Ryanair’s (RYA) fall in profits tops off a bad run for airlines

• Profits hit by rising fuel costs, staff related matters and costs relating to new Austrian airline Lauda.
• €700m share buyback may provide some respite for investors as shareholder value is potentially boosted.
• Investors should remain cautious until costs and fare pricing show steady improvement.

Budget airline Ryanair ran into more turbulence today with news of a 30% drop in full-year profits signalling further difficulties in the airline sector. Contributing factors included rising costs, especially of fuel and staff-related matters, and the expense of starting up the new Austrian airline Lauda. Fares came under pressure due a rise in capacity and the late Easter weekend. Furthermore, the market also noted the rather gloomy expectations on pricing in the new financial year and forecasts of another rise in costs. The one positive note for investors was news of a €700m share buyback.

Ryanair’s shares dropped 6% in response to the results, taking them close to their January lows. Once the high-flying star of the industry, the company has clearly run into some difficulties in recent times. While some of its issues are commonplace across the industry there have been other negatives such as staff strikes, profit warnings and executive bonuses which have dampened sentiment further.

We remain cautious on Ryanair

Until there are signs of improvement on costs and fare pricing, investors should be cautious. We prefer International Consolidated Airlines in this sector for investors seeking growth but willing to accept a higher level of risk.

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