Ryanair shares surge as airline avoids fares war

Ryanair shares surged as much as 10% yesterday as the airline indicated it had one of its most profitable summers in years.

A price war that could have been expected across Europe’s airline industry following the plunge in oil fuel costs did not materialise, helping to drive profits.

A wet summer and the additional capacity the airline can draw on in Northern Europe also helped, and should help to maintain the airline’s momentum through the winter, analysts said.

Ryanair told the market it now expected after-tax profit to soar to between €1.18bn and €1.23bn in the 12 months to the end of March 2016, up by 25% from its earlier guidance.

Carriers across the board appear to have tapped a healthy pricing environment and have desisted from waging a prices war.

That has meant that airlines have been able to hold onto more of the windfall gains from lower fuel costs.

Ryanair may now face less competition to lower fares over the winter months.

“It’s a story that has been gaining momentum for some time. The carrier has upgraded passenger volume numbers yet again.

"What we are seeing is an improving pricing improvement,” said Robert Murphy at Investec Ireland.

“Overall the industry commentary has been saying that the summer has been very strong for the industry across the board. Winter isn’t looking as choppy as analysts had in their numbers previously.”

Goodbody Stockbrokers said Ryanair is citing “a generally benign environment across Europe” for its profit upgrade, while the outlook remains rosy on pricing.

“One of the major shifts, from a profit after tax perspective, is the adjustment to third-quarter fare guidance. Ryanair is now guiding for third-quarter fares to be flat, we were at minus 4.6%,” the stockbroker said.

Goodbody now sees fares in the fourth quarter to be closer to -3%, as opposed to its estimate of a drop of 7%.

Ryanair said in a statement it expected fares to be higher than previously forecast in the three months to December, but forecast “sustained fare wars” in the spring, with Germany and Lufthansa a key target.

Lufthansa is meanwhile struggling with a two-day pilot strike stemming from its efforts to cut costs.

The German airline has said it would comfortably reach its 2015 profit targets after a better than expected July and August, yet a forecast operating profit margin of around 5% compares with around 20% for Ryanair.

“The likes of Air Berlin, Germanwings etc will probably try to hang on to the market share that they have, which will lead to share pressure across the winter,” Ryanair chief financial officer Neil Sorahan said in an interview with Reuters.

Industry experts say Lufthansa is having a hard time dealing with unions because its forecast of improving results runs counter in the eyes of some workers to its stated need for savings.

Lufthansa may even have helped Ryanair by expanding its Germanwings budget brand in Germany, said Jonathan Wober, chief financial analyst at CAPA, Centre for Aviation.

“Lufthansa, through expanding Germanwings, has warmed up customers to the idea of no-frills flying and having unbundled fares,” Mr Wober said.

“Now Ryanair, with its lower cost base, can come in and undercut on price.”

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