Idea of the Day Ryanair down but not out

What: Budget airline Ryanair made a shocking announcement over the weekend that it was cancelling up to 50 flights a day for the next 6 weeks due to “mess up” that means a backlog of pilots’ will be taking their annual leave at the same time. How a listed company could make such a basic mistake is beyond us here at City Index, and although bonkers, this statement is very Michael O’Leary-esque, and when it comes to this man nothing much surprises us.

However, this proved a costly decision for Ryanair, whose share price slipped to its lowest level since April on the news. The share price has been in the doldrums since peaking in mid-August, and had already fallen some 14% ahead of the cancellation announcement, bucking the overall strong period for market sentiment. The question now is, where will Ryanair go next, in the past PR disasters have had little impact on Ryanair’s share price, so will this time be any different?

Overall, our view is that budget airlines tend to be lapse on customer service and get away with it because they can beat the competition on price; thus, the next few weeks’ flight cancellations may not harm the Ryanair share price in the long term.

How: There are a few things that make us think that the recent decline in Ryanair’s share price could be a turning point for the stock. Firstly, it has retraced some 61.8% of the gap that occurred when the stock opened this morning. That suggests that there is some latent buying interest in Ryanair’s stock that could stoke a broader recovery.

Secondly, today’s decline stopped short of the 200-day sma at EUR 16.27, which is a key technical support level. This move suggests that technical traders are watching Ryanair, and may have been waiting for a decline to this level before buying the stock. Bargain hunters could be on the prowl for Ryanair, which may help to fuel a deeper recovery.

Thirdly, market dynamics may also help to boost Ryanair’s share price. With risk sentiment high, and inflows into global stocks holding up well, investors are on the lookout for a bargain. With a P/E ratio of 14, lower than the 18 level for the overall Eurostoxx index, Ryanair looks cheap in comparison to the overall market, which could also attract potential buyers.

From a technical perspective, if we get a close in the next couple of days that fills this morning’s gap at EUR 17.09, then we may see further gains. Other key resistance levels to watch include EUR 17.94 – the 100-day sma – and then EUR 18.50 – the 61.8% retracement of the mid-Aug high to Monday’s low.