Ryanair blames overcapacity after rare fall in quarterly profit
Budget airline warns of more tough trading but manages to secure CEO Michael O’Leary for another five years
Dublin — A 6% drop in fares plunged Ryanair to its first quarterly loss since 2014 and Europe’s biggest budget airline said overcapacity was likely to continue driving ticket prices lower, albeit at a slower pace.
Monday’s warning of more tough trading came as the Irish company said it had secured the services of its long-standing CEO, Michael O’Leary, for another five years. He said in September 2018 he was not sure about committing to another five-year contract.
The 57-year-old, who has led Ryanair for the past 25 years, will move to be CEO of a new group structure, overseeing the firm’s four airline subsidiaries.
The weak third-quarter performance was flagged two weeks ago when Ryanair cut its profit forecast for the year ending March 2019 for the second time in three months, and the airline reiterated on Monday it could not rule out a further downgrade, noting possible uncertainty from Brexit.
The firm said recent falls in oil prices would allow loss-making rivals to survive longer, maintaining excess capacity in Europe as others like Ryanair add more and more planes. O’Leary said he saw an eventual reduction in capacity, as well as consolidation in the sector, returning over 12 to 18 months.
Ryanair, which makes most of its profit in the summer, said fares were down 1% so far for April to September, with just under a fifth of bookings in place, and pointed to a “flat to slightly down-ish” trend for the year ending March 2020 if short-haul overcapacity in Europe continues.
Ryanair’s shares, down more than 40% from a peak of €19.39 18 months ago before it was hit by a wave of industrial unrest, were 4.6% lower at €10.87 during the morning.
“We’ve seen commentary from some low-cost competitors with very few bookings in place for summer 2019 promising enormous fare growth. Frankly we do not share the optimism and in some cases the irrational optimism. We think we should be cautious,” O’Leary said.
Ryanair’s new group structure will be similar to that of British Airways owner IAG. There will be four airline subsidiaries — the main Ryanair carrier led out of Dublin, its Austrian and Polish airlines Laudamotion and Ryanair Sun, and Ryanair UK — each led by their own CEOs and management teams.
O’Leary will oversee cost efficiency, capital and aircraft allocation between the airlines in his new role, as well as potential small-scale acquisitions, all on reduced basic pay and a lower bonus.
Goodbody analyst Mark Simpson said O’Leary’s commitment to five more years was a positive, while Davy Stockbrokers’ Stephen Furlong said there was little sign of him relinquishing control. “Some of the operations are clearly going to be run at the individual subsidiary levels but is Michael O’Leary taking a step back? Not really and wasn’t expected to,” Furlong said.
Ryanair said chair David Bonderman, whose reappointment to a role he has held for more than 20 years was opposed by 30% of shareholders in 2018, plans to stay on until the summer of 2020, when he will be replaced by Stan McCarthy, the former CEO of Irish food company Kerry Group.
In its fiscal third quarter, Ryanair said an 8% rise in passenger numbers was offset by a 6% decline in average fares, while a 26% increase in ancillary revenues to €557m was offset by higher fuel and staff costs.
The quarterly loss of €20m, excluding €46.5m start-up losses at Laudamotion, compares with a €106m profit in the same period a year earlier.
Ryanair reiterated its 2018-19 profit forecast of €1bn-€1.1bn, which would be down by as much as 31% on the previous year. In an October profit warning, the company also blamed a summer of strikes and higher oil prices.
Pilot unions in some countries have suspended talks over pay conditions in protest at the threat of base closures. While O’Leary said the airline had made “very good progress” in those talks, he could not rule out further base cuts if fares keep falling.
Ryanair needs to conclude a collective labour agreement with the British Airline Pilots Association, "trade through to the spring with no union disruption and keep the market informed on post-Easter yield developments to rebuild confidence”, Simpson wrote in a note.
“At that point we feel the market will once again place a premium on Ryanair’s sustainable business model, with FY20 costs expected to be down year on year.”