☀️☕️ Airline Industry Success: Ryan’s Flyin’

📝 Focus

• Ryan’s Flyin’

📊 In the Markets

• China’s Big Bang?

📖 MoneyFitt Explains

🎓️ Capital Intensive Businesses

📝 Focus

Ryan’s Flyin’

Irish low-cost carrier Ryanair announced profits after tax for the first half up 59% on the previous year to €2.18bn, capitalising on a robust summer season with average air fares nearly a quarter higher. With industry supply constraints expected to continue, airfares are likely to remain high in the foreseeable future. 

It joins a list of airlines, including European peers British Airways, easyJet and Air France-KLM, that have reported sparkling summer earnings. The whole travel industry has been on a roll post-pandemic as consumers continue to prioritise experiences over stuff.

The airline is projecting full-year net profits to next March of €1.85 to €2.05 billion, taking it past the record set in 2018, though it sounded a note of caution on factors like geopolitical unrest and a significantly higher fuel bill. But Ryanair’s cost base remains at least 50% lower than its key rivals’.

..... ▷ Ryanair's strong performance throughout the pandemic years followed by the sharp rebound of European air travel has strengthened its financial position. 

A bit of a capex holiday next financial year (i.e. the year to March 2025) between order deliveries (all basically still Boeing 737s) will keep its balance sheet solid and could allow further share buybacks.

..... ▷ More surprisingly, Ryanair is for the first time planning to start paying regular dividends of about a quarter of the prior-year’s after tax profits, reflecting the airline's "maturity" following decades of capital spending and market share building, which has taken its route network to over 200 destinations across 40 countries.

..... ▷ A year ago, Ryanair was not only Europe’s largest low-cost airline by market value, it was its most valuable airline full stop, and sat at number 4 globally, bigger than full-service powerhouses such as Singapore Airlines and United Airlines and even more than quasi-flag carriers Qantas and Cathay Pacific combined. 

But now it’s sitting at #1, having overtaken not only Air China and Delta Airlines, but the former Top Dog, Southwest Airlines, the 52-year old OG of low-cost airlines, with a stock ticker "LUV" named after its home airport Dallas Love Field.

LUV under the legendary Herb Kelleher was the originator of the business model where strict cost control extended to choosing non-central airports and keeping planes in the air as much as possible with minimal turnaround time. 

Keeping fares much lower than regular airlines (with bloated costs and a reliance on premium passengers to drive the bottom line) meant they could keep the single aircraft type planes, almost all Boeing 737s from the start, fuller and running more efficiently both in the air and on the ground.

..... ▷ Many investors, among them Warren Buffett, avoid investing in airline stocks due to the industry’s poor track record of profitability as airlines are capital intensive🎓 businesses with high fixed and variable costs.

The industry is highly competitive, with low barriers to entry and exit, making it difficult for airlines to maintain pricing power and achieve sustainable profits, particularly across cycles.

(However, Buffett did invest in the four major American airlines in 2016, only to sell all of them off in 2020 due to the coronavirus pandemic.)

📊 In the Markets

South Korean stocks burst out of the blocks on Monday, outperforming other Asian markets, after the country's financial watchdog banned short-selling for eight months. 

Seoul's Kospi index soared 4.5%, its biggest one-day gain since June 2020. But other major markets did well too, with the Topix, CSI 300 and Hang Seng indexes all up over 1% as Asian stocks extended their rally for a fourth straight day, following Wall Street's best week of the year.

The country’s Financial Services Commission fined HSBC and BNP Paribas a combined $41mn for naked short selling (i.e. without having already arranged the stock to borrow, which is illegal there.) The FSC is like a blend of the Securities and Exchange Commission (SEC) and the Federal Reserve (Fed) of the United States, but without the monetary policy role of the latter, which is with the Bank of Korea. It was established as part of the government's response to the Asian Financial Crisis of 1997-1998.

European markets didn’t do much, but higher oil prices helped the UK’s energy-heavy FTSE 100 close marginally higher on the day.

Saudi Arabia and Russia confirmed they would maintain their production cuts to cushion prices amid concerns over weaker demand from a softening global economy. Tougher sanctions on Iranian oil exports from the US also sent global benchmark Brent Crude up about 1.5% to $86.17 per barrel. 

And though US stocks opened higher on Monday, they struggled to maintain the momentum from last week’s strong rally and closed flat for the day. Last week saw the S&P 500 and the Nasdaq jump 5.9% and 6.6%, their biggest weeks since November last year. 

Last week also saw Treasury bond prices recover after the 6-month-long rout that pushed yields up to 16-year highs. Some of the buying momentum would have come from short-covering after the Fed left rates alone and jobs data came in soft.

But if the higher Treasury yields were at least partly doing the Fed’s job for it in cooling the economy, sending stocks up sharply the last week and a bit, then these (slightly) lower yields could do the opposite, or at least give stocks cause to pause.

Meanwhile, ahead of Federal Reserve Chair Jay Powell’s comments on Thursday, Fed Governor Dr. Lisa Cook said she hoped that the Fed's current interest rates are adequate to return inflation to the Fed's 2% target.

And addressing the bond-geek obsession du jour, Cook also noted that the recent increase in long-term US bond yields appears unrelated to investor expectations of more Fed rate hikes. 

She highlighted the importance of distinguishing between market yields influenced by central bank actions and those affected by other factors. The latter could potentially impact financial conditions and curb demand and inflation, regardless of Fed's actions, but the former would need the Fed to follow through. 

China’s Big Bang Moment

Shares in Chinese brokerages jumped on Monday on state media reports that the China Securities Regulatory Commission will support brokers to “become better and stronger” through  buyouts, mergers, acquisitions and restructuring to help create investment banks.

The Hong Kong-listed shares of China International Capital jumped 6.3% while Guolian shot up 10%, with Huatai and Citic Securities also trading up.

If followed through, more consolidation in the financial sector could be a very significant development. It suggests that the Chinese government is willing to allow the creation of larger and more competitive financial institutions, which could benefit the Chinese economy in the long run.

..... ▷ China's financial system has grown rapidly in recent decades, becoming one of the largest in the world.

It has a diverse range of financial institutions, including banks, insurance companies, securities firms, and asset management companies. The system is also highly interconnected, with complex relationships between different market participants.

The consolidation of the financial sector could have a number of benefits for the Chinese economy. First, it could lead to lower costs for businesses and consumers by giving them greater access to capital. Second, it could lead to increased innovation and improved risk management in the financial sector. Third, it could make the Chinese financial sector overall more resilient to shocks.

..... ▷ The support for buyouts and mergers in the financial sector is likely motivated by a number of factors. 

First, the Chinese government is likely concerned about the profitability of Chinese brokerages. The brokerage industry has been struggling in recent years, due to factors such as slowing economic growth and increased competition from foreign banks. Second, the government hopes to create larger and more competitive financial institutions that can compete with global banks.

However, there are also some risks associated with consolidation in the financial sector. It could lead to a decrease in competition and increased concentration of risk while potentially making it more difficult for the government to regulate.

..... ▷ It is not yet a financial deregulation or Big Bang of the sort that New York and London went through in the 1970s and late-1980s, though some of these reforms could lead to a Big Bang-style event.

A Big Bang is a sudden and dramatic liberalisation of a financial market that should lead to increased competition, innovation and economic growth but can also lead to increased volatility and risk.

(The Big Bang in London was a response to the need for modernisation and increased competition in the financial industry. It came about as the result of an agreement to settle a wide-ranging antitrust case against the London Stock Exchange. They were part of a broader trend towards deregulation and globalisation in the financial markets that continued into the 1980s and beyond, and included the abolition of fixed commission charges and the distinction between stockjobbers and stockbrokers on the London Stock Exchange, and the change from open outcry to electronic trading.)