Ryanair to slash fares 5%
Thursday, 31 July 2008

The Guardian

Ryanair will slash fares by 5% over the winter after abandoning plans to raise ticket prices amid fears that cash-strapped passengers will be turned away by costlier flights.

The average fare at Europe's largest budget carrier will fall from €42 (£33.30) to around €40, reversing a pledge to raise them by €2 in the other direction.

Howard Millar, Ryanair deputy chief executive, admitted that the sales outlook had worsened since early June, when Ryanair chief executive Michael O'Leary warned that fares might have to rise.

"The UK and Ireland seem to be going into a fairly strong recession and we now estimate that yields [average fare] will fall 5%," said Millar. Ryanair's second-in-command added that the carrier's priority was keeping up its load factor - or the amount of seats that it sells per flight. Under the budget aviation business model, fares are kept low in order to maximise passenger numbers and wring profits from supplementary charges such as bag check-in fees and car hire deals.

News of the fare cuts came today as Ryanair shocked the City with an 85% plunge in first-quarter profits on the back of high oil prices and warned that it could fall into the red for the full year. This would be the carrier's first full-year loss since it reinvented itself as a budget airline 20 years ago.

Its shares plunged 15% to €2.74 and dragged the rest of the airline sector down too. Low-cost rival easyJet dropped over 7%, to 310.5p and British Airways, which is expected to announce route cut-backs on Friday, was down over 4%, at 235.75p.

'In the path of the economic storm'

Millar admitted today that Ryanair will have to slash fares this winter in order to fill its planes, in apparent contrast with easyJet, which has been more optimistic on yields: "This is a load factor-aggressive, yield-passive operation. If we have to reduce fares in order to keep our loads, we will."

One analyst, speaking on condition of anonymity, said Ryanair's fares announcement indicated that the business is more vulnerable than it thought to a downturn in discretionary spending. "One wonders if they are finding that they have less pricing power than they thought. The airports and passengers on Ryanair routes might be more marginal and price sensitive" said the analyst.

Another Ryanair stockwatcher said the airline's predominantly leisure traffic customer base left it badly exposed to an economic downturn. Andrew Fitchie, analyst at Collins Stewart, said: "Ryanair is directly in the path of the current economic storm. Its demand is made up of leisure traffic much of which is highly discretionary short break holidays."

Millar said Ryanair faced "short-term pain but long-term gain", with more than €2bn in cash on its balance sheet and a fleet comprised of some of the most fuel-efficient planes in the airline industry. As a result, Millar said, the airline will pick up the routes and passengers dropped by less financial robust airlines that are expected to go bust over the next year.

Some analysts fear that Ryanair might be overwhelmed by its ambition, with its fleet expected to grow by 163 planes this year to 239 by 2010 - when in order to stay profitable it will need to maintain load factors of around 85% during the worst economic downturn in 20 years.

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