Airlines stocks are tumbling after Irish budget carrier Ryanair's (RYA) trading update reveals that full-year profits will be at the lower end of expectations.


Ryanair sheds 13.8% to €5.85, while Easyjet (EZJ) tops the list of FTSE 100 fallers, dropping 7.4% to £11.85. British Airways-owned International Consolidated Airlines (IAG) slides 4.4% to 281.70p and Yorkshire-based Dart (DTG) falls 3% to 251p. Bucking the sectoral trend however is Exeter-based regional UK carrier Flybe (FLYB) which climbs 5.6% to 85p.


The old adage about renting but not buying airline stocks looks rather telling as the sector nosedives on Ryanair's warning that annual net profits will sit at the lower end of the €570 million to €600 million guidance range.


Chief executive Michael O'Leary tells investors that 'close in late bookings in July had been at weaker than expected yields due primarily to the heatwave in Northern Europe and weaker sterling/euro exchange rates.'


O'Leary also says that 'in recent weeks we have noticed a perceptible dip in forward fares and yields into September, October and November' which was blamed on increased price competition and capacity increases in the UK, Scandinavia, Spanish and Irish markets.


Despite this apparent increase in competition in the Irish market, late last month (28 August), the the UK Competition Commission (UKCC) ruled it should reduce its holding in Irish rival and national flag-carrier Aer Lingus (AERL).


But is this just a storm in a teacup or are jitters in the sector justified?


Certainly, the ever-ebullient O'Leary isn't worried, pledging to respond to this lower-yield outlook by selectively reducing winter season capacity, thereby cutting the group's full-year traffic target from over 81.5 million to just under 81 million. He also tells investors that Ryanair will be rolling out a range of lower fares and aggressive seat sales particularly in those markets mainly UK, Scandinavia, Spain and Ireland.


While it is doubtless prudent to warn investors that earnings will be challenged, it is worth bearing in mind that Ryanair's cash flows and balance sheet remain robust and the Irish airline has no plans to change its ongoing €400 million share buyback programme (€177 million already completed for the full year to March 2014) and up to €600 million via a combination of dividends and buybacks in FY March 2015.


Stephen Furlong at Davy Stockbrokers in Dublin is not unduly concerned by the warning and continues to 'see Ryanair as one of the industry-leading players with a renewed growth story, higher and rising returns over the medium term and material free-cash generation.'

Issue Date: 04 Sep 2013