Price war looms as profits dive at Ryanair

The Irish airline, Europe's biggest budget carrier, said fares would have to be cut if it is to keep travellers taking to the air this year. In an extraordinary profit warning and the most pessimistic outlook from chief executive Michael O'Leary since the Irishman burst effing and blinding on to the European airline scene a decade ago, Ryanair told investors its profits could plunge in the teeth of a "perfect storm".

Analysts' comment: broker Panmure Gordon on Ryanair (pdf)

The news sent Ryanair shares diving 41 cents, or more than 11%, to €3.12 - dragging down arch-rival easyJet, off 8% on the day.

O'Leary said the "perfect storm" Ryanair faces comprises diving consumer demand and rising fuel prices, exacerbated by hiked-up take-off and landing charges at its main airport bases at Stansted and Dublin and as the pound's weakness against the euro made Continental breaks more expensive for Brits.

"Our only competitive response can be to slash fares and see what the competition make of it," he added.

With the credit crunch squeezing consumers, passengers already seem to be deserting Ryanair as the airline reported its worst-ever January since it became one of Europe's major carriers.

It admitted its planes flew 69% full last month against a normal average of more than 80%. Even in the 2002 recession following the 9/11 terrorist atrocities, they were flying 72% full.

Ryanair flew almost 50 million passengers in the last 12 months. It expects to continue its expansion on the Continent and carry up to 60 million in 2008 despite a consumer slowdown.

However, flying that many services means it is going to be thumped if the price of fuel stays close to the record highs that have seen crude at $100 a barrel this winter. Unlike many other airlines, it has not forward-bought to hedge against the soaring price of oil.

"With oil prices at $90 a barrel and fear of recession in the UK and many other European economies, the current outlook for the coming fiscal year is poor," said O'Leary. "We remain essentially unhedged for next year. Current oil prices, which have risen by nearly 40% to $90 a barrel, will impose significantly higher costs during a year when we are expanding capacity by almost 20%.

"If forward oil prices remain at $85, and consumer sentiment and sterling weakness leads to a 5% reduction in yields [earnings per passenger, or average fares], profits in the coming year could fall by as much as 50% to as low as €235 million [£177 million]." That compares with the €470 million of profits that Ryanair is expecting it will post for the year to the end of March.

Last summer's strong trading has been offset by a poor winter. Profits in the Christmas quarter plunged 27% to €35 million, and Ryanair is forecasting profits of just €15 million for the current quarter.