Budget airline Ryanair posted a larger than expected fall in third-quarter earnings on Monday, and its shares dropped after it said high oil prices, a faltering UK economy and weak sterling could halve profits.
The warning from Europe's biggest low-cost carrier also hit other airline stocks, with many seen ill-equipped to cope with slowing demand, while Ryanair cuts costs further and continues its expansion.
Analysts said airlines already making a loss and those heavily exposed to the UK market had the most to fear from the challenge posed by Ryanair.
"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 research note.
Ryanair said there was a "significant chance" profits would fall in the 2008/09 business year, but capacity would still grow by almost 20 percent and discounts by airports -- hit by cutbacks by other airlines -- allowed it to reduce costs.
"(Recession) will be good for certainly our part of the aviation industry," Chief Executive Michael O'Leary told a news conference in London.
Ryanair said net profit in the three months to the end of December fell 27 percent to EUR35 million euros (USD$52 million) as winter fares fell almost 5 percent.
That excludes a one-off gain from the sale of aircraft, while the previous year's figure was distorted by EUR10 million received after a hotel partner cancelled a contract.
Having earned much of its income during the busy European summer, Ryanair maintained its forecast for profit after tax to rise 17.5 percent to EUR470 million in the year to the end of March, but Goodbody analyst Joe Gill said investors were focusing on the airline's "grim prognosis" for the following year.
Ryanair said on Monday the European airline sector was facing a "cyclical" downturn, with the prospect of higher oil prices, poor consumer demand, weaker sterling and higher costs.
Based on its most optimistic scenario, profit next year could grow 6 percent to EUR500 million if average yields are flat and oil prices drop to USD$75 a barrel.
The Dublin-based carrier said its most conservative projection assumed oil prices remain at USD$85 a barrel and that poor consumer sentiment and weak UK currency shave 5 percent off yields.
"Then profits in the coming year could fall by as much as 50 percent to as low as EUR235 million (excluding profits from aircraft disposals)," it said.
Analysts said Ryanair's forecast range was wide and pointed towards a fall in profit, but added that even the lower end of the range would be enviable for many industry players.
"Fundamentally, it's a very strong company," Gill said.
In terms of protection against high jet fuel prices, Ryanair said it still had very little insurance for its 2008/2009 business year: "We remain essentially unhedged for next year."
Ryanair also said it planned to spend up to EUR200 million buying back shares which, based on a share price of 3.60 euros, would equate to 3 percent of Ryanair's share capital.
