Falling air fares behind Ryanair’s second profit warning in as many months
Austerity and competition continuing to chip away at airline’s business
Michael O’Leary during an interview on Bloomberg Television in London yesterday. Ryanair predicted a profit drop for its fiscal full year as increased competition and weaker economic conditions across Europe weigh on earnings. Photograph: Matthew Lloyd/Bloomberg
At the close of business yesterday, Ryanair was worth around €2 billion less than two months ago, ahead of the first of two profit warnings, the second of which it issued yesterday. Shareholders have lost around 20 per cent of the value of their holdings in the company over that time.
Ryanair now expects full-year profits to be between €500 million and €520 million, far lower than the €570 million to €600 million range estimated in the first of its two profit warnings.
Its shares plunged by more than 12 per cent following the news yesterday morning. Despite this, deputy chief executive, Howard Millar, said discussions with investors in London and Dublin indicated that they still believe the company’s fundamentals remain strong. “We are still going to make over half a billion this year,” he said. “That’s a good performance from any company.”
There were a number of ingredients to the first profit warning, including weak demand and the euro-sterling exchange rate. This time around it it’s air fares. Ryanair expects the amount that people will pay for tickets to fall by 9 per cent in the third quarter of its financial year – the three months to December 31st.
In the succeeding three months, it believes fares will fall 10 per cent. It has managed to cut costs per passenger by 7 per cent and it is seeing a slight rise in actual numbers, but the net effect means that sales will generate less profits.
All this has come after the airline unveiled ambitious growth plans earlier this year based around its €11 billion- or-so purchase of 175 new craft and a pledge by chief executive, Michael O’Leary, to improve customer service.
One of Ryanair’s problems is that it has no real idea how long this weakness will last. Its statement says it has “zero visibility” about what will happen in the fourth quarter. “It should right itself by next spring, but we will tell you when we get there,” Millar said.
He pointed out that even though Europe is meant to be on the road to recovery, “the man on the street has probably not had a pay increase in five years”. In short, austerity is continuing to chip away at its business.
Along with this, the airline is facing increased competition, something it acknowledged very clearly in September. Yesterday, Brenda Kelly, senior strategist at IG Index, said Ryanair’s approach has been cannibalised to a degree by other airlines, including Easyjet and Aer Lingus.
Ryanair’s response to all these problems was typically aggressive: it cut fares and launched a series of seat sales. Yesterday it said that a 6 per cent rise in traffic in October vindicated this approach. It is too early to establish if its recently-trumpeted customer service improvements have had any impact.