Ryanair’s share price sees a 7% gain as demand returns

Ryanair’s share price has taken wing this year. Demand for short-haul flights has roared back into life following the pandemic, while a deft – or perhaps lucky – oil hedge has seen the carrier escape an eye-watering rise in fuel costs. But can Ryanair’s share price fly higher with the second half of 2023 on the horizon?

Ryanair’s [RYA.IR] share price has delivered a gain of over 36% this year, closing Monday 29 May at €16.72. Last week the stock continued to gain altitude, climbing nearly 7% as full-year earnings showed a return to profitability.

Ryanair reported a €1.4bn profit for the 52 weeks ending 31 March, thanks to a rebound in traffic and smart oil hedge. The bumper haul reverses the previous year’s €355m loss. Revenue was up 124% year-on-year to €10.78bn. The carrier reported growth in Italy, Poland and Ireland. Operating costs were up 75% year-on-year to €9.2bn, offset by its hedging conditions.

For comparison, earlier in May easyJet [EZJ.L] posted a £415m pre-tax loss for the six months to 31 March.

Ryanair’s share price has locked on a near 12% gain over the past month, jetting ahead of easyJet’s 2.5% drop.

“Favourable” oil hedge pays off for Ryanair

Russia’s invasion of Ukraine sent fuel costs haywire last year as oil prices soared. The average closing price of Brent crude was $100.93 a barrel last year, well ahead of the previous year’s average close of $70.86 a barrel.

Whether through design or luck, Ryanair’s bottom line was spared the worst of the heightened fuel prices as the carrier hedged approximately 80% of its fuel costs at $64bbl. This made for a tidy saving of €1.4bn.

This year Ryanair has hedged 85% of its fuel at $89bbl. The carrier reckons that its fuel bill this year will increase by €1bn. How Ryanair is able to balance the additional cost with growing its business will determine where its share price goes this year.

Ryanair aims for growth in Europe

Pent-up demand from customers has seen short-haul flights roar back to life. Ryanair reported a 74% increase in traffic to 168.8 million passengers last year. This year the company is looking to grow traffic by 10%, to 185 million passengers. Over the summer it plans to operate its largest-ever schedule with 2,500 routes and 3,000 daily flights.

Ryanair’s boss Michael O’Leary sees further growth in Europe, telling the Financial Times that the thesis “that there’s no more growth in Europe” is wrong. The carrier has an ambitious goal to fly an additional 300 million passengers each year by 2034. To fuel this ambition Ryanair has purchased an additional 300 short-haul planes from Boeing at a cost of $40bn.

.“As long as we don’t do something stupid — which is a daily challenge in this industry — we will continue to wipe the floor with every other airline in Europe,” O’Leary said.

The playing field for Ryanair is more favourable than it has been in recent years. Ryanair welcomed the EU General Court’s decision to annul state aid given to Italian carriers over other EU airlines. The Italian government gave out €130m in subsidies to Italian carriers affected by Covid. The EU General Court has also annulled such deals in Germany, Sweden and Denmark.

Ryanair had argued that this was discriminatory and went against the principle of a “single market for air transport” in the EU.

Where next for Ryanair’s share price?

Despite O’Leary’s bullish tone, there are headwinds to navigate. With increased fuel prices, customers will have to pay more if they want to fly. Ryanair may aim to be the cheapest, but that won’t stop fare hikes. Last year its airfares were 10% higher than pre-Covid levels.

Passenger demand could also wane as the airline industry starts to normalise after the pandemic, especially if the cost of living crisis intensifies in the UK and across Europe.

Analysts have a €22 median 12-month price target on Ryanair’s shares. Hitting this would see a 31.6% upside on Friday’s close.