Ryanair shares rebounded Monday after Deutsche Bank upgraded the airline's stock. Deutsche analysts were persuaded by the strength of the low-cost carrier's ancillary revenues – money from sources other than ticket sales. This includes baggage charges, priority boarding, reserved seating and inflight food as well as other items such as travel insurance.
The broker has set a target for the shares of €17.60, on a day when they closed nearly 1.3 per cent stronger at €14.35, having touched €14.58 earlier in the session.
The upgrade marks an about-turn by analysts at the German bank who last September cut Ryanair’s outlook to hold, citing expected pressure on pricing and slow action to improve costs.
Now, Deutsche reckons the Irish airline could be making as much income from ancillary revenues by 2020 as it does today from ticket sales and these additional items.
More stable
It said many in the market did not realise just how geared the airline’s business model was to ancillary revenue. “We think, if cultivated properly, ancillary revenues are more sticky and stable than average fares,” the analysts said in a note to clients.
It was also reassured by the high margins on such ancillary revenue, noting that it was a “struggle to get below a 65 per cent” margin on ancillary earnings. Ryanair does not break out margins on this part of its business but, on the basis of the margin suggested by Deutsche, the €1.57 billion in ancillary turnover last year would have delivered more than €1 billion in profit, or around 70 per cent of earnings before interest and tax.
“Therefore, while ticket revenue is clearly relevant, it is the tail to the ancillary dog,” said the Deutsche team.
They argue that success in driving non-fare revenue helps Ryanair to deliver even lower fares, bringing more passengers on board and providing more opportunities to drive ancillary sales.
“In our view, Ryanair is a structural winner, can return 8 per cent of market cap in the next two years and has consensus expectations that are too low,” they say.