Ryanair Flying High

The low-cost European airline posts a 20% profit jump on increased revenue for secondary services. Investors also like a plan for fewer off-season flights

It's been a long time since the airline sector has looked this good. After United Airlines (UAUA) and American Airlines (AMR) recently posted strong first-quarter growth, their European counterparts are now getting in on the act. On July 31 Dublin-based Ryanair (RYAAY), the Continent's leading budget airline, announced a 20% increase in its first-quarter profits, to $190 million.

The improvement comes despite growing competition from rival low-cost carriers and rising airport charges at the company's key London hub. By branching out into secondary markets, particularly selling goods aboard flights and offering rental cars back on the ground, Ryanair Chief Executive Michael O'Leary has been able to ride high in the European airline sector. O'Leary is legendary in the airline industry for charging his customers for everything from checking baggage to a drink of water. Revenue for services such as travel insurance and in-flight snacks has risen 53%, to $160 million, and will represent 20% of the company's total income by 2010.

But what investors seem most pleased about is O'Leary's promise to cut back on capacity during slow winter months. Like other airlines, Ryanair is looking to shore up its business by getting rid of unprofitable off-season flights. The problem of empty seats has been compounded by a doubling of airport costs last year at Ryanair's British base, Stansted. That caused the firm's operating costs to rise 5% in the first quarter.

According to Stephen Furlong, analyst at Dublin-based Davy Stockbrokers, Ryanair's decision to reduce flights from Stansted between October and March by 20% sends a strong message to both the airport and investors. That message is being heard. On July 31 the company's share price rose 11.58% to close at €5.30, the biggest daily increase since November, 2004.

Fuel Prices Could Limit Expansion

O'Leary is an outspoken opponent of airport operator BAA, which owns Stansted, and the announcement to cut the number of planes operating from the airport allows him to take a swipe at BAA while at the same time helping to improve his profit margins. Beyond such industry sniping, analysts are supportive of the reduction in capacity, with Davy's Furlong raising his 2007 and 2008 earnings forecasts for Ryanair by 4%.

Ryanair could sputter. Rising fuel costs could still hurt Ryanair's expansion across Europe, although the company has hedged 90% of its fuel needs until March, 2008, at $63 per barrel. With current spot prices hovering around $77 per barrel, however, any future hedging at higher prices will cut into the firm's bottom line. Similarly, growing competition from other low-cost carriers, particularly in Eastern Europe, could make life increasingly difficult for Ryanair.

The airline is sure to face such challenges with the same gusto that epitomizes its flamboyant CEO. Ryanair's O'Leary is well-known for his over-the-top publicity stunts. Yet with figures like these, it's best to let the numbers do the talking.

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