Ryanair reports bumper profit on ‘favorable’ fuel hedges, sees major industry consolidation

Ryanair Full-year net profit of 1.43 billion euros ($1.55 billion), reported on Monday, was boosted by a recovery in traffic and fares, as well as favorable oil hedging positions.

Despite a poor first quarter of 2022 due to Russia’s invasion of Ukraine, travel demand rebounded throughout the year. The Irish low-cost carrier reported full-year passenger traffic growth of 74% to 168.6 million customers, while fares were up 10% from pre-Covid levels.

Operating costs rose 75% to 9.2 billion euros due to a 113% rise in fuel costs, but the airline said “favorable” hedging helped offset this, while unit costs at 31 euros per passenger were well below those of other airlines. European competitors.

“Our industry-leading fuel hedges (more than 80% hedged at approximately US$64 barrels) made a significant contribution to the final FY23 profit result, saving the Group over €1.4 billion,” Chief Executive Michael O’Leary said in an earnings report on Monday.

Airlines use forward contracts to hedge against potential oil price hikes by buying a certain amount of fuel at a fixed price for future delivery.

International benchmark Brent crude oil It was trading just above $75 a barrel on Monday morning.

Ryanair is 85% hedged this year at $89 a barrel, which will add about $1 billion to fuel bills this year, company chief financial officer Neil Solohan told CNBC on Monday. But he said Ryanair was confident it could cover higher costs and deliver a “modest” year-on-year increase in profit.

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

“Nearly all of the Group’s B737 fleet is owned and 99% unburdened, which greatly extends our cost advantage as rival rates and leasing costs continue to rise.”

Ryanair earlier this month signed a deal for 300 new Boeing 737-MAX-10 planes – 150 firm orders and 150 future options – with deliveries scheduled for phases between 2027 and 2033 . The purchase has been delayed by a dispute over pricing in 2021, with Ryanair aiming to carry 300 million passengers a year by 2034.

In a note on Monday, O’Leary said: “As well as delivering significant revenue growth, the additional seats (combined with greater fuel, carbon and noise efficiency) will further widen Ryanair’s position relative to all European rival airlines. Considerable unit cost advantage.”

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

“Every few years there are going to be problems, but because we have the balance sheet, because we have the cost base, we will be able to weather any storm,” he added.

Merger ‘inevitable’

Sorohan said there had been a “systematic change” in European airline capacity in light of the Covid-19 pandemic, as many airlines were forced to scale back. Meanwhile, OEMs (Original Equipment Manufacturers) are struggling to meet demand, while rental companies have also been hit by sanctions against Russia.

But the data shows that travel is a top priority, Sorohan said, which is why Ryanair placed an order for 300 planes this month and set such an ambitious passenger growth target.

However, he stressed that industry-wide consolidation in Europe was “inevitable” – in fact “already under way”.

“Norwegian is half the size, but if you look at Italy, 40% of the airline has been consolidated from ITA (formerly Alitalia) to Lufthansa to get to 100%. Portugal’s TAP is for sale, no Inevitably some capacity will come on top of that, and there’s more to come,” he said.

“I wouldn’t be surprised to see the other two low-cost airlines in Europe being consolidated in the next few years. I think it’s inevitable too, you’re going to see more consolidation, we’re going to do more things like The US model is the same, only four or five large airlines can efficiently carry 80% of the traffic in Europe.”

Larger European former “flagship” airlines, some bolstered by their respective governments’ controversial state aid, have taken a major hit during the pandemic.

Earlier this month, the EU’s General Court annulled the German government’s €6 billion recapitalization plan for Lufthansa, originally approved by the European Commission, and the Swedish and Danish governments’ €1 billion recapitalization plans for Lufthansa. SASruling that state aid unfairly tilted competition towards Ryanair’s rivals.

“We’ve seen systemic changes in capacity and I think we’re going to leave some of the big flag carriers with a long history — Air France KLMLufthansa – but ultimately short-haul, point-to-point will be a key player for Ryanair,” Sorohan added.