Ryanair and SWA bet differently on fuel hedging
08-05-2008, 11:05 AM
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Ryanair and SWA bet differently on fuel hedging
In Europe I've heard some refer to Ryanair as the European Southwest, or “Southwest de'Lite” (I think 'lite’ implies either their very ‘lite’ fares or being a no-frills version of SWA (no really 
), or both)
Anyways, I found it interesting that the two carriers bet differently on the fuel hedging and while SWA profited from it Ryanair lost big time.
Ryanair Hurt By Bad Bet
Vidya Ram, 07.28.08, 1:06 PM ET
Michael O'Leary
LONDON - The luck of the Irish has eluded low-budget airline Ryanair, which had a weak first quarter. The company's profits slumped as its fuel bill nearly doubled, following its failure to protect itself against rising oil prices.
Shares of Ryanair (nasdaq: RYAAY) plummeted to close down 22.0%, or 71 euro cents ($1.12), to 2.52 euros ($3.97), in Dublin Monday after the airline said that its first-quarter net profit slipped to 21 million euros ($33.1 million), from 138.9 million euros ($218.6 million), short of analyst expectations, and warned that it could post a loss for 2008.
Ryanair said that the price of oil had risen to $117 a barrel, in the first quarter of 2008, from $61, in the first quarter of 2007, and that its fuel bill had risen in tandem, by 93.0%, to 367.0 million euros ($578.2 million). "Fuel now represents almost 50.0% of our total operating costs, compared with 36.0% last year," Chief Executive Michael O'Leary said in a press release.
During the first quarter, the airline's average fare level, known as "yield" within the industry, fell by 8.0%, as Ryanair launched new routes and the Easter holiday season fell outside the quarter. The number of passengers who paid to check in baggage also fell, as many opted to check in online, or carry hand baggage.
Ryanair said last year that it would not hedge against the rising cost of oil last year, unless fuel prices fell below $100 a barrel. However on Monday, O'Leary said the airline was now hedged 90.0% for September, at $129 a barrel, and 80.0% hedged for the quarter ending in December. The airline is unhedged for the final quarter, ending in March 2009. "We continue to believe that oil prices remain subject to irrational exuberance," added O'Leary.
O'Leary, known for his cautious outlook, warned that tough conditions would persist for the rest of the year. In order to prevent a decline in its load factor, which measures the number of occupied seats as a percentage of those available, Ryanair will be forced to cut ticket prices.
Average prices could fall by 5.0% for the year, and the airline may post an annual loss of up to 60 million euros ($94.5 million), the company warned Monday. In June, Ryanair had said it expected to break even in fiscal 2008-2009.
Ryanair's aggressive, low-cost business model has been coming under pressure lately, as an economic slowdown in Britain hits discretionary spending. Though larger airlines like British Airways (which releases its quarterly results on Friday) have been affected by the downturn too, their long-haul, premium operations have proved more resilient.
"Because Ryanair gets a substantial proportion of their business from discretionary spending, it is pretty heavily affected by the slump in consumer confidence," said Panmure Gordon analyst Gert Zonneveld. O'Leary said that the company was responding to its higher fuel bill, through cost-cutting measures elsewhere. During the quarter costs, excluding fuel, fell by 6.0%, while the company has now introduced a freeze on pay and redundancies at its main call center in Dublin.
O'Leary brushed aside speculation that the days of low fare air travel were now over. "Higher oil prices just increases the attraction of Ryanair's lowest guaranteed fares, as consumers become more price sensitive and switch away from high fare, fuel surcharging airlines like British Airways," he said Monday.
), or both)Anyways, I found it interesting that the two carriers bet differently on the fuel hedging and while SWA profited from it Ryanair lost big time.
Ryanair Hurt By Bad Bet
Vidya Ram, 07.28.08, 1:06 PM ET
Michael O'Leary
LONDON - The luck of the Irish has eluded low-budget airline Ryanair, which had a weak first quarter. The company's profits slumped as its fuel bill nearly doubled, following its failure to protect itself against rising oil prices.
Shares of Ryanair (nasdaq: RYAAY) plummeted to close down 22.0%, or 71 euro cents ($1.12), to 2.52 euros ($3.97), in Dublin Monday after the airline said that its first-quarter net profit slipped to 21 million euros ($33.1 million), from 138.9 million euros ($218.6 million), short of analyst expectations, and warned that it could post a loss for 2008.
Ryanair said that the price of oil had risen to $117 a barrel, in the first quarter of 2008, from $61, in the first quarter of 2007, and that its fuel bill had risen in tandem, by 93.0%, to 367.0 million euros ($578.2 million). "Fuel now represents almost 50.0% of our total operating costs, compared with 36.0% last year," Chief Executive Michael O'Leary said in a press release.
During the first quarter, the airline's average fare level, known as "yield" within the industry, fell by 8.0%, as Ryanair launched new routes and the Easter holiday season fell outside the quarter. The number of passengers who paid to check in baggage also fell, as many opted to check in online, or carry hand baggage.
Ryanair said last year that it would not hedge against the rising cost of oil last year, unless fuel prices fell below $100 a barrel. However on Monday, O'Leary said the airline was now hedged 90.0% for September, at $129 a barrel, and 80.0% hedged for the quarter ending in December. The airline is unhedged for the final quarter, ending in March 2009. "We continue to believe that oil prices remain subject to irrational exuberance," added O'Leary.
O'Leary, known for his cautious outlook, warned that tough conditions would persist for the rest of the year. In order to prevent a decline in its load factor, which measures the number of occupied seats as a percentage of those available, Ryanair will be forced to cut ticket prices.
Average prices could fall by 5.0% for the year, and the airline may post an annual loss of up to 60 million euros ($94.5 million), the company warned Monday. In June, Ryanair had said it expected to break even in fiscal 2008-2009.
Ryanair's aggressive, low-cost business model has been coming under pressure lately, as an economic slowdown in Britain hits discretionary spending. Though larger airlines like British Airways (which releases its quarterly results on Friday) have been affected by the downturn too, their long-haul, premium operations have proved more resilient.
"Because Ryanair gets a substantial proportion of their business from discretionary spending, it is pretty heavily affected by the slump in consumer confidence," said Panmure Gordon analyst Gert Zonneveld. O'Leary said that the company was responding to its higher fuel bill, through cost-cutting measures elsewhere. During the quarter costs, excluding fuel, fell by 6.0%, while the company has now introduced a freeze on pay and redundancies at its main call center in Dublin.
O'Leary brushed aside speculation that the days of low fare air travel were now over. "Higher oil prices just increases the attraction of Ryanair's lowest guaranteed fares, as consumers become more price sensitive and switch away from high fare, fuel surcharging airlines like British Airways," he said Monday.
