First Free Story (1 of 3)Join Skift Pro
Europe’s biggest budget airline Ryanair could miss its annual profit target for the first time in a decade, it said on Wednesday, blaming lower demand across the continent and a weaker currency in its largest market, Britain.
Shares in the Irish group, which has routinely beaten profit forecasts in recent years, dropped as much as 15 percent to a five-month low, dragging down other airline and travel stocks.
While some indicators suggest Europe’s economy is starting to emerge from years in the doldrums, Ryanair said there had been a noticeable dip in bookings for the coming months. It also blamed a weaker sterling for hitting demand and lifting costs in Britain, where it makes about a quarter of revenues.
“I have no doubt that the market will be weaker than the industry is expecting over the next couple of months and we are going to respond to that by being out there first and being aggressive with pricing,” Chief Executive Michael O’Leary said.
Analysts said it was too early to know whether the weakness was specific to Ryanair or a broader industry problem.
“Ryanair’s rivals certainly haven’t indicated they have seen this kind of weakness, though Ryanair has a history of calling things early,” said Davy Stockbrokers’ Stephen Furlong.
At 1542 GMT, Ryanair shares were down 11 percent at 6.028 euros, posting the biggest fall by a European blue-chip stock and dragging the European transport and leisure index down 1.6 percent. Rival easyJet fell 5.1 percent while tour operator TUI Travel was off 3.2 percent.
But Barry Norris, chief investment officer at Argonaut, one of the airline’s top 20 institutional investors, dismissed talk of a serious downturn in previously robust industry trends and said the announcement appeared to be aimed at starting a price war to discourage weaker competitors from running more flights.
“Ryanair management clearly believe that short-term shareholder pain will result in longer-term gain. As such we have been buying shares today, believing that the … fall in the shares is an overreaction,” Norris told Reuters.
Airlines across Europe have been struggling with weak economies, high fuel prices and costly fleet upgrades. Ryanair has fared better than most thanks to its low cost base, but said price competition had increased in recent weeks as airlines faced weak demand in the coming months.
Ryanair, which last month became embroiled in a row about potential safety issues, said net profit for the year to March 2014 was likely to be at the bottom end of its previous forecast range of 570-600 million euros ($750-789 million). O’Leary said if pricing remained weak through to March next year profit “might slip slightly below” that range.
Ryanair said it would respond to weak bookings by grounding 70-80 aircraft in the winter, up from an earlier plan to ground 50, and with “aggressive seat sales” particularly in Britain, Scandinavia, Spain and Ireland.
Analysts had become too optimistic after Ryanair had repeatedly beaten forecasts in recent years, O’Leary said. A Reuters poll before the statement forecast a full-year net profit of 645 million euros compared with 570 million last year.
The last time Ryanair warned profit would be at the bottom of a previously guided range was 2009, which was also the last year in which the company reported a fall in profit. The last time Ryanair missed its profit forecast was in 2004.
There was evidence Norwegian Air, Aer Lingus and easyJet had all moved to cut prices, leading to a “perceptible dip” in yields – average revenue per mile per passenger – for September, October and November, O’Leary said.
O’Leary said the main reason for the profit warning was weakness in sterling compared with last year – which finance chief Howard Millar said could wipe up to 50 million euros off the company’s profit.
Although sterling has strengthened to around 85 pence per euro in recent days, it is still trading well below the levels of around 79 pence this time last year.
Additional reporting by Sinead Cruise in London. Editing by Pravin Char.
Copyright (2013) Thomson Reuters.