Ryanair (RYAAY), Profit -15% Due to Fuel Cost Shock..."Fares Will Rise Further Next Year"

▲ Ryanair (RYAAY), Aircraft/AI Generated Image

European low-cost airline Ryanair (RYAAY) expressed confidence that weaker competitors would have to withdraw capacity from the European market despite soaring fuel costs.

Ryanair Group CFO Neil Sorahan, in an interview with CNBC on November 2 (local time), responded to the criticism that surging fuel costs were a stumbling block for every airline's plan this year by stating that relatively good hedging had mitigated the impact. In the earnings announced on the same day, CEO Michael O’Leary warned that fares could rise by 20% next year due to high costs. Ryanair's hedging at approximately $67 per barrel until the end of March next year significantly protects its profits. However, the price of the unhedged 20% of fuel doubled to $130 per barrel. Sorahan stated that this increase was one of the main reasons why profits decreased by 15% from last year, reaching only 2.15 billion. Nevertheless, he assessed it as a fairly strong performance in a volatile market.

Passenger numbers increased by 6%, just under 126 million. Sorahan said, "Demand is still very strong." Fares decreased by 4%, indicating a need for some stimulus. Part of this was due to the Easter period in the first quarter, and a larger part was due to consumer hesitation surrounding the Middle East crisis and conflict, and the need for stimulus for last-minute bookings. Costs excluding fuel only increased by 2% in the first half.

The goal for next year's fuel is to hedge up to 50%. Sorahan stated that he is looking for opportunities to buy when oil prices fall, observing events like this week's US midterm elections. The current hedging level is lower than usual. Normally, 70-80% is hedged at this time, but only 25% of next year's volume has been hedged at approximately $95 per barrel. It is 80% until March next year, and 25% for the subsequent 12 months. Sorahan said, "If we can secure more around the already confirmed $95, we will look into it," adding that the Dublin team is on standby this week in anticipation of falling oil prices. However, he stated that they would not build up to the same levels as before. Most competitors also do not have robust hedging. The explanation is that prices are driven by geopolitics and headlines, not supply issues, so hedging too much could give up a competitive advantage if prices revert.

Ryanair hedges jet fuel, and the crack spread, the price difference between jet fuel and crude oil, has widened significantly. Sorahan believes that even if WTI or Brent crude falls significantly, refining margins and crack spreads will remain high for the next 12 months or so. The positive aspect is that a lot of capacity is being withdrawn from the European market. Weaker airlines without the financial strength and cost advantage of Ryanair will have to reduce capacity next year, and a significant portion may not return. Several airlines have already entered Chapter 11 bankruptcy protection proceedings.

[Key Summary of Article]

-Ryanair's profits decreased by 15%, but passenger numbers increased by 6%. One of the main reasons for the decrease was the doubling of fuel costs for the unhedged 20% of fuel volume to $130 per barrel.

-For next year's fuel, 80% is hedged until March, and 25% for the subsequent 12 months at approximately $95, with opportunities sought to increase it to 50%.

-Sorahan observed that weaker airlines would reduce capacity next year, and a significant portion might not return.

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