Ryanair PLC (LON:RYA) shares soared early on Tuesday after the low-cost carrier said it is still on track to turn a record annual profit this year despite recent troubles.
Last month, the Irish airline announced plans to cut 20,000 flights over the winter months due to a cock-up over pilot holiday scheduling, while more generally the industry has had to deal with falling ticket prices amid increased competition.
READ: Ryanair publishes list of flight cancellations
Those issues didn’t affect first-half performance though, with Ryanair making a €1.29bn profit in the six month ended September 30, up from €1.17bn a year earlier.
Helping to drive the bottom line growth was a sharp increase in passenger numbers which jumped 11% to 72.1mln (H1 2016: 64.8mln).
‘Strong H1 numbers’
"These strong H1 results reinforce the robust nature of Ryanair's low fare, pan-European growth model even during a period which suffered a material failure in our pilot rostering function in early September,” said chief executive Michael O’Leary.
But it was the full-year forecast that seemed to please investors. Many in the City had thought the recent issues would hit profitability, but Ryanair said it could “see no reason” to change its profit after tax guidance of between €1.40bn and €1.45bn.
That maintained guidance comes despite Ryanair grounding 25 of its aircraft over the next six months which will see traffic slow from 131mln to around 129mln customers.
The company expects ancillary spend per customer – things like snacks, drinks, gifts etc – to rise by 1% this year which will offset some of the reduced volume, while bookings are ahead compared to this time last year, albeit at slightly lower prices.
€25mln compensation hit from flight cancellations, “materially higher” pilot pay
Even though it still expects record profits this year, the Dublin-based airliner will take a €25mln one-time hit from the recent disruption, as well as a steep jump in annual crew costs.
The “perfect storm of one-off pilot shortages” will cost around €25mln in one-off compensation payments to affected travellers, while additional pilot costs will add another €45mln to its crew costs this year.
That second figure could possibly head up towards €100mln in the next full year.
The decision to give its pilots “materially higher” pay – 20% higher, in fact – is to try to stop them from defecting to rival airlines such as Norwegian Air, who were namechecked in Tuesday’s statement.
Ryanair did add that the higher crew costs going forward “will not significantly alter the substantial unit cost advantage” it has over its rivals.
‘What was all the fuss about?’
“More passengers, lower fares and on course for another record profit - investors might be wondering what all the fuss was about in the wake of September’s cancellation fiasco.
“But beneath the rising revenues and passengers there are concerns about rising labour costs that will affect Ryanair’s unit cost advantage over peers.
“Ex-fuel, [costs] will be 3% higher this year. Partly it’s compensation costs but it’s also because Ryanair plans to pay pilots more.
“This should prevent future disruptions but it comes at a cost of €100m every year (€45m for FY18). Whilst the airline says that this will not affect the hefty unit cost advantage it has over competitors, it will undoubtedly have a material impact on earnings.”
Shares in the airline were up 5% to €16.60 in mid-morning trade on Tuesday.