Ryanair spooks investors with profit warning

DUBLIN/LONDON Mon Jul 27, 2009 9:09am EDT

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DUBLIN/LONDON (Reuters) - Budget airline Ryanair (RYA.I) (RYA.L) trimmed its full-year profit forecast on Monday as it was forced to cut fares to fill aircraft, sending its shares down 12 percent and hitting the broader airlines sector.

Ryanair, famed for its fixation on cuttings costs, squeezes its customers by charging stiff penalties for excess baggage, booking fees on certain credit cards and has even considered a "fat tax" on heavier passengers and coin-operated toilets

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

Yields are a keenly watched measure in the airline industry as they shows the average revenue gained per mile per passenger.

"There are no signs of recovery in any country across Europe. We think things are getting worse. There are no signs of green shoots so a tough winter for everyone," Chief Financial Officer Howard Miller told a news conference.

The profit warning hit share prices across the airline sector, and shares in Ryanair -- Europe's biggest low-cost airline, which started out with a 15-seater plane in 1985 -- were down 9.1 percent to 3.06 euros by 1302 GMT.

Shares in Lufthansa (LHAG.DE) were down 0.9 percent, while fellow 'Big Three' carriers British Airways BAY.L and Air France-KLM (AIRF.PA) fell 3 and 2 percent respectively.

"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 analyst Andrew Fitchie from Collins Stewart.

Despite the sobering outlook, Ryanair is still expected to roughly double its full-year profit unlike rivals BA and Virgin VA.UL which are both expected to suffer heavy losses as premium customers tighten their belts.

Ryanair is hoping to mop up business from travelers 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 percent this year and average fares to fall by 20 percent or slightly more, helped by lower fuel costs.

"We still have only 10 percent of total market in Europe so there's plenty of scope for us to reduce fares to stimulate that growth," Deputy Chief Executive Michael Cawley told Reuters.

DOMINANT PLAYER?

Ryanair is planning to increase its aircraft fleet to 300 by 2012 from 200 currently as it seeks to mop up market share from struggling rivals, but Miller said: "You can't forever grow at 15 percent or you would blow up. After 2012 it'll be more like single-digit growth."

One analyst said a protracted downturn between now and 2012 will leave Ryanair the dominant player in the European market.

"The long-term issue is can they end up with an enviable market share in Europe short haul with slower growth?" Stephen Furlong, analyst for Davy Stockbrokers said.

"This recession is very good for Ryanair because in the end it might be easier to get there. There won't be any competitors left and you can get efficiencies out of suppliers, particularly airports, if you're the only growth game in town," he added.

Ryanair's net profit for the three months to June 30 was 136.5 million euros ($194 million) just beating the 132 million euros on average expected by three analysts surveyed by Reuters.

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

Ryanair said second-quarter yields would be at or slightly above the minus 15 to 20 percent range previously guided for the carrier's key profitable quarter.

($1=.7043 euros)

(Additional reporting by Carmel Crimmins; Editing by Mike Nesbit, John Stonestreet and Marie Maitre)

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