Ryanair: A lean, mean investment machine
A flight with Ryanair can often require a bit of mental preparation. For a few hours, life will consist of little more than cramped seats, water bottles sold at a premium and entertainment by way of a safety card plastered to the front of your seat.
But when the flight from London to Naples costs under £20, this seems, literally, a small price to pay. And Ryanair knows it.
According to Fidelity fund manager Marcel Stötzel, the brazen acceptance of this standard by the airline, and by those who fly it, is exactly why the company is a success.
“Part of the reason why Ryanair is the lowest cost provider is because the firm has done something really smart. I haven’t seen any other company do this in the world. It has convinced its customers to accept the absolute bare minimum,” Stötzel said.
This acceptance has even become part of the company’s brand. It’s X profile page is filled with reposts of unhappy clients, who Ryanair pokes fun at in return.
“Ryanair has created this environment where your expectations are really low. Sometimes those low expectations are not exceeded, but sometimes they are. But then what that means is Ryanair can offer a level of service at such a low cost,” Stötzel said.
“If BA tried to charge you for a bottle of water on the flight, people would be up in arms. But Ryanair can easily do it. If easyJet tried to charge you £50 for a printed boarding pass, people would go crazy, right? And that’s just one manifestation of it. The way it runs the planes, the staffing and the quick turnaround times, it’s a lean, mean machine.”
In addition to the customer experience, Ryanair saves money by owning its planes, instead of leasing them like many other major airlines. The strategy also affords them some immunity from market wobbles.
“If you think of leasing as like renting or owning a house, obviously, in the long term, it’s cheaper to own than rent. It’s the same with planes. But that gap has widened even further recently, because interest rates have gone up. So lease rates have gone up accordingly, but, because they own the planes, they have no impact from that,” Stötzel said.
Despite not offering a luxury experience Ryanair does provide one perk to its customers that may draw them in along with the lower price tag: for the past two years, it’s been the most punctual airline in Europe.
“Some people will voluntarily fly with Ryanair for a work trip, because they know the flight will arrive on time. It’s much more likely than BA. And if you’re doing three or four trips per month, and one of them ends up delayed, meaning you arrive home at one in the morning,” Stötzel said, “you just say, ‘I’d rather go with the one that arrives on time and is slightly less luxurious.’”
UK domestic companies offer food for thought
While UK businesses grapple with higher costs following last autumn’s budget, domestic companies can still be an attractive proposition despite facing headwinds, according to Martin Currie’s Richard Bullas.
Bullas co-manages the £425m FTF Martin Currie UK Mid Cap fund, which invests in a concentrated portfolio of 35 FTSE 250 stocks.
“We invest across the FTSE in domestic companies and international businesses. At the moment, we’re trying to tread a bit of a line,” he said. “We have been quite optimistic on a domestic recovery over the second half of last year. But clearly, we’ve got to be cognisant given last autumn’s budget and some of the announcements which have increased costs [for UK businesses].
“The domestics have started to price that in and we’ve seen from some of the retailers over the Christmas period that the trading outlook has been a bit muted. Consumers are still very cautious in how they are spending. However, we do see some opportunities within domestic companies.”
Bullas points to Cranswick as a strong domestic play, which sits among the fund’s top 10 holdings. The company provides food for supermarkets and eateries such as McDonald’s. It supplies proteins such as pork and chicken.
“Ultimately, the consumer is its customer, but it is supplying Tesco and Sainsbury’s for their product,” Bullas said. “What retailers found over the Christmas period is that consumers do find eating out expensive at the moment, given inflation, and instead are willing to treat themselves at home.
“There is a bit of a trading-up trend, with consumers dining at home and wanting to treat themselves to a better product, so they’re moving up to slightly more premium products in the supermarkets. Cranswick has demonstrated it has a great product range in that category.”
Over the year to 21 March, Cranswick’s share price has risen 23.6%.
Bullas added Cranswick’s competitors are largely owned by private equity and are highly financially geared, which could prove to be a competitive advantage for the publicly listed company.
“It is a business that is taking market share and it’s a great example of a company with a very strong balance sheet.
“In an environment where there are high debt costs, high servicing costs, or cashflows are having to go back to the bank to pay the interest on the outstanding balance, those companies are not investing as much into capital, equipment or growth. It’s allowing Cranwick, with its balance sheet and low debt profile, to continue to take market share and win new business by investing.
“In the past 18 months, it has won the McCrispy chicken sandwich business for McDonald’s, which is fantastic.
“If you look through Covid, its profits are up 50% in five years. It has taken another leg up in the past five years, given the market dislocation. More importantly, it has invested in new product development.”
Small UK tech player makes big waves
Sedgefield in Durham is the unlikely home to Filtronic, an AIM-listed tech stock that forms a cog in the supply chain for SpaceX. The firm, which manufactures radio frequency components, shows that the UK can produce leading tech companies, according to Rockwood Strategic portfolio manager Richard Staveley.
“This could be an exciting, potentially famous British technology company that few people own,” Staveley said. “There are only a few institutions invested, making it a unique opportunity. It’s a good example of how the UK stockmarket isn’t just about traditional sectors like banks and oil, but includes innovative technology companies.”
The £96m UK small cap-focused Rockwood Strategic investment trust began buying Filtronic shares at 12p per share just over 18 months ago. At the same time, the company started receiving orders from Elon Musk’s SpaceX. Its share price currently stands at £1.10.
The company makes up 7.9% of Rockwood’s portfolio, according to the investment trust’s latest fact sheet, making it the trust’s third-largest position.
Filtronic calls Sedgefield its home due to its proximity to Durham University, according to Staveley, which is a leader in radio frequency technology. “At the most basic level, Filtronic supplies components into first responder walkie-talkies in America, made by Motorola. That’s its cheapest product. Its a low wavelength, easy-to-do, commoditised technology. But as you want more complicated and faster data, you have to go up the wavelength.
“It works in defence, providing the radar system for the Eurofighter. Elon Musk has revolutionised the economics of space with re-entry rockets, making space access much cheaper. He created a satellite network with Starlink – an internet-based satellite system now surrounding the Earth with around 5,000 satellites.
“The service is doing well, with increasing subscribers wanting low-latency internet. Whether for high frequency traders, billionaires’ yachts, or people wanting to be off the normal grid, satellite connectivity is key. As demands increase, you have to go up the wavelength, which is a difficult problem Filtronic has solved for SpaceX.
“Currently, Filtronic provides components for ground stations. With fewer ground stations than satellites, they’re working to develop products for actual satellites. Other tech leaders like Jeff Bezos are developing rocket technology and satellite networks that will need to solve similar technical challenges.”
Rockwood Strategic is one of only a handful of investment trusts that currently trade at a premium. It has returned 190% over the past five years, according to FE Fundinfo data, compared with 88.5% for the average UK small cap trust.
Staveley runs a concentrated 24-stock portfolio, made up of the “smaller end of small cap” and AIM stocks. Alongside Filtronic, Rockwood has a large position in RM PLC, a provider of IT products to educational organisations. The company is the trust’s largest holding at 13.1%.
This article first appeared in the April issue of Portfolio Adviser magazine