Ryanair Warns on Profit Expectations: Budget Airline Says It Will Cut Winter Capacity

Updated September 4, 2013, 10:32 a.m. ET

By   KATHY GORDON

The Wall Street Journal

LONDON—Ryanair Holdings said it may miss its net profit forecast for the current fiscal year as it reduces ticket prices to match a rash of low fares offered by its main competitors since mid-August.

The warning Wednesday caught investors off-guard as Ryanair, Europe's biggest discount airline by passenger numbers, said analysts' expectations of its earnings in the year to end-March 2014 were badly out of line with its own forecast.

Ryanair is known in the industry for its conservative earnings guidance, which in recent years has underplayed the strengths of its low-cost business model as the airline has continued to take market share in Europe and expand to new destinations.

The Irish carrier's confirmation that it is cutting its own fares in response to rivals' discounting also sent a shot across of the bows of Europe's other airlines, from the low-fare carriers to national flag carriers, which have all spent many months struggling to shore up the profitability of their own short-haul operations in face of the relentless competition from budget airlines.

Ryanair has the lowest operating costs of Europe's discount carriers meaning it is better positioned than its rivals to absorb cost increases, particularly higher fuel prices, and has greater flexibility to take them on with lower fairs if necessary.

The airline's average aircraft ownership and maintenance costs per passenger is just €6 compared with €8 for easyJet PLC and as much as €14 for Norwegian Air Shuttle, though they all compare well with Europe's flag carriers, according to Chris Tarry, a consultant at U.K.-based aviation industry firm CTAIRA. "Ryanair scores well on both low ownership cost and high revenue productivity," Mr. Tarry said.

Ryanair now expects full-year net profit to be at the lower end of its previously guided range of €570 million to €600 million ($750.7 million to $790.3 million), and may be even lower if fares and yields continue to weaken over the winter. Analysts had expected net profit of €653 million, according to the consensus earnings forecast compiled by data provider FactSet.

Chief Executive Michael O'Leary told analysts on a conference call their estimates were too high. He said the company had seen weak bookings for September to November and planned to follow its competitors in aggressively lowering prices to ensure its planes were as full as possible.

Mr. O'Leary acknowledged that Ryanair's tactic was a self-fulfilling prophecy—the airline has lowered its profit guidance partly in anticipation of its own planned price cuts.

"We think there's generally an underlying weakness out there and we think the best way to respond to that is to be on the front foot and be very aggressive on pricing which we intend to be" into the third and fourth quarters, Mr. O'Leary said.

Ryanair now expects full-year passenger numbers of just under 81 million from just over 81.5 million in the guidance earlier this year. It plans on keeping more planes on the ground during the less-busy winter season to respond to lower demand and to save costs.

With capacity generally flat "we've been surprised that bookings have been weak," Mr. O'Leary said.

Shares in some of Ryanair's main rivals, including the U.K.-based easyJet PLC, Irish flag carrier Aer Lingus Group  PLC and Norwegian Air Shuttle, all fell Wednesday as the news of the Irish carriers' profit warning sank in.

"There is no doubt the market will be weaker than the industry is expecting over the next couple of months and we're going to respond to that by being out there first and being aggressive with the pricing and fares. Will that have an impact on the market generally? You bet it will," Mr. O'Leary said.

On a comparable London to Alicante, Spain, return journey in October, Ryanair's web fare came in cheapest at £51.98 ($80.88) from Stansted airport. Norwegian Air Shuttle cost £56.40 from Gatwick airport and the easyJet fare was £69.98 from Luton airport.

Norwegian Air Shuttle acknowledged it has undercut its rivals to kick-start its recently launched U.K. business.

"We don't try to start any price war on Gatwick with our low prices," said Frode Foss, the carrier's chief financial officer. "We are a small player there with a relatively unknown brand, so we have set the prices to get a better market position, though we still take our costs into account."

Still, at least part of Ryanair's profit concerns stem from the recent weakness in the euro against sterling. Around a quarter of Ryanair's revenue is denominated in the U.K. currency so the sharp rise in sterling in the past six weeks makes it more expensive for Ryanair to convert that sterling revenue back into euros. Sterling has risen to around €1.18 from €1.14 since the beginning of August.

In July, Ryanair reported a 21% drop in net profit to €78.1 million for the three months to June 30, despite a 4.5% rise in revenue to €1.34 billion. The airline reported net profit of €569.3 million in fiscal 2013, up slightly from €560.4 million the year before.

—Gustav Sandstrom in Stockholm and Marietta Cauchi in London contributed to this article.

Source:   http://online.wsj.com