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Profit Warning

Ryanair Faces Future Trouble

By Mark Scott

The European discount carrier says high fuel prices could wipe out profits this year, auguring much worse for rivals that lack its lean cost structure.

You know times are tough in the airline industry when European low-cost powerhouse Ryanair raises the white flag. That’s exactly what the carrier did on June 3 when the carrier said its goal was to break even this year as fuel costs continued to rise. The airline also posted a 20 percent increase in net profit excluding one-off items to $748 million in the 12 months until Mar. 31 compared to $626 million a year earlier.

The announcement could well be the canary in the coal mine for other airlines. Most analysts expect Ireland’s Ryanair -- and its low-cost British rival Easyjet -- to weather the double whammy of rising oil prices and slowing economic growth better than the legacy carriers. Their stripped-down business models, coupled with passengers switching to low-cost flights to reduce travel costs, were expected to keep Ryanair and Easyjet flying high.

Yet even the Dublin-based carrier appears to have succumbed to the woes facing the broader airline industry. According to Ryanair, fuel now represents more than a third of the airline’s operating costs and every $1 increase in the price of crude above $65 adds $21.8 million to annual operating costs. Ryanair also is mostly unhedged on jet fuel -- a strategy that makes the carrier highly susceptible to oil price volatility.

The airline does have a new, more fuel-efficient fleet that will help offset the soaring fuel prices, but Ryanair’s Chief Financial Officer Howard Miller said the carrier would ground 20 planes this winter in an attempt to cut overheads. The carrier mothballed seven aircraft during the same period last year.

The fact that Ryanair may struggle to break even this year should have execs at legacy carriers shaking in their boots. If one of the world’s most cost-efficient carriers is facing the pinch, you have to wonder what economic challenges now face others in the airline industry