Ryanair Predicts Full-Year Profit Drop as Competition Grows

Ryanair Holdings Plc (RYA), Europe’s biggest discount airline, predicted its first profit drop in five years as greater competition drove a decline in air fares.

Profit after tax for the year ending March 31 will be 500 million euros ($674 million) to 520 million euros, the Dublin-based carrier said in a statement today. The company previously predicted net profit of as little as 570 million euros and had cautioned that it might fall short of that number. Ryanair slumped as much as 12 percent in Dublin trading.

Ryanair has slashed prices and said it will ground as many as 70 aircraft for the winter season to take out capacity. Chief Executive Officer Michael O’Leary, whose brash outspokenness has come to define Ryanair’s business model, has said he may need to moderate his approach to win over fliers. The company said today it will offer fully allocated seating from February, a further departure from its no-frills service.

“While the next six months look a good time to take a low-cost Ryanair flight, it is not shaping up as a good investment outlook,” said James Hollins, an analyst at Investec Securities in London. “Investors need to decide whether Ryanair can drive sufficient traffic growth and yield increases in fiscal year 2015 and onwards.”

First Half

Ryanair declined as much as 71 cents to 5.39 euros, and the report weighed on shares of smaller competitor EasyJet Plc (EZJ), whose stock dropped as much as 6.9 percent in London. Other airlines in Europe, including Deutsche Lufthansa AG (LHA), also fell.

Profit after tax last year was 569 million euros. Profit for the first six months of the fiscal year gained 1 percent to 602 million euros, as the airline flew 49 million passengers. Revenue rose 5 percent to 3.26 billion euros. Seeking to take advantage of lower fuel prices, the carrier said it extended its fiscal 2015 fuel hedge to 60 percent at $94 per barrel.

“We identified in September that we saw softer economic conditions, we now see them throughout Europe,” Chief Financial Officer Howard Millar said in a telephone interview. “We’re impacted by weaker sterling-euro and generally there are a lot of very low fares out there, so a softer economic environment driving low fares.” The airline will continue “aggressively filling” aircraft, he said.

Heatwave

Rivals across Europe including Air France-KLM Group (AF) and Aer Lingus Group Plc (AERL)have a slashed earnings targets as a stronger euro and sluggish economic growth weigh on sales. While forward bookings are ahead of last year, fares are set to drop by 10 percent in the fourth quarter, Ryanair said, adding that the next 12 months will see a “brief pause” in traffic growth following two decades of consecutive expansion.

Shares slumped 11 percent on Sept. 4, the day Ryanair first warned that profits might fall below guidance. The stock has gained 18 percent this year, valuing the carrier at 7.67 billion euros.

The 2 percent decline in first-half fares was driven by the timing of Easter, a summer heatwave, a weaker sterling and strikes in France, Ryanair said. While fares have retreated, ancillary revenue, which includes sales on extra services, have grown 22 percent to 713 million euros over the past six months.

The carrier said it plans to complete 150 million euros of additional share buybacks by the end of fiscal year 2014 after having repurchased 177 million euros-worth in the first half. Plans to return as much as 600 million euros to shareholders via buybacks and special dividends by the end of fiscal year 2015 are unchanged.

With an eye to the digital marketing success of rival EasyJet, Ryanair has embraced Twitter, now offers its mobile-phone app for free and is planning a range of enhancements to its website to make it more user-friendly.

The move to allocated seating is “a clear yield-enhancing measure,” Barclays Capital analyst Oliver Sleath said in a note to investors today. “We see signs that Ryanair recognizes a greater focus on yield is necessary in the current environment.”