Jan. 28 (Bloomberg) -- Ryanair Holdings Plc, Europe`s biggest low-cost airline, may report fiscal third-quarter profit fell 43 percent after fares declined and fuel costs increased.

Net income slid to 23.5 million euros ($31 million) in the quarter to Dec. 31, from 41 million euros a year earlier, according to the median estimate of six analysts surveyed by Bloomberg News. Chief Executive Michael O`Leary said in a Jan. 19 interview that he agreed with analysts that earnings would drop. Sales rose 9 percent to 278 million euros, the survey showed.

Fuel prices surged to a record in October, and O`Leary cut average fares by 5 percent in the six months through Sept. 30 to win customers from British Airways Plc and EasyJet Plc. Traffic grew 13 percent last quarter, and the company reduced costs by adding new and more-efficient Boeing Co. 737-800 planes.

``They`re not out of the woods yet,`` said Stephen Clapham, an analyst at Williams de Broe in London with a ``sell`` rating on the shares. ``Fuel is still a big issue. Fares are still coming down.``

Jet fuel for delivery in northwest Europe rose to a record $538 a ton on Oct. 25. Crude oil futures in New York on Jan. 25 climbed to an eight-week high. Jet fuel is a refined oil product.

Fuel costs made up 25 percent of Ryanair`s operating expenses in the fiscal second quarter. The company said last year it hasn`t hedged its fuel expenses because oil prices are too high to buy contracts. Hedging allows a company to purchase fuel at a fixed price for future delivery, reducing risk. Ryanair will discuss its hedging policy when it releases earnings, O`Leary said.

The earnings release is due Jan. 31.

Of the 21 analysts covering Ryanair, 10 rate the shares a ``buy,`` nine a ``hold,`` and two a ``sell,`` according to Bloomberg data. Estimates in the analyst survey for third-quarter net income ranged from 2.7 million euros to 44.2 million euros.

Stock Decline

Ryanair shares have declined 11 percent in the last 12 months compared with a 14 percent decline in the Bloomberg Europe Airlines Index. Shares of London-based British Airways have fallen 12 percent, while Luton, England-based low-fare competitor EasyJet has lost 40 percent of its market value.

Average fares on scheduled domestic and international flights in and out of the U.K. fell 1.6 percent in the three months through December compared with a year earlier, according to Britain`s Office of National Statistics` air fare index.

``Ryanair is using its competitive advantage to lead the fare cuts,`` said David Harbage, who helps oversee $2.9 billion in stocks at Barclays Private Clients in London and who sold his Ryanair holdings two years ago. ``We expect more pain this year.``

Fuller Planes

The airline filled an average of 84 percent of its seats last quarter, an increase of 1 percentage point from a year earlier, the company said on Jan. 5. It added routes including London Stansted airport to Riga, Latvia, and the Spanish town of Zaragoza, as well as Frankfurt Hahn airport to Santander, Spain.

Ryanair`s traffic growth will pick up this quarter as it takes delivery of more Boeing 737-800s, O`Leary said in the interview. ``January traffic growth will be in double digits,`` O`Leary said. ``February and March will get faster and faster.``

The airline currently has 70 Boeing 737-800s and nine older 737-200s, with 85 737-800s on order. By the end of 2005, Ryanair will have a fleet of 96 737-800s, with another 59 on order.

Ryanair is boosting revenue by charging passengers to use its new in-flight entertainment system and with Internet sales of rental cars and hotel rooms. Ticket sales from the Ryanair Web site increased by one percentage point to 97 percent. The airline`s annual sales per employee of 467,000 euros are highest among Europe`s carriers, according to data compiled by Bloomberg.

EasyJet Slowdown

Passenger traffic at EasyJet, Europe`s second-largest discount carrier, grew at twice the rate of Ryanair`s, or 26 percent, in the last three months of 2004. EasyJet plans to slow its expansion, accelerate cost cuts and shed jobs as competition intensifies, Chief Executive Ray Webster said on Nov. 23.

O`Leary said on Jan. 28, 2004, that annual profit would fall as much as 10 percent because of sliding fares. The shares plunged 30 percent on that day, a record one-day decline. In last year`s fiscal fourth quarter, the airline posted its first loss since selling shares to the public in May 1997.

``Regaining control of the bottom line has been the important theme of 2004, and the airline that grows more slowly is likely to do that,`` said Mike Powell, an analyst at Dresdner Kleinwort Wasserstein in Madrid, who has a ``buy`` rating on the shares. ``Ryanair looks like they`ve timed it better.``

Airline Shakeout

O`Leary last year predicted a shakeout among discount carriers. Italian low-cost carrier Volare Group went bankrupt in December and Germany`s VBird collapsed in October. ``The only long- term survivors will be Ryanair and EasyJet,`` he said.

The airline, which operates 211 routes, sells round-trip tickets from London Stansted to Berlin Schoenefeld for as little as 45.20 pounds ($84.63) for the last weekend in February. EasyJet has round-trip fares between London Luton and Berlin Schoenefeld on the same dates for 75.98 pounds.

O`Leary, 43, is the biggest individual shareholder in Ryanair with 41 million shares, or 5.4 percent, of the total, according to Bloomberg data. In the fiscal year ended in March 2004, he received a base salary of 505,000 euros and a bonus of 127,000 euros, a decline of 14 percent from the year before.

To contact the reporter on this story:

Rebecca Barr in London at rbarr1@bloomberg.net.