Business: Boom in European low-budget air travel turns to bust as Ryanair predicts first loss in 20 years

The boom in low-budget air travel has turned to bust, Ryanair admitted yesterday, as Europe's largest no-frills carrier warned that it is heading for its first annual loss in 20 years.

Ryanair said it would plunge from a profit last year of €439m (£348m) to a loss of up to €60m in 2009 if fuel costs stay high and render many of its cheap flights unprofitable.

The airline was also forced to reverse a planned fare increase and instead said it would slash prices over the winter - prompting speculation that it is struggling to fill airplanes bound for some of its more obscure destinations.

The average fare on Ryanair will fall from €42 to around €40, reversing a pledge to raise them by €2.

The global airline industry is going through its worst crisis since the aftermath of the September 11 attacks and at least 25 carriers have been grounded this year by the high oil price and weak sales. Ryanair, one of the strongest players in the business, confirmed the unprecedented financial threat facing its peers yesterday with a severe profit warning that sent its shares crashing by 22%.

Howard Millar, its deputy chief executive, said the sales outlook had worsened since early June, when the airline had warned that fares would have to rise.

"The UK and Ireland seem to be going into a fairly strong recession and we now estimate that yields [average fare] will fall 5%," said Millar, adding that the carrier's priority was keeping up its load factor - or the amount of seats that it sells a flight.

Under the business model for budget airlines fares are kept low in order to maximise passenger numbers and wring profits from supplementary charges such as bag check-in fees and car hire deals.

Ryanair will have to slash fares this winter in order to attract customers. "This is a load factor-aggressive, yield-passive operation. If we have to reduce fares in order to keep our loads, we will," said Millar.

Ryanair and easyJet, two of the world's most profitable carriers since 2000, insist they will emerge from the downturn much stronger than other airlines. British Airways, which is also struggling with ballooning fuel costs and weak sales on its key London-to-New York route, has admitted that it will struggle to make a profit over the next 12 months despite posting a record profit of £883m last year.

Millar said Ryanair faced "short-term pain but long-term gain". With more than €2bn in cash on its balance sheet and a fleet comprised of some of the most fuel-efficient aircraft in the airline industry, he said, the carrier would pick up the routes and passengers dropped by less financially robust airlines that were expected to go bankrupt over the next year.

However, shares in other airlines also plunged yesterday as the stockmarket focused on Ryanair's immediate troubles. The warning of a probable loss in the year to March 31 2009 was accompanied by news that first-quarter profits fell 85%. One analyst, speaking on condition of anonymity, said Ryanair's fares announcement indicated that the business was more vulnerable than it thought to a downturn in discretionary spending.

"One wonders if they are finding that they have less pricing power than they thought. The airports and passengers on Ryanair routes might be more marginal and price sensitive," said the analyst.

Another stock watcher said the airline's leisure-orientated customer base left it badly exposed to an economic downturn. "Ryanair is directly in the path of the current economic storm. Its demand is made up of leisure traffic much of which is highly discretionary short break holidays, said Andrew Fitchie, an analyst at Collins Stewart, who also pointed to the temporary closure of Ryanair's operations in Poland as an indication that a slowdown in immigration between eastern Europe and the UK is also affecting one of the airline's growth markets.

Some analysts fear that Ryanair might be overwhelmed by its ambition. Its fleet is expected to grow by 163 airplanes this year to 239 by 2010, yet in order to stay profitable the airline will need to maintain load factors of around 85% during a severe economic downturn.

The last time Ryanair made a loss was in 1989, when it was a full-service airline that flew 644,000 passengers a year - 57.4 million fewer than it expects to carry over the next 12 months.

Ryanair also announced its first "hand luggage only" flights will begin in October, stepping up its campaign against checked-in baggage. It is considering charging higher fares for the services, which it claims will be more punctual owing to quicker turnaround times from no luggage being carried in and out of the hold.