Future earnings growth at low-cost airline Ryanair (RYA) could be driven by higher ancillary sales, instead of aggressively slashing ticket prices to drive sales volumes, according to Deutsche Bank.

Traditionally, the market focuses on ticket prices and load factor, which is the percentage of available seats on scheduled flights occupied by passengers.

In the year to 31 March 2017, average fares fell 13% to €41 while load factor was up 2% to 96% in the year to June 2017.

Deutsche Bank analyst Anand Date believes that investors are fixating on the wrong factor at Ryanair, flagging that over 75% of group profitability is ancillary derived.

‘Ryanair is, in our view, still in the preliminary stages of generating a significant uplift in its ancillary profitability’, comments Date.

Sales in this division are generated from non-tickets sources, including baggage fees, on-board food, car hire and hotel bookings.

If Ryanair focuses on ancillary sales growth to help offset its low ticket prices, this could theoretically help to boost overall profitability.

However, news (19 Jul) that companies will no longer be able to add surcharges for UK card payments from January 2018 is negative for Ryanair’s ancillary revenue. Airlines are among the worst offenders with 2% to 3% typical fees for customers who pay for tickets with credit cards. The card fee clampdown is part of an EU rule change.

Deutsche Bank says ancillary sales could be supported by an increase in the number of passengers flying, a greater breadth of ancillary services and higher spend per customer.

Group net profit is expected to rise by 8% to a range of €1.4bn to €1.45bn in the financial year to 31 March 2018.

Ancillary revenue is becoming a bigger part of Ryanair’s business. The airline says it is currently on track to reach 30% of total sales from this source of income by March 2020.

Revenue generation from ancillary products has been strong in the past, reflected by a 13% sales jump to €1.8bn for this part of the business in the year to 31 March 2017. That represented 27% of group revenue.

Deutsche Bank is not the only one flagging ancillary services as a potential growth driver. Davy analyst Barry Dixon says ancillary revenue growth, improved economics from Boeing Max aircraft and cash flow generation over the next five years could help push Ryanair’s share price to €25 over the next year. It presently trades at €18.47.

Buy at €18.47.

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