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‘World’s favorite airline’ feels the heat

Wednesday, 4 Sep 2013 | 6:29 AM ET
Ryanair CEO Michael O'Leary
Vladimir Simicek | isifa | Getty Images
Ryanair CEO Michael O'Leary

Ryanair's stock price tumbled on Wednesday after it announced that it may miss its full year profit guidance and will cut its winter capacity, as competition heats up from competitors in the challenging winter months.

The Irish budget airline's share price dropped by as much as 14.9 percent and caused many other European airline stocks, such as EasyJet, to fall as the Irish company's CEO Michael O'Leary said he expected the European airline market to be weaker than generally expected in the coming months.

The company also said in a trading update that it faced increased price competition and some capacity increases from other airlines in the U.K., Scandinavia, Spanish and Irish markets.Firms like Norwegian, Aer Lingus and IAG's Iberia and Vueling are mounting pressure on the low budget Irish airline.

High fuel costs have dented the airlines' profits and Europe's largest discount airline now expects full year net profit to be at the lower end of its previously guided 570-600 million euro range ($750-790 million).

The company said it had noticed a dip in forward fares and yields for September, October and November, which it said was due to not just fiercer competition, but also because of a weak sterling-euro exchange rate. O'Leary said the sterling exchange rate was the number one reason for the weaker profit forecast, stating that it could impact full year revenue by £30-50 million.

(Read more: Ryanair CEO Calls Boeing 787 Problems' Regulatory Crap')

Ryanair will now cut back on some winter routes and revised its full year traffic target to under 81 million from a previous target of over 81.5 million. O'Leary said he would ground 70-80 aircraft in the winter months.

In the trading update, O'Leary said, "We are also rolling out a range of lower fares and aggressive seat sales particularly in those markets mainly U.K., Scandinavia, Spain and Ireland."

The news follows months of differing news from Ryanair.

Why Ryanair may have little to worry about
Stephen Furlong, senior equity analyst at Davy Research, explains that despite warning on guidance, Ryanair remains confident of its cash flow generation power.

In August, British broadcaster Channel 4 showed a program which alleged that pilots for Ryanair had"deep-rooted" concerns over the safety of the airline. The program,called Ryanair: Secrets from the Cockpit - Channel 4 Dispatches, raised serious concerns that the airline's employment practices could have an impact on passenger safety.

O'Leary described the concerns as a joke, arguing, "This is clearly an example of the European pilots unions desperately trying to unionize Ryanair, failing and playing the safety card."

(Read more: Ryanair safety concerns: Genuine or joke?)

In June, at the Paris Air Show,O'Leary finalized an order for 175 Boeing 737-800 - Boeing's largest ever firm order from a European airline - and said the order would allow Ryanair 25 percent growth up to 2019, when he expected 400 aircraft to comprise the company's fleet and when international passenger numbers would reach 100 million.

(Read more: Ryanair Orders 175 Boeings, but CEO Wants More Seats, Less Baggage)

Ryanair claims the mantra "the world's favorite airline," as the International Air Transport Association (IATA) states that the company carried the most international passengers in the world in 2012: 79.6 million. That figure is 29 million more than Lufthansa, with 50.8 million passengers. EasyJet had 44.6 million international passengers.

Despite today's challenging news, O'Leary said, "Ryanair cash flows and balance sheet remain in rude good health and there is no change to our recently announced plans to complete share buybacks of at least 400m euros and up to 600m euros via a combination of dividends and/or buybacks in FY March 2015."

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