Ryanair profits fall as expected amid tough market for airlines

Ryanair reported a 7% fall in first half profits to €1.20bn in its half-year-report on Monday, excluding losses from its 75%-owned Laudamotion investment.

The Dublin-based low-cost carrier said average fares declined 3% for the period, which it said was due to excess capacity in Europe, an earlier Easter in the first quarter, and repeated air traffic control strikes and staff shortages which apparently caused a spike in cancellations of higher fare weekend flights.

Higher fuel and staff costs reportedly offset strong ancillary revenue growth, as had expenses related to the EU261 regulation, the airline said, which allows passengers the right to compensation when their flight is delayed or cancelled.

Passenger numbers rose 6% year-on-year to 76.6 million, while revenue improved 8% to €4.79bn.

Profit after tax was 7% lower at €1.2bn, with the airline’s net margin shrinking by four percentage points to 25% for the six months ended 30 September.

“As recently guided, first half average fares fell by 3%,” said Ryanair’s chief executive Michael O'Leary.

“While ancillary revenues performed strongly, up 27%, these were offset by higher fuel, staff and EU261 costs.

“Our traffic, which was repeatedly impacted by the worst summer of ATC disruptions on record, grew 6% at an unchanged 96% load factor.”

The company took delivery of 23 new Boeing 737 aircraft in the period, bringing its fleet to 450, and launched more than 100 new routes.

It trimmed winter capacity by 1%, including base closures in Eindhoven and Bremen, in response to weaker fares and higher oil prices.

O’Leary said it expected 2019 financial year traffic would grow to 141m, including three million at Laudamotion.

“As we look beyond this winter, we have announced new bases in Bordeaux, Marseille, London Southend and increased capacity in Luton.

“We plan to operate over 100 new routes in [summer] 2019.”

With spot fuel reaching $85 per barrel, rising interest rates and the stronger US dollar, O’Leary explained that airline margins were under pressure, saying it was “inevitable” that more of the weaker, unhedged, European airlines would fold in the coming winter.

He noted that in recent weeks Switzerland’s Skyworks, Belgium’s VLM, Germany’s Small Planet and Azur Air, Cyprus’ Cobalt and Scandinavia’s Primera Air had collapsed.

At the same time, a number of larger airlines were closing bases and cutting routes to minimise winter losses.

“We expect more failures this winter and we cannot rule out further capacity cuts or base closures in Ryanair if oil prices rise or airfares fall further.

“Over the medium term, this consolidation will create growth opportunities for Ryanair's lowest fare [and] lowest cost model.”

In August, the company increased its holding in Laudamotion to 75%.

Despite a “very difficult” first summer, O’Leary said Laudamotion would carry almost three million passengers this year, but would lose around €150m in first year startup exceptional costs.

“We are working closely with the Laudamotion team who recently launched their summer 2019 schedule, which will see them grow their fleet to 23 aircraft, including 19 Airbus A320's.”

Laudamotion had reached agreement to return nine lease aircraft to Lufthansa this winter, and would replace those with lower cost, longer term, operating lease aircraft, which were apparently readily available at “competitive terms” as more Airbus operators failed.

“We are assisting them to improve cost control, fuel hedging and fleet management which will deliver significantly higher revenues and much lower costs next year as the airline moves towards break-even in its second year of operation.”

As the company said in an update on 1 October, 2019 full-year profit after tax was forecast in the range of €1.10bn to €1.20bn, excluding Laudamotion.

Following a 3% reduction in first half fares, the company said it expected fares to fall by around 2% in the second half due to weaker-than-expected forward fares in the third quarter, particularly in the October school mid-term and around Christmas, and the absence of Easter in the fourth quarter.

A 1% reduction in winter capacity would mean that full-year traffic would grow by 6% to 138m, or 141m including Laudamotion.

Ryanair said its fuel bill would be approximately €460m higher than last year and ‘other costs’ would be negatively impacted by higher EU261 costs.

Ancillaries continued to perform “strongly”, although, as the airline had previously highlighted, the second half figures would be adversely impacted by timing differences on the recognition of certain fees arising from the adoption of IFRS 15, which had a positive impact in the first half.

The guidance excluded exceptional start-up losses in Laudamotion of approximately €150m, which were and would be consolidated in the Ryanair Group full year financial results, the firm said.

“This full year guidance remains heavily dependent on airfares not declining further - they remain soft this winter due to excess capacity in Europe - [as well as] the impact of significantly higher oil prices on our unhedged exposures, the absence of unforeseen security events, ATC and other strikes and the impact of negative Brexit developments,” Michael O’Leary said.

“We cannot rule out further base closures or capacity cuts this winter if oil prices rise or airfares fall further.

“Winter trading may be positively impacted by the rate and timing of other airline failures which is already creating a ready supply of well trained pilots and cabin crew for summer 2019 growth.”