Chit Chat Stocks - Ryanair (Ticker: RYAAY) Not So Deep Dive

Episode Date: September 12, 2023

Ryanair Holdings (RYAAY) is a major European low-cost airline, celebrated for its no-frills approach and expansive route network, while also facing regulatory and competitive hurdles in the industry. At the end of the month, we will publish an Arch Capital episode that will cover the company: Adyen. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Ryanair. Enjoy the show! ****************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (2:00) Industry | (20:13) Management & Ownership | (26:00) Earnings | (30:06) Balance Sheet | (32:21) Valuation | (34:53) Our Analysis | (35:42) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is Chit Chat Money. My name is Brett Schaefer, and I'm joined by my co-host, Ryan Henderson. Today is our Tuesday Not So Deep Dive episode. This is where,

if anyone hasn't listened before, but I know there's a lot of recurring guests out there, we talk about one business. We go through its ownership, financials, future growth opportunities, and we'll still relate it to the stock. So we're going to talk about its valuation. We're talking about its income statement. We're going to talk about our bull and bear cases, stuff like that. Hopefully, as you finish this episode,

you get a better perspective on the company and either decide to, okay, I want to research this further, or maybe you discard it, or maybe you put it on your watch list. Hopefully, we just help you learn as an investor as that's what we're trying to do as well, learn about a new company.

and today we're covering one where if you live in europe you know this company probably quite well but if you're outside of europe which is about the majority of our listeners i think half are in the united states you don't know them as well you may have heard them before but it is ryan air the hyper discounted airline that flies in continental europe but i won't spoil it ryan i'm gonna let you get into it uh unless you want to talk or actually first i should say if you want access to the show notes and any charts subscribe to our newsletter for free but besides that ryan do you want to get into it unless you have anything else to add before we start no i mean this is really sort of a our kind of cursory look at a business for the first time you know we spent

basically a little under a week researching we're going through kind of our checklist and we're on another podcast yesterday and they were like so it's kind of like building up your watch list and it's like, yes, that is, we're trying to find a way to make that our tagline. So use this show to hopefully build up your watch list and find companies that you're maybe more interested in. Oh, and I should say new theme this month, uh, airlines and cruises. I may still try to convince you to do another airline next week instead of Royal Caribbean, but we're planning on doing Ryanair this week, Royal Caribbean next week, and then Hawaiian airlines the week after, which should be fun it's an interesting time in these industries so yeah all right ryan continue

yeah i gotta say this is probably one of the i haven't really spent that much time looking at airlines prior to this week so this was kind of a fun one to do especially because as we're going to get into it ryanair is a bit unique so ryanair is europe's largest airline by number of flights um the company focuses really on being the low cost provider for short haul point-to-point flights so ryanair has um i'll describe what i mean by short haul but ryanair has 558 planes its fleet 95 of those are boeing 737s and then the remainder are airbus a320s that are leased and it's the only reason they have those is because they got them through an acquisition but they really, for the most part, buy in bulk from Boeing and try to keep the aircrafts the

same. And then they offer more than 3000 different routes per day. And the average flight duration is just over two hours. And so it's important that we kind of talk about that, the short haul aspect, because we're going to see here in a second that Ryanair is really kind of a no frills airline. They keep things very basic. The, if you were doing long haul flights and I think Ryanair even at one point ventured into this a little bit, it would be very tough to maintain some of these no frills and it would be coming back. It would be uncomfortable. Yeah. Yeah. For, uh, for customers. Now, since most airlines are pretty similar, I'm going to talk about kind of the basics and the fundamentals of the business, because we, you know, the goal of

this segment is to describe what the business does. And really a lot of the airlines do similar things. And so I'll talk about the basics and then kind of describe why I think and why investors perceive that Ryanair is a little different. So there are actually a couple of ways that airlines generate revenue. So the most obvious one is selling seats on a route. That's, you know, the kind of basic one. But I believe 35% of Ryanair's revenue last year came from what they call ancillary revenues. So this includes travel insurance, fast track services, airport transfers, car rental deals, offering accommodation advertising on their website, selling food on the plane. Now, some airlines do this on their own or do it

uh, included in the ticket. Um, but Ryanair adds basically all these additional fees. If you want any of this, um, beyond your, just your basic seat or your basic route. Um, so that's, that's kind of the basics. And then for the typical cost, there's really a lot airlines have to pay for staff. So pilots, crew administration, people, um, they got to pay ground handling fees. They have to pay route charges, which is the price they pay to airports. And it kind of varies depending on the country um and that that's really not up to them i mean it also varies depending on the airport so um for example there's certain i'm trying to remember what the example is but there's one airport in paris that pays these you basically have to pay these

exorbitant fees in order to fly in there they're not fans uh ryanair is not fans of paris and that's what you'll talk about with management or i'll talk about management you'll talk about with the history they're not afraid to say what's on their mind yeah 100 um but they also um they'll try to go to the lower cost airport if it's possible and so they'll do that as well but the other costs that you know they pay for marketing um you got to pay to maintain and or rent your aircraft you have to pay for depreciation expenses and then one of the biggest ones is fuel um all the big airlines have to pay for this most i believe all hedge using financial derivatives to basically compensate for any changes in the price of

fuel. But ultimately, even if you have really good derivatives or hedging in place, if prices go up for long enough, you're going to end up paying more for fuel. And most of the time that gets passed through to the customer. But here's some of the ways that Ryanair is a little different or how they save money. So for starters, they are seriously no frills. So there's no in-flight infotainment system, no TVs or anything on the back of seats. There's no free internet. There's no free food, no free checked bag. You have to check in online or you'll have a boarding pass reprint fee. If your name is improperly printed, so let's say your name is Ray on some ID or whatever on your boarding pass but or it's ray on your boarding pass but your id says raymond

there's a fee yeah what's interesting about that thing where they make you do mobile ordering mobile boarding pass only is that you would think okay why are they just being so annoying with the customers and you know 90 of people use that mobile boarding pass nowadays but it's to keep the staff at the airport minimized because you know there's just so many that we see time and time again with the check bag stuff with the the printing out stuff where it's just all these employees from these airlines working at the gates or not the gates excuse me the check-in area and it's just a lot of money it's a lot of wasted time and when you keep it so streamlined you can save a lot on costs which Ryanair does exactly and then there's some there was some

stuff you know if you look up Ryanair uh top 10 cost savings items or whatever there you're going to see some stuff that got a little crazy. And some of this was for PR, but at one point they had floated the idea of a fat tax. So people that were overweight had to pay more. They quickly pulled that back. But some of this stuff, it creates free marketing because people are like, oh my gosh, this is so ridiculous. But then it paints in your mind like, wow, they are really trying to save money. I wonder why. Oh, probably because they're the low cost provider. There was even the rumor that they would, or they even announced the idea of potentially making their bathrooms coin slot operated.

So you had to pay to use them. Another one that never really went through, but there's all these different, it's ingrained in the culture and really, I think, instituted by Michael O'Leary, the CEO. He kind of leads these initiatives of save costs wherever you can. The other parts that really, I think, help in maybe a bigger way, they operate a single aircraft type. So that Boeing 737 I mentioned, it's 95% of their fleet. That limits the training, maintenance, and part procurement expenses for basically the ownership of the aircrafts. The other part, and this is a big one, tickets are purchased through Ryanair's website or mobile app directly.

So they don't have to pay any travel agent commissions, which is a big, uh, cost for a lot of airlines. I think, yeah, I think they may have like one or two partners, but it's the vast majority is direct. Right. And then they also get better rates from airports, um, typically because of their passenger volume, but also they will go to the lower cost airport. And a lot of people, you know, they're booking through Ryanair.

They're going to say, I'm willing to save 50 bucks on this flight. If I have to go to the other airport and other airports are really accommodating for it because a lot of airports make money through people coming through the airport, buying things. And so having Ryanair give you basically that guarantee that you're going to get passenger traffic, people are willing to give them discounted rates and then better rates buying actual airplanes. So I'll talk about this in a little bit in terms of why they get better rates. but um here's one thing cost yeah and here's here's one thing there's a lot of stuff to talk about here here's one thing i would add and this is how they you'll talk about the mirroring of the southwest model and basically putting the southwest model on steroids but they are very quick i think the exact number is 25 minutes from hitting the gate to leaving the gate which is i

think either twice or even faster than a lot of the big but are the you know the premium airlines like their competitors left hands or air france or british airways so they want to go from say getting to the gate half hour leaving again that saves them a ton on costs and it allows them to fly more routes per day on these short routes yeah exactly and it like that's a good example where just because you have a quick turnaround time wouldn't be that useful if your average flight was six hours whereas if your average flight is two hours it gives you an extra whatever two flights in a day. So, and I would like that as a customer as well. You're like, okay, you know, we're not just going to be sitting at the gate all day. Yeah, exactly. Uh, here's how Michael

O'Leary kind of described this culture in, in this book. Uh, it's called the life in full flight. I believe. Um, he says we have the lowest cost base of any airline in Europe. Business is simple. You buy it for this, you sell it for that. And the bit in the middle is ultimately a profit or loss. We have low cost aircraft, low cost airport deals. We don't provide frills. We pay travel agents less our people are well paid but work hard and we deal in efficiencies i gotta say as a prospective investor here that is music to my ears um well he's the perfect c or it's the perfect company for us because it's named literally after you and the uh the ceo is an irish farmer which is my ancestors so and o'leary i was uh my my family wasn't was o'leary's back in the day irish

beautiful it's like it's written in the stars it's fate it's fate yeah all right but continue let's talk about the history real quick so despite michael o'leary getting a lot of the notoriety for the business um ryanair was actually founded by this wealthy irish family called the ryans in 1985 um initially it was just a single propeller plane seat of 15 people and flew from waterford ireland to london they still even at the time they really tried to challenge the pricing from a lot of the legacy companies. And this kind of allowed them to expand their fleet. A lot of the companies at this time were basically just national monopolies. A lot of the airlines were, and the EU wasn't organized until 1993. So they were these local monopolies that

could kind of charge whatever they wanted. And so it helped them expand their fleet. But by the late 1980s, the company was still struggling financially. I mean, it took three years before they were like, yeah, this isn't going to work. At the time, they were trying to be this full service operator, and they decided it was really time to try to pivot to being a low cost provider. They literally tried to copy Southwest. There's, I believe, in 1992, Michael O'Leary went and spent some time with Herb Kelleher of Southwest and basically just tried to steal all his best ideas. he saw the uh the no check-in thing or the just line up and go and he was like oh this is incredible we're going to replicate that that's efficiency right there yeah i should mention

there michael o'leary was brought in as the cfo in 1988 i believe he was in his late 20s and there was this interview he's like how'd you get the job in your late 20s as cfo he's like this was a single like there was like eight planes no one wanted this job the company was about to go bankrupt. So basically I was the only person that wanted it. Anyway, so the model was far more successful being the low cost provider. And then they started to add more planes, add more routes. In 1994, they promoted O'Leary to CEO. Around that time, they started to take delivery of the Boeing C737s as well. So kind of pivoting their fleet to that aircraft type. And then that EU organizing in 1993, it made it a lot easier for routes across the continent. So it allowed them to

really expand and be a low cost provider, not only in their local countries, but across the continent as well. One of the biggest moments in the company's history though, came in 2001. And so this gets to the whole buying aircrafts cheap. Shortly after 9-11, Ryanair made a substantial order for new Boeing 737s and got them at a major discount. Michael O'Leary in an interview said this pretty much kickstarted the company because when things are going poorly or when the industry is in crisis, that's when they tend to make bulk orders. So this really helped the company expand. Obviously it's a huge expense for businesses buying planes, airlines. So they were able to save big on those costs. And since that time, O'Leary has really tried to replicate

that. In that interview that I talked about, he literally said, at this time, we were... It says, all our aircraft orders have been placed during moments of great crisis. We bought after 9-11, we bought after the Gulf War, we bought tons after the financial crisis, and we renegotiated our existing deals during COVID. Basically, they got lower prices. Basically, anytime Boeing is in crisis, Ryanair's like, okay, yeah, let's come in and save the day and we'll make a bulk order that gives them a big backlog. And if you're a Boeing investor, a lot of people pay attention to that backlog figure, but it's lower prices for more planes and it just allows them to continuously gobble up share and add to their fleet. Last thing I'll say is just over the last

two decades, the European market has kind of been consolidating and this low cost model has allowed them to put a lot of the other airline operators out of business. Yep. I will talk about the difference between the European market and the US market and industry section. I think this is a good point though, as you mentioned Boeing and their struggles to talk about that. Do you think it's better for Ryanair that Boeing has been struggling over say the last five to six years? Because I think there's some downside there where if they can't get enough planes out the door ryanair is not going to be able to fulfill their orders because we've seen them in their annual reports and in all the stuff they talk about they're like hey look we have this

order with boeing but they're not keeping up with what we want so i feel like there's a delicate balance there but what do you think yeah the supply chain issues are kind of i think hopefully going to get resolved it's the stuff where it halts halts demand for new purchases where I think that's when Ryanair is excited to step in. Maybe it's not during necessarily the supply chain deficiencies, but where like, you know, COVID, I imagine a lot of airlines kind of pulled back

on their orders or said, you know, we're not buying any new planes for the time being. Ryanair, that's when they want to kind of make these big deals. And they even talked about, you know, O'Leary has said like, I honestly underestimated the impact COVID would have because I've been through so many of these crises that I thought, yeah, this is a blip.

Things will return. It's time for us to make a big order. The supply chain deficiencies suck, but I don't think that's necessarily what they've capitalized on as much as the, like he says, he says that they're basically three to the airline industry is three to four years away from a crisis at all times. And they want to be there to capitalize when it happens. Yeah. And I think that just describes a cyclical industry.

So everyone stay cautious when looking at an airline because there are a lot of bankruptcies, as I think everyone has heard that Buffett quote from time to time. Today's episode is presented by the Science of Hitting Investment Research Service. The Science of Hitting was founded by Alex Morris, who spent a decade working as a buy side equities analyst before launching his own service in early 2021. you've heard him here on the show a number of times, but Alex produces really, really high quality equity research. And in addition, he provides a hundred percent transparency into all his portfolio decision-making. We were early subscribers to the science of hitting research service. And we genuinely believe that Alex produces research that is on par with top wall street analysts at a fraction of the costs. I mean, the fact that you also get

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federal evap rebate on select 2027 volt and 2026 equinox ev models visit your local chevrolet dealer today for more details but let's hit industry and competition so as ryan mentioned they operate exclusively in europe mainly serving their home market ireland the united kingdom you have spain and Italy. And then there's a bunch of other options on their map. If you look at our newsletter, which will come out the day of this episode, I have a map of the chart or the airports that they have. A lot of them are in Spain, Italy, UK, and Ireland, but they have all over the European continent with a little bit less exposure to Eastern Europe, which I think is a good thing given the war in Ukraine. Now, last fiscal year, which ended in March, they had 169

million passengers and flew 950,000 sectors, which I didn't get a definition of that, but I believe that it's just total flights. I think I'm going to make a little leap there and say that it was just total flights because I think that makes sense. It is hard to really get a market size for the specific industry that they operate in. I honestly didn't get good numbers when I looked. I mean, yeah, if I paid for some research, maybe I would get some. And that is really just flights within Europe, nothing leaving the continent or going across the Atlantic or to Asia or Africa. But I found that Europe flight numbers were estimated to be around 11 million in 2019 and are expected to grow to around 16 million by 2050. So if you look at that, the 11 million and 16 million versus Ryanair and 950,000, they have a decent market share there.

Two things to note, though. On a dollar value, Ryanair will have much lower market share, given that they're selling their tickets at much lower prices than someone like Lufthansa. And then second, a lot of the growth for Ryanair will be specifically determined by how many planes Boeing can deliver to them. Like we mentioned just in the previous section, they have a long order with Boeing. I believe it is through 2033. and they basically say, if Boeing gives us these planes on time, we're going to hit 300 million

passengers by 2034. But if they don't, that's going to be our hiccup. Look at competition. People are aware of Lufthansa, British Airways, Iberia, which is owned by British Airways, I believe, and then Air France, stuff like that. The big ones that, especially if you live in the United States, that's probably how you get over to the European continent. But the most important competitor for them is going to be EasyJet, the other dirt cheap airliner in Europe. If you look at, I took a look at a review blog, there's plenty of those out there. They say the experience is fairly similar between the two companies for consumers, except some people hate the Ryanair seats because they're all yellow and kind of gross. They're pretty ugly.

But I think it's part of the brand, but maybe getting a little too cute. But there's not too much differentiation among consumers. So I think it all comes down to winning routes, cost advantages, economies of scale, who can get bigger. And it seems like Ryanair is trying to be aggressive. If we look at that interview that O'Leary did, which I believe was pretty recent, so I think that's the best one. We'll make sure to put a link into that in our show notes in the newsletter, which we have all our sources that we go through. He believes the industry, and it was a podcast, so I hopefully am remembering correctly. Ryan, you can correct me here. He says the industry will consolidate to three premium players over the long term.

And these are people that do cross Atlantic routes. This would be British Airways, Air France, Lufthansa, and then a low-cost producer. He obviously believes the low-cost producer will be Ryanair, but EasyJet is quite large and is still there as well as a formidable competitor. Now, the opportunity he believes there is quite large because the European airline industry is much less consolidated than in the United States. In the EU, I think this might include Britain, might not. There are 135 total airlines, while in the US, there are 59. This likely means if they They follow the same trajectories as the United States with Southwest and the big premium ones. There is plenty of room to take market share for someone like Ryanair.

Ryan, which is kind of confusing with this episode while I address you, is there anything in the industry that you want to cover? Anything you found from the research? Yeah, there was some industry kind of consolidation figures in a value investors club write up that I saw that I wanted to talk about. So the European market, just in terms of size, is pretty similar to the U.S., as far as seats flown goes. However, Europe's a little more fragmented, but the market share trends have been similar. So in 2004, it was basically the four large airlines in the U.S. made up 62% of the market. From 2004 to 2018, it went from 62% to 86%. So the big airlines started to consolidate more.

And in Europe, it's been at a similar pace, only from a smaller starting base. So the five biggest airlines accounted for 38% in Europe in 2004 versus, I'll introduce here, I think it's like 66% or something now. So it's been growing at a solid pace, basically, that the major airlines have. And a lot of this is because either Ebony or... Ryanair and EasyJet. Yeah, or companies just going out of business and Ryanair, EasyJet picking up those routes slowly, but surely.

Yeah. And I think the big, if you're looking at it from a perspective of you want Ryanair to get bigger, if this trend continues, it'll likely happen. And when you mentioned the fact that the flights flown or whatever it is, the seats flown are the same in Europe and the United States. What's interesting is that can mean Europe has possibly a larger growth trajectory. if the cost can stay reasonable, which would benefit Ryanair because the population of Europe is double that of the United States. All right, let's move to management and ownership. As we

talked about before, the CEO of Ryanair is Michael O'Leary. He's a famous Irishman. He's been with the company since 1988, and he has been the CEO since 1994. So this is really, he is basically the founder here. He's 62 years old, and has a contract extended many years into this decade. So as 62, he's not too old for an executive. I think people probably don't want to get the Buffett bias in here and likely not going to be going into his 90s, but he probably, and he seems very motivated. He probably has at least 10 good years left in him. I wouldn't be worried about the age here. I couldn't really find much on specific executive compensation. I would say whenever I get so annoyed when looking at a European company, because

can you just organize your guys' investor relations pages in a very streamlined manner? I mean, come on, just put the results out there. I don't know what's going on over there with these iron teams, but maybe they're just on vacation all the time. But I'm not really too concerned because I couldn't find much on the executive compensation. Maybe I didn't look at the right spot, but I'm not really concerned because with O'Leary at the helm, he is basically one of those executives when it could be a Jeff Bezos, it could be a Satya Nadella, Tim Cook, even a Brian Chesky for me. I know some people don't like him, but it's one of those where you talk for 30 minutes or excuse me, you listen to him for 30 minutes and you understand that you're in good

care. He cares about all stakeholders, which includes shareholders. It's a tough industry that they're in, but I'm not concerned at all about this management team. I think the box is checked off for me i would say as a note if we look at management and ownership here the adr is trades at a premium typically it kind of varies but it's it's kind of a weird restriction where foreigners are limited on the amount of shares they can own so unless you live in i believe it might be ireland might be the total uk plus ireland i'm not exactly sure but But you should look into that and say like, okay, what stock I'm actually going to be able to buy here.

If you live in the United States, you got to base your valuation work off of that ADR probably. And then if you have the ability to buy the local shares, kudos to you, get to buy the discount potentially. But yeah, definitely look at that before buying. And then lastly, I would say the share base is very diversified. If it's not a United States company, so we don't just have Vanguard, BlackRock in there, but they got a lot of different holdings.

you know hsbc uh bailey gifford fidelity and then michael leary owns around four percent of the company which i don't know what do you think about that i i always get a little bit nervous is the wrong word but i feel like skin in the game might be overrated but maybe that's hearsay i i like it i mean i'd prefer that over him just taking the stock and selling it true um true he i don't know he seems very he kind of lives within his means it seems like you know someone talked about like someone interviewed him was like you know how is the whatever the success or any tips for life he's like well i'm rich and wealthy and i'm a farmer and nothing's changed except my farm's gotten

bigger so it like yeah he's forcing his kid he is he's having his kids work on the farm for a which i thought was uh funny yeah i don't know it's just he seems very modest um and it seems like he doesn't care about the wealth it's similar to buffett like it's one of those where i think buffett would talk to him be like okay yeah he's in my he doesn't actually care about the wealth he cares about winning yeah he prides himself on the competition aspect and and kind of eating up the incumbents routes but um no i mean i like that he owns four percent of the stock it feels like he's more inclined to do what's best for shareholders overall yeah all right let's move to financials these are tough and it's honestly tough because we're still lapping

some tough periods with the ukraine stuff like that and still some covet stuff in europe so what do you got for us what are some of the most recent numbers yeah so like you said there's a lot of moving parts here and uh we can talk about all those later on but basically 13 billion in trailing 12-month revenue. They say they can still basically get higher than that and that they haven't perfectly recovered since pre-COVID, but it's a much better reference point than the same time last year. And so the average fares were up 42% year over year. A lot of that is because they decreased the prices last year. They basically went and did a bunch of discounting when Russia invaded Ukraine because there wasn't as much passenger traffic.

Um, there's the delivery delays from Boeing right now are kind of slowing them down. Traffic grew 11%, but ultimately it's $13 billion in trailing 12 month revenue, $2 billion in trailing 12 month net income. And is that a different than their profit after tax number? Because I'm getting 1.7 billion on the, uh, Euro to USD conversion. It could be, I just pulled the number off of Kofi and it was like 1.95, but I would I think it's going to be, I pulled it from the document. So I think the numbers on the Koi Fin and all that stuff is weird because of the translation.

Okay. And then, you know, 1.7, basically 1.7 to 1.9, somewhere in that range. Really, I looked at the operating margins for the whole decade prior to COVID and the operating margins on average were around 17%. So on a $13 billion base, you're getting right around that $2 billion kind of operating profit figure. So, um, like I said, though, it's really lumpy. Um, the airline business as a whole, it feels like you're always guessing, like what, what would normalize margins look like? Well, I don't know. Cause margins are never normal because there's always some factor that's affecting that, whether it's air traffic control, limiting routes, whether it's delivery is not there or, you know, all that stuff. I would pick a 10-year period and do the average and then apply that to what you think the revenue could be because it could be higher, it could be lower, but over that time period, you think it probably fluctuated around that. What's good about Ryanair is that they prepare for this,

which leads into the balance sheet. Yeah, I was going to say, I'd be a little more worried about the exact earnings figures if they had this horrible balance sheet, but they don't. So they've got just under $5 billion in cash and cash equivalents. Most of that is invested in these less than three-month treasuries or some interest-bearing asset that's really short-term. But then the liability side, they've got $3.6 billion in total debt. Most of that is long-term, so due after the next 12 months. And then most of that debt, I think it was 70%, is fixed rate unsecured bonds, and the weighted average interest rate on that is 1.4%. That might sound extremely low, and it is, but keep in mind, rates are a little lower

in Europe, and they're investing at lower rates as well. Thank you, Europe. Yeah. Thank you, the Central Bank. What are they called? The Central Bank of Europe. Thank you for the negative interest rates. Yeah. They're not earning as much on just the short-term interest-bearing assets as US companies are. So it's all kind of relative there. But my guess is that they are, and I probably should have looked at this, interest income positive at this point, if they're earning 3% or 4% annualized and paying out 1.4%. And I would say that they changed their strategy that they're going to plan on paying down the debt now that interest rates are rising, which it'll be an interesting strategy. It looks like they

will be able to pay it down but they said they're going to try to fund everything from cash flow from operations now that debt isn't free uh it would be maybe the right definition yeah the other thing that's just worth noting here so it's net cash which for an airline uh at least the airlines i've looked at before it seems kind of rare um so net cash on the ballot sheet they generate consistent profitability even during tough times of covid um but their debt rating just got upgraded from BBB to BBB+. Typically, I don't really pay attention to that, but it helps with the aircraft leases, apparently.

And so they don't lease most of their aircrafts. It's only a small minority of their fleet. But it just helps that if the time comes where they decide they want to lease some of the Airbus planes instead, because whatever, they're not getting good deals, they're going to get better ratings or better rates from the suppliers

than someone who's got this really low, poor credit quality. So it kind of gives them further cost advantage relative to their peers. Yep. All right. Let's hit the valuation now. If we look at the market cap, I'm going to be doing this in US dollars, but again, there's a little bit of the ADR

can trade at a different premium to the regular shares. And again, we know the Euro to USD has been quite volatile. So again, look at whatever market it matters to you, whatever currency matters to you, you got to do a little bit of math here, but I have a market cap as of this recording as about $19.4 billion. And I'm going to assume they're basically net cash neutral, not going to worry about that. And then if we look at that profit after tax over the last 12 months, we get a price to profit after tax, which is basically

a price to earnings of 11.5. Take that information with what you will. I don't know if you're going to say they're over earning right now, or if that's a steady state number, we'll probably discussed that in our bull and bear case but let's move on to anecdotal evidence ryan what do you think here i mean we don't live in europe but it's basically spirit combined with southwest i would say right with more routes so i don't know what do you think yeah i've never flown with them but i i know people who have and i asked them you know what what did you think of ryanair and pretty much the universal answer was it does the job which is really super cheap yeah it's the cheapest and it does the job the so i i think that's probably what they're kind of striving for is you know

it's the no frills as long as people aren't totally pissed and so upset with the experience that they still come back because we're the lowest cost provider that that it means they're going to gain market share uh the other thing is i think some of the stuff with the like they were considering standing seats the coin slot operated bathrooms the fat tax like this was all ridiculous but it definitely garnered interest from people and i think it really worked in terms of well you know because at the end of the day like if you're if you're booking a one and a half hour flight you're just gonna buy the cheapest flight and then you're gonna listen to some music or a podcast or watch a show on your phone yeah so it doesn't really it's such a winning strategy

yeah for the short flights for a two-hour flight versus a six-hour flight i mean it's entirely different that kind of plays into the geography advantage i think they have but i would also mention that apparently they're very good at the outrage social media stuff which makes sense giving kind of their crazy things that they throw out from time to time and apparently they get a lot of views across all this stuff didn't really do research for that in the show uh that would be maybe a little bit more in depth and possibly a waste of time and uh something that we like to talk about is the over research aspect i don't know if you can buy shares on something because their tiktok strategy is strong but i'll move into mine uh you know like if you're flying around

europe which a lot of people do uh because you know things are so close so many historical things it's a popular thing to do for time to time i know ryan you have a friend doing that right now i definitely do that i mean it's going to be much cheaper it's going to be make it a lot more economical from you and look from an outsider perspective not in europe very often um you know when we're flying into the country if we ever do we're going to be flying in over the atlantic so we're not going to be flying them much but it seems like for the intercontinental stuff that their geography is perfectly suited for this low-cost economies of scale because it's a much smaller you know geographical wise than the united states where if you're southwest okay you can fly

from say washington down to california over to texas to colorado and that's very very i mean that's a bit like that's still kind of large distance distances right like a flight to texas from washington which would be the farthest there is what four hours or something like that where in europe you can go all these different routes you don't have the great plains and the middle of america just kind of blocking you out there where if you want to fly from new york to la i mean that's six hours europe has so many of these potential routes and they're with all these different cities and all these different countries that i think it's much more suited for someone like this to succeed compared to a southwest which you know obviously it's still succeeded but

the industry is not as suited for them there's like i what what the experience that i require for a four-hour flight is so different than what i require for a two-hour flight And most of the average flights, really, if you live in Washington like ourselves, to get anywhere except the West Coast are three hours plus. Yeah, I mean, even SoCal is going to be over, too. So, yeah. And for any of our European listeners, SoCal is just Southern California. Right, right. It's the West Coast slang.

I know we have a, yeah. And, yeah, we don't need to go on and on about that. Let's move to future growth opportunities. They have a simple bottle, but there are a few things in there. I think that could be potentially helpful for them over the next decade as they try to take this next step. So, Ryan, why don't you talk about yours? Yeah, I mean, it's kind of the obvious one or the one that they talk about the most. So they just placed a new aircraft order with Boeing.

So they announced a $40 billion purchase agreement with Boeing for 300 737 MAX 10s. These planes apparently have 21% more seats, require 20% less fuel and are 50% quieter. no aside from the quieter part both the seats and the fuel means that's that's great for shareholders them receiving those deliveries on time i think is going to be critical for meeting their customer volume goals over the next decade like you said it's really they are kind of at the whim of deliveries from boeing um because if if boeing can't get jets out door can't get planes out the door um it's gonna basically limit ryanair's ability to grow and add new flights so um it's funny it's that domino meme which is boeing moves headquarters to chicago and

then european has europe has uh none of the flights you know what i mean that's the big one yeah 20 20 30. that is that's that's the biggest lever for customer growth there's other things they can do to kind of control costs and continue to kind of steal share um or be be the low-cost provider relative to others but in turn they cannot offer more flights without more planes yeah all right well i'll move into mine which is moving into more of the first tier airports like we mentioned before originally ryanair targeted gates at cheaper second tier airports in order to save costs on the gate fees however eventually you got to move into these airports if you want to be a bigger you know truly ubiquitous cheap daily airliner where someone can go to any

airport basically at any time of the day and say hey look i want this flight to here they will you know i think it will further help like it would be impossible for them to do this in 2000 and do this strategy because the cost probably didn't make sense but now that they're very profitable and now that they're very scaled up and they have that operating leverage or excuse me the negotiating leverage with these airports i think it will further help them with their economies of scale and provide an opportunity to increase annual passengers i didn't take a really big look at easyjet but apparently this will be more of an encroachment on easyjet's turf so i think that competition might tighten over this decade and it'll be

interesting to see who comes out whether both can concede succeed or whether ryanair starts to continue to extend its lead okay highlights low lights i think we got pretty similar ones here but ryan as we close things out what did you like about this business what did you dislike about it i think the biggest one for me well michael o'leary might be my favorite ceo in the world i'm so glad we studied this business because he's for one he's like just competitive as hell He's relentless about gaining market share and being the low-cost provider. And he's really just funny to listen to, which makes it that much easier. But the other one, and I think this is the biggest competitive advantage for me, is that they control their own distribution for the most part for tickets.

So without having to pay the OTA's huge fees, they can really pass through that cost savings and build that self-reinforcing competitive advantage. And I think Buffett's talked about this, where being the low-cost provider, not necessarily the low-price provider, is the only sustainable advantage someone can have or the only sustainable way to win in the airline industry. Because people can be the low-price provider or whatever and just lose money for a while. But to be a truly low-cost provider, you're going to outlast all your competition. So I think Ryanair has that and they have a very good recipe for success currently. And if they just continue to do that, it's hard to see how they would not do well on behalf of shareholders. But low lights, this is really just particular to the airline industry as a whole, but there

are a lot of moving parts, no pun intended there. there's delivery delays, fuel prices, union strikes, regulatory slowdowns. They've talked about the air traffic control in France, limiting some of their routes, staffing shortages. It just feels like every single year there's something prohibiting them from being at their normalized margins. And so it's just sometimes a little frustrating, I think, to invest in a business that has so many variables that could go wrong. Yeah. And I think what's interesting is about a lot of their costs, mainly fuel, are outside of their control. So what they can't control, they try to do really well on, but some of that, I'll talk about that in my lowlights as well.

So my highlights, clearly management is a highlight. It's really a breath of fresh air when you look at a management team and you can immediately check that box off because so many times as any listeners who listen to are not so deep dives, no, we find ourselves looking at a high quality business trading at a reasonable price, but the management team seems to not care about shareholders and it's just another maybe McKinsey blowhard, as I would say, that it's just repeating stuff and going to give themselves a lot of stock options. O'Leary and this culture are probably the opposite of that. And it's a big highlight. Now, the second one is that the economies of scale should give them a competitive advantage and one that can widen this decade.

So for the, I think it was the Todd Combs quote of when they're looking at a stock, they asked, can the moat widen over the next five years? I think the answer with Ryanair is yes, because as they expand their route map, as they expand all their economies of scale across Europe, as they densify the, I call it the route tree, but that's also a football, American football term. So I kind of laugh when I say that,

but the route map and all the frugality with the expenses, it only gets harder and harder, the bigger they get and the more savings they get passed on to customers to compete with them and still make a profit. But the most similar business model from this standpoint, I think, would be Costco. What do you think, Ryan? Amazon, maybe too. Yes.

Yeah. It's just the scale economy shared concept. Yeah. I would say. But Amazon is not necessarily the lowest price. Yeah, that's true. It might be more of a Walmart. Yeah.

Because they squeeze suppliers more. but you know, that's whatever it's, I think listeners get it. Yeah. The, the online experience, I would say like delivery time plus price is what you're paying for. So like maybe, you know, if you combine those two, maybe it's, maybe it's the lowest, it's the best experience. Yeah. All right. And then my other highlight is the industry, which it, you know, there's a lot of ability to take market share here.

There's a hundred plus airliners in Europe, as opposed to, you know, southwest of the United States, which has less of an opportunity, I would say, to take market share. It's probably because they're older as well. Now, lowlights with me. While the strategy is similar to Costco, I believe the industry is, I think it's quite obvious, much lower quality. This is in regards to the demand side where travel to man can be cyclical. And then the cost supply side where fuel costs are the big one. Unions kind of get the silver medal there. they're not as much under the control of Ryanair as a lot of the costs at Costco are. A retailer at Costco, I think, or excuse me, a retailer such as Costco has much less to worry

about when it comes to consumer demand and supply costs. Although there are some there to some degree, but it's a lot less volatile. It's a lot more predictable. And I think that makes the business, higher quality compared to Ryanair. Now, second low light is the Boeing stuff. I think, well, Boeing plus local governments, airports, et cetera, they need to consistently grow the flights flown in order to grow their competitive advantage and grow the business. I think my feeling is that these relationships could continue to hold things up for them and slow the growth projections and slow their growth goals. I don't think this is the end of the world because they're still profitable, they'll still generate cash, but it really would hurt

the reinvestment runway or how rapid the reinvestment runway can be. All right. Anything else there, Ryan, or do you want to move on to your bull case? Let's do bull case. For me, it's just more of the same. You can try to throw specific numbers on it, but like I said, with all the moving parts, it's a little hard to forecast what margins will look bike you know the simple way to do it would just be take the take the pre-covid operating margins from the decade prior which was 17 assume what they can grow revenue by and slap it on there but yeah it's tough who knows i feel like you need a margin of safety in your projections yeah probably but it's just like the projections are it's so no one if you tried to forecast or

model out what earnings would have been in 2018, you would have been so far off the mark for any airline. Or 1999 or 2000. It's three to four years away from the next crisis, as Michael O'Leary said, which typically, even though a crisis might benefit them in the long term, it's going to hurt their earnings power. So anyways, I just stole this quote from Michael O'Leary because I think it kind of encapsulates the opportunity here. So he says, all of our incumbent competitors have been emerging out of COVID with materially higher unit costs than Ryanair is. I'm astonished, never ceased to be amazed. I looked at the numbers last week. Our PE multiple is currently 11. The PE multiples of Wiz and EasyJet, who can either match our profitability, our growth, or who can

neither match our profitability, our growth, or our unit costs are also 10 and 11. So either we're materially undervalued or they're materially overvalued yeah today they're at 11 and a half just for reference right around the same yeah I don't think airlines should trade at big commanding multiples

in general just because there is the lumpiness in the earnings but I think at 11 times if they continue to do what they're doing they're gonna dominate more and more of the European short haul flights

market and that's just going to be greater revenue i i guess i don't look at the operating margins for all the airlines in europe but 17 operating margins when you're the lowest cost provider is pretty astounding and it gives you a lot of room to lower price if someone tries to compete with you which will put them into the negative territory i think the the big question is what is a like what pe ratio can you get comfortable with at these margins with the risks of the airline industry is it 11 is it 7 is it even higher like that's that's the big question i think for anyone looking to invest in this i i say i think 10 or 11 times feels like a fair multiple honestly maybe not for whiz or easy jet but for ryanair i don't really know the whiz or

easy jet models but um it's not I don't think it doesn't feel dirt cheap though exactly I was going to say and now maybe margins are a little depressed but because of the uncertainty I would want to be paying somewhere in kind of the seven to eight times earnings range as opposed to anything double digits yeah and my bull case is going to be similar to yours you know I think the the business model there's no question there they just have to keep doing it but the the two things i think need to go right for the stock to work which is one the ability to grow supply unconstrained which means boeing can supply them with orders and the european economy stays afloat i'm assuming that oil prices are not substantially higher because if they are the european economy is not

going to do well i think if they're kind of not going crazy the european economy will do just fine um i think this occur these two things occur the path to growing revenue with stable margins or at least somewhat stable margins should lead to a lot of cash getting paid back to shareholders or a lot of cash getting piled up on the balance sheet whatever you want to say you know high free cash flow yield over the next five to seven years shareholders probably do quite well now the bear case ryan what do you think i mean there's a lot it's really the classic airline one is i think the main bear case yeah yeah you're probably right i think the macro issues though will find a way to work themselves out over time and ryanair will probably be better for it because i mean i think

when shit hits the fan in this industry if as long as it doesn't last for too long ryanair's competitive advantages are going to help them steal share even more so during those periods um but i want to i would say the the biggest way that i think something could really really hurt the investment case here is that another company finds a way to compete on cost and experience people say that whiz is doing that but and there are they the eastern european one this is definitely something if you're interested in this company to research these right is that the eastern european i believe so yeah yeah and then so here's what and i just keep stealing o'leary quotes because I think they're hilarious.

But here's what O'Leary had to say about Wiz's market share gains. He said, there will still be idiot analysts out there later on today producing research that says Wiz will have lower costs than Ryanair. And it won't happen in this decade

or the next decade or the decade, probably after that, because what nobody factors in is the materially different price at which we buy our 737s compared to the ludicrous price they pay for A321s. And that gap is never going to close.

Makes sense. And now I do think they're going to get it's not just going to be something where listen they bought cheap planes because of 9-11 or whatever it now they've got these long order books and they've got the scale to buy big volume and get bulk discounts really or at least some bulk discount from the big suppliers so um plus the order book their orders extend out far enough that it's it's a discount that'll last for a while yeah yeah and they don't you know back in the day they had fewer cost advantages that they really had to take advantage of or excuse me try to capture which as ryan mentioned one of those

was paying cheaper prices for the planes in in times of you know 9 11 type times for the airline industry but now they have even more which should make them a lot more comfortable uh passing on the cost you know doing that costco model now mine is you know just the classic worry about buying a sickle cyclical stock that has a long growth trajectory with a shiny looking pe you know when when the industry is in a boom, like it is currently, you know, a PE a tad over 10, it may not be look crazy, but it's, it might not be the average they would earn on this level of flights to

recycle, which means from a margin perspective, if they're running the same amount of revenue, it might not be the same through throughout a five to 10 year period. But I think the key difference for Ryanair is that they have a clear path to getting to a much higher level of flights flown five and 10 years from now. so you have to balance that fact out which is it reminds me a bit of the semiconductor industry where you get a little bit there's two fact you know there's two different factors there and it's hard to balance it out yeah it's like their slice of the pie will definitely grow but i have

concerns about the pie where it's yeah well the profitability of the pie but the pie should grow not as fast as semiconductors but the pie should grow at a decent rate yeah probably not as fast the us right or at least it hasn't over the last couple decades i guess it depends how many planes they can get because of ryanair gives those cheap flights out there they are growing the market they're the ones growing the market yeah that is true it's probably even stealing share from people that would you know previously take a train or something like that yeah or drive that's one of the things they do talk about all right more or less interested ryan final thoughts here more interested part of me just wants to buy some shares just for michael o'leary uh i think the

guy's absolutely hilarious um we could do like a there are so many funny quotes that he said i i wish i wrote them all down here but he he's fun to listen to on conference calls it's a good model he's like just all in on this business and stealing share and it honestly kind of reminded me and it kind of reminded me of Sam Walton in a way, like an early day Sam Walton, where he's just so focused on being a low cost provider and eating share. Um, and you know, people know how that's worked out, but, um, obviously it's a little bit of a more mature business than early day Sam Walton, but more interested a hundred percent. Yep. I'm more interested. I do like the business model. Uh, you know, I think that's quite obvious it's worked and then I like

management. I think it brings them a competitive advantage that can grow. The one holdup, and I think I would say this again, we've talked about this a lot in this episode, is I don't know what price I would pay for the stock because it is very hard to value. These types of businesses are ones I kind of like to see a situation where you can, you know, things go right, you earn their entire market cap in cash within five or so years. That could be right now. I don't know that could be today but i i feel like i want it a little bit cheaper when maybe the earnings multiple looks worse than it has right but the margins are a little bit compressed i i don't know if right now is the best buying opportunity but i also think it can do well over the next 10

to 15 years it's kind of it's a tough one it's a really tough one i i gotta look at it further gonna put it on the watch list and it's something i'm gonna track and i want to research more yeah and then you know to be honest i and this is more just like a personal pet peeve that i could easily get over if the opportunity is there investing in european companies is like sometimes a headache with the with the way they communicate numbers oh yeah it's just annoying it's just annoying and and the conversion yeah maybe the opportunity is there because of that but i don't like it and it always feels a little cheaper but it doesn't like i've had i don't know I've had ones like that in the past where I'm like, oh, this is really cheap.

And then it just never plays out the way I think it will. But Ryanair, as far as European businesses go, it feels like one of the best European business models I've come across. Adyen's probably up there. But I don't know. I really like the business and I like management. All right. That's a good way to close things out. The stock for next week is going to be Royal Caribbean, unless I can convince Ryan to do Delta Airlines.

but I think that either way, that'll be a fun one. No. Yeah. Yeah. Royal Caribbean is Delta. If it, I don't know. I just don't want to end up doing so many airlines that feel similar, but I would say Ryan air is unique. Hawaiian's unique. Maybe we could do Delta. We'll talk about it offline. It's either going to be Royal Caribbean or Delta, which both will be fun. They're both at very dynamic parts of the business cycle right now. That's going to do it for this episode.

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