Is Ryanair's third-quarter profit boost a sign of things to come?
Despite falling passenger numbers and rising fuel costs, Ryanair (LSE: RYA) has announced a third-quarter increase in profits. Net income for the third quarter of 2011 was €14.9 million, compared to a €10 million loss for the same period in 2010.
The airline says its new routes have performed well this winter, and plans to open five new European bases in March/April 2012. The airline has raised its profit forecast for the year by €40 million, taking its expected net income to €480 million. Revenue was up by 13% compared to Q3 2010, while fares rose by an average of 17% and ancillary revenues were up by 8% per passenger, or 6% overall.
These strong results come less than a week after a similar set of results from easyJet (LSE: EZJ), highlighting the profitable streak that is currently being enjoyed by the UK's two biggest budget airlines.
How do they do that?
Ryanair has managed to boost its profitability this winter by grounding 80 airplanes and raising its prices by an average of 17%, broadly offsetting the 18% increase in fuel prices. The company's stock has risen by 30% over the last six months, while easyJet's has risen by 23%.
Despite this deliberate slowing of its growth plans, Ryanair continues to look for expansion opportunities further afield, as my Foolish colleague Alan Oscroft commented recently.
Euro airlines face privatisation or failure
Both Ryanair and easyJet could find that their growth opportunities are helped by other airlines' problems.
Spain's fourth-largest airline, Spainair, went into administration over the weekend after the Catalonian government withdrew its support and talks with Qatar Airways failed to result in a deal.
Elsewhere in Europe, the Irish government's 25% stake in Aer Lingus (LSE: AERL) is also thought to be up for sale to help it meet its IMF-imposed targets. Similarly, Portugal's TAP airline is likely to be sold this year, while the Polish, Czech and Hungarian governments are all thought to be seeking private investment in their flag carriers.
A good time to invest in budget airlines?
Airlines' profitability is notoriously fickle, and Ryanair admits that, in part, its above-target performance in Q3 was due simply to cutting capacity, a lack of cancellations and reduced de-icing costs.
Both Ryanair and easyJet are reasonably profitable, but neither has a long record of paying dividends or of market-beating growth. They are a little too uncertain for me.
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