“Aviation in the evening, I can feel it coming on”
– Aviation: The Last Shadow Puppets
Professional fund managers tend to make their name by taking big sector positions. Famously Neil Woodford did very well avoiding banks, and owning tobacco companies. When I started everyone loved technology and hated mining companies. Then 10 years later this reversed, mining companies had hugely outperformed tech (caused by under investment and a commodity driven boom from China). Now technology seems to be back in fashion (Facebook, Amazon, Google etc) and companies like Lonmin have come to close to failure.
But I’m more interested in the huge disparity of returns within a sector. It’s easy to make generalisations and say “technology companies are great investments”…but not all technology stocks are. Groupon shares anyone? Snap?
Similarly not all “banks/restaurants/films are a terrible businesses”, just because most lose money. A few companies in the unloved sectors go on to be very successful. And it’s the unlikely successes that I’m most interested in. It appeals to the contrarian in me. I like the idea of thriving in an industry where most companies struggle.
The same goes for airlines, which is normally considered a terrible sector for investors. Sensitive to the economic cycle, high fixed costs (airplanes, staff), no control over variable costs (fuel price), that’s why most airlines are a poor investment. But some budget airlines have done really well, with their structurally lower cost operating model versus the “national flag carriers” like Iberia or Allitalia. But even within the subsector, performance varies widely. Budget airlines have very different results: Air Berlin has gone into insolvency. EasyJet is up 3x since it listed on the stockmarket. But the market leader in budget airlines is up 40x in the last couple of decades. 40x bagger that’s my kind of company.
Looking back it’s not particularly obvious which airline was going to massively outperform.
Airlines are so familiar – we think that we understand them. But I realised that I don’t really understand them. Or at least, I can’t answer why the winners have done so well, and the losers have done so badly.
An online travel agent like lastminute.com was put in the technology sector, but Ryanair has been much more successful at exploiting the internet, is still in the airline sector. Even in the 1997-2000 internet bubble Ryanair outperformed the wider stockmarket, up 300% in the 3 years after it IPO’ed in May 1997. At this point Ryanair was trading on 3.5x revenue and 20x historic earnings…not exactly a bargain, but still went on to be a multibagger over the next decade and a half.
Even if you believed that the internet was going to be bad news for traditional travel agents – the best idea was not to buy shares in an online travel agent like Lastminute. Customers who previously had used high street travel agents didn’t start using online travel agents, instead they cut out the middlemen completely. They started going directly to the airline websites, compare prices and book the cheapest flights directly.
Why is it flying so high?
Ryanair and easyJet have subtly different strategies. Ryanair’s strategy is to offer the lowest fares, but to fly to secondary airports like Oslo Torp and Frankfurt Hahn. Ryanair struck deals with regional authorities across Europe, who owned these secondary airports, and received money to fly to these out of the way places.
EasyJet focused on popular destinations like Geneva (good for skiing in Chamonix) and offering good value, “no frills” prices, but not the cheapest. EasyJet also thought hard about marketing its brand, targeting catchment areas close to airports. They deliberately didn’t use TV advertising because management thought it was too unfocused – but instead got lots of free publicity with a documentary about its workers at Luton Airport, which (unbelievably) got 7.5 million viewers in the early noughties.
For me, the best way to learn about Ryanair and easyjet is to go back and read the previous years’ Annual Reports. They are fascinating to read. One thing to notice is that Ryanair is never afraid to pick a fight, either with airport monopolies, competitors, elected politicians or regulators. They are happy to publish the low cost fares in their reports to shareholders.
The one thing Ryanair management are quite sensitive about is the accusation that the only reason they have done well is by paying their staff less. Or that they have bad labour relations. So they publish this table in their 2009 Annual Report.
One consequence of MIFID II is that management of companies won’t be able to rely on sell side research analysts employed by investment banks to make the investment case for them…they will have to make their own investment case in their Annual Reports to shareholders. I like reading these documents, I appreciate the really well written informative ones like (Ryanair, Burford, Games Workshop, even WPP) and have a quick laugh at the ones that just spout vague banalities (most large banks) before discarding them in frustration.
Michael O’Leary receives a lot of attention, because he tends to be outspoken. He wanted to charge customers for using the toilets. He also came up with the idea of expanding Ryanair to long haul flights. Offering Eu10 tickets cheap seats, then 10-15% super premium seats at the front of the plane with champagne and blowjobs included.
Meanwhile the former Chairman of easyJet Sir Stelios Haji-Ioannou sued his rival for libel, after a Ryanair advertising campaign that implied he lied about easyJet’s punctuality statistics. O’Leary responded by challenging Stelios to a running race around Trafalgar Square.
Bonderman and Rake
I think the lower profile Chairman of Ryanair is more interesting: David Bonderman. The US billionaire has been chairman of Ryanair for the last 20 years, and also founded a private equity company TPG and was on the board of Uber, until he resigned after making comments that were perceived as sexist at a board meeting. In the 1960’s Bonderman studied law at Harvard, and after completing his studies then traveled to Cairo, to study Islamic Legal Jurisprudence and Law and learnt Arabic. A Jewish lawyer in the 1960’s learning arabic jurisprudence in Cairo? Not the most obvious path to billions of dollars – it does show intellectual curiosity and to take an interest in obscure, unpopular areas. So Bonderman is a quirky figure, he went on to be a bankruptcy lawyer then making his billions investing in unloved banks and airlines. Unpopular sectors that others dismissed. Then becoming an early investor in Uber in 2013. He doesn’t get everything right, TPG tried to buy Bradford and Bingley, which I thought was worthless. But at least when he shows poor judgement he can walk away from the deal without losing money.
On the other hand Stelios is widely associated with founding easyJet, but actually stood down as Chairman in 2002. And later resigned from the board, complaining about the fact that the business hadn’t created much in shareholder returns.
The Chairman of easyjet after Stelios stepped down was Sir Colin Chandler then Sir Mike Rake. No doubt one of the best-connected people in the City (KPMG, BT and on the board of Barclays) an accountant who is more politically correct, good at climbing hierarchies, ticking boxes and counting beans. Not a risk taking entrepreneur though.
When Stelios and O’Leary started, they didn’t have much of a track record. But perhaps an investor could have looked at Bonderman and Rake’s track record, and taken a view that they would rather back Bonderman than someone like Rake.
Not what I’ve come to expect
There are a couple of things that I got wrong about Ryaniar. The first is that I’m generally against businesses that compete on price: it’s not very creative. As a rule of thumb I like businesses that can raise prices because they are doing something that their customers value. Anyone can open a bar that serves the cheapest beer, or is the lowest cost hotel in the city…you have lots of customers but you just don’t make any profit margin with the prices you charge. It’s better to find the businesses that can charge premium product (whether its craft beer or a tonic water) where there is a decent margin.
Ryanair’s strategy has been to offer the lowest fares in every market. But it has been able to do this while reporting higher margins than easyJet and other budget airlines. Not only that but average fares at Ryanair have actually fallen, from €54 in 1999 to €41 in 2017, despite this drop in prices revenues have increased 23x and profits are up 19x over the same time period. That’s highly unusual. None of the others (with the possible exception of Wizz) seem to be able to copy the lowest cost model. Which is ironic because both Ryanair, easyJet and Air Berlin copied the low cost model from Southwest Airlines in the US – which was a 100 bagger in the 1970s (a time period considered to be a terrible time to be an equity investor) – but only Ryanair has copied the Southwest Airlines successfully.
Returning the cash
The second thing I got wrong about Ryanair is that I don’t like companies that have to keep returning to the stockmarket to finance their growth. But Ryanair first came to the stockmarket with its IPO in 1996, but then came back 4 times for more money in 1998, 2000, 2001 and 2002. Companies that keep coming back to the stockmarket for more money often don’t have a viable business model. Ryanair though is different, since 2008 they have returned Eu5.4bn of cash to investors…10x the amount they raised in their early years.
“It’s the way you wing it while you’re figuring it out.”