Ryanair cuts profit outlook

Irish budget airline Ryanair cut full year profit forecasts to the lower end of its range yesterday due to falling yields, sending its shares down 10 per cent and impacting the broader airlines sector.

Investors shrugged off the carrier's better-than-expected first quarter profit, which was largely boosted by lower fuel costs, and focussed instead on its warning that full-year net profit would come in towards the bottom of between €200 and €300 million previously guided range due to falling yields.

"The downgrade in terms of profits that spooked the market," one Dublin-based trader said.

"I think people generally didn't believe him (chief executive officer Michael O'Leary) at the full-year stage when he was guiding yields down between 15 and 20 per cent and now that he is guiding them down further than that, guys are getting a bit scared."

Mr O'Leary's reality check hit share prices across the airline sector, and Ryanair's stock was the top loser on the main Irish index, falling nearly 10 per cent to €3.045 by midmorning. Dealers said the stock had support at €3.

"The profit warning is not the biggest surprise in the world, but it shows that yields are tougher than expected, and that reads across negatively to pretty much everybody. If you are putting a lot of growth in yield, management has to work pretty hard," said Andrew Fitchie from Collins Stewart.

Despite the sobering outlook Ryanair, which prides itself on sacrificing comfort to cut costs, is still expected to roughly double its full-year profit unlike rivals BA and Virgin which are both expected to suffer heavy losses as premium customers tighten their belts during the recession.

Famed for its zealous attitude to costs, which has seen customers heavily penalised for excess luggage and failing to check-in on the internet, Ryanair is hoping to mop up business from travellers willing to rough it during the global recession. The group, one of the world's largest airlines by market value, expects passenger numbers to grow by 15 per cent this year.

Average fares are expected to fall by 20 per cent or slightly more.

"We still have only 10 per cent of total market in Europe so there's plenty of scope for us to reduce fares to stimulate that growth," said deputy chief executive Michael Cawley.

Ryanair said net profit for the three months to June 30 came in at €136.5 million. That compared with €132 million on average expected by three analysts.

That five-fold rise was significantly distorted by a 42 per cent fall in fuel costs despite a 13 per cent reduction in average fares leading to an 11 per cent growth in traffic.

"We have limited visibility beyond the next two months but expect passengers to be very price sensitive for the rest of the year," chief executive officer executive Michael O'Leary said in a statement.

Europe's biggest low-cost airline, which prides itself on sacrificing comfort to cut cost and has considered coin operated toilets and extra charges for heavier passengers, will see revenue remain flat for the year, added Mr Cawley.

Ryanair, which had already taken a hedge for 90 per cent of its fuel needs for the first three quarters of 2010 and five per cent for the fourth quarter, further hedged for 60 per cent of fuel for Q4 at an average $610 per tonne.