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Ryanair clings to profit goal amid Max grounding, price war

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Ryanair says it has been forced to drop prices in the UK to stimulate demand amid uncertainty over how the split from the European Union will play out.

London

RYANAIR Holdings clung to its full-year earnings outlook as a European fare war and the grounding of Boeing's 737 Max jetliner ate into first-quarter profits.

Margins on ticket sales are shrinking, with a glut of seats hurting prices in Germany and concerns around Brexit weighing on UK demand, Ryanair said on Monday. At the same time, a jump in revenue from food, extra bags and faster boarding should keep the discounter on track to meet fiscal 2019 targets.

The impact of the fare war has been exacerbated by the global idling of the Max after two fatal crashes. Chief financial officer Neil Sorahan confirmed that with Boeing struggling to get the model back into service, Ryanair's first planes aren't expected until January or February. He revealed that cost cuts are being sought to make up for missed benefits from the fuel-efficient jets, for which the Dublin-based carrier is one of the biggest customers.

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Bernstein analyst Daniel Roeska said in a note that the reiteration of annual targets is positive for the stock, but that management is "in a tough spot", given a forecast 6 per cent drop in first-half fares, rising fuel expenses and growth of only about 3 per cent next summer due to the Max delays,

Ryanair shares are down 4.7 per cent for the year, compared with a 15 per cent decline in the Bloomberg EMEA Airlines Index.

Ryanair's net income fell 21 per cent to 243 million euros (S$371 million) in the first quarter through June, with the fare slump boosting passenger numbers and revenue 11 per cent at the expense of profitability.

Mr Sorahan said in an interview that retaining guidance for a full-year profit of 750 million euros to 950 million euros, versus 948 million euros in fiscal 2019, sent out an "important" message in light of the three-month figure. He added that strong ancillary sales should continue to prop up earnings.

The situation in Germany is particularly tough, according to Ryanair, which said Deutsche Lufthansa AG and its Eurowings discount arm are selling excess seats below cost after the acquisition of bankrupt Air Berlin. The Irish company said it has been forced to drop prices in the UK to stimulate demand amid uncertainty over how the split from the European Union will play out.

Ryanair's costs excluding fuel rose 4 per cent after it lifted pilot pay and hired additional staff to improve crew-to-aircraft ratios following a unionisation drive. Even so, the carrier could face further disruption as labour groups ballot cockpit crew based in Ireland and the UK on industrial action over pay and benefits. The votes will conclude next week.

Mr Sorahan said that the Max situation is problematic but that the impact on earnings should be largely offset by reimbursements from the US manufacturer, which set aside US$5.6 billion for compensation payments to airlines and leasing firms in the second quarter alone.

"We're fairly keen to let Boeing get this aircraft back in the sky, but there's a clear understanding that we would expect them to cover our costs for the delay," he said. BLOOMBERG