Is Ryanair Holdings Plc A Better Buy Than International Consolidated Airlins Grp SA Or Flybe Group PLC?

Ryanair Holdings Plc (LON:RYA) is flying high, but are International Consoldiated Airlins Grp SA (LON:IAG) or Flybe Group PLC (LON:FLYB) a better bet for future growth?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Ryanair Holdings (LSE: RYA) climbed 6% on Tuesday as the budget airline celebrated its 30th birthday by reporting a 66% increase in after-tax profits, which rose to €867m last year.

This surge in profits was driven by falling fuel costs and rising passenger numbers, which combined to lift Ryanair’s profit margin from 13% to 18%.

Investors were also impressed because seat utilisation rose by 5%, from 83% to 88%. The airline is targeting 90% this year, which could drive further improvement in profit margins.

Is Ryanair the best?

Ryanair founder Michael O’Leary’s promise to be nicer to his customers appears to be paying off.

The firm’s shares have risen by 61% over the last year. In today’s results, the airline’s management said it expects after-tax profit to rise by another 10% this year, to between €940m and €970m.

However, Ryanair isn’t the only carrier enjoying good times. British Airways owner International Consolidated Airlines Group (LSE: IAG) is also doing well. Profits at IAG, which also owns Spanish airline Iberia, recovered strongly last year and are expected to rise by around 55% in 2015 to €1,521m.

IAG is also thought to want to buy Aer Lingus, in which Ryanair has a 29.8% stake. Should Ryanair be forced to sell, enabling IAG to do a deal, then competitive pressure on Ryanair could rise on key routes.

Which airline is the better buy?

Both Ryanair and IAG offer potential for investors, but which airline looks the better buy today?

2015/16 forecast

Ryanair

IAG

P/E

15.9

10.6

Earnings per share growth

+16%

82%

PEG ratio

1.0

0.13

Based on these numbers, IAG looks a more appealing buy, but there are some other differences. Ryanair’s low cost structure means that its operating margin of 18% is more than three times IAG’s 5% margin.

All else being equal, this could mean Ryanair can generate more free cash flow than IAG and potentially offer greater shareholder returns, through dividends and share buybacks.

What’s more, both firms are targeting significant additional growth, but this sector is fiercely competitive. What’s more, Ryanair shares have risen by 180% over the last three years, while IAG has climbed 280% during the same period.

Is there another alternative with more untapped upside potential?

Enter Flybe

Flybe Group (LSE: FLYB) won’t be suitable for everyone. This loss-making £124m airline has issued a series of profit warnings which have seen its share price tank from a high of 150p in 2014 to just 56p today.

The airline has struggled to get rid of 14 surplus aircraft it cannot use that are costing a frightening £26m per year. However, solutions have now been found for seven of these aircraft and the firm raised £155m in a placing last year, so is well funded in the meantime.

Most of Flybe’s routes are short haul routes using small aircraft, where there is no alternative air service. This means that this company doesn’t necessarily face the same intense competition as carriers like Ryanair, IAG and easyJet.

When Flybe manages to resolve its legacy issues, underlying profits could to rise to around £19m, according to analysts’ forecasts for 2015/16. That breaks out as around 6.2p per share and equates to a forecast P/E of just 9.0.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »