Ryanair profits down as perfect storm hits

Ryanair showed a dip in profits but promised to continue to slash fares. The carrier said it made a profit of 35 million euros (about £26 million).

This was in the period October-December 2007 and was 27 percent down on the same period in 2006.

Ryanair chief executive Michael O’Leary is warning that the European airline sector is facing the possibility of a “perfect storm” of higher oil prices, poor consumer demand, weaker sterling and higher airport costs.


Ryanair, Europe’s largest low fares airline today (4 Feb) announced third quarter after tax profits of EUR35m, a 27% decline over the comparable quarter last year, and in line with previous guidance.


This profit figure excludes a EUR12.1m profit from aircraft disposals. Traffic grew by 21% to 12.4m, yields fell by 4%, as revenues rose by 16% to EUR569m. The prior year Q3 comparable was distorted by a one off EUR10m contract termination penalty received from a previous hotel partner. Excluding this one off prior year Q3 receipt reveals an underlying profit decline of 10%. Unit costs were flat in the quarter due primarily to a doubling of airport charges at Stansted, significant cost increases at the Dublin Airport monopoly, combined with longer sector lengths, offset in part by lower cost fuel hedges.

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

‘This net profit of EUR35m is a creditable performance in very adverse market conditions. It reflects Ryanair’s 21% traffic growth, a 4% decline in yields, flat unit costs and a strong ancillary sales performance. Ancillary revenues (excluding a one off EUR10m termination payment in the prior year) grew by 30% to EUR111m. Ancillary penetration continues to increase, and we are on target to achieve our ancillary sales objective of 20% of revenues over the next 3 years. Inflight mobile phone services will be tested on 25 aircraft - subject to regulatory approval - during the April-June quarter and we are optimistic that passengers will quickly adopt this service to make/receive calls and texts on their mobile phones and blackberries.

‘Whilst unit costs were flat during the quarter, excluding our fuel hedges they rose by 6% due to the unjustified doubling of airport charges at the Stansted Airport monopoly, significantly higher charges at the even less competitive Dublin Airport monopoly and 7% longer sectors. Costs were positively impacted by our decision to reduce Winter capacity at Stansted by 7 aircraft, while staff costs rose by 18% to EUR67m due to an increase in cabin crew ratios which will continue through the remainder of this fiscal year.

‘We welcome the UK Government’s decision to reject the anti-consumer proposal by the CAA Regulator to dedesignate the Stansted Airport monopoly. We continue to campaign for the break up of the BAA Airport monopoly in London, and/or a more effective regulatory regime than that operated by the inept CAA Regulator. The CAA stood idly by last year while Stansted Airport doubled passenger charges and at the same time delivered abject service to airlines and passengers.

The London airports and consumers need a much tougher regulator than the misguided CAA which has repeatedly put the needs of the BAA Stansted airport monopoly before the reasonable interests of passengers and airport users.

‘At Dublin, a similarly protected (Government owned) monopoly continues to raise prices by up to 50% at a time when most other European airports are reducing them. The DAA are pushing ahead with their crazy EUR800m second terminal, the cost of which has escalated to more than four times its original EUR200m budget. Passenger charges at Dublin Airport are rising at many times the rate of inflation, because the Irish Aviation Regulator (who is even more ineffectual than the CAA in the UK) is asleep on the job. Ryanair has called for his dismissal on grounds of incompetence. He can’t even run his own office efficiently or effectively, never mind regulate a powerful, abusive monopoly like the DAA.

‘Thankfully at most other airports, where competition exists, airport and handling costs are falling. This is as it should be in an era of ever declining air fares. Our new bases at Alicante and Valencia in Spain, Belfast City in Northern Ireland, and Bristol in the UK have performed well during their first Winter and we expect this trend to continue. We have recently announced two new bases at Bournemouth and Birmingham in the UK, where we expect to invest significantly in new aircraft, new routes and new jobs in Summer 2008, as we roll out Ryanair’s guaranteed lowest fares to more regional UK cities. We continue to have more new base opportunities than we can handle at present, and expect to be in a position to announce at least two further European bases shortly, both of which will launch in Winter 2008.


‘Looking forward to the end of the current fiscal year (‘07/‘08) we now have sufficient visibility over Q.4 bookings and yields to enable us to maintain our previous guidance of net profit growth of 17.5% to approx. EUR470m for the full fiscal year, (07/08). We expect the decline in average fares this Winter will be close to 5% and within the range previously guided. Our ability to grow net profits, in a year when most of our competitors are suffering declines or losing money is testament to the continuing strength of Ryanair’s guaranteed lowest fare business model across Europe.


‘At this time it is too early to make any accurate forecasts in such volatile markets for 2008/09. However with oil prices at $90 a barrel and fear of recession in the UK and many other European economies, the current outlook for the coming fiscal year is poor. We remain essentially unhedged for next year. Current oil prices, which have risen by nearly 40% to $90 a barrel, will impose significantly higher costs during a year when we are expanding capacity by almost 20%. Costs will be hurt by a projected 5% increase in sector length. To compound this negative outlook, European consumer confidence is waning which would suggest that, unlike two years ago, (when higher yields compensated for higher oil prices), next years yields may be flat or continue to fall, as consumers become more price sensitive.

Our earnings may also be impacted by the recent weakness of Sterling which accounts for a significant proportion of Ryanair’s revenues.

‘The European airline sector is presently facing one of these cyclical downturns, with possibility of a ‘perfect storm’ of higher oil prices, poor consumer demand, weaker Sterling and higher costs at unchecked monopoly airports such as Dublin and Stansted which account for a significant proportion of Ryanair’s traffic. While it is impossible to accurately forecast full year fuel prices and yields this far in advance, there is now a significant chance that profits may decline next year. At our most optimistic, a combination of flat yields and $75 oil would see profits grow by 6% to approximately EUR500m, but at our most conservative, if forward oil prices remain at $85, and consumer sentiment/sterling weakness leads to a 5% reduction in yields, then profits in the coming year could fall by as much as 50% to as low as EUR235m (excluding profits from aircraft disposals). We would hope to be in a position to provide a more informed update on guidance with the release of our full year results on June 3rd, 2008.

‘There can be only one competitive response to any consumer uncertainty, and that is for Ryanair to slash fares and yields, stimulate traffic, encourage price sensitive consumers, and promote new routes/base developments. The airline business is highly cyclical and we have seen these downturns before. They pose unique long term opportunities for the lowest cost producer - Ryanair - to grow rapidly, open new markets, win share from competitors and speed up the pace of industry consolidation which will lead to flag carriers withdrawing capacity from certain markets and loss making competitors disappearing altogether.

‘This process has already started in Europe. For example, Aer Lingus has already withdrawn services on routes from Dublin to Seville, Newcastle, Poznan, and from Shannon to London. We have also witnessed the withdrawal of British Airways from Birmingham following the sale of its ‘Connect’ subsidiary to Flybe and the subsequent closure of 9 routes. Capacity has also been withdrawn by weaker so called low fare carriers across Europe. Many of these carriers have cancelled their growth plans, while others are in significant retrenchment. High fuel costs combined with rising losses mean that some of these carriers will not survive should this potential ‘perfect’ storm materialise.

‘Ryanair has the lowest cost base in the European industry and even in a recession will continue to be substantially profitable. Despite the possibility of a fall in profits next year, our airline continues to deliver the industry’s highest margins and will remain enormously cash generative, with a very strong balance sheet. We continue to have over EUR2bn in cash despite spending over EUR700m in the last twelve months acquiring a 29% stake in Aer Lingus and completing a share buyback of EUR300m.


At our AGM in September 2007, shareholders authorised that directors could re-purchase ordinary shares (‘buyback’) amounting to 5% of the company’s issued share capital. The directors have decided, in the best interests of the company and its shareholders as a whole, to undertake a second buyback programme of up to EUR200m. At the current market price of EUR3.60 this equates to a buyback of approx. 3% of the company’s issued share capital. Whilst there is no guarantee that this buyback will be completed, we would not anticipate initiating any buyback programme until after at least February 6th 2008, if at all. Ordinary (and not ADR’s) shares may be re-purchased under the programme in accordance with the provisions of the company’s annual re-purchase authority and the requirements of the Irish Stock Exchange and UK listing rules. The company’s brokers, Davys, will conduct any share buyback programme and any shares re-purchased will be cancelled immediately.’