Ryanair flying towards €60m loss as cost of fuel continues to soar

Ryanair could lose as much as €60m (£47m) this year with Europe's largest budget airline warning it will be forced to cut fares despite the soaring cost of jet fuel.

Michael O'Leary, the company's chief executive, yesterday revealed the damage already wreaked on Ryanair by the surging oil price, admitting that profits in the first quarter of its financial year were 85 per cent down on the three months to the end of June 2007.

However, Mr O'Leary warned that much worse is to come unless oil prices fall back dramatically, with the airline now expecting to break even at best over the full year, with the worst-case scenario being losses of €60m.

"The outlook for the remainder of the year, which is entirely dependent on fares and fuel prices, remains poor," he said. "The emerging economic recession in the UK and Ireland caused by the global credit crisis and high oil prices means that consumer confidence is plummeting."

Ryanair has taken some steps to reduce its exposure to further rises in the price of oil, having hedged 90 per cent of its needs in the third quarter at $124 a barrel, but has no hedges in place for the fourth quarter.

To add to its woes, the airline also expects to have to cut fares by 5 per cent over the course of the year in order to persuade passengers to fly with it. It had previously hoped to increase its prices by 5 per cent.

The airline said the average cost of oil during its first quarter had been $117 a barrel, almost twice the $63 typical price a year ago. As a result, its fuel costs rose 93 per cent to €367m over the quarter, and now account for almost half its total costs, up from a third previously.

The result has been a near total collapse in profit margins, which are now down to 3 per cent compared to the 20 per cent on which Ryanair has been used to operating. Its profit in the first quarter was just €21m, compared to €139m last year.

Ryanair has managed to increase passenger numbers over the past three months, which were up 19 per cent to 15 million. It also maintained its load factor – the number of seats filled on each plane – at 81 per cent, broadly in line with last year. However, yields – the amount of money made on each passenger – fell 8 per cent as Ryanair cut fares to attract business. The figure was also adversely affected by an increase in the number of passengers checking in online and only flying with carry-on baggage, thereby avoiding Ryanair's extra charges.

Analysts were surprised by the scale of the downturn at Ryanair, with the airline's shares falling 22 per cent to €2.52 last night. "Ryanair is directly in the path of the current economic storm; its demand is made up of leisure traffic, much of which is highly discretionary," said Andrew Fitchie, an analyst at Collins Stewart.

"Lack of fuel hedging has left it exposed, and, with substantial committed capital expenditure over the next two years, its returns are collapsing."

However, Mr O'Leary promised to come out fighting. "The demise of low-fare air travel is once again being predicted by high-fare airlines like BA and others who are still losing traffic to Ryanair," he said. "Higher oil prices won't end low-fare air travel, it just increases the attraction of Ryanair's guaranteed lowest fares."

The airline has already announced it will sharply reduce its capacity over the winter. It plans to ground 15 aircraft at Stansted and a further four planes at Dublin. Mr O'Leary said he still expected passenger numbers to grow this year, though he has trimmed a previous forecast of a 16 per cent rise to 60 million to a 14 per cent increase to 58 million.