Ryanair warns of threats to profits

Ryanair posted a sharper than expected drop in third-quarter net profit yesterday and its shares fell 16 per cent as the airline warned high oil prices, a faltering UK economy and weak sterling could halve profits.

Europe's biggest low-cost carrier said net profit in the three months to the end of December fell 27 per cent to €35 million as winter fares fell almost five per cent. That excludes a one-off gain from the sale of aircraft.

The result was below an average forecast of €41.8 million and in line with the lowest estimate in a Reuters poll of 10 analysts.

Having earned much of its income during the busy European summer, Ryanair stuck to its forecast for profit after tax to rise 17.5 per cent to €470 million in the year to the end of March but Goodbody analyst Joe Gill said investors would focus on the airline's "grim prognosis" for the following year.

Ryanair warned there was a "significant chance" profits would fall in its 2008/2009 business year.

"The European airline sector is presently facing one of these cyclical downturns, with (the) possibility of a "perfect storm" of higher oil prices, poor consumer demand, weaker sterling and higher costs," the airline said in a statement.

Based on its most optimistic scenario, profit next year could grow six percent to €500 million if average ticket prices, or yields, are flat and oil prices drop to $75 a barrel.

The Dublin-based carrier said its most conservative projection assumed oil prices remain at $85 a barrel and that poor consumer sentiment and weak UK currency, shave five per cent off yields.

"Then profits in the coming year could fall by as much as 50 per cent to as low as €235 million (excluding profits from aircraft disposals)," it said.

Ryanair's forecast range was wide but clearly skewed towards a fall in profit, Merrion analyst John Mattimoe said.

"Even if you were to narrow that down, the bulk of that range is zero or less," he said.

In terms of protection against high jet fuel prices, Ryanair said it still had very little insurance for its 2008/2009 business year: "We remain essentially unhedged for next year."

Davy analyst Stephen Furlong said Ryanair was probably being overly pessimistic.

"We think this is excessively bearish given a market so supply-constrained into next summer and with Ryanair indicating that competitors are withdrawing capacity," he wrote in a research note.

Ryanair also said it planned to spend up to €200 million buying back shares which, based on its current share price, would equate to three per cent of Ryanair's share capital.