Friday 24 November 2017

Ryanair loses €200m on failed oil price gamble

Hedging strategy backfires as jet fuel price falls.

Ryanair chief executive Michael O’Leary.
Ryanair chief executive Michael O’Leary.

Paul O'Donoghue

Ryanair's gamble on fuel prices has backfired and potentially cost the company as much as €200m, according to analyst calculations prepared for the Sunday Independent.

Ryanair News">Ryanair typically hedges well in advance, meaning it buys up fuel ahead of time to protect itself from market shocks and allow it to budget in advance.

However a recent slump in jet fuel prices, triggered by the falling cost of oil, has meant Ryanair will pay a far higher price for its fuel than the current market rate - a price some of its competitors can take advantage of.

Jet fuel can account for between 20 and 50pc of an airline's operating costs, and swings in oil prices and jet fuel can mean a huge boost or hit to profits.

Ryanair has hedged 90pc of its fuel at $92 per barrel for the coming fiscal year, which is almost double the current market price.

Industry analysts have indicated Ryanair's move to lock in its future fuel needs at high prices means that it may be paying up to €200m more than it would if it bought fuel at current prices.

The cost of jet fuel was one of a few factors which took the shine off of the latest quarterly results for Michael O'Leary's firm.

Despite reporting strong growth in both revenue and passenger numbers and upping its profit forecast, shares in the airline dipped by 6pc when it released the results on Monday having recently hit an all-time high.

Mr O'Leary said this was due to the market being "a bit spooked by the fact that we're very cautionary on next year". Any eventual savings from falling fuel prices would be passed onto customers in the form of lower fares, he added.

Speaking later in the week, Mr O'Leary said: "There's a degree of irrational exuberance out there. I've seen it, some of the forward-looking numbers, that everyone is going to trouser all the fuel savings.

"Life just doesn't work that way. Periods of lower oil prices are generally followed by periods of downward pressure on fares."

Ryanair will spend just over €2bn on fuel in its next fiscal year, it is estimated, which runs from April 2015 to March 2016.

The company is at the upper end of the scale in terms of fuel hedging in comparison to competitors. IAG is hedged at a rate of 74pc while German carrier Lufthansa is hedged at a rate of 55pc.

A comparison run for the Sunday Independent by market sources showed that if Ryanair had hedged its fuel at a rate of 60pc instead of 90pc, the company would have added an extra €200m to its bottom line for the next fiscal year - slashing its fuel bill from just over €2bn to just over €1.8bn.

Even with a 15pc reduction in its hedging strategy, to 75pc, the Irish airline is estimated to have been in line for €100m in savings for the year. This is based on market estimates that fuel costs will average out at just over $57 per barrel over Ryanair's fiscal year.

The comparison also takes the difference between euros and dollars into account, although the figures assume that none of the savings would be passed onto customers in the form of lower fares.

Ryanair cautioned in its results that some of its rivals will be "significant beneficiaries" from the lower oil prices, adding that profit growth will be modest next year as rivals' cheaper fuel push fares down.

A spokeswoman from Ryanair said the company's hedging policy "achieves significant certainty in managing and growing Ryanair's business profitably over time".

"Our hedging policy enables us to obtain certainty in relation to key operating expenses, such as fuel, and the cost of our aircrafts," she added.

Several international airlines have recently seen their fuel hedging policies backfire. US firm Delta Airlines recently reported a fourth quarter loss of $712m which was largely attributed to its fuel hedging, while Singapore Airlines saw its hedging policy wipe $216m from its third quarter earnings.

Sunday Indo Business

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