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DUBLIN (Reuters) - Ryanair's (RYA.I) average fares fell more than expected in the last three months of 2016 amid a capacity glut in Europe's short-haul aviation market, but the low-cost giant said it remains on track to post a modest increase in annual profits.
While competition may ease in the coming year, the market will continue to be challenging, with average fares likely to post single-digit percentage falls, Chief Executive Michael O'Leary said.
Europe's short-haul carriers have struggled in recent months with over-capacity and Britain's vote to leave the European Union, with low-cost rivals Wizz (WIZZ.L) and easyJet (EZJ.L) both trimming their annual profit forecasts in recent weeks.
Ryanair, Europe's largest airline by passenger numbers, said average fares fell 17 percent in the three months to Dec. 31 and could fall up to 15 percent in three months to March 31. That is worse than its earlier forecast of a fall of between 13 and 15 percent over the six-month period.
Weak fares knocked its profit in the final three months of 2016, the third quarter of its financial year, by 8 percent year-on-year to 95 million euros ($102.2 million), compared to a forecast of 99 million euros in a company poll of analysts.
But it said it remained confident of meeting its profit guidance for its financial year to March 31 of 1.3-1.35 billion euros, which would imply an increase of around 7 percent on last year.
Shares in Ryanair, which have outperformed the wider European airline market in recent months, were 2 percent lower at 14.48 euros by 1416 GMT. The stock is 37 percent ahead of its post-Brexit low of 10.46 compared to a 23 percent increase in the ThomsonReuters European Airlines Index. .TRXFLDEUPUARLI
Ryanair hopes falls in fares will ease next year as a more than doubling of oil prices since January last year should encourage competitors to shed fuel-inefficient capacity.
"Europe's airlines have either been taking on too much new capacity or have not been retiring loss-making capacity over the past two years because oil prices were falling. That should reverse itself this year," O'Leary told a conference call.
"We think a number of our competitors will be under much more material pressure to get fares, yields up, whereas we are content to add capacity and drive down fares in the next 12 months if that's what we have to do" to fill our planes, he said.
O'Leary, who last month said he hoped fares would fall only by low-single digits, said the airline "doesn't have a clue" exactly what the outturn would be.
"We hope it will be less than [5 percent] but frankly, the way we are expanding capacity, the way others are expanding capacity, it may be worse," O'Leary said.
The Irish airline, which is focusing on market share rather than profit per passenger, increased its passenger numbers in the last three months of 2016 by 16 percent and further cut the number of empty seats on its planes.
It plans to grow capacity by 13 percent this winter compared to an industry average increase of around 9 percent - the highest level of capacity growth in the industry in a decade.
Ryanair said its costs per passenger were down 12 percent in its third quarter, half of that due to fuel. Unit costs for the full year to March 31 will fall by around 4 percent, it said.
"The Q3 results came in marginally light of our forecasts and consensus... However, we expect Ryanair's peers to face greater pressure given their narrower margins," said Liberium analyst Gerald Khoo, adding that he expected no change in analysts' consensus forecasts for Ryanair's full-year profit.
($1 = 0.9295 euros)
Reporting by Conor Humphries; Editing by Adrian Croft