Ryanair avoids 'bloodbath' with record profit forecast

Ryanair provided emphatic proof yesterday that it has emerged in far healthier shape than expected from the "bloodbath" its chief executive Michael O'Leary predicted for the no-frills airline sector a year ago.

The Irish carrier disclosed that its average fares rose marginally in the third quarter of the financial year - the first time that has happened since Ryanair's flotation in 1997 - and would increase further in the fourth quarter, helping the airline to yet another year of record profits.

Ryanair said it expected fares to increase by 5 per cent in the final three months of the year to April, having risen by 1 per cent in the previous three months, and forecast it would achieve a net profit for the year of €246m (£170m) compared with €226m in 2003-04. The airline's previous guidance was for a 10 per cent decline in profits this year to €201m. Ryanair shares closed 7 per cent higher at €6.31.

Third-quarter after-tax profits came in at €35m - down on the previous year's €47.5m but still almost double analysts' estimates. The net profit margin shrank seven points to 12 per cent.

Michael Cawley, Ryanair's deputy chief executive, said the airline had been helped during the period by lower-than-expected fuel costs and the fuel surcharges imposed by rival full-service airlines such as British Airways and Lufthansa, which had enabled Ryanair to keep its own prices higher than planned.

Asked what had happened to Mr O'Leary's dire predictions of a "bloodbath" and an "awful" winter this year for airlines, Mr Cawley replied: "One man's bloodbath is another man's 20 per cent after-tax margin. It's a relative term."

Mr Cawley cautioned that the 5 per cent increase in yields or average fares it is predicting for the fourth quarter had to be seen in the context of last year's "extraordinarily weak" market when Ryanair's fares fell 22 per cent as the Iraq war, terrorism fears, high oil prices and the entry of many new low-cost airlines offering "irrational" fares took their toll. Since then, about 10 budget airlines have gone bust, including Volare of Italy, V-Bird of Germany and Air Polonia.

Mr Cawley said that in 2005-06 he expected Ryanair's fares to fall by 3-4 per cent, in line with the long-term downward trend, as the airline expanded still further with an extra 23 per cent capacity planned.

Ryanair's fuel needs are fully hedged for the remainder of this financial year at an oil price of $41. Beyond that, the airline has no hedging in place but Mr Cawley said it expected the oil price to move further in its favour.

He also said Ryanair would not reach any decision until 2006 at the earliest on whether to start charging passengers for hold luggage - a possible indication that a consumer backlash is deterring the airline from going ahead with the idea.