Ryanair grounded by 'perfect storm'

It's been a rotten start to 2008 for Ryanair - its shares plunged this morning after it was forced to issue a profit warning...

Last Updated: 31 Aug 2010

After a week in which it clashed with the advertising regulator and provoked the wrath of French President Sarkozy, the Irish low-cost airline came out with a grim results statement today. Third quarter profits were 27% down on last year, with CEO Michael O’Leary suggesting that the sector was 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 at unchecked monopoly airports’. Unless things improve rapidly, he reckons Ryanair’s profits could halve next year. So it’s not surprising that its share price immediately plummeted 16%.

Ryanair’s problem is not passenger volumes – it’s getting more people onto its planes than it was a year ago. Last quarter traffic was up 21% to 12.4m, leading to a 16% rise in top-line revenue. However, with costs rising and passengers getting nervous, it’s been forced to slash prices to keep flogging tickets. So it’s making less money out of all these passengers – despite its inventive attempts to sell us all kinds of extra stuff during the flight (its so-called ‘ancillary revenues’ were one of the few bright spots in today’s results).

The escalating cost of oil – at a time when Ryanair’s been trying to increase capacity – has been a major reason for the decline in profits, while the slide in the pound’s value hasn’t helped either (and unlike some other companies, Ryanair has chosen not to take out an insurance policy be hedging against this fall). And naturally, it’s also blaming its two least favourite airport operators, Dublin and Stansted, who have both increased charges. ‘The Irish Aviation Regulator (who is even more ineffectual than the CAA in the UK) is asleep on the job... He can't even run his own office efficiently or effectively, never mind regulate a powerful, abusive monopoly like the DAA,’ Ryanair ranted today.

O’Leary is not the type to roll over, of course. He actually seemed as bullish as ever about his company’s prospects today, arguing that Ryanair’s low cost base would give it a big advantage in the coming downturn, and could even provide an opportunity for them to win more market share. He’s even persuaded his board to buy back another €200m of shares as a vote of confidence.

But judging by the reaction to today’s statement, he’s going to have to go some to convince the City. At this rate, arguments with world leaders could be the least of his worries next year...

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