Shares in low-cost carrier Ryanair are +2.5% in spite of an uncharacteristically downbeat surprise profits warning. Or was it?

After a strong 2018, with profits +10%, the worse outlook is being pinned on rising staff costs, now that it is recognising unions, and falling air fares amid fierce price competition, both likely to eat into 2019 profits. With falling fares, control of costs is paramount.

It may sound like great news that 90% of 2019 fuel needs are hedged at $58/barrel, but higher oil prices are still adding €400M to the bill. And this hedge does nothing to prevent the other newer cost pressure (higher pay for pilots and cabin crew), which is projected to add another €200M and other ex-fuel costs +6%.

Despite all this pessimism (zero H2 fare visibility), investors are taking the news in their stride. Perhaps because none of this is actually news: oil prices continue to rise and staff talks are ongoing. And O’Leary has a tendency to beat FY guidance. At this early stage of the year, is he trying to engineer a reappraisal and an upgrade in the quarters to come? Guidance remains contingent on a host of factors: fares, disruption, security and Brexit. Perhaps he is laying all the bad news possibilities out on the table early.

Security is always is an unquantifiable unknown and staff disruptions should be less likely now that airline is negotiating with unions. However, fare competition could well turn even more intense and we still don’t know what the UK/EU Brexit transition plan is for airlines in general. Are investors too complacent on the outlook this morning? Is there a risk of a hard landing later in the year? Or are we being too harsh?

Artjom Hatsaturjants, Research Analyst at Accendo Markets, 21 May 2018