As January sets in, thought often turns to holidays. Whether it’s hitting the pistes or hitting the pool, since Covid the demand for travel has remained elevated. The enduring appeal of the holiday inspired one of our purchases last year: low-cost airline Ryanair.
The inflation of 2022-3 was driven by external factors including the Ukraine war and, unexpectedly, a container ship getting stuck in the Suez Canal. However, there were areas of the market where prices rose in excess of inflation – and profit margins rose in turn. This has since sowed some distrust among consumers and a curb in their spending on specific products. As such, we are cautious about the prospects for companies selling consumer products including food, luxury goods, spirits and so on.
At the same time, inflation is falling. As a result, we expect interest rates to fall too. While the pace of any such fall remains an unknown, we are conscious that falling rates could improve consumer sentiment, particularly amongst lower-income households.
Our logic is that as inflation eases, wage growth catches up and mortgage and loan rates come down, consumers might feel more inclined toward the odd treat. A meal and drinks out, some clothing, a holiday, or perhaps all three in combination. We think the companies selling more modest ‘discretionary’ items could be first to see the benefit of improving consumer sentiment – a pattern we have seen in previous such cycles.
This notion prompted our purchase of Ryanair in the wake of its profit warning last July (when it indicated summer ticket prices would be down on the prior year). Ryanair operates low-fare, no-frills short-haul routes in Europe. In operation since 1985, and based in Dublin, it began to introduce the low-fares operating model between Ireland and the United Kingdom in 1991.
It is a high-quality business in a tough sector, the lowest cost operator in short-haul European flights, in which ‘value for money’ is a key competitive edge. There are some important features to its business model: it uses ‘dynamic pricing’ algorithms, meaning ticket prices change in response to consumer demand on its website. It also sells around 50% of the seats for a flight around 4-6 weeks before take-off. In other words, consumer sentiment is rapidly reflected in Ryanair’s revenue and operating profits.
The panic-stricken sell-off presented us with a great opportunity to buy a long-term winner in anticipation of brighter days for the consumer. It also helped that, as Ryanair is solely Europe-focused, we were not required to take a view on the Chinese economy.
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