"Ryanair plays down prospect of price war"

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"Ryanair plays down prospect of price war"

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Ryanair plays down prospect of price war

By Kevin Done, Aerospace Correspondent
Published: November 2 2004 07:59 | Last updated: November 2 2004 20:41
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The share prices of Europe's leading low cost airlines rose sharply on Tuesday, as Ryanair signalled that the winter price war may be less fierce than previously forecast.

Michael O'Leary, Ryanair chief executive, said that based on "current financial booking trends" the airline had revised its guidance, although he warned that high oil prices could still force some carriers into bankruptcy.

Ryanair on Tuesday forecast a decline in yields or average fare levels of between five and 10 per cent instead of the 10 to 20 per cent previously predicted for the winter months from October to March.

Ryanair said its yields had declined by five per cent in the first half to the end of September, again less than originally feared.

The Ryanair share price closed 64 cents or 15.9 per cent higher at €4.67, while Easyjet closed 11p or 6.9 per cent higher at 170½p.

Investors were encouraged that Ryanair was able to announce record traffic volumes and profits for its first half with net profits rising by 18.5 per cent to a record €200.1m despite surging fuel costs and lower fares.

The Irish airline, probably the world's most profitable carrier, achieved a 27.8 per cent net margin in the first half from April to September, seasonally the strongest months when it earns the bulk of its profits.

Mr O'Leary warned that the airline would earn only a "tiny profit" in both the third and fourth quarters with a big fall in earnings in the current third quarter and little more than a breakeven for the whole of the second half.

Ryanair has none of its fuel requirements hedged as of this month. Mr O'Leary said that, if the benchmark Brent crude oil price remained at $50 a barrel for the remainder of the financial year to the end of March, it would add €55m to the airline's total budgeted costs.

Even with this added burden, he said the airline would still achieve a net margin of around 20 per cent for the full year with a net profit in the range of €200m to €215m, little changed from the €206.6m achieved last year.

Chris Avery, aviation analyst at JP Morgan, said the market reaction was "in response to the realisation that the low fare model is in no way damaged. Even at $50 [per barrel of] oil the company is still guiding to €200m net income...The winter yield environment is nothing like as bad as they have been saying."

Ryanair has eased its drive to reduce fares and intensify competition in order to compensate in part for the added costs it faces from the surge in the oil price.

Mr O'Leary said that Ryanair would remain unhedged until forward rates returned towards their previous "normal" levels.

The group remained "by some distance" the most profitable airline in Europe and could absorb much higher oil prices and still offer the lowest air fares.

Mr O'Leary warned that the high oil prices could still force the collapse of some carriers, however.

"Many of our competitor airlines who were losing money heroically, when fuel was $25 a barrel are doomed the longer it stays at $50. Our prediction of a bloodbath and airline casualties this winter may be accelerated by record high oil prices as well as by irrational competition."

In recent weeks the main casualty has been V-Bird, a small Dutch-owned carrier operating out of Düsseldorf-Niederrhein airport in Germany, which has ceased operations.

"We anticipate that there will be further airline casualties as the 'perfect storm' of declining fares and record high oil prices force loss-making carriers out of the industry," said Mr O'Leary.

In the first half Ryanair passenger volumes increased by 24 per cent from 11.3m to 14m - for the full year it forecasts a 19 per cent increase from 23.1m to 27.5m - while turnover rose by 21 per cent from €596m to €721m.

Ryanair continues to benefit from a big jump in ancillary revenues including commissions earned on internet travel insurance, hotel and car rental bookings with a rise in the six months of 42 per cent from €73m to €103m.

It has just started the introduction of a pay-to-view inflight entertainment system on some aircraft, and Mr O'Leary said that the airline hoped in the future to introduce inflight gambling as a new revenue stream.

Continuing "disciplined" route growth was central to the group's record earnings with 41 new routes opened during the summer season and better than expected results from its new bases at Barcelona-Gerona and Rome.

During the winter season Ryanair is adding three more aircraft to its London Luton base, two more in both Rome and Milan-Bergamo, and one more at each of its Frankfurt-Hahn, Glasgow-Prestwick and Stockholm-Skavsta bases.

Two new bases will be announced in coming weeks.
Financial Times http://www.ft.com/
Maik
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