Above the Clouds: Ryanair, Volatus Aerospace and Air France-KLM in Focus

Ryanair: Stability in the Skies

Lufthansa expects additional costs running into the billions due to jet-fuel prices—this year alone. Like many other airlines, Lufthansa is suffering from the consequences of the war in the Persian Gulf. It remains to be seen whether the worst is behind us. The situation is somewhat different for the low-cost carrier Ryanair. "Cut costs" has always been the motto of CEO Michael O'Leary, who has been at the helm of the Irish airline for more than 30 years now. Ryanair's operating costs per passenger are in the range of EUR 55. That is about a quarter of the figure for its higher-end competitors. This makes the business model far more resilient in tough times like these. On top of that, the company now professionally hedges more than 70% of its fuel needs using derivatives. Not to be overlooked are the many small things O'Leary does. The company consistently relies on a single aircraft type (the Boeing 737), which reduces maintenance costs. Furthermore, every extra service costs money, which now accounts for 30%-35% of total revenue—from seat reservations and priority boarding to baggage fees and in-flight sales.

In the past fiscal year, ending in March, Ryanair further increased passenger volume to approximately 207 million (+3%) and achieved a seat load factor of 95%—the highest in the industry. Profit after taxes rose by 40% to EUR 2.26 billion. Total revenue came in at around EUR 15.6 billion, partly due to a stabilization in ticket prices.

By 2030, management aims to gradually increase annual passenger volume to between 220 and 300 million. In addition, the fleet is being modernized. The new 737-MAX aircraft offer 4% more seats while consuming 16% less fuel.

Although Ryanair's stock has been volatile this year, the big picture remains positive. Since its 2022 low, the share has gained more than 130%. The EUR 750 million share buyback program, which runs through the end of the year, is certainly helping. Investors can bet on growth in the aviation sector here, but should expect high volatility—as with all airlines.

Volatus Aerospace: Giant Leaps in Q2

Volatus Aerospace delivered strong results in the second quarter. This applies to both operations and financial figures. The Canadian drone pioneer has opened its manufacturing facility in Mirabel, Québec. Autonomous drones are set to be produced there. Added to this are the many small steps that can turn a small-cap company into a major enterprise. For instance, the company raised CAD 34.5 million from shareholders through a bought deal. This means the company is well-equipped for the investment phase. On top of that, there are numerous partnerships designed to support the business, such as those with the US provider Kraus Hamdani Aerospace or Singular Aircraft.

Orders are also coming in steadily, as drones are currently in high demand, especially in the defense sector, which is particularly true for NATO countries. For example, the company was able to secure a multi-year training contract with a member of the North Atlantic Alliance. What is really important, however, is that Volatus Aerospace is now gaining increasing acceptance among major nations. For instance, the company is currently in the Phase II evaluation of the US Drone Dominance Program for long-range platforms. Since European countries are also currently allocating massive budgets for drones, Volatus can benefit from the positive market environment.

The Canadians are also making progress in financial terms. In the second quarter, the company generated CAD 8.4 million in revenue, 49.5% more than in the first quarter. The gross margin reached 29%. However, due to investments in facilities and technology, the company still posted an EBITDA loss of CAD 4.35 million. Nevertheless, its balance sheet remains strong. The cash position stands at CAD 59.2 million. According to the company, this is the highest figure in its history. Volatus is likely to benefit in Q3 from orders that could not be finalized in Q2. Another positive: the service business grew by 59% quarter over quarter.

Volatus Aerospace's stock is working on forming a bottom following the correction triggered by the outbreak of the war in the Persian Gulf. With a market capitalization of around CAD 355 million, there is plenty of upside potential if management continues to deliver growth.

Air France-KLM: Torn Between Two Options

Should one invest in an airline in which two governments hold stakes and have a say in strategic matters? This is not an easy question to answer. The shares of the Franco-Dutch group have held up well since the start of the war in the Persian Gulf. The share price has risen by about a third since its March low.

Air France-KLM traditionally benefits from the recovery and expansion of profitable long-haul routes, particularly to North America and Asia. In recent years, the company has intensified its focus in this area; now, over 35% of revenue comes from premium classes. The maintenance business is also performing strongly, generating stable, high-margin revenue—regardless of fluctuating passenger numbers.

On the other hand, Air France-KLM's management still has a lot of work ahead of it. In 2020, France and the Netherlands jointly rescued the airline from bankruptcy—the pandemic had taken its toll. The consequences are still being felt today. The company's debt is high, and the interest burden severely limits its leeway for dividends and share buybacks. On top of that, the "Seahorse" (Air France) and the "Royals" (KLM) are already considered quite expensive airlines, particularly in terms of personnel costs. Additionally, the group pays relatively high airport fees at its main hubs in Paris (CDG) and Amsterdam (Schiphol).

Analysts are not necessarily helpful when it comes to deciding on an investment. Most experts recommend "Holding" the stock. Price targets are largely in line with the current share price, though JPMorgan is the most bullish. At the end of July, the investment bank set a target of EUR 16 and emphasized Air France-KLM's pricing power. Most other analysts, however, view the high debt burden with concern.

Air France-KLM continues to struggle with its high debt burden but is slowly getting back on track. The stock is considered the cheapest among all premium airlines with a P/E ratio of 4. Drone pioneer Volatus reported strong Q2 results and is now investing in technology, manufacturing, and partnerships to generate future cash flows. At Ryanair, as always, the focus is on costs. Management is skillfully navigating these challenging times for airlines. The Irish company is arguably the best-managed in the industry.