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Ryanair downgrades profit guidance on lower fares

By Michele Maatouk

Date: Friday 18 Jan 2019

Ryanair downgrades profit guidance on lower fares

(Sharecast News) - Ryanair cut its full-year profit guidance on Friday as it pinned the blame on lower-than-anticipated winter fares.
The budget airline now expects full-year profit excluding Lauda of between €1bn and €1.1bn, down from previous guidance of between €1.1bn and €1.2bn, as winter fares fell 7% versus previous guidance of a 2% decline.

Chief executive Michael O'Leary said: "While we are disappointed at this slightly lower full year guidance, the fact that it is the direct result of lower than expected H2 air fares, offset by stronger than expected traffic growth, a better than expected performance on unit cost and ancillary sales is positive for the medium term.

"There is short haul over capacity in Europe this winter, but Ryanair continues to pursue our price passive/load factor active strategy to the benefit of our customers who are enjoying record lower air fares. We believe this lower fare environment will continue to shake out more loss making competitors, with WOW, Flybe, and reportedly Germania for example, all currently for sale."

Leary said he could not rule out further cuts to air fares and/or slightly lower full-year guidance, should any unexpected Brexit or security developments impact yields between now and the end of March.

"As we are in a closed period, we will update shareholders in detail on these developments following our Q3 results release on Mon 4th Feb."

At 0930 GMT, the shares were down 1.4% to €9.88.

Neil Wilson, chief market analyst at Markets.com, said this a problematic warning as it comes at a time of great uncertainty for the sector.

"We note shares in Ryanair are starting to look rather cheap having declined by roughly half since August 2017, when the the scheduling issues started.

"Subsequently we've seen the Mons ruling, union recognition and a series of cabin crew and pilot strikes. Combined there is a mounting pressure on Ryanair's cost base as labour costs climb. This reassessment of Ryanair's low cost, high margin model has been at the heart of the reason why investors have steadily pulled out of the company. Today's lower guidance is a sign that a higher cost base makes it more problematic to maintain margins when overcapacity means lower fares.

"The fundamental problem of overcapacity in the European short haul sector remains and will yet take time to ease."

Russ Mould, investment director at AJ Bell, said: "Lower air fares is the fault of the industry being too aggressive with expansion plans as there is now over-capacity in the short-haul market. This situation could get even worse unless more airlines go bust.

"The airline industry is going through a difficult time at present. American Airlines and Delta Airlines have both issued profit warnings this year, causing the market to worry about the sector's growth outlook.

"Flybe is in talks to be bought for a tiny amount. Many operators have locked in fuel prices for much of 2019 so they won't immediately benefit from the recent retreat in the oil price. And the risk of strikes coming back to haunt the sector once more cannot be ruled out. "All these factors are a nasty reminder just how volatile the airline industry can be."

Bernstein said the company's refusal to rule out further guidance cuts may increase fears of a deteriorating demand environment across the sector.

"Today's announcement is perhaps unsurprising given the yield picture we have been seeing on Ryanair in our monthly analysis over the past few months, with short and medium term yields looking particularly weak in European travel," it said.

"Nevertheless, this will likely lead to downwards earnings revisions, which will put pressure on the stock. We would also expect a negative cross-read for other airlines in the European sector given Ryanair's comments about the yield and capacity environments."

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