Profit warning wipes £1bn off budget airline Ryanair

No-frills carrier hit by savage air fares war; Earnings set to fall 10%; Wage freeze in the offing
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The Independent Online

The meteoric rise of Ryanair came to a shuddering halt yesterday after the budget airline warned that savage cuts in air fares would result in its first fall in profits in 15 years.

Shares in the low-cost Irish carrier plunged 30 per cent on the news, wiping more than £1bn from its market value. Ryanair's no-frills rival easyJet was also caught in the downdraft, its shares tumbling 8 per cent.

Ryanair's chief executive Michael O'Leary compounded the grim news by warning that an impending ruling from Brussels outlawing state aid for regional airports would be a "disaster" for the whole of the low-cost airline sector and would ultimately drive up fares.

The crash in Ryanair's share price enabled British Airways to overtake it in terms of value, with a market capitalisation of £3.3bn against £2.44bn for its no-frills competitor. Ryanair had been forecasting a 10 per cent increase in net profits for the year to the end of March but yesterday it said it now expected net profits to fall by 10 per cent to ¤215m. Pre-tax profits for the third quarter fell 6 per cent to ¤44.8m.

Mr O'Leary blamed the reversal on an "enormous and sudden" decline in yields and fares caused by intense price competition and the huge increase in seat capacity that Ryanair and other low-cost carriers had put into the market.

Ryanair's average fare was ¤35.60 (£24.50) in the last three months of 2003 compared with ¤49 in 2002. This month, the average fare has been just ¤30 and Mr O'Leary forecast that for the coming year fares would fall by between 5 and 20 per cent from the ¤42 achieved across 2003 as a whole.

Ryanair said it now expected yields in the final quarter to April to be 25-30 per cent lower than in the same period last year, slashing Ryanair's profit margin for the year from 30 per cent to a little over 20 per cent.

Asked how much further profit margins might be eroded, Mr O'Leary replied: "It is possible we could be looking at profit margins of under 10 per cent for the next five years. Yes, it is possible. Traffic growth will continue but at much lower profit margins than heretofore."

In response to the dramatic decline in profits, Ryanair announced a sweeping efficiency drive, which could involve a pay freeze for its 2,000 staff this year. Mr O'Leary said the airline was aiming to reduce its unit costs by 8-10 per cent, which would produce savings of ¤80m for the year. Ryanair also intends to delay the delivery of some aircraft by a year, although it said it was still committed to fulfilling its 737-800 order with Boeing, which involves some 125 jets.

Despite the profits setback, Mr O'Leary reiterated Ryanair's goal of becoming Europe's biggest airline by increasing passenger numbers to 50 million over the next four years. However, capacity growth will fall sharply from 50 per cent for the past two years to 20 per cent a year.

Mr O'Leary was scathing about the European Commission's ruling, due next Tuesday, on the state subsidies it has been receiving to fly into Brussels state-owned Charleroi airport. The EU is expected to ban all further discounts on landing and handling charges at public airports but in an ominous move it also wants to extend the ruling to all private airports that benefit from state support. This would cover virtually all the airports Ryanair operates from including Luton, Liverpool and Glasgow Prestwick.

"They are trying to come up with a set of communist rules, which means that everybody pays the same high costs and charges the same high fare. It would not be the first time the EC has made a balls of an investigation," Mr O'Leary said. "This is an attack not just on Ryanair but on the entire low-fares sector. The ultimate by-product of the decision will be to increase air fares."

Mr O'Leary went on to accuse the Commission of being lured into a plot by flag-carrying airlines and high-cost airports to "emasculate low-cost airlines and erase them from the picture. There is a certain element in the Commission that would like to make life easier for Air France and other high-cost airlines."