Ryanair blames lower fares for latest profit warning

Budget airline issues second profit warning in as many months after average fares fall 2% during first half of the financial year

The Ryanair boarding scramble is to become part of airline history, with allocated seating only on all flights from next year, the budget carrier has announced, as it warned that it was on course for its first fall in profits in five years.

The Irish airline said average fares were likely to fall by 9% for the six months to the end of the financial year in March 2014. It predicted second-half losses extending to €90m and cut its full-year profit guidance to around €510m (£432m) from €570m.

The news sent its shares down 10% and hit the wider airline sector, with easyJet and British Airways group IAG shares both trading sharply lower.

Announcing the airline’s second profits warning in the space of two months, chief executive Michael O’Leary said the financial situation was “a bit grim at the moment”. He pointed to passenger numbers continuing to climb to 81m over the last 12 months but admitted: “Our traffic is up but it’s up on the back of lower fares.”

O’Leary said he didn’t want to keep finding excuses, having blamed earlier weakness on an unusually warm northern summer. But he attributed the underperformance to “softer pricing” – or lower fares – exacerbated by the weakness of sterling and “the culmination of three to four years of austerity across Europe”.

The airline will be continuing its new-found focus on customer service in the coming year, in a rare period of static fleet capacity. Expansion resumes with the first deliveries from an order of 175 Boeing 737-800 planes arriving in September 2014.

Allocated seating will be introduced for all passengers from 1 February, following the apparent popularity of the airline’s reserved seating, which allows customers to book seats at the front of the plane. Choosing those seats or exit rows will cost £10, or passengers can choose any other seat for £5 – otherwise they will be allocated a seat without charge. O’Leary said the move was in response to both growing demand for reserved seating and customer feedback via the airline’s website.

While O’Leary said he anticipated some extra revenue – with such ancillary revenues making up an increasing proportion of the airline’s take as fares fall – he said the move to allocated seating was primarily prompted by the new policy of listening to customers.

Joining such innovations as a more flexible baggage allowance, the curbing of in-flight sales announcements and lighter penalties for reissuing boarding passes, the move appeared to be eroding some of the perceived differences between Ryanair and traditional airlines. O’Leary said the flag carriers Air France-KLM, Lufthansa, British Airways and Iberia were now his greatest competitors, but added that he did not regard his airline as necessarily more no-frills. He said: “What exactly are the frills BA gives you apart from lost bags and flight delays?”

When it was suggested that the conversion to presenting a warmer, nicer Ryanair to the public had coincided with profits falling, O’Leary said: “There must be some Biblical lesson in that.”

The new customer service odyssey, which started at Ryanair’s annual meeting in September when O’Leary told shareholders he recognised the need to address the “abrupt culture” at the airline, will also see major changes to its cumbersome website. Admitting Ryanair had lagged behind easyJet in its online booking facility, O’Leary said a €10m redevelopment of the website would mean customers would soon be able to make a booking in five clicks instead of 17. He added: “You’ll no longer be asked to buy life insurance, orphaned children from Romania or anything else.”

A cheapest fare finder and new mobile app will be introduced by the end of May.

Despite the gloomier financial outlook, Ryanair said it would press ahead with its plan to return up to €600m to shareholders through buy-backs and special dividends before the end of the 2015 financial year. For the first half of 2013-14, it announced revenue up 5% to €3.25bn and profit after tax rising 1% to €602m.

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