Ryanair cautious despite record profits

Ryanair has unveiled record after tax profits of €302m, some €7m ahead of previous expectations.Traffic grew by 26% to 35m passengers, yields were up 1%, as total revenues grew by 28% to €1.69bn. Excluding fuel, unit costs fell by 6% (including fuel they rose by 5%). Fuel costs rose by 74% to €462m. Despite these substantially higher fuel costs, Ryanair achieved an 18% after tax margin, as adjusted net profits increased for the year by 12% to €302m.

Announcing these results Ryanair’s Chief Executive, Michael O’Leary, said:

“Ryanair has again delivered record traffic and profits despite substantially higher oil prices, intense competition and the absence of Easter from the fourth quarter. This robust performance validates our lowest fare/lowest cost model which continues to grow profitably in Europe even during adverse market conditions, when many of our competitors are reporting losses.

Highlights of the past 12 months include:
- After tax profit of €302m, an increase of 12% despite a 74% increase in fuel costs.
- Cost discipline continues with a 6% unit cost reduction excluding fuel.
- Average yields increased by 1% despite a 27% increase in capacity.
- Significant traffic growth of 26% to 35m passengers, across 330 routes with 103 aircraft.
- The retirement of our remaining B737-200’s, reduced the average age of Ryanair’s fleet to 2? years, the youngest in Europe.
- 46 new routes and 1 new base have already been announced for the remainder of 2006.
- Our balance sheet has been further strengthened with cash increasing €366m to €1.97 billion.

“The key to Ryanair’s traffic and profit growth was our refusal to levy fuel surcharges on our passengers at a time when most other airlines in Europe are introducing or increasing them. In some cases other airline surcharges exceed our average fares. This is driving millions of passengers to Ryanair. We will continue to absorb significantly higher oil prices thanks to the benign yield environment and continuing unit cost reductions.

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We have taken advantage of the recent short-term fall in oil prices to hedge 90% of our needs from June to October 2006 at an average price of $70 a barrel. The recent weakness in the dollar will help us to partially offset these higher oil prices. We remain unhedged from October onwards, and will continue to look for opportunities to hedge further into the future, but only if suitable pricing opportunities present themselves. As always hedging will eliminate near-term uncertainty and risk, it will not deliver lower costs during periods of rising oil prices.

Ryanair’s inexorable growth in aircraft, routes and passengers continues. Over the coming year we expect traffic to grow by 20% to 42m passengers. Traffic at our new bases in Liverpool, Nottingham East Midlands and Shannon is performing well, with strong advance bookings into the Summer months. The passenger response to our new French base at Marseille which will open in November has been very positive. We also expect to announce one or possibly two further bases for Spring 2007 and expansion of some of our existing bases before the end of the Summer.

We refuse to allow higher oil prices distract us from aggressively pursuing unit cost reductions and operating efficiencies. A number of recent initiatives will help our drive for lower costs and fares. Web based check-in and charging for bags are both running ahead of expectations. After some initial delays with the roll out of web check-in we are now seeing flights with over 50% of passengers using our web check-in and priority boarding facility. Charging for check-in bags has encouraged passengers to travel with fewer and in some cases zero check-in bags. Indications over the past two months suggest that this initiative may offset the anticipated decline in overall yields by more than €1 per passenger.

The winglet modification programme on our 737 fleet is proving effective with better aircraft performance and a 2% reduction in fleet fuel consumption, a saving which we believe can be improved over the coming year. Our operating performance continues to make Ryanair the No. 1 customer service airline in Europe. No other major or low cost airline can match Ryanair’s record for consistently high punctuality, with fewest lost bags and least flight cancellations.

Ancillary revenues continue to grow strongly. From an already high base we expect these revenues will grow at a faster rate than scheduled traffic for the coming year. We are close to finalising new initiatives to offer our customers mobile phone services on board in 2007 and website gambling which we believe will give a further boost to ancillary revenues in this fiscal year.

Negotiations on pilot pay were successfully concluded at 14 of our 15 bases (excluding Dublin) at the end of April. Pilots at 13 bases have voted for a one year deal with a basic pay increase of 1.8%, whilst the Luton base voted for a 4 year deal which incorporated a 5% pay increase this year, as well as improved rosters. The Dublin pilots continued to absent themselves from these direct negotiations with the company, as is their right and consequently they have not yet negotiated any pay increase this year.

We are also continuing to campaign for the breakup of the BAA airport monopoly in the UK. We welcome the OFT’s recent announcement that it is considering looking into the BAA’s monopoly over the main London Airports. It should examine why the BAA is pushing ahead with plans to spend some £4b on a second runway at Stansted that should only cost around £1b. The contradiction between the BAA’s position 3 months ago - that it couldn’t afford to build this runway in Stansted without doubling passenger charges - with its recent announcement that it will return over £1 billion to its shareholders this year, is typical of the overcharging monopoly. This clearly demonstrates how the BAA has been featherbedding its balance sheet, at the expense of airline users and the travelling public. It also proves that the CAA has failed to regulate this overcharging monopoly in the interests of users. Competition between the London airports will improve facilities and reduce costs. Regulation has clearly failed.

Ryanair’s fleet will increase by 30 aircraft between September 2006 and April 2007. We will launch a large number of new routes and bases at the worst time of the year, and we expect that Winter trading will be negatively effected by a combination of this capacity expansion, much higher oil prices (compared to last year) and further price dumping by loss making competitors who will be trying to survive next Winter.

Accordingly we remain cautious about our profit guidance for the coming year. Whilst we are confident that traffic will grow by 20% to 42m passengers and yields will be flat, we expect that profit growth will be more modest in the +5% to +10% range if oil prices remain at $70 a barrel. Profitability will also be more seasonally pronounced due to the presence of Easter in Q.1, the impact of competitor fuel surcharges, and the higher proportion of “sun routes operated this Summer. We expect that in excess of 85% of annual profits (compared to 80% last year) will be earned in the first half of this fiscal year, and thereafter profitability in Q.3 and Q.4 will be reduced (against last years comparables) as the proportion of annual profits earned in the last two quarters falls to less than 15% of the annual total.

It is Ryanair’s resolute commitment to offering the lowest fares in every market which has made us Europe’s largest low fares airline. Shortly we will become the “World’s Favourite” airline, as we expect to overtake Lufthansa’s international passenger traffic later this year, thereby making Ryanair the world’s largest international scheduled airline by passenger numbers. Ryanair will continue to deliver the lowest costs and the lowest air fares in Europe for the benefit of our customers, our people and our shareholders.”
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