REFILE-UPDATE 3-Ryanair lifts profit forecast as quality drive pays off

Mon Jul 28, 2014 9:17am EDT

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* Net profit jumps to 197 mln vs 157 mln euros forecast

* Forward bookings strong, service improvements taking hold

* Guidance boost follows profit warnings by main rivals

* Shares up 4 percent

By Padraic Halpin

DUBLIN, July 28 (Reuters) - Ryanair raised its full-year profit forecast on Monday as a campaign to improve service quality pulled more customers away from its struggling rivals.

Europe's biggest no-frills airline has let travellers choose their seats, eased restrictions on hand luggage and cut penalty charges, giving them fewer reasons to book flights with more expensive, full-service airlines.

It is also trying to focus on more primary airports that land holidaymakers and business travellers closer to their destinations, addressing another weakness versus competitors.

The changes followed a fall in profits last year that pushed the Irish airline to rethink a focus on price over service that often left customers disgruntled and tarnished an image Chief Executive Michael O'Leary said was seen as "cheap and nasty".

Ryanair said its first-quarter profit more than doubled to 197 million euros ($264.7 million), beating a consensus forecast of 157 million euros from analysts polled by the company. It raised its profit forecast for the year to March 2015 to 620-650 million euros from 580-620 million.

Fares were likely to fall in the second half of its financial year, the company said, as rivals compete more aggressively on price.

Yet it is still in rapid expansion mode, and plans to raise winter season seat capacity by 8 percent. Ryanair will take on the first of 180 new Boeing aircraft in September.

That could spell further bad news for big European airlines such as Lufthansa and Air France-KLM, which have both warned of lower profits.

"A lot of the problems that are hitting the sector are not hitting Ryanair because, if anything, Ryanair is the protagonist - they're the ones that are making problems for other players," said Gerard Moore, a Dublin-based analyst at Investec, who rates Ryanair shares a "buy".

Ryanair shares, which rose in advance of the results after O'Leary told Reuters he did not plan to cut profit forecasts, were up 4 percent at 7.116 euros by 1150 GMT.

FORWARD BOOKINGS STRONG

Many traditional airlines emerged leaner from the global financial crisis but face new problems as Middle Eastern airlines challenge them on long-haul routes and low-cost carriers like Ryanair and easyJet compete on routes within Europe.

Lufthansa has said it plans to expand its own low-cost brands. Air France-KLM has announced a plan to win back customers from the budget airlines, but analysts say that will be difficult to achieve.

Ryanair's fares rose 9 percent in the first quarter. Chief Financial Officer Howard Millar said paying to choose a seat was particularly popular with passengers and had made up for the reduced charges elsewhere.

"We've made a lot of service improvements over the last six or seven months and we're seeing the benefits in terms of rising profitability," Millar told Reuters in a telephone interview.

Ancillary revenue - charges for extras like carry-on baggage and on-board refreshments - rose 4 percent in the first quarter, in line with growth in passenger numbers.

Ryanair said strong forward bookings from a strategy aimed at tempting passengers to book their flights earlier had increased its confidence for the year ahead.

But it included a note of caution, warning against any "irrational exuberance" in what it said was still a difficult economic environment.

"For the flag carriers, excess capacity coming on from the low-cost airlines is the last thing they want to see," said David Holohan, an analyst at Merrion Stockbrokers. ($1 = 0.7443 Euros) (Additional reporting by Tess Little in London; editing by Jason Neely and Tom Pfeiffer)