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A 27% drop in third quarter net profits for budget airline Ryanair (RYA), and a warning that profits could fall by as much as 50% next year, has left a cautious feel to the airline sector as higher oil prices and fear of a recession continue to pile on the pressure.

Having reported profits of E35 million for the third quarter, Ryanair said that figures could fall further next year if forward oil prices remain at $85, and consumer sentiment and sterling weakness results in a 5% fall in yields. Ryanair is essentially unhedged on fuel for next year, leaving it particularly exposed to high oil costs.

Chief executive, Michael O’Leary, says the European airline sector is currently facing a cyclical downturn, which could lead to a ‘perfect storm’, and the airline may slash fares if market conditions continue to deteriorate. Ryanair also saw its share price slashed, plunging as much as 16% during the day, but closing 2% lower at E3.53. The news had a knock on effect for rival easyJet (EZJ) whose shares fell as much as 9% during the day, and closed 3% lower at 459p. easyJet is expected to announce a first quarter update today (Thursday 7 February) and chances are that it too will be feeling the pinch from higher fuel costs and uncertain markets.

Broker Numis is currently in the process of reviewing its numbers for easyJet, stating that it is concerned about the likely deterioration in the yield outlook for airlines. However, broker ABN AMRO says that it expects the supply/demand balance for European low-cost carriers to be ‘broadly favourable’.

Shares says: Difficult market conditions are unlikely to be resolved in the near future.

SELL Ryanair

HOLD easyJet

by: Rachel Robson