As of May 11, 2018, the International Air Transport Association (IATA) estimates the jet fuel price average for this year will rise above the feared $80 per barrel mark. With this, the impact on 2018 fuel bill of the global airline industry is estimated to be $39.3 billion. But do rising oil prices mean only bad news for airlines around the world? For Ryanair, at least, a fuel-price surge may force weaker competitors out of business.
The case of Ryanair
Europe’s biggest budget airline, Ryanair, says its net income could fall as much as 14% in the year through next March, as the airline deals with higher labor expenses following a rostering mishap in September of 2017. But the discount carrier is also forced to tighten its belts due to rising fuel costs, which, compounded with the increase in labor costs, reflects its outlook for fiscal year 2019 as “on the pessimistic side of cautious”.
According to Ryanair’s financial results, released on May 21, 2018, its full year profits rose by 10% to reach €1.45bn in the year ended March 31, 2018. “We are pleased to report a 10% increase in profits, with an unchanged net margin of 20%, despite a 3% cut in air fares, during a year of overcapacity in Europe, leading to a weaker fare environment, rising fuel prices, and the recovery from our September 2017 rostering management failure,” the airline states.
But lower fares and higher oil prices cut Ryanair’s fiscal 2019 guidance. Overall, it expects profits will fall to €1.25bn - €1.35bn in the current 12 months. The airline also predicts a 9% rise in unit costs (ex-fuel they to rise by 6%) this year due to higher crew and oil prices, which should add more than €400m to its fuel bill. Although Ryanair says fuel will be “a major cost headwind” for the next 24 months, it is "well-hedged" on fuel prices for fiscal 2019, currently being 90% hedged at around $58 per barrel.
Facing the fuel cost headwind
The Irish company predicts that an increase in crude oil prices will not only pressure earnings in the short term but could also spark a new round of airline failures by the end of this year. According to Ryanair’s CEO Michael O’Leary, “spot prices close to $80 a barrel are going to lead to a significant shakeout in the industry as early as this winter. Some of those loss-making airlines who couldn’t make money when oil was at $40 a barrel certainly can’t survive,” he reportedly told Bloomberg.
O’Leary believes that the speed of that shakeout will determine the outlook this year. According to him, profitability will depend largely on whether the surge in fuel costs leads to the early exit of weaker carriers such as the low-cost, long-haul carrier Norwegian Air Shuttle, eliminating capacity and bolstering fares, or whether they are acquired in time, and thus saved from failure. A new round of airline failures in Europe would, of course, benefit the airline by eliminating its competitors.
Norwegian is among the carriers that threatened to push profits lower for the big three U.S. carriers – Delta, United and American – in the trans-Atlantic market, Investor’s Business Daily points out. Hence, Ryanair’s warning could be good news for at least some airlines in the U.S. But beyond Europe, there is a worry that the U.S.' exit from the Iran nuclear deal could pose a "material risk" to airline profits. According to Bloomberg, oil prices rose to a three-year high on the day of the announcement of U.S.‘s exit.