Ryanair pricing warning sends airline sector into tailspin

Ryanair reported an impressive jump in quarterly profits but its warning of pricing pressures sent shares across the airline sector descending fast on Monday morning.

The Irish budget carrier said its first quarter result, where profit after tax rose 55% to €397m, was greatly helped by a later Easter this year boosting prices, but management continued to guide to first-half average fares falling roughly 5% amid a drive to grow traffic by almost 11%, while checked bag revenue is seen as continuing to steeply decline.

Ryanair raised its full year traffic target to 131m from 130m, predicted ex-fuel unit costs were on track to deliver a 1% reduction in the year and kept full year post-tax profit guidance for a range of €1.4-1.45bn.

But its added that, "after a difficult winter last year, we expect the pricing environment to remain very competitive" into the second half, where it expects to grow traffic by roughly 7% and see fares decline 8% on average in the second half.

The profit forecast is "heavily dependent" on close-in summer bookings, second-half average fares "and the absence of any further security events, ATC strikes or negative Brexit developments".

Shares in Ryanair fell almost 5% to €17.30 in early trading on Monday, while fellow airlines IAG and Easyjet and were down 4.8% to 576.5p and down 2% to 1,274.65 respectively. Carriers Flybe and Wizz Air, and travel groups Tui and Thomas Cook were also in the red.

Investors are worried that overcapacity will hit fares, reducing profits and margins in the second half, said analyst Neil Wilson at ETX Capital.

He said Ryanair’s Q1 was by any reckoning very good, with margins improved and costs 6% lower.

"Ryanair also seem to be making less money from all those extra charges, noting that lower bag revenue was a factor in the lower profits as more customers switch to its two free carry-on bag policy."

Wilson noted with the recent Wizz Air update, which showed a similar trend of strong growth but downbeat outlook, the industry is pretty good at competing away any margin accretion by creating more capacity, with lower costs tending to equate to lower fares.

"Rynair is rightly cautious on fares but there is a good chance to gain market share this summer as legacy carriers restructure."