Budget airline predicts airfare price war will hit 2015/2016 earnings
Plunging oil prices will spur competitors to lower airfares while hedges already in place will limit benefits from lower-cost oil for Ryanair, the low-cost airline has warned investors in its quarterly earnings report.
Although the airline raised its earnings guidance for full-year net income to as much as €850 mn ($963 mn) from its earlier guidance of as much as €830 mn, it warned investors to ‘temper expectations’ for profits in 2015 as some of its competitors may be in a better position to compete on airfares.
While oil prices hovered at record highs in recent years, Ryanair sought to protect itself from further increases by locking in fuel costs that reflect oil at $92 a barrel, the company says. That means it will continue to pay prices above $90 a barrel through 2015 and 2016 – even as some competitors take advantage of current prices of less than $50 a barrel.
‘Some competitors whose weak balance sheets rendered them unable to hedge forward will be significant beneficiaries of lower oil prices and this may lead to downward pressure on airfares in 2015/2016,’ Ryanair says in a statement to investors. ‘As lower oil prices kick in over the next two years, Ryanair intends to pass on much, if not all, of these savings to our rapidly growing customer base in the form of lower fares and therefore our profit growth expectations will be modest.’
Ryanair’s stock fell as much as 7.6 percent in intraday trading despite the increase in full-year profit guidance and the announcement of a €400 mn share buyback program starting on February 12 as well as a special dividend of €0.375 a share. In its fiscal third quarter earnings report, the company also announced that earnings beat expectations, with a net profit of €49 mn, compared with a loss of €35 mn in the same period a year earlier.
Late last year, the tumbling price of oil spurred a wave of profit warnings, layoffs and rig closures among fracking companies and other high-cost drillers, and the adverse effects have now spread to other firms. Companies including oil services firm Petrofac and offshore supplier COSCO Singapore have recently issued profit warnings, while others both inside and outside the oil sector have seen their shares drop, including General Electric, BP and Shell.
