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Ryanair (RYAA.Y)
Ryanair Plummets as Low-cost Fares Beget a Loss
The only number dipping lower than Ryanair's plane fares is Ryanair's share price. The Ireland-based company's stock price has plunged 20 percent in today's trading as investors are discovering that the disappointing quarterly results for Europe's top low-cost airline may just be the beginning of the financial struggles. Steep oil costs and a cautious consumer market are affecting companies on a global scale and the value proposition of cheap plane tickets hasn't been enough to lure travelers. As rivals with stronger margins are feeling the pinch as well, how will Ryanair steady its course?
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Ryanair, known internationally for offering super low-cost plane travel in and around Europe, posted an 85 percent drop in quarterly profits. Net profit was reported at 21 million euros, or $33.1 million, for the period ending June 30, which is down from 139 million euros, or $218.6 million, it made during the same quarter last year. Analysts had expected earnings of 75.4 million euros, causing investors to sell off shares at a frenzied pace. The losses were blamed on a series of one-time charges for depreciating assets including 93.6 million euros, or $147.3 million, for its stake in Aer Lingus, a rival Irish airline. The company also indicated that the occurrence of the Easter holiday in the first quarter of the year rather than the most recent quarter impacted results in a negative way.
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A major factor leading to Ryanair's recent struggles was its decision not to purchase fuel in advance as the cost per barrel of oil continues to rise. Ryanair watched the rising price of oil deal a serious hit to its bottom line as the company's fuel bill soared 93 percent from the first quarter of 2007 to the first quarter of 2008. Chief Executive Michael O'Leary acknowledged the lack of foresight or improper planning in regards to watching the oil prices by admitting that he thought the price per barrel would fall sooner than it would increase. O'Leary stated, "Fuel now represents almost 50.0% of our total operating costs, compared to 36.0% last year." The company has changed its policy about hedging against the cost of oil and is currently hedged 90.0% for September, at $129 a barrel, but O'Leary says, "We continue to believe that oil prices remain subject to irrational exuberance."
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In spite of the missing Easter holiday from this quarter, Ryanair reported that passenger traffic actually increased 19 percent to 15 million travelers during the period. Sales improved 12 percent to 777 million euros, or $1.22 billion, though revenue per passenger, which accounts for reservation, check-in, baggage, and in-flight amenities, dipped 8 percent. Aside from offering severely discounted airfares, Ryanair hopes to set itself apart by allowing passengers to use their cellular phones on 10 Dublin-based airplanes.
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Ryanair will have to make some changes to the costs that it can control in order to stabilize for the next quarter. So far, the company has cut some jobs as well as implemented a company-wide pay freeze. O'Leary says, "The emerging economic recession in the United Kingdom and Ireland caused by the global credit crisis and high oil prices means that consumer confidence is plummeting, and we believe this will have an adverse impact on fares for the rest of the year. We will respond as always with lower fares and aggressive pricing to keep people flying and maintain our high load factors." In June, Ryanair estimated a break-even year for the fiscal 2008-2009 calendar, but that forecast has been revised today to warn that the company may report an annual loss of up to 60 million euros, or $94.5 million. Summing things up, O'Leary noted, "The outlook for the remainder of the fiscal year which is entirely dependent on fares and fuel prices remains poor." This quarter's loss is the company's first since 1989.
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