Ryanair CEO Michael O'Leary has sounded the alarm that European airfares might climb as much as 20% next year. The airline is wrestling with steeply rising fuel costs. O'Leary, speaking to CNBC, pointed out that the expiration of fuel hedges and the doubling in price of unhedged jet fuel are major contributors to this expected jump.
The financial hit is already evident. Ryanair's profits have slid by 15%, landing at 2.15 billion euros ($2.3 billion) in the first half of the fiscal year. The surge in unhedged jet fuel costs has played a big role in this decline. O'Leary remarked that while the market has been buffered from these costs over the past year, the end of hedging means airlines will soon face a hefty cost increase.
Jet oil prices currently hover around $170 per barrel. The ongoing instability in the Middle East only adds to the uncertainty. O'Leary foresees a 10% to 20% hike in European airfares next year as airlines transfer these rising costs to consumers. Yet, Ryanair doesn't expect that higher short-haul fares will fully cover the projected increase in fuel expenses.
To counter the impact, Ryanair is conducting a cost review. This includes measures like cutting down on crew rations, contemplating a temporary pay freeze, and utilizing AI to boost efficiency. Initially, the airline's shares rose in early Monday trading but later dipped. This reflects a more than 22% decline over the year.
Back in September, Ryanair cut its full-year traffic target from 216 million to 214 million passengers. This move is aimed at reducing exposure to unhedged fuel costs during the winter. The airline now projects winter traffic to remain mostly flat compared to the previous year.
O'Leary mentioned that Ryanair and other European airlines have reduced winter capacity. "It makes no sense for us to be expanding capacity if we're purchasing unhedged oil at $170 a barrel, " he stated.
Ryanair has hedged 80% of its jet fuel at $67 per barrel for this year, offering some protection against volatile oil prices. The airline has also hedged at least 25% of its 2028 jet fuel prices at $95 per barrel. This strategy provides Ryanair a competitive edge, keeping its earnings relatively insulated compared to competitors.
Market analysts, including eToro's Vetesse, believe investors have already taken into account the effects of unhedged fuel and weaker summer fares. "Near-term earnings remain vulnerable to oil prices and last-minute bookings, " Vetesse said. However, he noted that the market's initial positive response shows confidence in Ryanair's cost advantage.
Despite the hurdles, Ryanair reported having 2.6 billion euros in cash as of September 30, after repaying 1.3 billion euros in debt. O'Leary underscored the airline's robust financial standing, with zero debt and 650 aircraft on its balance sheet. Yet, he acknowledged broader industry challenges like oil price volatility, lack of hedging, and increasing financing costs.
O'Leary criticized competitors for using sale and leasebacks to raise cash, suggesting such tactics are risky.
