Ryanair margins under threat from 10% cut in airfares

Ryanair, the no-frills Irish airline, intensified the price war with rival carriers yesterday by announcing plans to cut its average fares by 10 per cent this year at the expense of margins.

The announcement prompted an 8 per cent fall in Ryanair shares as analysts factored in the impact on the Dublin-based carrier of yet lower fares. Ryanair recorded a 53 per cent increase in profits to a record ¤265m (£188m) in 2002-03, even though average fares fell by 6 per cent.

Michael O'Leary, Ryanair's chief executive, said the further reduction in fares this year meant that net margins were likely to fall from last year's 28 per cent to around 20 per cent. But he said earnings would still grow, adding that he was comfortable with analysts' forecasts of a 10 per cent increase in after-tax profits compared with the ¤239m achieved in the year to the end of March.

"Shareholders should be aware that the results for the past 12 months have been exceptional," Mr O'Leary said. "We have repeatedly stated that profit margins of almost 30 per cent are a one-off and non-sustainable."

The reduction in fares will take the average ticket price on Ryanair down from ¤46 to between ¤40 and ¤42.

The first shot in the renewed price war will be a summer fares offer involving the sale of one million one-way seats ­ a third of total capacity ­ for £29.99 and £19.99. This will be the first time that Ryanair has offered special discounts during the peak months of June, July and August.

Mr O'Leary said: "There is no end in sight to how low fares will go."

He even held out the vision that in 10 to 15 years up to three-quarters of passengers would be flying for free, and that some passengers would actually be paid to fly in return for the income they brought in for airport operators.

Ryanair expects the fall in the value of the pound to lop about ¤20m from profits this year. Around half of Ryanair's sales are in sterling.

Profits will be further affected by the relaunch of Buzz, which Ryanair took over earlier this year, and the cost of operating more expensive BAe 146 jets.

Mr O'Leary also said load factors would come down because of the sheer number of new routes being launched by Ryanair in the coming 12 months. Following the takeover of Buzz, the Irish airline plans to start 50 new routes, taking the total network to 125, and carry around 24 million passengers ­ a 50 per cent increase on 2002-03.