ROUNDUP Ryanair’s FY profits up as growth slowdown looms

LONDON (Thomson Financial) – Low cost airline Ryanair Holdings PLC today warned it expects profit growth to slow over the next year as a result of softening market conditions, despite having earlier posted full-year net profit of 401.4 mln eur — 33 pct up on the same period last year.

The airline beat consensus forecasts for 395 mln eur, but warned of the potential slowdown in growth in spite of ongoing plans to expand its route network.

Ryanair said it expects yields to fall by up to 5 pct, with unit costs seen rising by 6-7 pct due in part to longer journey lengths and higher airport charges at Stansted and Dublin.

‘We think market demand will continue to soften and as a result load factors might be slightly lower,’ Ryanair’s finance director, Howard Miller told Thomson Financial News in a telephone interview this morning.

‘We are guiding that the average fare will be down slightly and as a result of those two factors we think that profit growth won’t be as fast next year as it has been this year.’

The airline expects the seasonality established over recent years to continue with the majority of the group’s annual profits set to be generated in the first half of the year, with the possibility of a small loss being recorded during quarters 3 and 4.

‘Our normal profile is that we make the vast majority of our profits in Q1 and Q2 and I think that trend will continue this year,’ said Miller. ‘We don’t have a great deal of visibility into the winter period at the moment but we feel that there’s a possibility that we might make a loss in Q3 and Q4.’

Over the past 12 months, Ryanair saw fuel costs increase by 50 pct to 693 mln eur. However, looking ahead, the carrier said it has extended fuel hedges for the remainder of fiscal 2008 with the average cost per barrel significantly lower than last year.

‘Fuel costs will rise at a slower pace than they did last year so we expect slower growth in fuel prices,’ said Miller. ‘Our average fuel price this year is about 63 usd a barrel and that equates to about 70 usd a barrel last year. In terms of hedging, we went from 50 pct to 90 pct in Q2 and we expect about a 10 pct reduction in the cost per barrel over the year.’

Revenues were 32 pct higher at 2.237 bln eur, while passenger traffic figures increased by 22 pct to 42.5 mln.
Average fares rose 7 pct but after raising its ticket prices for the past eight quarters, the airline estimates that fares will have to come down by around 5 pct over the next 12 months. Miller said he hopes such enforced price reductions will benefit the British traveller.
‘Five interest rate rises have definitely impacted the UK consumer — they have less disposable income now,’ said Miller. ‘I think that combined with the doubling of Air Passenger Duty from 5 stg to 10 stg and the doubling of passenger charges at Stansted from 6 stg to 12 stg then people have less money available and they are more price resistant.’

Ancillary revenues grew by 40 pct due to higher passenger spend, increased penetration and the growth of excess baggage revenues.
‘Sales of drinks and snacks, car hire, hotels, travel insurance and excess baggage charges have all been strong so there’s a whole raft of things driving ancillaries forward,’ Miller said. ‘We have worked very hard on this over the last number of years and we said it would rise to about 20 pct of revenues — it’s presently at around 16 pct.’

Ryanair said it would continue to press for the break-up of the BAA airport monopoly and that it welcomed the recent OFT and Competition Commission investigation into BAA.

The airline said the current BAA Stansted plan to spend some 4 bln stg building a second runway and terminal ‘provides further proof of this monopoly’. Ryanair is also against plans to spend over 800 mln eur building a 15 MPPA passenger terminal at Dublin Airport.
Significant cost increases associated with higher airport charges at Stansted and Dublin since April, combined with a doubling of the UK airport departure taxes have also had a negative impact on traffic and yields.

Miller added that Ryanair would likely challenge the European Commission’s (EC) review of Ryanair’s proposed offer for Aer Lingus Group PLC, which is expected to fail to receive competition approval.

‘The Irish government is not in favour of it [the proposed merger] and the EC competition authorities generally do what the governments want to do,’ said Miller. ‘It has approved other similar deals but when it comes to two carriers operating with less than 5 pct of the market share they decide they are not going to approve it so you can only assume it’s a politically motivated decision.’
Despite warning of potential losses over the coming year, Ryanair ‘normally easily beats its guidance’, Citigroup’s Andrew Light wrote in a note today.

Collins Stewart analyst Andrew Fitchie, meanwhile, claims that Ryanair chief executive Michael O’Leary may have ‘managed market expectations downwards only to go on to surpass them and we think he has good reason to do this now’, he wrote in a research note on the airline published this morning.

Last week, Ryanair ordered 27 Boeing 737-800 planes valued at 1.9 bln usd to add new routes and lower costs. Its fleet has grown from 103 planes in 2006 to over 130 today.

Peter Caldwell, an equity analyst at Barclays Wealth, is of the view that although Ryanair is still cautious on its near-term outlook the airline is more optimistic about the long-term view.

‘The recent new aircraft order implies that the group feels growth potential in the low-cost carrier space warrants continued capacity additions,’ wrote Caldwell in a note on the airline today.

At 11.55 am, Ryanair’s shares were trading 5.87 pct or 0.32 eur down at 5.05 eur.
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