Ryanair reports windfall profit on ‘favorable’ fuel hedges and sees major industry consolidation

Ryanair reported annual net profit of 1.43 billion euros ($1.55 billion) on Monday, helped by the upsurge in traffic and fares, as well as favorable oil hedge positions.

Despite a difficult first quarter of 2022 due to Russia’s invasion of Ukraine, travel demand rebounded during the year. The Irish low-cost carrier reported a 74% increase in full-year traffic to 168.6 million customers, while fares rose 10% from pre-Covid levels.

Operating costs rose 75% to 9.2 billion euros due to a 113% increase in fuel costs, but the airline said “favorable” hedges helped offset this, while unit costs amounted to 31 euros per passenger, considerably lower than other European rivals. .

“Our industry-leading fuel hedge (over 80% hedged at approximately $64 billion) was a significant contributor to FY23 bottom line earnings, saving the group more than $1. 4 billion euros,” CEO Michael O’Leary said in Monday’s earnings report.

Airlines hedge against the risk of potential oil price increases by buying a certain amount of fuel via forward contracts at a fixed price, for delivery in the future.

International reference Crude Brent was trading at just over $75 a barrel on Monday morning.

Ryanair is 85% hedged at $89 a barrel this year, and the company’s chief financial officer, Neil Sorohan, told CNBC on Monday that would add about $1 billion more to this year’s fuel bill. But he said Ryanair was confident it could cover rising costs and grow profits “modestly” year-on-year.

“Our balance sheet is one of the strongest in the industry with a BBB+ credit rating and gross cash of €4.7 billion at year-end, despite an €850 million bond redemption in March 2023,” O’Leary said in the report.

“Virtually all of the group’s B737 fleet is owned and 99% unencumbered, significantly expanding our cost advantage as interest rates and lease costs continue to rise for competitors.”

Ryanair earlier this month signed an agreement to purchase 300 new Boeing 737-MAX-10 aircraft – 150 firm orders and 150 future options – with staggered deliveries expected between 2027 and 2033. The purchase, delayed in due to a pricing dispute in 2021, concerns Ryanair. ambition to carry 300 million passengers per year by 2034.

“As well as delivering significant revenue growth, the additional seats (combined with greater fuel, carbon and noise efficiency) will further expand Ryanair’s significant unit cost advantage over all airlines. competing European airlines,” O’Leary said in Monday’s report.

Chief Financial Officer Sorohan said the airline’s low-cost base was its biggest advantage as it sought to expand its presence and market share across Europe, but said the biggest risk to this growth strategy was the aviation industry itself.

“Something always goes wrong every few years, but because we have the balance sheet, because we have the cost base that we have, we can weather any storms that come our way,” he added. .

“inevitable” consolidation

European airline capacity has undergone a “systemic change” in light of the Covid-19 pandemic, Sorohan said, as many airlines have been forced to downsize. Meanwhile, OEMs (original equipment manufacturers) are struggling to keep up with demand and leasing companies have been hit with sanctions against Russia.

But data shows travel is a priority for people, Sorohan said, which is why Ryanair feels comfortable placing an order for 300 planes this month and setting targets for traffic growth too. ambitious.

However, he stressed that industry-wide consolidation in Europe is “inevitable” – and has in fact “already begun”.

“The Norwegians are half the size they used to be, but if you look at Italy, 40% has been consolidated from ITA, ex-Alitalia, to Lufthansa with a view to reaching 100%. TAP in Portugal is for sale, inevitably some capacity will come out as a result of that, and there is still a lot to do,” he said.

“I wouldn’t be surprised to see two of the other low-cost carriers in Europe consolidate over the next two years. I also think it’s inevitable that you’re going to see more things come together and we’re moving more like the American model, with only four or five major carriers effectively handling 80% of traffic in Europe.”

Europe’s biggest ‘flag carrier’ airlines have taken a heavy hit during the pandemic, with a number of them being backed by controversial state aid from their respective governments.

Earlier this month, the EU General Court annulled the German government’s €6 billion recapitalization plan to Lufthansa (originally approved by the European Commission) and the Swedish governments’ €1 billion package and Danish for SASfinding that the State aid unfairly steered competition towards Ryanair’s competitors.

“We’ve seen a systemic shift in capacity, and I think we’ll end up with some of the great historic flag carriers – Air France-KLMLufthansas – but ultimately short-haul, point-to-point, will be something that Ryanair will be a key player in,” added Sorohan.