Ryanair Profit Warning: A Negative Reading For IAG?

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Ryanair has issued a profit warning which, in reality, amounts to a warning for the entire European industry as it shows that the sector is beginning to be affected in both earnings and costs (margins) by three negative factors: increasing oil prices (aviation fuel), slowing of demand because of the slowing of the global economic cycle and the increased likelihood of strikes (greater in Ryanair´s case, but not only in their case).

The business context has become delicate again: not only for Ryanair, but also for the entire industry, although especially for Ryanair because of its particular problems in managing human resources. The company will therefore cut -1% of its capacity from 5 October (it´s likely there will be more strikes) and will be forced to offer major discounts to fill its aircraft (eg the offer of 1 thousand seats in Spain with discounts of up to -25%).

Although the negative impact has already been almost entirely discounted, the share price remains affected. And not only Ryanair´s, but the share prices of the whole sector beause the contagion effect is high at the moment, given that the increase in the price of aviation fuel is becoming a serious problema for the whole industry´s costs, at the same time as the loss of traction in the global economic cycle is expected, which will slow the growth in both tourism and business trips.

Thus the sector is beginning to be affected in both incomes and costs (margins) and yesterday´s profit warning from Ryanair was no more than the first warning of this change, which Will hit both low cost and mainstream Airlines (although the difference between the two models is ever less clear).

Rivals like Easyjet and IAG lost -7% and -2.13% in share value respectively on the day of the announcement. This is why the analysts in Bankinter recommend downgrading the sector as a whole.

We put Ryanair at Sell and we lower IAG from Buy to Neutral, revising our Objective Price (to 8.6 euros).

On the other hand, Alphavalue remains short on Ryanair, even though the recommendation has risen automatically following the sharp falls.

Morgan Stanley recalls that in IAG we also have the negative impact of the Brexit negotiations.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.