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Broker cuts Aer Lingus rating as oil price rise hits earnings

A steep rise in oil prices and likely further reductions in long-haul flight capacity prompted Goodbody Stockbrokers yesterday to cut its full-year 2011 forecasts for Aer Lingus and slash the 'fair value' of the airline's shares by 17pc, from €1.40 to €1.16.

The broker cut its rating on Aer Lingus stock to an 'add', citing rising oil costs as the main dampener to the carrier's earnings in the current financial year.

Goodbody now reckons that Aer Lingus will generate operating profits of €43.3m this year, compared to the broker's own previous estimate of €79.7m.

Aer Lingus releases its full-year results for 2010 in less than two weeks.

Chief executive Christoph Mueller said recently that the airline's 2010 results would demonstrate how successful its 'Greenfield' cost-cutting programme had been.

Goodbody is forecasting a €38.4m operating profit at Aer Lingus in respect of its 2010 financial year.

That compares to the €81m operating loss the airline made in 2009. Shares in Aer Lingus closed relatively flat yesterday at €1.04 having fallen over 2pc earlier in the day.

The director general of the International Air Transport Association (IATA), Giovanni Bisignani, said yesterday that high oil prices posed one of the single biggest threats to the expansion and profitability of the airline industry.

"Higher oil prices could spoil our party," he said. Fuel comprises about 27pc of an airline's overheads, and the price of Brent oil was trading above $101 a barrel at the close of business yesterday.

The IATA has predicted that the number of air travellers will jump to 3.3 billion a year by 2014, up from 2.5 billion in 2009, as demand in China drives growth. However, Mr Bisignani warned that economies remain fragile.

"The shadow of global recession is expected to remain over parts of the industry for some time. Sluggish growth rates in Europe and North America are not just the result of being mature markets," he said.

Irish Independent