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Have discount airlines hit maximum flying altitude?

Ryanair says it is abolishing the cheeky bugle clarion that rudely awakens slumbering passengers whenever a flight lands on schedule. But the decision to press the mute switch, and a plethora of promised customer service improvements, are not enough to silence mounting alarm over two profit warnings from Europe's biggest air carrier in the space of two months.

Signs of a brewing price war among Europe's short-haul budget airlines, and an unusually tepid start to winter bookings, forced Ryanair today to issue a warning that its profits for the year to end March would fail to meet last year's total of €569-million ($800-million). Instead, the company predicts that lower fares and weaker yields (the amount the company earns per passenger carried) will push net profit to between €500-million and €520-million.

Ryanair stock tumbled this morning as investors tried to gauge whether the airline's uncharacteristically downbeat outlook was a bit of turbulence, or a full-scale emergency.

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Only two months ago, chief executive officer Michael O'Leary hosted a conference call where he tried to dampen hopes that Ryanair's profit would reach €600-million. Noticing a perceptible dip in fares and yields in the autumn, the company would ground aircraft and take 750,000 seats out of the market. There would be promotions and discounts needed to keep the load factor high. At its heart, Ryanair is a bums-on-seats operation – typically, the company barely covers its costs from the airfare alone. The profit comes from extras: fees for handling stowed luggage, food and drink, booking fees and even penalty charges – £70 ($116) to issue a second boarding pass for any passenger who fails to print one at home.

In the past, that strategy has worked a treat for Ryanair. Assisted by the bumptious personal style of its CEO, it acquired the reputation of being Europe's most hated airline as well as its fastest growing. Not just poor, but indifferent service seemed to be Ryanair's business model alongside frequent fare promotions and lurid advertising in the style of a British tabloid newspaper. The company even published a calendar featuring its own cabin crew semi-naked, draped over parts of the aircraft amid frequent stories of Ryanair's grabby behaviour. More recently the media attention has turned sour with the sacking of a long-serving pilot for comments he made about Ryanair safety in a television documentary.

If Ryanair's business model occasionally enraged passengers, it pleased shareholders until last month when Mr. O'Leary appeared to swallow a huge mouthful of humble pie. A clutch of measures were announced to appease customers: halving the cost of checked luggage, fewer strident announcements on early morning flights, seat allocation (rather than a mad scramble by passengers) and less aggressive rules about carry-on bags.

It sounds like a victory for Ryanair's critics but the reality may be worse. The company would seem to be following in the footsteps of its arch-rival Easyjet by attempting to woo a better class of passenger with a modicum of service. However, Ryanair rarely competes head-to-head with its peers or with the major airlines, preferring to use smaller airports where it gets cheap landing rights. The real story may be that the budget travel market is peaking.

Load factors seem to be weakening across the board, according to statistics from the Association of European Airlines. This may be a temporary blip but it doesn't tally with stories of European economic recovery. The truth may be that the spending power of Ryanair's customers is dwindling. Wages in Europe are not rising, unemployment is still high, household costs are rising and the money left for travel is dwindling. If Ryanair is really going after the premium traveller, that is very bad news for all airlines.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More


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