Ryanair warns plunging oil price will hurt profits

Ryanair Boeing 737

Ryanair has warned that lower oil prices will push down air fares next year and keep a lid on profit growth at the budget airline.

The company said it had hedged its fuel costs at $92 (£61) a barrel for next year, limiting the carrier’s gains from falling oil prices that have slumped below $50 per barrel. It added that some competitors would be able to cut prices because they had held back from locking in higher fuel costs.

Fuel is the biggest expense for low-cost airlines and carriers often buy it in advance at a fixed price, a practice known as hedging. Ryanair, which as an average fare of €40 (£30) said it would set fares to fill its planes whenever possible – with a knock-on effect on pricing as it lowers fares in line with rivals in order to fill seats.

“This may lead to downward pressure on air fares in 2015/16,” Ryanair said in a trading update. “As lower oil prices kick in over the next two years, Ryanair intends to pass on much, if not all, of these savings to our rapidly growing customer base in the form of lower fares and therefore our profit growth expectations will be modest in [2016].”

Ryanair shares dropped 2.2% to €10.17 in early trading. Rival budget carrier easyJet was down 4%, making it the biggest faller in the FTSE 100, and British Airways owner IAG also fell.

Fuel hedging makes life more predictable but if fuel costs fall rapidly, as they have done since last summer, the company will have paid an above-market price for its fuel. Prices locked in through hedging is one of the reasons air fares have not fallen to reflect the more than halving of the oil price in the past six months.

Ryanair, Europe’s biggest short-haul airline, increased its annual profit forecast and said it would buy back €400m (£301m) of shares in the next six months. Net profit for the year ending in March will be between €840m and €850m – up from earlier guidance of €810m to €830m. Last year the company made a profit of €523m.

In the third quarter to 31 December, passenger numbers increased 14% as it flew more routes and seat occupancy rose by 6 percentage points to 88%.

Michael O’Leary, the chief executive, said Ryanair had improved performance largely because of its discovery of the benefits of emphasising customer service. Ryanair has allowed more carry-on baggage, allocating seating and cut punitive charges. It has also improved its website and launched a service for business customers.

O’Leary said: “These strong results confirm that our ‘always getting better’ customer programme and our expanded business schedules, coupled with our substantial fare and cost advantage over competitor airlines, is drawing millions of new customers to Ryanair.”

Analysts expect Ryanair’s profit to rise about 9% to €917m next year. Gerald Khoo, an analyst at Liberum, said the company might be trying to guide forecasts down but that it was more likely seeking to stop upgrades running away based on falling oil prices.

Khoo said: “Management has flagged likely pricing pressure from lower fuel prices, has seen some pricing softness in January, and expects ‘modest’ profit growth in 2016. We suspect this is an attempt to keep a lid on fuel-driven upgrades. It has not stopped management declaring a new €400m share buyback.”

Powered by Guardian.co.ukThis article was written by Sean Farrell, for The Guardian on Monday 2nd February 2015 09.32 Europe/London

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