Ryanair profit declines 27% outlook Airline warns that fiscal 2008 profit could fall as much as 50%

LONDON (MarketWatch) -- Shares of Ryanair Holdings Plc declined 12% on Monday as Europe's largest low-cost airline reported a 27% drop in adjusted third-quarter profit because of lower ticket prices, and warned that higher fuel prices and weaker consumer spending could cut next year's profit by as much as 50%.

Third-quarter net income at the budget carrier slipped to 47.2 million euros from 47.7 million euros a year earlier. Excluding a one-time gain of 12 million euros from the disposal of aircraft, adjusted profit fell 27% to 35 million euros.

Passenger traffic rose 16% to 12.4 million. Sales climbed 16% to 569 million euros as a 30% increase in ancillary revenue offset a 4% drop in yields, also known as ticket prices.

Ancillary revenue includes revenue from food sold on the plane, luggage charges and commissions on auto rentals and hotels booked through Ryanair's (RYA)(RYAAY) Web site.

The airline said it's on track to meet its ancillary sales target of 20% of revenue over the next three years and the planned introduction of in-flight mobile phone services on 25 planes this spring should further pad revenue.

Ryanair Chief Executive Michael O' Leary called the results a "creditable performance in very adverse market conditions" and confirmed the outlook for profit of roughly 470 million euros this year.

'Significant chance' that profit could decline

But the airline was much more cautious on the view for next year, saying that while it is too early to make an "accurate forecast," fuel prices hovering around $90 a barrel and fears of recession in the U.K. and many other European economies mean the current outlook is poor.

As a result, it said there is a "significant chance" that profit could decline as much as 50% in fiscal 2008 if ticket prices fall 5% and oil trades around $85 a barrel. In the best case scenario, assuming average fares are flat and oil prices fall to $75, Ryanair would post a 6% rise in profit to 500 million euros.

Ryanair shares were last down 13% in London morning trading. The weakness spread to the many other airlines. Shares of low-cost rival EasyJet (EZJ) fell 7.1%. Shares of German low-cost Air Berlin (AB1000) dropped 2.7%. See London Markets.

O' Leary reminded investors that the airline is unhedged for next year and said the 40% increase in fuel prices will impose "significantly higher costs" in a year when it plans to expand capacity by 20%.

The airline also said the slump in consumer confidence would likely result in flat or lower average ticket prices in 2008 and the recent weakness of the pound would bite.

"The European airline sector is presently facing one of these cyclical downturns, with possibility of a 'perfect storm' of higher oil prices, poor consumer demand, weaker sterling and higher costs at unchecked monopoly airports such as Dublin and Stansted," O' Leary said.

In response, Ryanair plans to slash ticket prices to stimulate demand, but said its low cost base means it would remain profitable in case of a recession.

But Deutsche Bank analyst Chris Reid doesn't think too much of the airline's cost base. He said in a note to clients Monday that Ryanair is not getting the benefit of its volume growth in its unit cost base, which is resulting in "business model failure."

Aude Lagorce is a senior correspondent for MarketWatch in London.