Airline chief predicts profits to rise as fuel hedging strategy pays off

RYANAIR is forecasting an increase in profit of between 5% and 10% over the next 12 months after hedging most of its fuel needs for this summer.

Chief executive Michael O’Leary said: “We have taken advantage of the recent short-term fall in oil prices to hedge 90% of our needs from June to October of this year, at an average price of $70 a barrel.”

He added that the airline will remain unhedged from October onwards but will continue to seek hedging opportunities in the future if suitable pricing opportunities present themselves.

Hedging is where a firm protects itself from fluctuating commodity prices by buying a futures contract, allowing it to get a relevant commodity — in this case, fuel — at a set price.

“Hedging will eliminate near-term uncertainty and risk but it will not deliver lower costs during periods of rising oil prices,” Mr O’Leary said. “The key to Ryanair’s traffic and profit growth was our refusal to levy fuel surcharges on our passengers at a time when most other airlines in Europe are introducing or increasing them. In some cases other airline surcharges exceed our average fares.

“This is driving millions of passengers to Ryanair and we’ll continue to absorb significantly higher oil prices thanks to the benign yield environment and continuing unit cost reductions,” he added.

The weakness of the US dollar will also help Ryanair to offset high oil prices — Ryanair also benefits in this regard as it purchases its aircraft in dollars. Ryanair’s head of treasury, Neil Sorahan, said at the company’s results

announcement in Dublin yesterday that oil prices would need to reach $90 a barrel before threatening to impact on profits. Responding to questions that the airline previously quoted a price of $80 per barrel — a couple of years ago — as being dangerous to profits, Mr Sorahan added that Ryanair was “much more profitable now” than it was then. Fuel costs over the past 12 months rose by 74% despite hedging for the second half.

According to NCB stockbroker John Sheehan — which looks set to lower its current earnings per share forecast for Ryanair from 45.3c to 42c/43c: “While current year profit growth is set to be relatively modest and high oil prices will limit the upside for all transport stocks, Ryanair’s cost and revenue initiatives are impressive. As its competitors’ hedges expire in the next six to 18 months, Ryanair should deliver relative outperformance.”