Preparing for take-off

Rynair's loss highlights the need to change

If further evidence was needed that Ryanair has to change quickly, it came with the low-cost carrier's third-quarter results. Without reform, the airline could soon run out of profitable growth. Investors are twitchy after the airline issued two profit warnings in 2013. On February 3 it confirmed its previously stated full-year guidance. That implies a 10 per cent drop in net profit, but Ryanair's share price rose seven per cent by 1230 GMT, largely in relief that there were no new nasty surprises.

In late 2013, the airline outlined its intention to update its business model and focus on improved customer service. It is trying to move its brand - and ultimately its fares - upmarket. The competition is stiffer than it was: flag carriers such as Lufthansa have restructured their short-haul business and lowered fares. Low-cost rival easyJet has wooed passengers with more convenient connections to airports in primary city locations and a better service experience. Ryanair has introduced allocated seating, which makes boarding less chaotic and creates new revenue as passengers are prepared to pay for the privilege of choosing their seat. Ryanair has also relaunched its website, lowered fares for checking in luggage and relaxed its strict hand-luggage policy. It also plans to offer larger numbers of flights to more better-connected airports.

For all the talk of reform, the evidence suggests the carrier still sees price-cutting as its trump card. When demand fell in late summer 2013, Ryanair lowered average fares by nine per cent. Aggressive seat promotions kept its planes full, but profit suffered. Passenger numbers rose six per cent but revenue dropped 0.5 per cent. Net losses rose to euro 35.2 million, a euro 53.3-million swing compared to a year earlier.

As investor hopes of a Ryanair renewal have gained ground, the shares have risen. They are up 25 per cent over the last three months, reversing most of the losses of the previous quarter. According to Thomson Reuters data, the stock trades on a forward price-earnings ratio of 14, an 18 per cent premium to peers. The valuation suggests investors think Ryanair will get it back on the growth track. The airline's chances of success, however, are still up in the air.