Sunday 28 December 2014

Aer Lingus profits to take a hit this year

Crisis in Iraq sends the price of oil soaring

Published 29/06/2014 | 02:30

A column of smoke rises from Beiji oil refinery after it came under attack by Islamic militants (AP)
A column of smoke rises from Beiji oil refinery after it came under attack by Islamic militants (AP)

AER LINGUS will take a profit hit this year from conflict in Iraq that's sent oil prices soaring, experts have predicted.

Operating profits at the national flag carrier could be impacted by as much as 9 per cent because of the spiralling cost of oil, a group of analysts polled by Bloomberg found. The price of a barrel of brent crude has soared in recent weeks as militant group Isis took control of parts of northern Iraq.

The violence has brought an unprecedented period of volatility in oil prices to an end.

Airline shares across Europe have fallen sharply in response, down 13 per cent since militants entered the Iraqi towns of Mosul and Tikrit on June 10.

Ryanair is arguably the most protected of all European airlines. It practices a very aggressive hedging strategy against fluctuations in the cost of fuel, after learning a costly lesson in 2008 when Hurricane Katrina and other global events caused large swings in fuel prices.

Ryanair, which at the time had a more relaxed hedging policy, took a blow of around €102m that year, prompting Mr O'Leary to admit it had "screwed up".

Ryanair chief financial officer Howard Miller sought to play down the rise in the cost of oil last week.

"This short-term thing happens all the time," Mr Miller told the Financial Times. "It was Ukraine, now it's Iraq, it will be something else. Every week that goes by in the fuel markets there is an event."

Aer Lingus is more vulnerable. The airline had hedged about 70 per cent of its fuel requirements by the end of spring, as opposed to 90 per cent at Ryanair.

It has already been forced to issue two profit warnings in less than a year. Earlier this month, it said 2014 operating profits would be as much as 20 per cent lower than last year after the strike in May, coupled with the threat of further action, caused "significant damage" to trading.

Most vulnerable of all is Norwegian Air Shuttle, Europe's third largest low-cost carrier after Ryanair, which is in the process of reshuffling its long-haul base to Ireland.

In the last 12 months Norwegian has poured at least €350m into two new Dublin-based subsidiaries, Norwegian Air International and Arctic Aviation Assets, which will administer flights from Europe to the US and Far East.

The airline does not hedge against fluctuating fuel costs. Its 2014 operating profits will be impacted by around 52 per cent as a result, analysts said.

The end to low volatility in prices will have an impact on all airlines. Stable prices tend to reduce the cost of hedging.

Sunday Indo Business

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