The Wall Street Journal-20080205-Ryanair Expects Profit Drop on Fuel Costs

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Ryanair Expects Profit Drop on Fuel Costs

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Ryanair Holdings PLC warned that profit could fall by as much as 50% next fiscal year because of high fuel costs and pressure on ticket prices from waning consumer demand.

The bearish outlook came as Dublin-based Ryanair, Europe's largest budget airline by passengers carried, posted a slightly lower net profit for its fiscal third quarter ended Dec. 31.

The weaker outlook hit Ryanair shares, which fell 1.7% to 3.54 euros ($5.24) in Dublin.

Ryanair Chief Executive Michael O'Leary said the European airline industry is headed for a cyclical downturn and warned of rising oil prices, weakening consumer confidence and sterling softness. The carrier may need to cut prices further next year as consumers become more price-sensitive, he said. Ryanair is exposed to the British pound as it has significant operations in the U.K.

Mr. O'Leary said oil prices, which have risen to about $90 a barrel, will impose significantly higher costs during a year when the carrier is expanding capacity by almost 20%, while the recent weakness of sterling may also be a factor.

However, though the airline faces a challenging environment, Mr. O'Leary said he doesn't plan to slow its aggressive rate of expansion. While many carriers opt to trim capacity, or airplane seats, and delay aircraft orders when the cycle weakens, Ryanair has historically sacrificed profit in favor of boosting its market position. Just a few months after the Sept. 11, 2001, terrorist attacks in the U.S., amid slackening demand for airlines globally, Ryanair placed an order for as many as 150 Boeing 737-800 airplanes to take advantage of falling aircraft prices.

Mr. O'Leary said Ryanair would consider taking out fuel-hedging contracts again if crude oil dropped below $80 a barrel. The carrier is unhedged on oil for its next financial year starting April 1, although it has 10% of its fuel needs for the third quarter of that fiscal year hedged at about $70 a barrel.

Mr. O'Leary said oil prices may be pressured by weaker economic conditions, though he added that an economic downturn might in the long run benefit Ryanair, as some smaller carriers might go out of business and governments may be less inclined to push through certain environmental taxes.

Ryanair said that flat yields -- typically average revenue per passenger -- and oil at $75 a barrel would result in profit growth of 6% next fiscal year to around 500 million euros ($740 million). But if forward oil prices remain at $85 a barrel, and consumer sentiment and sterling weakness lead to a 5% fall in yields, profit could fall 50% to 235 million euros, excluding profit from aircraft disposals.

For the third quarter, the airline posted a 1% drop in net profit to 47.2 million euros from 47.7 million euros a year earlier, as yields fell 4%. Excluding the 12 million euros profit made on the sale of five aircraft, Ryanair said quarterly profit would have fallen 27% to 35 million euros. Ryanair is in talks to sell an additional 10 airplanes in order to take advantage of high prices.

Revenue rose 16% to 569.4 million euros from 492.8 million euros. Passenger numbers rose 21% to 12.4 million.