregation of

capacity providers and suppliers exiting the market as a result of increased and

prolonged competitive pressure.

Supply and demand dynamics in equilibrium

Against a backdrop of 3% forecast average annual growth in regional European

economic activity over the next 10 years (according to the IMF), we expect

passenger traffic to increase by 3.5% per annum as measured by revenue

passenger kilometres (RPKs) and based on Airbus’ Global Market Forecast. Such

passenger growth is equivalent to a 1.2x GDP multiple, reflective of a relatively

mature industry underpinned by an improving macroeconomic environment.

Meanwhile, we forecast capacity increasing by 3.2% annually, marginally outpaced

by demand. As a result we forecast industry wide load factor increasing modestly

over our forecast period by circa 25bps per annum from 80.8% to 83.0%.

Figure 32: Long run rational capacity allocation observable in European short haul market

Source: IATA

Figure 32 above highlights a European marketplace exhibiting rational capacity

deployment over the last 10 years. We expect net intra-European seat capacity

growth to remain relatively benign, with continued retrenchment of legacy carriers

from non-hub P2P flying and carriers exiting the industry counter balancing the LCC

capacity coming on-stream.

The evolution of LCC capacity in Europe

LCC share growth dynamics are well embedded in the intra-European market. Over

the past decade, LCC capacity growth has averaged 14% per annum. In contrast,

the legacy carrier model has produced average capacity growth rates of 1% per

annum Figure 33 below depicts the growth of the broader LCC and hybrid LCC

capacity share growth in the European market.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Passenger Demand (RPKs) Capacity (ASKs)

80% of seat capacity delivery:

Domestic US: 4 carriers

Intra-Europe: 34 carriers

European passenger capacity deployment

has followed a rational path over the last

10 years


Figure 33: The evolution of the broader LCC movement in the European market

Source: CAPA

Ryanair to lead LCC share gains

Ryanair has already taken sizeable market share, with a 10 year CAGR in

passenger growth of 13%. We estimate that Ryanair commands 14% total market

share, a figure that we see rising to 25% by 2024. We see the LCC space leading

European market consolidation, with Ryanair as best positioned to lead the charge

supported by its fleet order book.

Order books highlight the growth trajectory in Europe

The individual order books of both LCC and legacy carriers, alongside assumed

retirement profiles for the European commercial fleet, support our share thesis. Our

analysis highlights a European capacity environment adding 3% CAGR of

incremental seat capacity between 2014 and 2024, with Ryanair, Easyjet,

Norwegian Air and Wizz Air together accounting for between 47-66% of annual seat

capacity deployment in any given year.

Figure 36: LCC share of intra-European capacity growth

Source: Ascend, Investec Securities estimates

Delivery / Retirement profiles highlight a changing hierarchy

Based on current order books and aircraft retirement profiles, we estimate that

Ryanair’s share of seat capacity will increase by c.4pp by 2019 in an intra-European

context, equating to 30m additional passengers. We view this as a relatively

conservative assumption, exiting Ryanair jets at c.15 years to maintain an average

fleet age profile of c.6 years, Easyjet aircraft at 15 years and the remaining

European peer base at an average age of 21 years.

5%

8%

14%

18%

21%

24%

29%

31% 32%

35% 36%38%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0%

1%

2%

3%

4%

5%

6%

40%

45%

50%

55%

60%

65%

70% LCC share of capacity growth (LHS) European capacity growth (RHS)

We estimate Ryanair market share could

reach 25% by 2024

LCCs to account for 47%-66% of annual

seat capacity deployment in any given

year


Table 13: European seat forecast to 2019, assuming fleet retirements and new orders

Carrier 2014 closing fleet 2015 2016 2017 2018 2019

Ryanair 57,078 63,693 72,387 82,026 87,129 90,100

Easyjet 37,056 39,936 43,176 49,296 55,236 57,876

Norwegian 17,035 18,003 21,141 26,643 30,187 32,115

Wizz 9,900 14,220 17,900 21,200 21,020 21,020

IAG 47,577 46,182 47,982 50,202 53,865 57,333

Lufthansa Passenger Group 63,187 54,976 56,714 57,273 56,275 56,175

Air France / KLM Group 45,803 44,734 43,840 42,408 42,118 41,279

Other 247,111 255,871 239,067 242,028 247,704 256,798

Total Europe 524,747 537,615 542,207 571,076 593,534 612,696


Table 14: Relative % size of fleet seat capacity assuming fleet retirements and new orders

Carrier 2014 closing fleet 2015 2016 2017 2018 2019

Ryanair 10.9% 11.8% 13.4% 14.4% 14.7% 14.7%

Easyjet 7.1% 7.4% 8.0% 8.6% 9.3% 9.4%

Norwegian 3.2% 3.3% 3.9% 4.7% 5.1% 5.2%

Wizz 1.9% 2.6% 3.3% 3.7% 3.5% 3.4%

IAG 9.1% 8.6% 8.8% 8.8% 9.1% 9.4%

Lufthansa Passenger Group 12.0% 10.2% 10.5% 10.0% 9.5% 9.2%

Air France / KLM Group 8.7% 8.3% 8.1% 7.4% 7.1% 6.7%

Other 47.1% 47.6% 44.1% 42.4% 41.7% 41.9%

Total Europe 100% 100% 100% 100% 100% 100%


Share gains should remain on track

No company is immune to periodic economic down-cycles, Ryanair included.

Potential macroeconomic shocks and irrational competitor activity, while disruptive,

should not derail our investment thesis. A high degree of operational flexibility and a

best in class unit cost platform provide protection in downturns, allowing the

company to continue its pursuit of volume growth and aggregation of intra-European

P2P market share.

High degree of operational flexibility: Ryanair has a high degree of

operational flexibility in its business model, enabling it to scale back production

and variable costs in the event of an economic downturn. In FY12 the carrier

grounded 30% of its fleet as a result of a weak economic backdrop and high

fuel prices. During that year, net profit increased 50% yoy with lease adjusted

ROCE + 1.5% yoy.

Lowest average fares: Operating from an industry leading cost position

allows the carrier to charge the lowest average fares in the European sector

(estimated at 26% below that of peers – see Figure 37 below) while continuing

to generate economic returns. As a result, we see any potential destabilisation

from lower industry yields as short term, with the long term sustainability of

discounting by peers unviable.

Ryanair’s fleet to become the largest

provider of intra-Euro seat capacity

Ryanair’s business model has been ‘stress

tested’ for macroeconomic downturns


Figure 37: Ryanair average fare 26% below that of its closest peer

Source: Company reports, Investec Securities estimates

Ryanair, the leader of the pack

LCC share of intra-European capacity indicates a divergence in growth ambitions

vs. legacy carriers. A fragmented market presents ample scope for carriers to exit

the industry providing upside to share projections. We estimate that Ryanair will

take its share from 14% to 25% of the total market by 2024, leading the LCC sector.

We view 25% market share as achievable for Ryanair as it grows its forecasted

traffic base by 102% from 81.7m in FY14 to 165m in FY24E. Share gains are

consistent with historical trends exhibited by the carrier. We see potential for some

rationalisation in future short haul deliveries to European carriers, with any deferrals

or cancellations providing scope for further share gain by Ryanair. Furthermore,

with 34 carriers currently providing 80% of intra-European short haul capacity vs. 4

in the domestic US, we see large scope for consolidation through carriers exiting

the market and LCCs, led by Ryanair, absorbing share. After only a month of

trading in 2015, we have seen the demise of 2 capacity providers - Cyprus Airways

and Eurolot.

Table 15: The virtuous circle of unit costs driving share gain to 25% in FY24E

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Passenger growth 10.5% 11.5% 6.3% 7.7% 6.3% 7.3% 6.5% 6.0% 5.5% 5.5%

Capacity growth 3.9% 11.3% 6.0% 7.0% 6.0% 7.0% 6.0% 5.0% 5.0% 5.0%

LF 88.3% 88.4% 88.7% 89.3% 89.5% 89.7% 90.1% 91.0% 91.4% 91.8%

Ex fuel unit costs 0.4% -0.7% -0.4% -0.2% -0.5% 0.7% -0.8% -0.5% -0.2% -0.3%


And the circle continues… Market share gains will facilitate Ryanair’s impressive roll out of capacity. Higher

volumes will drive down unit costs reinforcing Ryanair’s competitive pricing. And the

circle continues…

€0

€20

€40

€60

€80

€100

€120

€140

Ryanair Easyjet Norwegian Air Berlin AF / KLM short haul

We forecast 25% market share by 2024


Enter the Max

While Ryanair’s new strategy is building LF and reducing unit costs, we believe the

introduction of the MAX in FY20 will provide scope for the carrier to increase its

competitive advantage vs. the competition. Increased fuel efficiency and reduced

operating costs alongside reduced noise and emissions underscore what is widely

aknowledged to be the most competitive unit cost platform in the industry.

Refreshed cabin interiors, improved range and best in class seat capacity

accelerate a brand refresh and leverage the volume driven revenue generation

strategy. Finally, in transitioning to the MAX we see scope for revenue generation

opportunities in the aftermarket before the wheels leave the tarmac.

Figure 38: Ryanair’s MAX order will see the carrier reach new heights

Source: Boeing

Fleet strategy sees Ryanair reaching new heights

We forecast that the cost gap enjoyed over competitors will not only be maintained,

but should actually widen. Costs stand to benefit from an increase in seat density of

4.2%, an 18% improvement in fuel burn per seat and importantly a potential 1.1%

per seat delta over competitors in fuel efficiency. An estimated 6% delta in

depreciation costs per seat vs. peers should widen the ownership cost gap.

Furthermore, we see the potential for Ryanair to generate €519m in after tax profits

from asset sales as part of its upcoming fleet rollover program, with a PV / share of

€0.37 on our estimates. In addition, we believe the MAX offers incremental annual

revenue generation with a PV/share of €0.09.

The arrival of the MAX in FY20 provides

scope for revenue, cost and brand refresh

opportunities

Unit cost tailwind:

- 4.2% seat density improvement

- 18% fuel burn improvement

- Potential 1.1% fuel efficiency

per seat delta vs. peers

- 6% delta in ownership costs per

seat vs. peers


Seat density underscores unit costs

Ultimately seat density represents the trump card when assessing unit costs. By

increasing the maximum potential passenger count per aircraft the denominator of

the unit costs equation is driven ever lower. Aircraft manufacturers are acutely

aware of this trend. While Airbus’ recent patent application for bicycle style airplane

seating may be a bridge too far, it nevertheless highlights the industry wide

acknowledgement that by increasing capacity you lower unit costs.

Figure 39:The pursuit of seat density, patented bicycle airline seating

Source: Airbus

Ryanair currently has a 2% advantage against a best in class industry peer, Wizz

Air and an 8% seat density advantage vs. a selection of its short haul peers. When

compared against the global industry average (Fig.40), the extent of Ryanair’s

advantage is clear, with a 20% seat density differential. We see this seat density

differential as placing Ryanair at a structural advantage in terms of maintaining its

industry leading unit cost position.

Figure 40:Seat density vs. peers Figure 41: Staying ahead of the curve - industry seat density trends

Source: Innovata, SeatGuru Source: Airbus, SeatGuru

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200

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Current Ryanair Average (189 seats)

Current industry average (157 seats)

Ryanair seat density:

- 20% above the industry

- 8% above peers

- 2% above best in class Wizz Air


Greater seat density

Boeing’s MAX aircraft provides prospective airlines with a 200 seat configuration,

while the NEO offers a maximum seat layout of 189. Ryanair’s proposed 197 seat

configuration for the MAX would offer an additional 8 seats per aircraft representing

an increase of 4.2% in seat capacity vs. the carriers’ industry leading B737-800NG

configuration. Meanwhile, A320NEO recipients look set to configure aircraft with

186 seats, an increase of 3.3% vs. the current in service A320CEO jets. Assuming

configurations remain as indicated we see the potential for Ryanair to widen the

relative seat density gap vs. the competition as it introduces the MAX in FY20.

Table 10: Maximum manufacturer specifications vs. forecast configurations

Maximum seat configuration Forecasted seat configuration

A320CEO /NEO

B737NG/ MAX200

Est LCC peers Ryanair

Current generation technology 180 189 Current generation technology 180 189

Next generation technology 189 200 Next generation technology 186 197

Potential upside 5% 6% Potential upside 3% 4%

Source: Company presentations, Investec Securities estimates

Better fuel efficiency

The emergence of the NEO and MAX, iterations of the long standing 737 and A320

families, offers approximately 20% fuel burn savings to prospective purchasers.

Ryanair stands to decrease its fuel burn per seat by 18% with the arrival of the MAX

in FY20. While competitors are re-fleeting and deriving similar benefits, we see

scope for Ryanair to widen its unit cost gap vs. NEO customers by an estimated

1.1% delta in structural payload efficiency.

Table 17: NEO and MAX customer snapshot

Airbus NEO Boeing MAX

British Airways Ryanair

Easyjet Norwegian

Lufthansa Icelandair

Norwegian Monarch

Swiss Southwest

SAS American

Vueling Westjet

Wizz Air Canada Source: Ascend


Ryanair and the industry to benefit from next generation technology

In FY15E, fuel will represent 44% of Ryanair’s operating cost - 13% above that of

the industry average. The arrival of the MAX should offer Ryanair 18% fuel burn per

seat savings vs. its current 737-800NG, offering a projected fuel savings of €51m

upon introduction.

Table 18: Ryanair’s MAX fuel efficiency forecast

737-800NG MAX200

Seats 189 197

Fuel burn/seat - -18%

2020E Fuel cost - €2,277.6

Relative MAX fleet composition - 38%

Projected fuel saving (m) €51


Weight is the key to fuel efficiency

As both the NEO and MAX are yet to enter service, we are reliant on marketing

material from both manufacturers for the relative benefits of each unit. In assessing

whether any competitive advantage is to be derived from choosing the NEO over

the MAX, or vice versa, one must return to the overriding principal in the

determinant of fuel efficiency - weight.

Aircraft suffer a performance penalty in terms of fuel efficiency for every pound (lb)

of weight they have to lift. The majority of this weight is unavoidable as it is tied to

making flight possible (airframes, engines etc.). Weight over and above this can be

used for revenue generation by means of transporting passengers and freight. This

extra weight – the payload - is paid for by passengers. The structural payload is the

carrying capacity of the aircraft. It is calculated by taking the Operating Empty

Weight (OEW) from the Zero Fuel Weight (ZFW).

We measure the percentage of structural payload utilised by both the Airbus

A320CEO and the Boeing 737-800NG using seat configurations employed by the

best in class LCC peers and those of Ryanair. We then assess this differential vs.

the maximum specifications of the next generation technology, namely the 189 seat

layout for the NEO and 200 seat layout for the MAX. Finally, we evaluate the seat

configurations that are being indicated for the first wave of next generation

deliveries with 186 seats for the NEO and 197 for Ryanair’s MAX200 cabin. Taking

an average weight of 210lb per passenger plus checked and hand luggage, we

assess the relative percentage of payload utilised.

Table 1911: A320 CEO and B737-800NG structural payload comparison (lb)

LCC peers Ryanair Variance

Aircraft A320 CEO B737-800NG

Seats 180 189

ZFW 137,789 136,000

OEW 93,476 91,300

Structural Payload 44,313 44,700

210lb per passenger / baggage 37,800 39,690

Payload utilised 85.3% 88.8% 3.5%


New engine technology with the MAX to

reduce fuel burn / seat by 18%

The structural payload weight is the

revenue carrying capacity of an aircraft.

The percentage of payload utilised

highlights relative efficiency.


Table 20: A320 NEO and MAX200 payload comparison (full density) Table 21: A320 NEO and MAX200 payload comparison (Est density)


Aircraft A320 NEO B737MAX

Seats 189 200

ZFW 141,789 140,000

OEW 97,476 95,300


210lb per passenger/ baggage 39,690 42,000



Aircraft A320 NEO B737MAX

Seats 186 197

ZFW 141,789 140,000

OEW 97,476 95,300


210lb per passenger/ baggage 39,060 41,370


Source: Ascend, Investec Securities estimates Source: Ascend, Investec Securities estimates

Ryanair’s relative fuel efficiency differential is set to widen

Based on our estimates the NEO is using 88.1% of its structural payload. In

contrast, the MAX uses 92.6% of its structural payload for passenger transport.

Conceivably excess capacity could be used to transport freight, however, the LCC

model strays away from freight transport. We forecast the payload use gap to widen

by 1.1% to 4.4% when comparing the Ryanair configured MAX200 to the 186 seat

NEO configuration. In our view, this positive delta underscores Ryanair’s fuel

efficiency advantage and, in our view, provides scope to drive the gap wider.

Ownership costs to remain best in class

We believe that Ryanair’s current order book preserves the carrier’s industry

leading ownership cost differential. Ryanair currently has a 23% unit cost per seat

advantage in ownership costs. Given Ryanair’s order book was secured at above

industry average discounts we see this gap widening by 2%. Furthermore, we see

Ryanair generating €519m from the disposal of some 140 737-800NG units as part

of its fleet rollover program targeting an average fleet age of ca. 6yrs.

Ownership costs, leading the charge

Ownership costs comprise maintenance, aircraft hire and depreciation. Depreciation

of aircraft represents 62% of Ryanair’s FY15E ownership costs, it is through this line

item that we estimate Ryanair will widen its cost differential by 6% vs. peers.

Figure 42:Ryanair has a 23% advantage in unit ownership costs Figure 43: GDP projections and major Ryanair aircraft orders

Source: Company reports Source: Company reports, OECD

Ryanair has an impressive track record in both the timing and negotiating of its

aircraft orders. We estimate that the airline has secured above industry average

discounts from manufacturers, lowering its book value per aircraft. We estimate that

on a BV per seat basis, Ryanair’s most recent 180 737-800NG order delivers a 35%

delta vs. the average of peer Airbus A320 CEO orders. We estimate the BV per

seat gap as being secured and widening by 6%, driven by a 14% differential when

comparing the MAX orders vs. the average of peers’ NEO orders.

€0

€2

€4

€6

€8

€10

€12

€14

€16

€18

Ryanair Easyjet Wizz Vueling -1%

0%

1%

2%

3%

4%

5%

6% 2002 Boeing contract 737NG order MAX order

Ryanair fuel efficiency:

4% per seat ahead of rivals

Scope for gap to widen

Ryanair has a 23% unit cost per seat

ownership cost advantage.

A 5% lower book value per seat drives

ownership cost savings


Table 22: Ownership cost delta as carriers transfer to the next generation of aircraft

Operator Aircraft Variant Seats Unit price BV/seat Delta Operator Aircraft Variant Seats Unit price BV/seat Delta

Est. LCC peer average Airbus A320 CEO 180 $40.0m $0.22m

Est. LCC peer average Airbus NEO 186 $45.0m $0.24m

Ryanair Boeing 737-800NG 189 $31.0m $0.16m -35% Ryanair MAX200 197 $41.0m $0.21m -14%


In table 22 above we have summarised our estimates on delivery prices for both

Ryanair’s oldest B737-800NG and its MAX200 aircraft vs. an average A320CEO

and A320 NEO of its LCC competitors. Our estimates are based on market

commentary and observed tranactions at the time of aircraft delivery.

Maintenance and aircraft hire capped by industry leading order book

Ryanair’s order book is the largest of its peer group, representing 50% of the total

group backlog. We see this as tangible as it:

Reduces Ryanair’s future requirements for aircraft hire vs. peers

Maintains Ryanair’s average fleet age at 6.9 years vs. peers’ at 7.9 by FY24

Figure 44: Ryanair’s order book vs. peers, aircraft units


Maintenance related charges, at 16% of Ryanair’s ownership costs are highly

correlated to aircraft age. With Ryanair guiding average fleet age relatively flat out

to FY24 (moving from 5.4 years to 6.9 years between FY15-FY24) we forecast

maintenance charges will remain relatively stable. In contrast, we forecast a gradual

ageing of LCC peers’ fleets from a FY15 starting point of 4.4 years to a FY24

average age of 7.9 years).

Figure 45: Average fleet age of current LCC peer group Figure 46: Forecasted average fleet age of select LCC peer group

Source: Ascend Source: Ascend, Investec Securities estimates

0

10

20

30

40

50

60

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Easyjet Wizzair Vueling Ryanair

4.0

5.4

6.4

7.4

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Wizz Ryanair Easyjet Vueling

3

4

5

6

7

8

9

10 Norwegian Ryanair Wizz Air

Easyjet Peer Average

Ryanair’s delivery pipeline represents 50%

of its immediate peer’s backlog


Capturing more revenue

The MAX offers Ryanair clear revenue upside with increased range bringing new

markets and primary airports into scope. With 8 extra seats vs. the current

generation of Boeing jets, we forecast 4% revenue per aircraft uplift with the advent

of the MAX. We estimate that the additional seats, when fully in place by FY24, will

generate €128m in additional EBIT, which when discounted by our WACC of 8.5%

implies a present value per share of €0.09.

Table 23: MAX capacity provides revenue opportunity, €

737-800NG MAX200 Variance

Flights/Day 5 5 0

Seats 189 197 8

Seats/Day 945 985 40

Seats/Year 344,925 359,525 14,600

Passengers (target LF 91%) 13,360

Average fare

€60

Additional revenue per aircraft

€804,005

Number of MAX aircraft

200

Total additional MAX revenue, €m

€160.8m

Additional EBIT (80% drop through) €128.6m

PV per share, € cent

€0.09


MAX to drive increased revenue per

aircraft equating to a PV/share of €0.09


Ryanair’s fleet renewal, a solid cost base with aftermarket profit potential

We highlight our fleet evolution projections for Ryanair in table 24 below. Not only

does this fleet evolution profile drive reduced ownership costs but it highlights the

exit of some 160 737-800NG units through FY24. We see this as significant in both

size and scope and we detail below how we believe Ryanair could benefit from

€519m in profit with a PV of €0.37 / share through disposal of aircraft.

Table 24: Fleet renewal program highlights a profitable opportunity

Fleet Evolution FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E

Beginning year fleet 300 308 342 370 402 420 474 483 497 512

Deliveries -737-800NG 11 40 50 50 29 0 0 0 0 0

Deliveries - 737MAX200 0 0 0 0 0 62 34 42 40 22

Returns/Disposals -3 -6 -22 -18 -11 -8 -25 -28 -25 -14

Year End Fleet 308 342 370 402 420 474 483 497 512 520

- 737-800NG 308 342 370 402 420 412 387 359 334 320

- 737MAX200 0 0 0 0 0 62 96 138 178 200

Average fleet age (yrs.) 6.5 6.6 6.2 6.1 6.4 6.2 6.0 6.1 6.3 6.9


Extracting value from the aftermarket

With an upcoming fleet rollover program we believe that Ryanair is set make further

gains from its order book. Between Mar’99 and Mar’13 Ryanair took delivery of 348

B737-800NG (NG) aircraft and exited 43 units (26 disposals and 17 lease hand

backs). We estimate that the period FY15-FY24 will see the company exit 160 NG

aircraft with 20 lease hand backs. We take our estimated BV of Ryanir’s oldest NG

units and benchmark this against observed half-life market values for 12 year old

units to arrive at a potential gain on disposal.

Table 25: Ryanair stands to materially benefit from its fleet rollover program, millions

B737-800NG list price $81.00

Assumed Ryanair discount of 62% $50.22

Estimated unit price $30.78

Book Value (BV) $30.78

Residual Value (RV) 15% $4.62

Depreciation per annum $1.14

(Straight line over 23yrs to RV)

12yr old Ryanair 737-800NG BV $17.13

12yr old 737-800NG Half-Life Market Value (MV) $22.00

Gain on disposal $4.87

2015-2024 Estimated disposals (aircraft) 140

2015-2024 Forecasted Upside €519


Risk is mitigated by deepest embedded fleet in history

The current Boeing NG fleet is the most established in recent history providing a

deep, liquid and stable aftermarket leading to a greater degree of price certainty.

The NG entered service in 1997 and when the MAX enters service in 2017 Boeing

forecast that 6,200 NG aircraft will have been delivered from a total order book of

6,700.

Aircraft trading has the potential to

generate €519m with a PV of €0.37 /

share

Residual value risk limited by deep liquid

aftermarket


Fortress Stansted, the cornerstone of the network Ryanair’s airport strategy should further allow the carrier to reinforce its competitive

position. Negotiated strong deals at existing bases have been achieved at

favourable terms and will facilitate a transfer to primary airports while maintaining

cost discipline. Moreover, we believe that Ryanair may turn Stansted into a hub,

which would connect network traffic flows driving higher volume and LF.

Airport charges are backed by good deals:

We view the outlook for Ryanair’s airport charges as favourable, backed by

impressive airport deals. In a recently secured ground breaking deal at

Stansted airport, Ryanair secured unit passenger charges that will decline as

volumes grow. This deal combines reduced passenger charges at both DUB

and BGY to ensure that the top 3 bases in the network – (25% of summer

2015 capacity) - are locked in at declining rates.

Good deals lay the groundwork for primary expansion:

We forecast primary airport network capacity growing from a current base of

60% to 80% by FY20. Facilitating this primary expansion, while maintaining

unit cost discipline, is an estimated network wide FY16E-FY24E 2% per

passenger airport charge saving secured from strategic long term deals.

Consolidation and selective expansion create further scope for growth:

An aggregation of capacity and consolidation decreasing supplier power

should provide Ryanair with opportunities to secure favourable rates at primary

airports. Budapest (BUD) was a case in point. Furthermore, in assessing

airport and handling related charges across Europe we have encountered

instances whereby some primary airport charges are actually lower than those

of secondary airports.

Stansted as a hub

STN, as Ryanair’s biggest airport, accounts for 12% of total network capacity.

We forecast the carrier expanding its traffic at STN by 46% from a 2014 figure

of 15m passengers per annum to 22m by 2024. On this firm footing and given

the characteristics of Stansted, we see clear potential for Ryanair to turn the

North East London airport into a hub. We see significant scope to leverage the

network scale from connecting traffic flows at STN. We estimate that such a

move could result in an initial 785k additional passenger, 0.7pts of LF and

€40m EBIT.

Airport charges are backed by good deals

- 25% of capacity at declining

rates

- 43% of capacity at flat or

declining rates

20% primary capacity expansion

facilitated by

- Good existing deals

- Opportunistic expansion

- Primary charges in some

instances cheaper than select

secondary airports



Airport costs represent 15% of Ryanair’s FY15E cost base and we estimate

the carrier has a 32% unit cost gap vs. peers. We forecast primary airport

network capacity growing from a current base of 60% to 80% by FY20E.

Facilitating this primary expansion, while maintaining unit cost discipline is an

estimated cumulative network wide FY16E-FY24E 2% per passenger airport

charge saving secured from strategic long term deals.

Figure 47: Airport handling charges per passenger, € (FY14) Figure 48: Ryanair’s top 10 airports in seat capacity


Fortress Stansted, a new dawn a new deal

STN is Ryanair’s biggest airport, accounting for 12% of total network capacity, while

Ryanair represents 83% of total seat capacity at STN. Despite the relative

importance of Ryanair, airport management at STN have learnt that deterioration in

its passenger numbers and growth in passengers across the Ryanair network are

not mutually exclusive. Fig. 48 below highlights the period 2006-2013 in which STN

traffic declined by 26% while network wide Ryanair traffic grew by 87%. We believe

that this fact aided Ryanair management in securing a long term deal that has

paved the way for growth at reduced unit costs per passenger.

Figure 49: STN and Ryanair traffic growth, passengers, m Figure 50: RYA per passenger airport charge at STN


Fig. 49 above highlights a break from tradition with the old airport charges model of

a pure linear relationship between passenger growth and billable charges broken.

Instead, Ryanair’s 10 year airport deal sees charges levied by STN inversely related

to growth, incentivising a significantly larger presence by Ryanair, while at the same

time driving down average unit costs. We forecast the carrier expanding its traffic at

STN by 57% from a figure of 14m passengers per annum to 22m by FY24E.

Assuming a 2% discount for every additional 1m passengers at STN, this deal

would deliver a total savings of €128m by FY24E.

€0

€5

€10

€15

€20

€25

Ryanair Norwegian Vueling Easyjet0% 2% 4% 6% 8% 10% 12%

PSA

OPO

BVA

MAD

BCN

CRL

CIA

BGY

DUB

STN

Declining per passenger charges

0

10

20

30

40

50

60

70

80

2006 2007 2008 2009 2010 2011 2012 2013

Stanted Total Ryanair


- 25% of capacity at declining

rates

- 43% of capacity at flat or

declining rates

Airport operator and its largest tenant

are now primed for growth


A tailwind from DUB and the continent experience

Airport charges at DUB (7% of network capacity) look set to provide a significant

cost tailwind for Ryanair’s DUB operations out to FY20. The Commission for

Aviation Regulation (CAR) announced in October that it would place a cap on per

passenger costs at DUB that would see charges fall by 4.2% per annum in the

period 2015-2019. This move would see charges reduced from €10.30 to €8.68 per

passenger by FY20 - a 16% reduction.

Table 26: Regulatory charge tailwind at DUB Table 27: A relatively benign regulatory charges environment

FY16E FY17E 2018E FY19E

Per passenger airport charge

€9.87 €9.45 €9.06 €8.68

Annual change % -4.20% -4.20% -4.20% -4.20%

Estimated saving, €m 4.30 4.76 4.90 5.04

Market Driver Weighting

United Kingdom Long term STN deal 12%

Spain Aena freezing charges for 2015 15%

Ireland DUB airport charges falling 8%

Italy 5 year deal inked at Bergamo 8%

Airport charges locked in 43% Source: Irish Commission for Aviation Regulation (CAR), Investec Securities

estimates

Source: Innovata, Investec Securities estimates

We view the remaining Ryanair network as benefitting from an environment of more

benign regulatory charges combined with competition for growth from both primary

and secondary airports. We summarise in table 27 above the headline moves on

the continent that either freeze or lower current regulated airport charges for

Ryanair.

Good deals lay the groundwork for primary expansion

We forecast primary airport network capacity growing from a current base of 60% to

80% by FY20E. An estimated network wide FY16E-FY24E 2% per passenger

airport charge saving, secured from strategic long term deals, should facilitate this

primary expansion while maintaining unit cost discipline. These savings, in

conjunction with consolidation and opportunistic deals, should support a primary

airport build out and maintain airport cost discipline.

Industry consolidation, reduces supplier power

Furthermore, we see scope for further cost containment through selective primary

airport expansion and continued strong deal execution. The aggregation of seat

capacity in an increasingly homogenised European marketplace will decrease

supplier power. Ryanair should benefit through increased opportunities to deploy

capacity in return for favourable long term primary airport deals. We note 2015 has

seen the demise of both Cyprus Airways and Eurolot and we see this trend

continuing.

More opportunistic BUD type deals likely

We see Ryanair acting as first responder as carriers exit the industry and a

fragmented market consolidates. With primary airports increasingly reliant on

passenger volume as legacy carriers retrench, we view Ryanair as well positioned

to take advantage of advantageous deals to secure cost competitive growth. After

Malev collapsed on February 3rd

2012; Ryanair had an operational base at the

capital by February 17th

. Initially basing 5 aircraft and opening an additional 32 new

routes Ryanair demonstrated tactical operational flexibility and timely decision

making to acquire sizeable share at a low cost.

A favourable regulatory environment at

DUB to provide €25m in savings out

through FY19

20% primary capacity expansion

facilitated by

- Good existing deals

- Opportunistic expansion

- Primary charges in some

instances cheaper than select

secondary airports

Malev had 45% capacity share at BUD. Its

collapse was instantly absorbed by the

LCCs


Figure 51:BUD traffic progression, passengers ‘000s Figure 52:BUD capacity share December 2014

Source: Innovata Source: Innovata

Saving the day at BUD - decreased supplier power

Prior to its 2012 exit, Malev had circa 45% capacity share at BUD. Ryanair and the

regional LCC Wizz were the big share winners, instantly absorbing Malev’s deficit

and assuming control of 41% of the market. The airport’s tenant list was

subsequently transformed with 5 out of the top 10 airlines now in the LCC / budget

carrier category and an overall LCC penetration level of 54%. After the setback of

losing its anchor tenant, BUD reported 2012 traffic down just 4.7% year-on-year.

Traffic performance of -0.5% in 2013 and +8.44% in 2014 saw traffic surpass the

Malev era and reach record highs. Having saved the day at BUD, we believe

Ryanair’s operational flexibility will place it atop the speed dial list of primary and

secondary airport operators.

Not all primary airports are created equal

In assessing airport and handling related charges across Europe we have

encountered some instances where primary airport charges are actually cheaper

than those of secondary airports on the continent. We view this as highlighting an

avenue of primary market growth for Ryanair that could facilitate unit cost

containment.

STN as a Hub

STN is Ryanair’s biggest airport, accounting for 12% of total network capacity. We

forecast the carrier expanding its traffic at STN by 46% from a 2014 figure of 15m

passengers per annum to 22m by 2024E. On this firm footing and given the

characteristics of Stansted, we see clear potential for Ryanair to turn the North East

London airport into a hub. We see significant scope to leverage the network scale

from connecting traffic flows at STN. We estimate that such a move could result in

an initial 785k additional passengers - 0.7pts of LF and €40m EBIT.

Figure 53: Proportion of connecting traffic at London airports Figure 54: STN daily frequencies to European cities

Source: UK CAA Source: Innovata

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0% 5% 10% 15% 20% 25%

Turkish Airlines

BA

KLM

Norwegian

Air France

Germanwings

EasyJet

Lufthansa

Ryanair

Wizz Air

0%

5%

10%

15%

20%

25%

30%

35%

40%

Heathrow Gatwick Stansted Luton LondonCity

LondonMetro Area

0

1

2

3

4

5

6

7

8

We see Ryanair offering instantaneous

capacity to stricken primary airports.


With a relatively low proportion of connecting traffic, STN has both the catchment

area and the geographic location to become a hub airport. Hub airports require both

scale and scope: STN as satisfies both requirements with 19.1m passengers in the

twelve months to September 2014 and a network offering high frequency services

to 136 destinations spanning 34 countries.

High frequency services facilitates traffic flow linkage

STN has untapped potential to link short haul traffic flows, while providing ample

scope for any long haul operations. Figure 54 below highlights the dense nature that

Ryanair has built out, serving 185 airports in summer 2015. Figure 55 highlights

STN’s positioning at the heart of Ryanair’s network linking pan European traffic

flows.

Figure 55: Ryanair European network, a visible hub at STN Figure 56: STN leveraging Ryanair’s network

Source: Innovata Source: Innovata

Leveraging the network at STN

By packaging STN as a simple self-connecting hub product, Ryanair could broaden

its network, increase its addressable market and facilitate above consensus traffic

and LF performance. In table 28 below, we highlight 8 high frequency services that

could drive 785k additional passengers per annum from self-connecting traffic flows.

Such connecting traffic flows would be incremental, with a high drop through margin

resulting in an estimated €40m EBIT per annum. This could prove conservative with

STN boasting 113 Ryanair routes - all potential drivers of incremental connecting

traffic.

STN boasts a solid point to point base

with strong development potential

We estimate the creation of a STN hub

could generate 0.7% incremental network

LF and €40m in annual EBIT


Table 28: STN as a hub connects traffic flows across a vast network

Origin Hub Additional destinations Annual traffic

DUB STN 54 575,000

BGY STN 100 51,830

LIS STN 95 34,310

BCN STN 94 33,580

MAD STN 92 28,470

CIA STN 78 26,645

BUD STN 73 18,250

WMI STN 71 17,338

Incremental traffic 785,423

Average fare, €63 €50m

Drop through margin, 80% €40m


Annualised passenger forecasts in table 28 above are based on an assumed

number of connecting passengers per day each way (PDEW) to additional

destinations offered by using STN as a transfer point.

Connecting traffic - the Ryanair way

We believe Ryanair will harness an increasing proportion of connecting traffic,

providing upside to traffic volume and LF performance. Management have stated

that the company would be unlikely to sign formal 'interline' agreements for feeder

flights, but legacy carriers could instead schedule their long-haul flights to fit in with

Ryanair's arrival times.

Table 29: Ryanair sidestepping historical connecting traffic costs

Cost Item Description Ryanair 'side step'

Missed connection costs Costs incurred from passengers missing a leg of

an itinerary

Itinerary sold as two tickets. Self-check in at

STN required

IT development costs Linking reservation systems with external carriers

drives cost. Offer a self-connecting

(RYA-RYA) product only

Interline service charges (ISC)

Charges resulting from two carriers cooperating on connecting traffic

Offer a self-connecting (RYA-RYA) product only

Codeshare commission Fees payable when carriers share each other’s

flight numbers Offer a self-connecting

(RYA-RYA) product only

Frequent Flyer (FFP) costs

Connecting traffic can involve the cost of frequent flyer points

Offer a self-connecting (RYA-RYA) product only

Misconnected baggage Costs associated with delivery of transfer

baggage Offer a hand baggage

only connecting product


Connecting traffic without the additional

costs and complexities -, the Ryanair way


Section 5: Forecast & Valuation Ryanair continues to prove that the LCC model does not equate to a low ROCE.

Continued execution of the group’s commercial strategy underscored by a

sustainable unit cost position should allow volumes and LF to drive improved

profitability. More specifically, we forecast a FY15E-FY24E volume CAGR of 0.4%

above guidance and FY16E net profit (€1,113m) 5% above Bloomberg consensus

(€1,065m). Greater LF and improved revenue per aircraft will drive higher ROCE. In

parallel, free cash flow generation (FCF) should remain robust – averaging €1bn per

annum, 8% FCF yield - from FY15E though FY24E.

Above guidance volume growth - declining unit costs

As summarised in table 30 below we forecast a 10 year CAGR in volume growth of

7.3% vs. company guidance 6.9%, driving materially higher LF and unit cost gains.

Ex-fuel unit costs are forecast to decline by 2.9% between FY15E and FY24E,

driven by higher LF and new aircraft technology.

Table 30: Summary Ryanair operational forecasts

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Investec passenger volume, m 90.3 100.6 107.0 115.2 122.4 131.3 139.8 148.2 156.4 165.0

Guided passenger volume, m 90.0 100.0 106.0 114.0 120.0 128.0 136.0 143.0 150.0 160.0

Delta 0.3% 0.6% 0.9% 1.1% 2.0% 2.6% 2.8% 3.7% 4.3% 3.1%

Investec capacity growth 3.9% 11.3% 6.0% 7.0% 6.0% 7.0% 6.0% 5.0% 5.0% 5.0%

Investec LF 88.3% 88.4% 88.7% 89.3% 89.5% 89.7% 90.1% 91.0% 91.4% 91.8%

Investec ex fuel unit costs growth 0.4% -0.7% -0.4% -0.2% -0.5% 0.7% -0.8% -0.5% -0.2% -0.3%


Fuller planes drive above consensus FY16E net profit

We forecast FY16E net profit of €1,113mm - 5% above Bloomberg consensus

(€1,065m), in our view primarily due to higher passenger volumes and LF

assumptions stemming from Ryanair’s strategic changes. We show our more

detailed P&L and KPI forecasts out to FY17E starting on page 45.

Table 31: Summary Ryanair Income Statement forecasts

Income statement (€m) 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Total revenue 5,679 6,237 6,298 6,782 7,206 7,729 8,231 8,725 9,205 9,711

Total costs 4,651 5,080 4,984 5,358 5,669 6,050 6,373 6,672 6,986 7,323

EBITDAR 1,510 1,713 1,906 2,060 2,197 2,416 2,619 2,851 3,061 3,270

margin % 26.6% 27.5% 30.3% 30.4% 30.5% 31.3% 31.8% 32.7% 33.3% 33.7%

EBIT 1,029 1,156 1,314 1,425 1,537 1,679 1,858 2,053 2,219 2,388

margin % 18.1% 18.5% 20.9% 21.0% 21.3% 21.7% 22.6% 23.5% 24.1% 24.6%

NOPAT 847 965 1,113 1,221 1,329 1,446 1,589 1,751 1,885 2,024

yoy % 62% 14% 15% 10% 9% 9% 10% 10% 8% 7%



ROCE expansion – fuelled by increased revenue per aircraft

Ryanair has historically generated robust ROCE, averaging 15.5% since FY04. We

forecast a FY15E lease adjusted ROCE of 23.6% rising to 30.8% in FY24E (see

page 53 for details of our methodology). This improvement in ROCE is driven by

higher LF and increased revenue per aircraft. Over our 10 year forecast horizon, we

expect the capital base to grow by a CAGR of 5.9%, which should be more than

offset by an EBIT CAGR of 13.3% on our forecasts.

Figure 57: Ryanair lease adjusted ROCE FY04A-FY24E Figure 58: More profitable revenue from the capital base


Total returns - built off a platform of robust cash generation

Ryanair has a history of strong cash generation and returning this cash to

shareholders. Since FY13, a large proportion of the value created by the carrier has

been returned to shareholders, amounting to €2bn – 15% of the market cap - in the

form of special dividends and share buybacks. Most recently, Ryanair has returned

€520m in a special dividend and launched a €400m share repurchase programme.

Supported by this, Ryanair has generated a 12 month total shareholder return of

34% vs. 4% for Easyjet and 13% for the broader index (Figure 58 below).

Figure 59: Total returns benefiting shareholders, (Indexed at 100) Figure 60: Robust FCF generation to provide a base for returns

Source: Bloomberg Source: Investec Securities estimates

Capex visibility – shines the light on FCF

Ryanair’s fleet programme provides excellent capex visibility out through FY24E.

Taking this capex into account, we estimate that Ryanair will generate an average

FCF of €1bn per annum, equivalent to an average FCF yield of 8%.

Undemanding valuation

In our view Ryanair’s valuation is undemanding against its own history as well as

relative to its main peer Easyjet. On a 12 month forward price to earnings multiple,

based on consensus, Ryanair trades on 14.4x, a 3% premium to its 3 year average

and in line with its 10 year average. Assessed alongside Easyjet, Ryanair trades on

0%

5%

10%

15%

20%

25%

30%

35% ROCE Historical Average

€0

€2

€4

€6

€8

€10

€12

€14

€16

€18

€20

-10%

-5%

0%

5%

10%

15%

20%


70

80

90

100

110

120

130

140

150 RYA EZJ SXXP

-€2,500

-€2,000

-€1,500

-€1,000

-€500

€0

€500

€1,000

€1,500

€2,000

€2,500

2012A 2014A 2016E 2018E 2020E 2022E 2024E

FCF Net Capex

We see this strong tradition of rewarding

shareholders with capital returns as

continuing.


a relative premium of 19% versus a 3 year average premium of 18% and a 10 year

average premium of 9%.

Figure 61: Ryanair 1 year forward P/E, trading above 3 year average Figure 62: RYA relative premium to EZJ close to 3 year average

Source: Bloomberg Source: Bloomberg

Comparing Ryanair and LCCs to legacy flag carriers has its obvious shortcomings.

Diverse business models and fundamentally different organisational DNA create

varied challenges faced by flags and LCCs. Nevertheless, on a traditional

comparative multiples Ryanair is currently trading at 14.4x FY16E P/E and 8.7x

FY16E Adj EV/EBITDAR, an average 50% premium to its industry peers. We

believe Ryanair’s premium to the peer average, which has been the case for some

time, is justified given Ryanair’s attractive business model and strong growth profile.

Table 32: Ryanair peer comparatives

PER Adj EV/EBITDAR Net Debt/ EBITDA Carrier Y/E Curr Price (LC) YTD % chg MV, €m FY1 FY2 FY1 FY2

IAG Dec EUR 580 19.3% 11,489 13.0 10.2 5.9 5.0 0.3

Lufthansa Dec EUR 13.10 -5.3% 6,060 14.3 6.5 5.1 4.1 1.0

Air France Dec EUR 7.08 -11.1% 2,125 NM 4.8 4.3 3.7 2.5

Scandinavian Airlines Oct SEK 18 20.4% 946 NM 18.3 6.9 5.1 1.7

Norwegian Dec NOK 233 -15.6% 820 NM 8.0 9.4 8.5 7.2

Easyjet Sep GBP 1732 3.7% 9,479 13.0 11.6 7.4 6.8 -0.6

Peer Average 13.4 9.9 6.5 5.5 2.0

Ryanair Mar EUR 10.13 7.8% 14,014 16.5 14.4 9.9 8.7 -0.3

Premium / Discount to peers 23% 45% 52% 58%

Source: Bloomberg consensus data for all peers except Ryanair (IS estimates) as at close 27/2/2015

TP of €13.00 highlights 32% upside

Our target price is derived from our returns-driven 10 year DCF. We adjust our

valuation by capitalising operating leases at 7x and adjusting EBIT for the interest

component of lease payments. A target EV/EBIT multiple of 12.3x is derived from a

long term sales growth of 2%, a weighted average cost of capital (WACC) of 8.5%

and a sustainable lease adjusted ROCE of 26% - reflective of the average ROCE

across our forecast horizon.

10 x

11 x

12 x

13 x

14 x

15 x

16 x

17 x


RYA fwd P/E 3 yr avg 10 yr avg

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%


RYA fwd P/E premium 3 yr avg 10 yr avg

Re-initiating on Ryanair with a Buy

recommendation and a target price of

€13.00 per share


Table 33: Ryanair multiples at current and target price

At current price €10.13

At target price €13.00

x FY14A FY15E FY16E

FY14A FY15E FY16E

Adj EV/EBITDAR 13.4 9.9 8.7

17.1 12.6 11.1

P/E 27.4 16.5 14.4

35.2 21.1 18.5

Adj EV/Sales 3.0 2.6 2.4

3.8 3.4 3.0

Source:Company reports, Investec Securities estimates


Table 34: Ryanair; DCF Valuation


Table 35: DCF sensitivity analysis to changes in WACC and terminal growth rate


Table 36: DCF sensitivity analysis to changes in EBIT margin and terminal growth rate


€m 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E TV

Sales 4,325 4,884 5,037 5,679 6,237 6,298 6,782 7,206 7,729 8,231 8,725 9,205 9,711 9,901

% change 19.2% 12.9% 3.1% 12.8% 9.8% 1.0% 7.7% 6.3% 7.3% 6.5% 6.0% 5.5% 5.5% 2.0%

EBIT 618 718 659 1,029 1,156 1,314 1,425 1,537 1,679 1,858 2,053 2,219 2,388 2,079

margin 14.3% 14.7% 13.1% 18.1% 18.5% 20.9% 21.0% 21.3% 21.7% 22.6% 23.5% 24.1% 24.6% 21.0%

Operating leases 91 98 102 110 118 119 121 122 122 122 122 122 122 125

Interest element of op leases 27 29 30 33 35 36 36 37 37 37 37 37 37 37

Lease adjusted EBIT 645 748 689 1,062 1,192 1,349 1,461 1,574 1,715 1,895 2,089 2,256 2,424 2,116

margin 14.9% 15.3% 13.7% 18.7% 19.1% 21.4% 21.5% 21.8% 22.2% 23.0% 23.9% 24.5% 25.0% 21.4%

Depreciation (ex isting assets) 309 330 352 372 439 474 515 538 615 639 676 720 760

Depreciation (capitalised op leases) 63 69 71 77 82 83 85 85 85 85 85 85 85

Change in working capital 130 221 297 205 178 19 154 135 166 160 157 153 161

Tax -81 -93 -86 -133 -149 -169 -183 -197 -214 -237 -261 -282 -303

Operating cash 1,067 1,274 1,323 1,582 1,742 1,757 2,032 2,135 2,368 2,543 2,747 2,932 3,128

Capex -290 -311 -506 -600 -1,000 -1,000 -1,200 -1,306 -2,077 -1,413 -1,606 -1,343 -1,073

as a % of sales 6.7% 6.4% 10.0% 10.6% 16.0% 15.9% 17.7% 18.1% 26.9% 17.2% 18.4% 14.6% 11.1%

Cash flow pre divs & int. 777 963 817 982 742 757 832 829 291 1,130 1,141 1,589 2,055 25,959

Discount factor 1.0 1.0 1.0 1.0 0.9 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.48

Discounted cash flow 777 963 817 982 683 642 650 597 193 691 642 824 982 12,407

Summary DCF assumptions FCF Valuation

LT sales growth 2.0% Enterprise value 18,313

Tax rate 12.5% Net debt March FY 15 -61

Discount rate (WACC) 8.5% Operating leases capitalised (x7) 767

Sustainable ROCE 26.0% Pension and other liabilities 0

Target EV/EBIT 12.3 Financial assets -367

Estimated equity value 17,973

Shares issued (m) 1,378

Estimated value per fully diluted share €13.04

Terminal growth rate

8.0 8.5 9.0 9.5 10.0 10.5 11.0

0.5% 12.82 11.75 10.98 10.22 9.55 8.95 8.40

1.0% 13.30 12.14 11.31 10.50 9.78 9.14 8.57

1.5% 13.86 12.59 11.68 10.81 10.04 9.36 8.75

2.0% 14.50 13.04 12.06 11.15 10.33 9.60 8.96

2.5% 15.26 13.68 12.59 11.55 10.65 9.87 9.18

3.0% 16.17 14.38 13.16 12.01 11.02 10.17 9.43

WACC

Terminal growth rate

18% 19% 20% 21% 22% 23% 24%

0.5% 10.67 11.03 11.39 11.75 12.11 12.48 12.84

1.0% 11.01 11.38 11.76 12.14 12.52 12.90 13.28

1.5% 11.39 11.79 12.19 12.59 12.99 13.39 13.78

2.0% 11.78 12.20 12.62 13.04 13.46 13.88 14.30

2.5% 12.33 12.78 13.23 13.68 14.14 14.59 15.04

3.0% 12.93 13.41 13.90 14.38 14.86 15.35 15.83

EBIT margin


Fuel and yield sensitivities The tables below detail sensitivities to average revenue per passenger and jet fuel

price.

Table 37: Ryanair FY16E net income sensitivity to average revenue and fuel price

Unhedged fuel price ($) FY16E revenue per passenger

Jet $ / mt -4% -2% 0% 2% 4%

525 854 963 1,067 1,175 1,279

575 844 952 1,056 1,164 1,269

625 833 941 1,046 1,150 1,258

675 822 931 1,035 1,143 1,247

725 812 920 1,024 1,133 1,237


Table 38: Ryanair FY16E net income sensitivity to average revenue and fuel price (vs. Investec)


Jet $ / mt -4% -2% 0% 2% 4%

525 -11% 0% 11% 22% 33%

575 -13% -1% 9% 21% 31%

625 -14% -3% 8% 19% 30%

675 -15% -4% 7% 18% 29%

725 -16% -5% 6% 17% 28%


Table 39: Ryanair FY17E net income sensitivity to average revenue and fuel price


Jet $ / mt -7% -6% -5% -4% -3%

525 1,146 1,201 1,255 1,313 1,368

575 1,076 1,130 1,184 1,243 1,297

625 1,005 1,059 1,113 1,172 1,226

675 934 989 1,043 1,101 1,155

725 864 918 972 1,030 1,085


Table 40: Ryanair FY17E net income sensitivity to average revenue and fuel price (vs. Investec)


Jet $ / mt -7% -6% -5% -4% -3%

525 3% 8% 13% 18% 23%

575 -3% 1% 6% 12% 16%

625 -10% -5% 0% 5% 10%

675 -16% -11% -6% -1% 4%

725 -22% -18% -13% -7% -3%



Detailed P&L analysis Table 41: Ryanair profit & loss account 2012A – 2017E

€ millions, unless otherwise stated 2012A 2013A 2014A 2015E 2016E 2017E

Operating revenues Scheduled revenues 3,438.7 3,819.8 3,789.5 4,289.3 4,686.9 4,658.3

Ancillary revenues 886.2 1,064.2 1,247.2 1,389.9 1,549.8 1,639.2

Total operating revenues 4,324.9 4,884.0 5,036.7 5,679.2 6,236.7 6,297.5

Opeating expenses Staff costs 415.0 435.6 463.6 498.3 555.1 589.2

Depreciation 309.2 329.6 351.8 372.0 439.4 473.7

Fuel & oil 1,593.6 1,885.6 2,013.1 2,027.9 2,176.3 1,908.6

Maintenance 104.0 120.7 116.1 142.0 158.2 167.7

Aircraft rentals 90.7 98.2 101.5 109.6 117.7 118.6

En-route charges 460.5 486.6 522.0 549.3 611.4 648.1

Airport charges 554.0 611.6 617.2 717.5 760.2 808.1

Marketing, distribution and other 180.0 197.9 192.8 234.0 262.1 269.9

Operating profit 617.9 718.2 658.6 1,028.6 1,156.2 1,313.7

Total other income / (expenses) (60.6) (67.3) (67.2) (61.1) (53.0) (41.2)

Profit before tax 557.3 650.9 591.4 967.5 1,103.2 1,272.5

Tax on profit of ordinary activities (65.1) (81.6) (68.6) (120.9) (137.9) (159.1)

Net operating profit after tax 560.4 569.3 522.8 846.6 965.3 1,113.4

Adjusted EPS Basic 38.03 39.45 36.96 61.57 70.21 80.48

Diluted 37.94 39.33 36.86 61.41 70.03 80.13

EBITDA (m) 927.1 1,047.8 1,010.4 1,400.6 1,595.6 1,787.4

EBITDA margin 21.4% 21.5% 20.1% 24.7% 25.6% 28.4%

EBITDAR (m) 1,017.8 1,146.0 1,111.9 1,510.3 1,713.3 1,905.9

EBITDAR margin 23.5% 23.5% 22.1% 26.6% 27.5% 30.3%

EBIT (m) 617.9 718.2 658.6 1,028.6 1,156.2 1,313.7

EBIT margin 14.3% 14.7% 13.1% 18.1% 18.5% 20.9%

Net income (m) 560.4 569.3 522.8 846.6 965.3 1113.4

Net margin 13.0% 11.7% 10.4% 14.9% 15.5% 17.7%

Source: Company data, Investec Securities estimates


KPI analysis Table 42: Ryanair KPIs 2012A – 2017E

Year to March 2012A 2013A 2014A 2015E 2016E 2017E

Operating Assumptions

ASKs (m) 114,488 117,208 125,394 129,681 144,335 152,995

Growth % 12.3% 2.4% 7.0% 3.4% 11.3% 6.0%

Seats 92.4 96.7 98.4 102.3 113.8 120.6

Growth % 6.3% 4.7% 1.8% 3.9% 11.3% 6.0%

Passengers 75.8 79.3 81.7 90.3 100.6 107.0

Growth % 5.1% 4.6% 3.0% 10.5% 11.5% 6.3%

Block hours ('000) 1,288 1,273 1,305 1,395 1,528 1,657

Sectors flown ('000) 490 513 525 541 602 638

Sector length growth 6.1% -2.2% 4.5% 0.0% 0.0% 0.0%

Load factor 82.0% 82.0% 83.0% 88.3% 88.4% 88.7%

Growth pps -1.0 0.0 1.0 5.3 0.2 0.3

Revenue Assumptions Average fares 45.4 48.2 46.4 47.5 46.6 43.5

Growth % 15.7% 6.2% -3.7% 2.5% -2.0% -6.5%

Ancillay revenue per passenger 11.7 13.4 15.3 15.4 15.4 15.3

Growth % 5.2% 14.8% 13.7% 0.9% 0.0% -0.5%

Total revenue per passenger 57.1 61.6 61.6 62.9 62.0 58.9

Growth % 13.3% 7.9% 0.1% 2.1% -1.5% -5.0%

Total revenue per seat 46.8 50.5 51.2 55.5 54.8 52.2

Growth % 12.0% 7.9% 1.3% 8.5% -1.3% -4.7%

Cost Assumptions Total cost per passenger 48.9 52.5 53.6 51.5 50.5 46.6

Growth % 12.2% 7.4% 2.0% -3.8% -2.0% -7.7%

Total cost per seat 40.1 43.1 44.5 45.5 44.6 41.3

Growth % 11.0% 7.4% 3.3% 2.3% -1.8% -7.5%

Fuel cost per passenger 21.0 23.8 24.6 22.5 21.6 17.8

Growth % 23.6% 13.1% 3.6% -8.8% -3.7% -17.5%

Fuel cost per seat 17.2 19.5 20.5 19.8 19.1 15.8

Growth % 22.2% 13.0% 4.9% -3.0% -3.6% -17.3%

Ex-fuel cost per passenger 27.9 28.8 28.9 29.1 28.9 28.7

Growth % 5.0% 3.1% 0.7% 0.4% -0.7% -0.4%

Ex-fuel cost per seat 22.9 23.6 24.0 25.6 25.5 25.5

Growth % 3.8% 3.1% 1.9% 6.7% -0.5% -0.1%

Source: Company data, Investec Securities estimates


Key risks Outlined below are what we believe to be the key risks facing Ryanair in the core

businesses in which it operates and that could have a material impact on our

forecasts:

Macroeconomic risk

Airlines are affected by economic demand with airline traffic highly correlated to

GDP. In the event of a macroeconomic shock airlines have historically reduced

capacity and parked aircraft to preserve profitability. Demonstrating its operational

flexibility in FY12 Ryanair grounded 30% of its fleet as a result of a weak economic

backdrop and high fuel prices. During that year net profit increased 50% yoy with

lease adjusted ROCE + 1.5% yoy.

Environmental disruption

The demand environment for the company is affected by environmental disruptions.

Environmental factors such as volcanic ash, snow and high winds can severely

curtail or halt regular operations.

Fuel risk

Jet fuel, a derivative of petroleum, represents 44% of FY15E operating expenses

and the company has limited visibility into price changes. The Group’s fuel risk

policy is to hedge between 70 per cent and 90 per cent of its forecast rolling annual

volumes required to ensure that the future cost per gallon is locked in. This policy

has been adopted to prevent exposures, in the short-term, to adverse movements in

world jet fuel prices and provides cost certainty for forward planning purposes.

Foreign exchange

Ryanair has a euro denominated balance sheet and P&L. However a large

proportion of its costs are US dollar denominated - namely jet fuel, maintenance

costs, insurance and aircraft capex. In addition a significant portion of Ryanair’s

revenues is in sterling. Where possible, the carrier’s foreign exchange risk is

reduced by holding assets/liabilities in euro; matching foreign currency income and

expenditures with each other; and using financial instruments to hedge a high

percentage of the remaining exposures on a twelve-month rolling basis.

Liquidity

The airline industry is capital intensive. When markets are capital constrained the

options for Ryanair to finance aircraft purchases and deliveries are reduced. In 2014

Ryanair received a BBB+ credit rating from both Fitch and Standard & Poor’s,

making it the highest rated airline in the world and providing potential access to

favourable financing rates in the debt capital markets.

Seasonality

The airline industry in European is exposed to seasonal patterns in demand. As a

result the company has historically generated cash in Q1 and Q2 and used cash in

Q3 and Q4. Ryanair has a higher proportion of its traffic base in secondary leisure

markets exposing it to greater swings in seasonality in its traffic base when

compared to legacy flag carriers and LCC’s with higher primary airport penetration,

such as Easyjet.

Regulation

The European airline industry is heavily regulated and taxed and Ryanair is

exposed to the risk of changing policies. An increase in regulated airport charges,

en route charges and environmental emissions regulation could negatively impact

the carriers’ earnings.


Residual value fleet risk

Ryanair is embarking on an aircraft delivery programme that could invole the future

disposal of units in the secondary market. As such, the carrier is exposed to

fluctuations in the market value of its aircraft type which in turn could affect the

residual value of its fleet.

Legacy brand perception

Ryanair has historically operated an ultra low cost carrier model (ULCC) with a

perceived low degree of customer service. While the carrier has embarked on a

new strategic direction with a more customer friendly business model there exists a

risk that this legacy brand perception persists hampering a product repositioning.


Porter Analysis Analysing Ryanair’s competitive position within the industry suggests the company

is structurally insulated from major risk factors. Producing seats at the lowest cost

allows the company to charge fares below that of its competition while continuing to

generate a profit. While it would be expected that the company would be a cost

taker on jet fuel - its largest operating expense, the group hedges its fuel risk with

an active policy to hedge between 70 and 90% of its forecast rolling annual volumes

required to ensure that the future cost is locked in.

In our view the scale and flexibility in the group’s operations, in our view, generates

above average industry supplier bargaining power. Barriers to entry are high given

the requirement to source and procure aircraft and scarcity of infrastructure capacity

at airports. Ryanair’s business is exposed to a threat of substitution, but this is

mitigated, by its scale and price positioning in the marketplace.

Figure 63:Porters 5 Forces

Supplier Power: LOW

Airports compete aggressively for traffic and Ryanair is willing to shift traffic accordingly.

Switching costs are low for Ryanair.

Barriers to entry: HIGH Degree of rivalry: MEDIUM Threat of substitute: MEDIUM

The airline industry is capital intensive, with the cost of acquiring aircraft a sizeable barrier to entry.

There are multiple players in the sector going after market share in a relatively mature market.

Consumers can easily switch airlines dependent on market conditions and preferences.

Access to capacity constrained airports is restricted for new entrants.

Ryanair is structurally insulated from a large degree of industry competition by its leading cost of production.

The price point of Ryanair's operations minimises risk of price substitution. Improving network mix insulates the carrier from itinerary related switching.

Buyer power: MEDIUM

Aircraft manufacturers compete aggressively for airline orders.

Limited alternatives to the few large suppliers in the market



SWOT analysis Ryanair benefits from a strong balance sheet and it has a proven track record in

strong free cash flow generation. Having established an industry leading position in

terms of unit costs the company has the ability to price significantly below the

competition, while continuing to generate profit per passenger. The primary threats

to Ryanair are an increase in competition on its routes and network, changing

industry regulation and adverse volatility in the level of jet fuel.

Figure 64: Ryanair SWOT Analysis

Strengths Weaknesses

Industry leading cost position Legacy brand perception

Low fares / price leadership Seasonality of earnings

Industry leader in innovation Residual value fleet risk

Network size

Fleet

Opportunities Threats

Scope to widen unit cost gap Volatility in the oil price

Increasingly homogeneous market Geopolitical unrest disrupting end markets

Improved brand perception Environmental disruption / volcanic ash

Enlarged addressable market Increased competition from peers

Higher yielding customer mix Currency fluctuations



Sector calendar Table 43: Airlines calendar

Date Stock Event

Date Stock Event

4-Mar IAG February 2015 traffic

6-Jul Easyjet June 2015 traffic

5-Mar Aer Lingus February 2015 traffic

6-Jul Aer Lingus June 2015 traffic

5-Mar Easyjet February 2015 traffic

8-Jul Air France KLM June 2015 traffic

9-Mar Air France KLM February 2015 traffic

9-Jul Lufthansa June 2015 traffic

10-Mar Lufthansa February 2015 traffic

22-Jul Easyjet Q3 2015 results

12-Mar Lufthansa FY 2014 statements

24-Jul Air France KLM H1 2015 results

6-Apr Easyjet March 2015 traffic

27-Jul Ryanair Q1 2016 results

8-Apr IAG March 2015 traffic

30-Jul Lufthansa H12015 results

8-Apr Air France KLM March 2015 traffic

31-Jul IAG H12015 results

8-Apr Aer Lingus March 2015 traffic

5-Aug IAG July 2015 traffic

13-Apr Lufthansa March 2015 traffic

6-Aug Easyjet July 2015 traffic

29-Apr Lufthansa AGM

7-Aug Aer Lingus July 2015 traffic

30-Apr IAG Q1 2015 results

11-Aug Lufthansa July 2015 traffic

30-Apr Air France KLM Q1 2015 results

3-Sep IAG August 2015 traffic

3-May IAG May 2015 traffic

4-Sep Easyjet August 2015 traffic

5-May Lufthansa Q1 2015 results

4-Sep Aer Lingus August 2015 traffic

6-May IAG April 2015 traffic

9-Sep Lufthansa August 2015 traffic

6-May Easyjet April 2015 traffic

5-Oct IAG September 2015 traffic

7-May Aer Lingus April 2015 traffic

6-Oct Aer Lingus September 2015 traffic

11-May Air France KLM April 2015 traffic

6-Oct Easyjet September 2015 traffic

12-May Lufthansa April 2015 traffic

9-Oct Lufthansa September 2015 traffic

12-May Easyjet H1 2015 results

29-Oct Lufthansa Q3 2015 results

21-May Air France KLM AGM

30-Oct IAG Q3 2015 results

26-May Ryanair FY 2015 results

2-Nov Ryanair H1 2016 results

4-Jun Easyjet May 2015 traffic

5-Nov Aer Lingus October 2015 traffic

5-Jun Aer Lingus May 2015 traffic

6-Nov IAG October 2015 traffic

6-Jun IAG June 2015 traffic

10-Nov Lufthansa October 2015 traffic

8-Jun Air France KLM May 2015 traffic

17-Nov Easyjet FY 2015 results

10-Jun Lufthansa May 2015 traffic

3-Dec IAG November 2015 traffic

Source: Company filings


Fuel hedging snapshot Table 44: Industry fuel hedging snapshot

Disclosure Airline Hedging period % Hedged Price ($/mt)

Disclosure Airline Hedging period % Hedged Price ($/mt)

25/02/2015 Aer Lingus 2016 21% $845

31/10/2014 IAG Fwd. 12 months 74% Not Disclosed

25/02/2015 Aer Lingus 2015 90% $830

31/10/2014 IAG Jul 2015 - Sep 2015 51% Not Disclosed

25/02/2015 Aer Lingus 2014 100% $954

31/10/2014 IAG Apr 2015 - Jun 2015 72% Not Disclosed

31/10/2014 IAG Jan 2015 - Mar 2015 85% Not Disclosed

19/02/2015 Air France / KLM 2016 27% Not Disclosed

19/02/2015 Air France / KLM 2015 62% $605

12/01/2015 Lufthansa 2015 73% 680

27/01/2015 Easyjet Oct 2015 - Sep 2016 63% $908

02/02/2015 Ryanair Apr 2016 - Mar 2017 35% 680

27/01/2015 Easyjet Oct 2014 - Sep 2015 84% $936

02/02/2015 Ryanair Apr 2015 - Mar 2016 90% $930

27/01/2015 Easyjet Oct 2014 - Mar 2015 91% $957

02/02/2015 Ryanair Apr 2014 - Mar 2015 90% $950

31/10/2014 Finnair Jul 2015 - Dec 2015 50% Not Disclosed

18/12/2014 SAS Aug 2015 - Oct 2015 6% $901 - $950

31/10/2014 Finnair Jan 2015 - Jun 2015 72% Not Disclosed

18/12/2014 SAS May 2015 - Jul 2015 26% $901 - $950

18/12/2014 SAS Feb 2015 - Apr 2015 72% $901 - $950

26/01/2015 Flybe Oct 2015 - Mar 2016 66% $900

26/01/2015 Flybe Apr 2015 - Sep 2015 71% $937

26/01/2015 Flybe Oct 2014 - Mar 2015 97% $948



Appendix Our ROCE calculation is on a lease adjusted basis. We capitalise operating leases

at 7x and adjust EBIT for the taxed interest element of the capitalised lease

payment. Capital employed is calculated by taking the average over two reporting

periods of shareholders equity, net cash and capitalised operating leases. We view

this approach appropriately capturing the capital deployed by an airline in the

generation of revenue during both the summer and winter IATA seasons.

More specifically ROCE = Adjusted EBIT

Average capital employed

Table 45: Ryanair lease adjusted ROCE calculation

€m FY14A FY15E FY16E FY17E

EBIT - reported 658.6 1,028.6 1,156.2 1,313.7

Interest element of operating lease payments 30.5 32.9 35.3 35.6

Adjusted EBIT 689.1 1,061.5 1,191.6 1,349.3

Tax 11.6% 12.5% 12.5% 12.5%

NOPAT 609.1 928.8 1,042.6 1,180.6

Average shareholders equity - reported 3,279.2 3,302.1 3,541.0 4,060.37

Average net cash - reported 109.4 109.7 142.7 451.60

Average capital leases (7x) 699.0 738.9 795.7 827.01

Average capital employed 3,868.8 3,931.3 4,194.0 4,435.77

ROCE 15.7% 23.6% 24.9% 26.6%



Summary Financials (€m) Year end: 31 March

Source: Company accounts, Investec Securities estimates

Income Statement 2013 2014 2015E 2016E 2017E Revenue 4,884.0 5,036.7 5,679.2 6,236.7 6,297.5EBITDA 1,047.8 1,010.4 1,400.6 1,595.6 1,787.4Depreciation and amortisation (329.6) (351.8) (372.0) (439.4) (473.7)Operating profit 718.2 658.6 1,028.6 1,156.2 1,313.7Other income 0.0 0.0 0.0 0.0 0.0Net interest (67.3) (67.2) (61.1) (53.0) (41.2)Share-based-payments - - - - - PBT (normalised) 650.9 591.4 967.5 1,103.2 1,272.5Impairment of acquired intangibles 0.0 0.0 0.0 0.0 0.0Non-recurring items/exceptionals 0.0 0.0 0.0 0.0 0.0PBT (reported) 650.9 591.4 967.5 1,103.2 1,272.5Taxation (25.8) (32.4) (120.9) (137.9) (159.1)Minorities & preference dividends 0.0 0.0 0.0 0.0 0.0Discontinued/assets held for sale 0.0 0.0 0.0 0.0 0.0Net Income (normalised) 569.3 522.8 846.6 965.3 1,113.4Attributable profit 625.1 559.0 846.6 965.3 1,113.4EPS (reported) 39.3 36.9 61.4 70.0 80.1EPS (norm., cont.) – FD (c) 39.4 37.0 61.6 70.2 80.5EPS (norm., cont., IAS19R adj.) – FD - - - - - DPS (c) 34.0 0.0 37.6 37.6 37.6Average number of group shares - FD (m) 1,447.4 1,418.2 1,378.6 1,378.6 1,389.6Average number of group shares (m) 1,443.1 1,414.6 1,375.1 1,375.1 1,383.5Total number of shares in issue (m) 1,447.1 1,376.6 1,383.5 1,383.5 1,383.5

Cash Flow 2013 2014 2015E 2016E 2017E Operating profit 718.2 658.6 1,028.6 1,156.2 1,313.7Depreciation & amortisation 329.6 351.8 372.0 439.4 473.7Other cash and non-cash movements 1.4 (0.1) 0.0 0.0 0.0Change in working capital 67.4 133.9 204.6 177.5 19.4Operating cash flow 1,116.6 1,144.2 1,605.2 1,773.1 1,806.8Interest (67.3) (67.2) (61.1) (53.0) (41.2)Tax paid (81.6) (68.6) (120.9) (137.9) (159.1)Dividends from associates and JVs 0.0 0.0 0.0 0.0 0.0Cash flow from operations 967.7 1,008.4 1,423.2 1,582.2 1,606.5Maintenance capex (310.7) (505.8) (600.0) (899.5) (631.5)Free cash flow 657.0 502.6 823.2 682.7 975.1Expansionary capex 0.0 0.0 0.0 0.0 0.0Exceptionals and discontinued operations 0.0 0.0 0.0 0.0 0.0Other financials (4.9) 23.9 0.0 0.0 0.0Acquisitions 0.0 0.0 0.0 0.0 0.0Disposals 0.0 0.0 0.0 0.0 0.0Net share issues (46.1) (465.3) (400.0) 0.0 0.0Dividends paid (491.5) 0.0 (520.0) (520.0) (520.0)Change in net cash 114.5 61.2 (96.8) 162.7 455.1Net cash/(debt) 60.7 158.1 61.3 224.1 679.1FCFPS - FD (c) 45.4 35.4 59.7 42.2 43.6

Balance Sheet 2013 2014 2015E 2016E 2017E Property plant and equipment 4,906.3 5,060.3 5,288.3 5,748.4 5,906.1Intangible assets 46.8 46.8 46.8 46.8 46.8Investments and other non current assets 226.3 260.7 366.6 366.6 366.6Cash and equivalents 3,559.0 3,241.7 3,241.7 3,241.7 3,241.7Other current assets 0.0 0.0 0.0 0.0 0.0Total assets 8,943.0 8,812.1 9,171.8 9,654.4 9,814.6Total debt (3,498.3) (3,083.6) (3,180.4) (3,017.6) (2,562.6)Preference shares 1.0 2.0 3.0 4.0 5.0Other long term liabilities (346.5) (368.6) (368.6) (368.6) (368.6)Provisions & other current liabilities (2,172.1) (2,442.7) (2,673.2) (2,873.1) (2,894.9)Pension deficit and other adjustments 0.0 0.0 0.0 0.0 0.0Total liabilities (5,670.4) (5,526.3) (5,853.5) (5,890.7) (5,457.5)Net assets 3,272.6 3,285.8 3,318.3 3,763.6 4,357.1Shareholder's equity 3,272.6 3,285.8 3,318.3 3,763.6 4,357.1Minority interests 0.0 0.0 0.0 0.0 0.0Total equity 3,272.6 3,285.8 3,318.3 3,763.6 4,357.1Net working capital (1,307.2) (1,604.0) (1,808.6) (1,986.1) (2,005.5)NAV per share (c) 22,615.6 23,869.8 23,985.0 27,203.8 31,493.3


Selection.Ta bles(1). Range.Fiel ds.Update

Calendarised Valuation Year end: 31 March


Ratios and Metrics Year end: 31 March


Target Price Basis

DCF

Key Risks

Global economic risk, oil price, competitive forces, currency , regulation

2013 2014 2015E 2016E

Calendar PE (x) 27.0 18.3 14.9 13.0Calendar Price/NAVPS (x) 0.0 0.0 0.0 0.0EV/sales (x) 2.8 2.5 2.3 2.2EV/EBITDA (x) 13.7 10.7 9.0 8.0FCF yield (%) 3.7 5.3 4.6 4.3Dividend yield (%) 0.8 2.8 3.7 3.7

Ratios and metrics 2013 2014 2015E 2016E 2017E Revenue growth (y-on-y) (%) 12.9 3.1 12.8 9.8 1.0EBITDA growth (y-on-y) (%) 13.0 (3.6) 38.6 13.9 12.0Net income (normalised) growth (yoy) 1.6 (8.2) 61.9 14.0 15.3EPS (normalised) growth (y-on-y) (%) 3.7 (6.3) 66.6 14.0 14.6FCFPS growth (y-on-y) (%) (8.1) (21.9) 68.5 (29.3) 3.3NAVPS growth (y-on-y) (%) (0.9) 5.5 0.5 13.4 15.8DPS growth (y-on-y) (%) 0.0 0.0Interest cover (x) 10.7 9.8 16.8 21.8 31.9Net debt/EBITDA (x) (0.1) (0.2) (0.0) (0.1) (0.4)Net debt/equity (%) (1.8) (4.8) (1.8) (5.9) (15.6)Net gearing (%) (1.9) (5.1) (1.9) (6.3) (18.5)Dividend cover (x) 1.2 n.m. 1.6 1.9 2.1EBITDA margin (%) 21.5 20.1 24.7 25.6 28.4Operating profit margin (%) 14.7 13.1 18.1 18.5 20.9ROE (%) 17.4 15.9 25.5 25.6 25.6ROCE (%) 11.3 11.0 16.9 18.1 20.2NWC/revenue (%) (26.8) (31.8) (31.8) (31.8) (31.8)Tax rate (normalised) (%) 4.0 5.5 12.5 12.5 12.5Tax rate (reported) (%) 4.0 5.5 12.5 12.5 12.5


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Company disclosures

Ryanair

Key: Investec has received compensation from the company for investment banking services within the past 12 months, Investec expects to receive or intends to seek compensation from the company for investment banking services in the next 6 months, Investec has been involved in managing or co-managing a primary share issue for the company in the past 12 months, Investec has been involved in managing or co-managing a secondary share issue for the company in the past 12 months, Investec makes a market in the securities of the company, Investec holds/has held more than 1% of common equity securities in the company in the past 90 days, Investec is broker and/or advisor and/or sponsor to the company, The company holds/has held more than 5% of common equity securities in Investec in the past 90 days, The analyst (or connected persons) is a director or officer of the company, The analyst (or connected persons) has a holding in the subject company, The analyst (or connected persons) has traded in the securities of the company in the last 30 days. Investec Australia Limited holds 1% or more of a derivative referenced to the securities of the company

Expected total return

12m performance Count % of total Count % of total

Buy greater than 10% 161 54% 73 45%

Hold 0% to 10% 107 36% 18 17%

Sell less than 0% 29 10% 0 0%

All stocks Corporate stocks

Expected total return

12m performance Count % of total Count % of total

Buy greater than 15% 21 35% 3 14%

Hold 5% to 15% 22 37% 5 23%

Sell less than 5% 17 28% 4 24%

All stocks Corporate stocks

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https://images.investec.com/group/online/investment-banking/Conflicts%20Policy.pdf

http://www.investec.co.za/legal/sa/conflicts-of-interest.html


Recommendation history (for the last 3 years to previous day’s close) Ryanair (RYA.I) – Rating Plotter as at 03 Mar 2015

Source: Investec Securities / FactSet

0

1

2

3

4

5

6

7

8

9

10

Buy Hold Sell Not Rated

Price Target


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