Airlines to be hit by rising oil costs

Irish airlines’ profits are likely to be hit by rising fuel costs if the situation in the Middle East worsens.

Bloxhams analyst Joe Gill has warned some derivatives traders are betting that oil prices will rise sharply and perhaps reach as high as $150 (€113) per barrel.

Bloxhams believes the high prices could benefit low-cost carriers such as Ryanair.

“We believe low-cost carriers like easyJet and Ryanair will win greater market shares if weaker airlines collapse amid rising oil prices, but short-term share price movements could be adverse if oil prices continue to spike,” Mr Gill said.

He pointed to some charter airlines and carriers around Europe who he said have “very weak balance sheets”.

He said if fuel prices continue to increase, we are likely to see a rerun of what happened with Spanair four weeks ago.

The airline went bust and competitors quickly took over the profitable routes that Spanair had been operating.

Ryanair has hedged its fuel costs for the next two years, insuring that it will be protected from any sharp rise. The company has grounded a number of planes in a bid to burn less fuel and to cut costs during the off-season winter period.

Ryanair already operates the most fuel-efficient modern fleet of any European airline, which provides the operator with significant cost advantage over its competitors.

A spokesperson for Ryanair said that it hedged its fuel costs to protect consumers from price hikes.

“Ryanair has significant fuel hedging in place and we continue to monitor fuel prices on a daily basis,” the spokesperson said.

According to its third quarter report, Ryanair has hedged 90% of its fuel costs for the first half of 2013 at approximately €99 per barrel.

Despite the hedging strategy, Ryanair notes that the cost of fuel will add an additional €350m, which poses a “significant cost challenge for next year”, the report states.

Ryanair refused to be drawn on whether or not this cost would be passed on to the customer, but a spokesperson said: “Ryanair will always deliver the lowest fares.”

Aer Lingus declined to comment on its position on fuel cost increases.