Soaring profits at Ryanair provide the airline sector with a welcome tail wind

Image of the 'Robin Hood' of carriers has taken a battering, but the numbers still add up

Ryanair, Europe's second- biggest low-fares carrier, yesterday gave the airline sector a fresh boost by unveiling record profits and passenger numbers and setting itself even more ambitious growth targets.

Reporting a 71 per cent rise in after-tax profits to €151m (£97m) for the six months to the end of September and a 37 per cent increase in traffic levels, Michael O'Leary, Ryanair's chief executive, forecast that passenger numbers would grow five-fold by the end of this decade.

The Irish carrier has already set itself a target of doubling passenger numbers from 15 million this year to 30 million in the next five years with the aid of a huge expansion in its Boeing 737 aircraft fleet and route network.

But Mr O'Leary said he now believed Ryanair could be flying between 70 million and 80 million passengers a year by 2010 "provided we do not do anything stupid". This is about 20 million more than the figure normally quoted by the airline in its City presentations.

The much better than expected first-half results, coupled with fresh guidance that full-year net profits would reach €230m compared with a previous figure of €200m, sent airline stocks sharply higher.

Ryanair shares rose 14 per cent to a new high of 476p, valuing the Dublin-based carrier at £3.6bn.

The share prices of other airlines were dragged higher in Ryanair's slipstream. EasyJet, which recently completed the takeover of its fellow no-frills airline Go, rose 11 per cent. British Airways, which reports first-half results today, also rose by 11 per cent, even though it operates a completely different business model from that of Ryanair.

It is not just rival airlines which are benefiting from the pace set by Ryanair. The airports operator BAA yesterday reported that the explosion in low-cost air travel in the past year had enabled it to grow passenger numbers at its seven UK airports by 1 per cent in the first half, despite the impact on air travel of the terrorist attack on the Twin Towers. "The traffic growth we have had is almost entirely due to the no-frills airlines," the chief executive, Mike Hodgkinson, said. "Now that there are several low-cost airlines with European bases we are also getting much better utilisation of runway slots, particularly during the middle of the day."

Mr O'Leary sought to dampen down City expectations by cautioning that Ryanair would not be able to maintain its performance of the first six months. "These half-year profits have been exceptional, but they will not, in my opinion, be repeated," he said.

In the next six months, Ryanair expects average fares to fall by 5 to 7 per cent, compared with a 2 per cent decline in the first half, thanks in part to its free seats initiative which resulted in the airline giving away 870,000 tickets for travel this autumn.

Ryanair will also have the additional costs in the coming six months of launching new routes from its base at Frankfurt Hahn and setting up a new base – its eighth – at Milan Bergamo in Italy. Ryanair has also confirmed that it will establish a ninth base on the Continent next year. This will either be a second base in Italy or Germany or an entirely new one in Scandinavia.

Despite the words of caution, many analysts were left with the impression that the sky is the limit as far as Ryanair and the rest of the low-cost sector is concerned. "If you want evidence of just how far ahead Ryanair is of British Airways then you only need to look at their respective margins," one aviation specialist said. "Rod Eddington at BA has set himself the goal of achieving 10 per cent operating margins whereas O'Leary is actually delivering net margins of 32 per cent."

The stellar performance of Ryanair has been built on huge volume growth – passenger numbers are rising at a compound rate of 30 to 35 per cent and will continue to do so as the airline introduces its new fleet of 125 Boeing 737-800s.

But cost reductions have also played a key role in Ryanair's financial performance. In the past six months alone, costs per passenger have fallen by 11 per cent. According to Ryanair's figures, it carries 9,492 passengers for every employee on the payroll. The equivalent figure for easyJet/Go is 5,500 passengers while for British Airways it is just 620 passengers.

So far, so good. If Mr O'Leary and Ryanair have an Achillesheel it is passenger service standards. With Ryanair, no-frills means no-frills and of late the airline has been subjected to an unprecedented barrage of adverse publicity. It has been pilloried over everything from lost baggage and delayed flights to its treatment of prize-winners and wheelchair-bound passengers and its insistence that even those travelling on domestic services produce photo ID cards at check-in.

Mr O'Leary responded in August by launching a passenger service charter but immediately shot himself in the foot by declaring that customers would not receive any compensation if Ryanair failed to meet the performance targets it had set itself.

It pays compensation only when flights are cancelled altogether or when baggage is permanently lost. Waiting six hours for a flight delayed by air traffic control problems or hanging around for three hours to retrieve your bags are inconveniences, not grounds for a refund – something which many passengers find hard to understand.

Ryanair insists that the level of passenger complaints it receives is statistically insignificant – 0.53 for every 1,000 passengers carried in September. Nevertheless, the coverage given to them is out of all proportion.

Mr O'Leary used to get very hot under the collar about this – greeting Ryanair's detractors with a torrent of expletive deletives. But yesterday he was in more relaxed mode. "We are no longer the Robin Hood of Sherwood that everybody loves. We are getting bigger and therefore we have to take the rough with the smooth."

But, as he adds: "At the end of the day people vote with their feet."

You cannot argue with that.