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Last Updated: Monday, 4 February 2008, 15:58 GMT
Ryanair warns of profits 'storm'
Ryanair plane
Ryanair has been expanding its routes to offset slower profit growth

Ryanair has warned that its profits could be halved this year as fuel costs rise and as the UK pound weakens.

The warning came as the budget airline reported that net profit dropped 27% to 35m euros ($52m; 26m) during the October to December quarter.

The drop was its first quarterly decline in a more than a year.

Chief executive Michael O'Leary said that the weakening profits were part of a cyclical downturn in the industry and a "perfect storm" may be lying ahead.

The company's shares stood at 3.35 euros on Monday afternoon, down 7% though up from a 12-month low of 3.05 euros hit earlier during the day.

"The European airline sector is presently facing one of these cyclical downturns, with the possibility of a 'perfect storm' of higher oil prices, poor consumer demand, weaker sterling and higher costs," said Mr O' Leary.

There is no visibility, it's just guesswork what they are doing at this stage
Bloxham analyst Ross McEvoy

Analysts said other airlines that rely heavily on the UK market for business would face similar challenges.

"We view the deteriorating outlook as UK-led and consequently see ramifications for our Easyjet and British Airways forecasts," NCB analyst Neil Glynn wrote in a note.

Shares in Easyjet were down 4.4% to 444 pence, while British Airways shares edged lower, down 0.4% to 316.8p.

'Perfect storm'

Mr O' Leary predicted that there would be a recession in the UK and across Europe, and would lead to people seeking cheaper travel arrangements.

And he rejected calls for the Bank of England to follow the US central bank, the Federal Reserve, in cutting interest rates when policy makers meet later this week.

"The whole system got very frothy over the last couple of years and we can't keep bailing ourselves out with these artificial interest rate cuts," Mr O' Leary told BBC News. "We need to tighten the belt and focus on reducing costs."

Easyjet plane
Some analysts say Easyjet could also suffer from the consumer slowdown

Dublin-based Ryanair and its rival Easyjet have built their businesses on a reputation for air fares that are lower than charges with larger carriers.

They aim to boost earnings by expanding their routes, adding planes and charging for any service above the basic cost of the flight, including baggage check-in.

Gloomy outlook

Mr O'Leary said it was too early to make an accurate assessment of earnings for the firm's financial year beginning 1 April.

But he warned that if oil prices remained above $85 a barrel, and if consumer sentiment and the UK pound stayed weak, then the airline's earnings for 2008 could fall by up to 50% to 235m euros.

He said that the company had not taken out protection, known as hedging, against the oil price or weak pound.

"We remain essentially unhedged for next year," the budget airline said.

Not being hedged essentially means the airline has not used financial instruments to insure itself against rising fuel costs or adverse exchange rate moves.

The gloomy outlook is likely to weigh on Ryanair's share price, which has already slipped 18% this year, predicted Bloxham analyst Ross McEvoy.

"There is no visibility, it's just guesswork what they are doing at this stage," he said.

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