Irish no-frills airline Ryanair (RYA) falls 12.3% to €5.35 after issuing its second profit warning in two months. This raises questions about whether recently-proposed changes to the airline's combative customer service policy may have been too little too late.


Today's half-yearly report sees the Dublin-based budget airline reporting record first half profits of €602 million. Passenger traffic increased 2% in the six months to 30 September as well as a 1% increase in load factor.


Yet the low-cost carrier admits that there has been a perceptible dip in forward fares and yields into the third quarter (Q3). This apparently due to increasing price competition; a general economic malaise in Europe and the weakness of the euro/sterling exchange rate.


Consequently, the group is lowering its March 2014 year-end traffic estimate by half a million to just under 81 million. While forward bookings are running slightly ahead of last year, Ryanair expects Q3 fares to fall by 9% and Q4 to fall by up to 10%.


In early September, Ryanair warned that full-year profits would be at the low end of the €570 million to €600 million range but also said the number could be even worse if fares continued to weaken into the winter. Dublin-based stockbroker Davy says this lower guidance and today's warning are driven entirely by the yield outlook. Read our analysis of the first profit warning here.


Ryanair's response to these financial vicissitudes is to come out fighting. New routes and bases have been announced with attendant aggressive fare promotions and rules relaxed around cabin baggage allowances.


The airline has begun to take further tentative steps towards image rehabilitation with CEO Michael O'Leary subjecting himself to the indignity of a Twitter grilling as the group unveiled its improved website and digital service.


In terms of fundamentals, Davy analyst Stephen Furlong characterises the group's balance sheet as fortress-like with an ongoing buyback and dividend strategy failing to make a dent in the group's €3.5 billion cash.


With the addition of new routes and new aircraft due to come online from September next year, 2015 may see Ryanair back on track after a subdued 2014. Davy lowers its price target from €8 to €7 but retains its 'outperformance' rating based on the group's 'industry-leading model, cash generation and potential for significant margin expansion in FY2015'.

Issue Date: 04 Nov 2013