Ryanair profits plummet by almost half – should you invest in airline stocks?

Budget airline Ryanair saw its first-quarter profits plummet to €360 million, it revealed today (22 July) – 46% lower than the same period a year ago.  

An early Easter was partly to blame, with half of the holiday period falling into the previous quarter.

The airline said its traffic was up 10%, but that airfares were weaker than expected. Customers enjoyed savings of around 15% over the period.

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Adding to these woes, the airline has now downgraded its expectations for next quarter. 

“While Q2 demand is strong, pricing remains softer than we expected, and we now expect Q2 fares to be materially lower than last summer,” said chief executive Michael O’Leary. Previously, fares had been expected to be flat, or to rise modestly.

Dan Coatsworth, investment analyst at AJ Bell, notes that lower fares put more pressure on airlines to “put bums on seats and fill planes to maximise revenue potential”. 

It has been a tough year for the airline’s share price, which is down almost 14% so far in 2024. 

What challenges is Ryanair facing?

“While travel demand has bounced back since the pandemic, travellers are reluctant to book too far ahead,” says Coatsworth. 

“That’s possibly because they are feeling the pressure of persistent high interest rates or because they are holding out for a bargain,” he adds.

This has forced the airline industry to cut its prices – great news if you are yet to book your holiday, but bad news if you own shares in an airline.

Other issues have also proved costly, including air traffic control (ATC) strikes. “In the last 10 days of June we suffered a significant deterioration in European ATC capacity which caused multiple flight delays and cancellations,” O’Leary said. 

Things went from bad to worse on Friday, when a large-scale IT outage caused mass disruption to flights. 

Given the extraordinary nature of the incident, the Civil Aviation Authority has said passengers are unlikely to qualify for additional compensation, however, those whose flights were cancelled will still be entitled to a refund. 

“The more people read about delays and cancellations, the more likely a chunk of potential last-minute bookers aren’t going to bother,” says Coatsworth. “They might think it’s all too much hassle so they just have a holiday at home.”

Should you invest in airline stocks?

Ryanair’s woes don’t bode well for other airlines. EasyJet’s shares are also down more than 7% today, while Jet2 is down more than 5%. But will this put a dent in the post-Covid rebound and should you still consider airline stocks for your portfolio?

One in three Brits is planning both an overseas holiday and a UK staycation this summer, according to recent research from American Express. What’s more, nearly two-fifths are planning to spend more on overseas holidays this summer than last year. 

This suggests the demand for travel is certainly there – even if consumers are still navigating cost-of-living pressures such as high mortgage rates.

However, it’s worth remembering that airlines operate in a highly competitive sector with customers ruthlessly shopping around for the lowest fare. They are also heavily exposed to fuel prices, which can contribute to volatile share price performance. 

Finally, running an airline comes with a lot of costs. Buying or leasing planes, and then maintaining them, doesn’t come cheap. This often means airlines have a high debt-to-equity ratio compared to other sectors.

In short, these factors combined can make for a bumpy ride for investors. If you are looking for a smoother journey, you might prefer to put your money in a different sector.