Michael O’Leary, acting as a vigilant steward both at the Aintree race track this week and in stock market affairs, is deploying four geldings in Saturday’s Grand National, with Delta Work presenting the most favourable odds. Simultaneously, he’s been closely monitoring Ryanair’s share value. Mirroring the nervous anticipation of the racecourse, a share price above €21 could secure the long-serving airline executive a substantial €100 million stock option bonus, provided it holds for 28 consecutive days. This landmark was briefly eclipsed three weeks ago but has since faltered, falling short of the required length of time.
Interestingly, this achievement has been hindered by a surge in oil prices, which has deterred investors due to escalating tensions in the Middle East. Originally intended to expire this year, this incentive scheme – which could also be activated by Ryanair recording a €2.2 billion annual profit – was renewed until 2028, when shares were valued under €13.
The story could have taken a different turn if O’Leary’s bonus had been tied to Ryanair’s US American depositary receipts (ADRs). As EU laws limit non-EU ownership of airlines to 49.9%, Ryanair proactively extended its ban on non-EU investors acquiring ordinary shares to include the UK following Brexit. This restriction leaves non-European investors with the sole option of trading in Ryanair’s ADR’s.
In a markedly conservative move to avoid breaching international ownership rules, the airline has forbidden the Bank of New York Mellon, in its capacity as its ADR programme’s US bank, from converting ordinary shares into fresh ADRs for over two decades. An extension of this protectionist approach, Ryanair stopped its London listing and stripped the voting rights of non-EU stakeholders in 2021.
As of June last year, 43 percent of shares were held by 54 ADR owners. Ryanair’s ADRs currently cost $143.63, translating to a per ordinary share equivalent of €27.39. This results in a market capitalisation of $33.2 billion (€31.1 billion) for the airline, surpassing Delta Air Lines’s $30.6 billion and making it the most valuable airline globally. The ADR-based valuation surpasses the €23.7 billion value derived from ordinary shares in Dublin by over 30 percent, a gap that has never been wider, as per Bloomberg data.
Joe Gill, the director of origination and corporate broking at Goodbody Stockbrokers, shares that the increasing ADR premium signifies rising demand amongst North American investors for Ryanair’s equity. Ownership rules, however, restrict this exposure. Additional factors contributing to the premium increase include the growing disparity in ESG investing between Wall Street and European counterparts.
Ryanair asserts its European leadership in the fight against climate change in the aviation sector, revealing plans to grow its fleet of fuel-efficient aircraft, utilise sustainable aviation fuel on 12.5% of flights by the decade’s end, and invest in carbon offset schemes. Yet, the airline’s latest sustainability report shows that it released almost 14.3 million metric tonnes of CO2 equivalent via jet fuel consumption as it transported nearly 182 million people up to March 2023.
Europe outpaces America in sustainable fund assets, with European holdings seven times that of the US following five consecutive quarters of US downturns. This is backed by data from US financial services firm Morningstar, showing the US’s fourth-quarter sustainable investment funds outflows at $5.1 billion, while Europe saw $3.3 billion of incoming investments.
The London Stock Exchange Group’s most recent survey revealed the distinct priorities of European and American pension schemes: nearly 75% of European funds cited climate change as a key investment focus for 2023, compared to just over 50% of US funds.
The ethical, social, and governance (ESG) movement has generated quite a controversy in the United States these recent years. Predominantly spearheaded by conservative figures, many object to what they perceive as ‘woke capital’ and are seeking to dilute rules that encourage transparent practices. Some political leaders are even attempting to establish laws that would criminalise the consideration of ESG factors in state fund investments. One such law was proposed in New Hampshire earlier this year, threatening up to two decades of imprisonment, but was eventually voted down in February.
While America is grappling with these problems, Europe seems to have largely sidestepped this opposition. Indeed, Europe is generally supportive of environmentally friendly initiatives, both politically and among the general public. This raises the question, could this support help to widen the valuation disparity between Ryanair’s conventional shares and American Depositary Receipts (ADRs)?
For Ryanair’s Michael O’Leary, his attention remains predominantly on traditional shares. The next event expected to boost the company’s stock, which was still below €21 this past Friday but had increased by 40% year-over-year, might be the release of the annual results due on May 20th.
Muneeba Kayani, a Bank of America analyst, expressed in a recent review that she would be watching for updates on summer reservations, flight fares, Boeing’s delay in delivery and whether there would be an announcement of a new share buyback scheme.
She stated that the airline consistently exhibits top-tier operational efficiency and is a cost leader in Europe, this combined with a healthy balance sheet allows for profitable growth from share increases.
Last month, O’Leary responded to queries about his bonus scheme during a Wall Street Journal interview. He compared his €100 million five-year package to the €20 million per year that premier league footballers earn and the €130 million contract French football sensation Kylian Mbappé received to be part of Real Madrid. He defended his agreement, stating that it presents a fair deal to Ryanair’s shareholders.