Ryanair shares fall 11.5% after cutting profits estimates by 10%
City Index November 4, 2013 3:01 PM
<p>Ryanair shares suffered their worst one-day decline in recent years today, falling 11.5% after the airline warned that annual profit is expected to decline for […]</p>
Ryanair shares suffered their worst one-day decline in recent years today, falling 11.5% after the airline warned that annual profit is expected to decline for the first time in five years.
Greater competition in the budget airline sector is forcing carriers to cut fees in an effort to maintain the volume of passengers and this is hurting Ryanair’s bottom line.
Only two months ago Ryanair shares fell 11.4% after the budget carrier announced its first profit warning in a decade and today’s announcement means that the situation is now expected to be worse than originally forecast.
Ryanair now expects annual profits to come in at €510mn against expectations of €570mn, marking a drop of 10%. In September, the airline said profits would be at the lower end of its consensus range between €570mn-€600mn and so today’s announcement marks a stark change of tone in the last two months.
Ryanair’s strategy is obsolete with economy in ‘recovery mode’
Whilst passenger numbers remained stable, Ryanair is struggling from the fact that its customers are progressively looking to fly with them on discount flights primarily, which is suppressing profit margins.
Ryanair is now moving ahead with its strategy of trying to attract higher end customers from budget rivals such as EasyJet. At the heart of this drive is customer service and trying to leave behind the darker clouds surrounding Ryanair’s controversial ‘culture’ of charging customers to use the toilets or print boarding passes.
The problem Ryanair has is that now that the broader economy is reviving, customers feel no longer forced to fly with them. They will shop around for a deal and where there is none to be had, they will fly with whomever gives them a good experience at an affordable cost. Ryanair has limited itself through poor customer service and a slogan for cheap flights to the lower end of the market. This works in recession but not in recovery mode, which the UK is now in following GDP growth of 0.8% in the last quarter. Ryanair now faces a monumental challenge to win back lost customers and it must do so through the one aspect it has an extremely poor reputation for – customer service.
Shares in ‘correction mode’
Shares have suffered a significant correction of just under 30% in the last three months alone, a correction exacerbated by today’s profits cut. The question will be: how far can shares fall? The old saying that ‘you don’t catch a falling knife’ appears quite relevant here, being that the speed and severity of the falls make any attempts to buy into the market hoping for a rebound filled with risks. Whilst there is every chance that there could be a bounce as bargain hunters make their move, I would caution against the potential for a dead cat bounce here.
note: source of chart, Thomson Reuters.
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