Ryanair Clings to Profit Goal Amid Max Grounding, Price War

(Bloomberg) -- Ryanair Holdings Plc clung to its full-year earnings outlook as a fare war and the grounding of Boeing Co.’s 737 Max jetliner ate into first-quarter profit at Europe’s biggest discount airline.

Margins on ticket sales are shrinking, with a glut of seats hurting prices in Germany and concerns around Brexit weighing on U.K. demand, Ryanair said Monday. At the same time, a jump in revenue from food, extra bags and faster boarding should keep the discounter on track to meet fiscal 2020 targets.

The impact of the fare war has been exacerbated by the global idling of the Max after two fatal crashes, and Chief Financial Officer Neil Sorahan confirmed that with Boeing struggling to get the model back into service, Ryanair’s first planes aren’t expected until January or February. He revealed that cuts to expenses are being sought to make up for missed benefits from the fuel-efficient jets, for which the Irish carrier is one of the biggest customers.

The CFO said Ryanair’s lower cost base means it’s still better off than European rivals, and stands to gain market share from any shakeout of the sector next winter. “Longer term the cost advantage that we have and the strength of our balance sheet means that we’re in a very strong position to participate in the opportunities that will inevitably arise,” he told Bloomberg TV.

Ryanair traded 1.3% higher at 10.15 euros as of 9:16 a.m. in Dublin, where it is based, after earlier advancing 3.4%. The shares are down 5.4% for the year, compared with a 17% decline in the Bloomberg EMEA Airlines Index.

Bernstein analyst Daniel Roeska said in a note that the reiteration of Ryanair’s annual target will support the stock, but that management is “in a tough spot,” given a forecast 6% drop in first-half fares, rising fuel expenses and growth of only about 3% next summer due to the Max delays.

Quarterly Slump

Ryanair’s net income fell 21% to 243 million euros ($270 million) in the first quarter through June, with the fare slump boosting passenger numbers and revenue 11% at the expense of profitability.

Sorahan said in an interview that retaining guidance for a full-year profit of 750 million euros to 950 million euros, versus 948 million euros in fiscal 2019, sent out an “important” message in light of the three-month figure. He added that strong ancillary sales should continue to prop up earnings.

The situation in Germany is particularly tough, according to Ryanair, which said Deutsche Lufthansa AG and its Eurowings discount arm are selling excess seats below cost after the acquisition of bankrupt Air Berlin. The Irish company said it has been forced to drop prices in the U.K. to stimulate demand amid uncertainty over how the split from the European Union will play out.

Ryanair’s costs excluding fuel rose 4% after it lifted pilot pay and hired additional staff to improve crew-to-aircraft ratios following a unionization drive. Even so, the carrier could face further disruption as labor groups ballot cockpit crew based in Ireland and the U.K. on industrial action over pay and benefits. The votes will conclude next week.

Sorahan said that the Max situation is problematic but that the impact on earnings should be largely offset by reimbursements from the U.S. manufacturer, which set aside $5.6 billion for compensation payments to airlines and leasing firms in the second quarter alone.

“We’re fairly keen to let Boeing get this aircraft back in the sky, but there’s a clear understanding that we would expect them to cover our costs for the delay,” he said.

©2019 Bloomberg L.P.

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