Business

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.”

http://www.ft.com/cms/s/0/5549021a-b693-11e0-ae1f-00144feabdc0.html#axzz1TE8efE6W

The Decline of Budget Airlines?

We live in an era of budget airlines, where its cheaper to ‘jump’ on the plane to Barcelona than it is to get a return train into London: crazy stuff. But are we nearing a time where such cheap flights are on the out? With oil prices hitting a record high of $100 per barrel, compared to $30 – $40 a number of years ago, airlines, especially those ones focused on the ‘budget boom’, are going to suffer, and the business model that once seemed unbreakable may be at an end.

It was suggested today that the airline industry is soon to go through a drastic restructuring, with a spate of Mergers & Acquisitions, where those smaller airlines that cannot afford to adsorb the rising fuel costs will join the more established, so-called ‘luxury’ airlines. Is this a good idea? When one looks at the business models of these airlines, it is clear that the strategies for customer creation and retention are very different. On the one hand we have airlines, like British Airways, that market themselves as ‘executive’ travel, whilst the budget airlines like Ryanair and Easyjet play a completely different ball game.

In fact, although very different, are the ultimate costs being paid for each not the same? Let me pose this question to you: how ‘budget’ are these so-called budget airlines? When you take into account the additional tax charges, the flat fees for baggage and the obscure airports that many of these budget airlines fly to, adding yet more travel expenses, the are not what the label says they are. What we are in fact seeing is a clever corporate marketing ploy/ business strategy. Unlike non-budget airlines, where you log on, search and are given prices for your journey that include everything, the budget airlines entice their customers by offering 1p seats, but then adding multiple additional costs, culminating in a ticket that is not all that much cheaper, and where the overall flying experience is by no means top class.

So we seem to be at a cross-roads. Is the airline industry going to see a change where budget airlines play no part (due to the rising fuel prices), or are we going to see large conglomerates of smaller airlines forming just to stay afloat. I think it is the latter. But my concern is this: which business model is going to survive? If, for example, British Airways and Ryanair were to merge, which business model, if either, would prosper. Perhaps more importantly, if you had a choice, which one would you chose to fly with?