Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

As time passes, goods and services get more expensive -- think education, healthcare or housing. Not airfares, though.

In Europe, a spate of terror attacks and the airlines' overly-ambitious expansion plans have created a surfeit of airplane seats compared to demand. A boon for frequent fliers, a bane for investors.  

Low-cost operator Ryanair Holdings Plc isn't immune to these trends. In the last three months of 2016, its average fare fell a steeper-than-estimated 17 percent to 33 euros ($35). That's less than what some people would pay for a haircut in many European capitals.

Airfare Deflation
Ryanair is slashing fares as Europe's air travel market suffers from overcapacity
Source: company presentations

Yet Ryanair investors needn't be overly concerned. The company is famously stingy and getting even more efficient -- unit costs, excluding oil, fell a further 6 percent in the fiscal third quarter. That helped to limit the decline in net income to just 8 percent, a decent outcome given the horrible operating environment.

Back in the days when Ryanair was famously nasty to its customers, it was easy to identify scope for improvement. Today, that's much harder. Ryanair carried 16 percent more passengers in the quarter compared with the year-earlier period, suggesting the manners makeover is paying off.

Leader of the Pack
Ryanair's rapid growth and low operating costs haven't gone unnoticed by investors
Source: Bloomberg

But with the shares trading on almost 14 times estimated earnings -- a bit more than Easyjet Plc and much more than high-cost carriers like Deutsche Lufthansa AG and Air France-KLM -- Ryanair looks much less of a bargain than its fares.

That premium seems rich enough for now with fares set to remain under pressure for years. Deutsche Bank analysts expect the number of European short-haul seats to expand at more than twice the rate of demand growth until 2021.

Ryanair's low costs and strong balance sheet (net debt was a modest 576 million euros at the end of December) leave it better placed than most to ride out that storm. But customers, not airlines, will be the true winners in a world of fare deflation.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Fares include a bag

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