Rising Fuel Costs Hit Ryanair's Profits

Posted by: Mark Scott on July 28, 2008

From publically berating rival airlines to verbally chiding local airport operators, Michael O’Leary, chief executive of low-cost carrier Ryanair (Europe’s largest airline by passenger volume), isn’t known for being understated. So when the Ryanair CEO said on July 28 that oil prices were subject to ‘irrational exuberance,’ you’d be forgiven for thinking he’s mellowed out a little.

If anything, O’Leary — like many airline execs — has born the brunt of rising oil prices. Ryanair’s first quarter adjusted profit fell 85% annually to $33 million on July 28 due to a 93% increase in fuel costs. That comes despite overall revenue jumping 12% to $1.2 billion in the first quarter due to a 19% increase in passenger volumes.

Predictably, the airline’s share price fell up to 25% in morning trading, only to recover slightly by the early afternoon. “Consumer confidence is plummeting, and we believe this will have an adverse impact on fares for the rest of the year,” O’Leary said in a statement.

So what’s the outlook like for Europe’s largest low-cast carrier? According to O’Leary, “we expect to record a full year result of between breakeven and a loss of €60 million ($94.5 million).”

As most analysts reckon Ryanair -- and its British rival Easyjet -- will fare the best in the economic downturn, O'Leary's prediction doesn't bode well for the rest of the industry. Others, such as Air France and Lufthansa, can't match Ryanair's low overhead to protect themselves from a slowdown in air travel.

And O'Leary isn't sitting on his laurels. Ryanair already has grounded 19 planes and has renegotiated maintenance and handling contracts with airports to reduce costs. The airline also has cut jobs at its Dublin call center and implemented a company-wide freeze on pay.

While these steps will help drive down top-line costs, the real issue relates to oil prices. On July 28, Ryanair said it had hedged 90% and 80% of its fuel in the second and third quarters respectively. The airline, though, remains unhedged during the first three months of 2009.

This stance reflects O'Leary's belief that "oil prices of approximately $130 per barrel are unsustainable over the medium term, but we don't know when they are going to fall." By locking in oil prices for the rest of 2008, Ryanair isn't taking any chances. Yet with the low-cost airline expecting to breakeven -- at best -- this year, rising fuel costs will continue to take their toll.