Michael O'Leary has been forced to admit that the airline may have overstretched itself in the low-fares wars, writes Siobhán Creaton, Finance Correspondent.
Ryanair, Europe's somewhat smaller low fares airline, has despatched its top executives to meet the big investors who were on board for the sudden drop in cabin pressure on Wednesday.
Chief executive Mr Michael O'Leary has gone to the US to talk with some of the traumatised investors and to encourage them to continue to fly Ryanair. Others are offering words of comfort and support in the UK and Europe.
By yesterday afternoon they had managed to steady the airline's stock market flight path although they advised those still on board to keep their seat belts fastened.
The panic was sparked by the announcement that Ryanair had sustained greater injuries as a result of the fare wars raging across Europe, than it had previously disclosed.
When Mr O'Leary issued the first profit warning since it began trading on the stock markets in 1997 investors leaped for the emergency exits. By close of business a record 100 million Ryanair shares had been traded.
The shares nose-dived, crashing from €6.75 to €4.75, wiping €1.3 billion off Ryanair's stock market value. Yesterday the shares were steadier although no one was saying they have hit the floor.
The extent of the trauma can be gauged by the fact that at €4.86 Ryanair shares were trading close to levels last seen in the aftermath of the terrorist attacks on New York and Washington on September 11th 2001.
Mr O'Leary responded to that crisis by slashing air fares to simply get people to fly again. He also placed an order for more aircraft from Boeing, chasing a substantial discount at a time when airlines were laying off staff and closing routes.
It was a bold, aggressive and successful strategy and it worked. Ever since investors have been delighted as Mr O'Leary consistently delivered huge growth in profits and expanded Ryanair's reach to even more obscure airports across Europe.
Ryanair has sold itself to investors as Europe's Southwest Airlines. For almost a decade, Mr O'Leary has steadfastly imitated the business model designed by the Texas-based, no-frills airline, generally regarded as the world's most successful low fares carrier.
One of the model's key components was the use of secondary airports, often many miles from major cities, where facilities were cheaper and where it could turn its aircraft around in just 25 minutes.
Ryanair pioneered the same concept in Europe and now flies to old air-force bases from France to Scandinavia. In the three months to the end of December last, over six million people bought cheap flights to remote airports that can be up to an hour and a half away from their destination. Charleroi airport, some 46 kms south of Brussels, has become its most infamous destination.
At the start of 2004 investors were braced for a possible negative ruling from the European Commission on the deal Ryanair got from the Walloon regional government when it established its first European base there in 2001.
Most analysts suggested Ryanair could have to pay back up to €13 million if the Commission found that the discounts on landing and ground handling charges and monies paid to cover marketing, office and staff training costs, amounted to illegal state aid.
This week it became clear that the Commission would be seeking a refund and would also be using the investigation's outcome to establish guidelines for the terms that could be offered to airlines by state-owned airports.
Mr O'Leary has described the soundings coming from Brussels as the worst possible for Ryanair, and for low fares airlines, saying it will ultimately result in a hike in the cost of air fares.
The Commission's lengthy deliberations and speculation about the likely outcome has weighed on Ryanair's share price for months now.
Most analysts assured investors that even if the airline had to repay those monies in Charleroi and was forced to re-negotiate deals at up to 20 per cent of the other airports it used, it could cost up to €33 million. They pointed out that this was pretty small change for an airline making profits of more than €250 million.
In the longer term too, even if Ryanair had to revise many of its airport deals, this would account for about 18 per cent of its cost base and would not be sufficient to loosen the wheels on its low- cost model.
The Commission's decision is expected next week and will continue to cast a cloud over Ryanair in the near term. Mr O'Leary, a man known to never issue refunds, has been adamant that he will appeal a negative decision in court. This will just prolong the uncertainty surrounding Ryanair.
His problems with the Eurocrats in Brussels may yet turn out to be the least of his worries though, as it is the price war that Mr O'Leary has so ably waged on his despised competitors across Europe that is a bigger concern. Ryanair claims to offer the lowest fares in every market and has been wreaking havoc to win new customers in the UK, Italy, Germany, Scandinavia and, more recently, Spain.
Through seat sales and promotions it has flooded these markets with both free and cheap fares to win more customers. It also ordered larger planes from Boeing with the capacity to bring another 30 people on each flight to each of its destinations.
Investors were stunned to hear Mr O'Leary say he wasn't fully sure why Ryanair's fares had been driven so low as to affect its profits this year. He accused Ryanair's competitors of "dumping" cheap fares and of "below-cost selling" but was forced to admit that the cheeky Irish airline may have been the author of its own misfortune and just overstretched itself.
The group of investors who purchased some of the 6.8 million shares sold for €6.90 each a fortnight ago by members of the Ryan family - which founded the airline - will have been feeling distinctly travel sick on Wednesday and will be in no mood to listen to Mr O'Leary's excuses.
This is a challenging time for Ryanair and its brash chief executive and it will take all of his considerable skills to help investors conquer their fear of flying.
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