Rising fuel prices clip Ryanair’s wings – FT.com

By Gill Plimmer and Mark Wembridge

Ryanair has scaled back its expansion plans in the face of high fuel prices and expects a wave of deal-making as weak airlines seek wealthy backers.

With airlines facing $100 a barrel oil, the low-cost carrier said there would be a period of consolidation in which four large airline groups would dominate the continental market in a few years. Fuel cost Ryanair €140m more in the three months to June than in the same period a year ago, a 50 per cent increase.

International Airlines Group, formed of the 2010 merger of BA and Iberia, is rumoured to be interested in TAP, the Portuguese Airline, while Lufthansa has been tipped to purchase SAS, the Scandinavian carrier.

Howard Millar, chief financial officer, said: “Once we get over $100 a barrel, it’s a tipping point. We expect the consolidation process to continue and capacity to come out of the airline industry.

“We believe we are into an era of high oil prices. Nobody believes we will see $20 or $30 a barrel again.”

Ryanair shares slipped 1.65 per cent to close at €3.41 as it admitted that “stubbornly high” fuel costs had squeezed its own profits growth and it expects passenger numbers to fall for the first time in its history this winter.

The company missed analysts’ forecasts of €151m with net profits up just 1 per cent to €139.3m in the three months to June 30. But in spite of the setback, Ryanair maintained its full-year profit forecast of €400m and said its fuel requirements for the year were 90 per cent hedged at $820 a tonne.

While confirming there would be short-term pain as the industry contracts, Ryanair said rivals’ fuel price surcharges and the tough economic backdrop were making its own fares more attractive. “Generally we love a good recession,” said Mr Millar.

Passenger numbers rose 18 per cent to 21m in the three months to June although the comparisons with last year’s total were flattered by the impact of the Icelandic ash cloud in April 2010, which grounded 9,400 of its flights across Europe.

Passenger growth was expected to slow to 4 per cent in the winter, said the airline, but it would offset the impact on profits by grounding 80 aircraft over the winter and raising ticket prices this year and in 2012. Average fares rose 11 per cent to €43 a seat – still lower than its 2007 price of €45 a seat – but are expected to rise further this summer.

Ryanair has been increasing the proportion of revenues from add-on services such as baggage check-in fees and priority boarding.

Ancillary sales grew 22 per cent to €248m in the quarter and now make up 21 per cent of total revenues. As part of that strategy, and like Easyjet , its rival, which is targeting business customers, the carrier said it was trialling reserved seating on selected routes at a cost of €5 for positions with extra legroom at the front of the aircraft or by escape hatches.

The airline was quick to counter criticisms of its baggage levy, saying the charge had been brought in to lighten loads and to consolidate its environmental position. “We’ve got to change consumer habits. We’ve got Mrs Millar down from seven pairs of shoes down to three pairs of shoes,” Mr Millar said.

Ryanair also said it would sue BAA, the UK airports operator, for what it contends are inflated charges at Stansted airport. “The Stansted cost base has been artificially boosted. We think they have been increasing their costs so they can jack up the charges on us,” Mr Millar said.

BAA said: “As of Friday we hadn’t received anything from Ryanair. We’d obviously need to see what their case is before we could properly respond. Our charges are set by our regulator, the Civil Aviation Authority, so it’s difficult to understand what case Ryanair could have.”


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