By Conor Humphries
DUBLIN (Reuters) - Budget airline Ryanair (ISE:RY4B) warned that annual profit is set to fall for the first time in five years and announced another departure from its no-frills business model as it contends with intense price competition in Europe.
Two months after delivering its first profit warning in a decade, the Irish carrier cut its forecast further for the year to March, to about 510 million euros from 570 million euros, with weak demand pushing down average fares by about 10 percent this winter.
The weak numbers coincide with Ryanair's efforts to attract premium passengers from low-cost rivals such as easyJet (LSE:EZJ) and Norwegian (OSL:NAS) in a big strategy shift announced after the September profit warning, including a series of radical customer service improvements.
Europes' biggest airline in terms of passenger numbers admitted that its "abrupt culture" might have become a problem. On Monday it continued the shift by saying it will now allocate all seats on its planes, ending the often frenzied boarding scramble.
Chief Executive Michael O'Leary remained in typically ebullient mood on Monday, saying that passenger numbers and on-board spending are strong but that there is weak demand for air travel across Europe.
"People are characterising this as 'what's gone wrong?' Nothing! We are booming ahead," he said in a conference call, citing October passenger numbers up 6 percent from a year ago.
"There is a weaker pricing environment out there. Get over it. Wherever that pricing falls, it will be significantly below what our competitors can withstand."
O'Leary said that he expects the weakness to prove temporary, but conceded that a "catastrophic" fall in pricing over the coming year could force the company to reconsider a promised share buyback due by the end of 2015.
Ryanair shares were down 11.9 percent by 1304 GMT, against a 4 percent decline for rival easyJet and the ThomsonReuters EU Airlines Index (.TRXFLDEUPUARLI).
"This is weak and disappointing profitability guidance from Ryanair, indicating that the airline is experiencing a more difficult operating environment than several of its peers," Merrion Stockbrokers analyst David Holohan said.
O'Leary, however, said that the customer service changes would eliminate perceived advantages for its rivals within three or four months, allowing Ryanair to beat them on cost.
Chief Financial Officer Howard Millar warned that the changes would not be instant and would not have a significant impact on the current year.
The airline met analysts' forecasts with a profit of 602 million euros for the six months to September 30, up 1 percent year on year.
Analysts said there could be some upside in the 2014/15 financial year, which includes two Easter periods and should also benefit from recent cuts to charges at key airports and lower fuel prices.
Several competitors, including Norwegian and Aer Lingus (ISE:EIL1), have also warned of strong competition pushing down prices.
Though Britain's easyJet last week nudged up its pretax profit for the 12 months to September, it has not yet released figures for the October-March period.
(Editing by David Goodman)