Ryanair reports strong profit on ‘favorable’ fuel hedges, sees significant consolidation in the industry

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BONN, GERMANY – JANUARY 30, 2023: A Ryanair plane parks at Bonn airport in Cologne, Germany. Ryanair reported a full-year profit for 2022/23 on the back of rebounding traffic and favorable oil hedges.

Ting Yang | Nurphoto | Getty Images

Ryanair On Monday it posted a full-year net profit of 1.43 billion euros ($1.55 billion), supported by rebounding traffic and fares, along with a favorable oil hedging position.

Despite a rough first quarter in 2022 due to Russia invading Ukraine, travel demand rebounded over the year. The Irish low-cost carrier reported a 74% increase in full-year traffic to 168.6 million customers, while fares were up 10% on 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, and unit costs came in at 31 euros per passenger, significantly lower than other European competitors. .

“Our core fuel hedging business (over 80% hedged at approx. $64bbl) made a significant contribution to the final FY23 profit result, saving the Group over €1.4bn,” CEO Michael O’Leary said in a report earnings Monday.

Airlines hedge against the risk of an increase in oil prices by buying some fuel through forward contracts at a fixed price, for future delivery.

An international benchmark Brent crude 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 this would add about $1 billion more to this year’s fuel bill. But he said Ryanair was confident it could cover the cost increase and grow profits “modestly” year on year.

“Our balance sheet is one of the strongest in the industry with a BBB+ credit rating and €4.7bn of total cash at the end of the year, despite a €850m bond repayment in March 2023,” O’Leary said in the report.

“Almost all of the Group’s B737 fleet is owned and 99% are unoccupied, which significantly extends our cost advantage, as interest rates and lease costs continue to rise for competitors.”

Earlier this month Ryanair signed an agreement to buy 300 new Boeing 737-MAX-10 aircraft – 150 firm orders and 150 future options – with phased deliveries scheduled between 2027 and 2033. 300 target carry one million passengers annually by 2034.

Ryanair CFO predicts European airline consolidation as fuel hedging drives big profit

“As well as delivering significant revenue growth, the additional seats (along with greater fuel, carbon and noise efficiency) will extend Ryanair’s large unit cost advantage over its European competitor airline all,” O’Leary said in Monday’s report.

CFO 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 airline industry itself was the biggest threat to the this growth strategy.

“Something always goes wrong every few years but because we have the balance sheet, because we have the cost base, we’ll be able to weather whatever storm comes our way,” he said.

Consolidation ‘inevitable’

Capacity across European airlines has undergone a “systemic change” due to the Covid-19 pandemic, Sorohan said, as many airlines have been forced to downsize. At the same time, OEMs (original equipment manufacturers) are struggling to meet demand and rental companies are being hit by sanctions on Russia.

But data shows that travel is high on people’s priorities, Sorohan said, which is why Ryanair feels comfortable placing an order for 300 aircraft this month and setting traffic growth targets so ambitious.

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

“Norway is half as big as they were, but if you look at Italy, 40% has been consolidated from ITA, the former Alitalia, to Lufthansa with a view to getting to 100%.” come out behind that, and there’s more of this to go,” he said.

“I wouldn’t be surprised to see two of the other low-cost carriers in Europe consolidate in the next year or so. I think it’s also inevitable that you’ll see more of that coming together and we will move more. like the US model, with only four or five large carriers effectively flying 80% of the traffic around Europe.”

Boeing and Ryanair CEO on Ryanair's massive order for Boeing 737-Max-10s

Larger European “flag carrier” airlines have been hit hard during the pandemic, with several being kept afloat by controversial state aid from their own governments.

The EU General Court earlier this month canceled the German government’s 6 billion euro bailout package to Lufthansa (first approved by the European Commission) and the Swedish and Danish governments’ 1 billion euro package for SASconcluding that the state aid prevented competition against Ryanair’s competitors.

“We’ve seen a systematic shift in capability, and I think we’re going to be left with some historical standard bearers – KLMs Air FranceLufthansas – but ultimately short-haul, point-to-point, will be something that Ryanair will be a major player in,” Sorohan said.

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