The rising price of oil is likely to bring about the demise of numerous low cost airlines with tight profit margins, Michael O’Leary, the chief executive of Irish budget airline Ryanair, said.
Speaking to Bloomberg TV after his airline issued a profit warning for the first time in five years, O’Leary warned that a significant “shake out” is coming in the aviation sector as a result of oil’s huge surge over the past year or so.
“Spot prices close to $80 a barrel are going to lead to a significant shakeout in the industry as early as this winter,” he added.
“Some of those loss-making airlines who couldn’t make money when oil was at $40 a barrel certainly can’t survive this winter with oil at $80 a barrel.” O’Leary did not specify any particular airlines he thinks are at risk.
Oil passed above the $80 per barrel mark last week, as a continuing squeeze by the OPEC nations lessens global supply. Saudi Arabia, the de facto head of OPEC is keen to increase oil prices as it prepares for the IPO of Saudi Aramco, the kingdom’s state oil company. For Aramco, the higher the oil price, the more money it can raise from its IPO.
O’Leary made the comments as his airline reported a 10% rise in profits, but warned that a combination of rising wages for staff, aggressive competition to have the cheapest fares, and rising oil prices, could dent the company’s profitability going forward.
“After a strong 2018, with profits +10%, the worse outlook is being pinned on rising staff costs, now that it is recognising unions, and falling air fares amid fierce price competition, both likely to eat into 2019 profits,” Artjom Hatsaturjants, an analyst with Accendo Markets wrote in an email Monday.
“With falling fares, control of costs is paramount. It may sound like great news that 90% of 2019 fuel needs are hedged at $58/barrel, but higher oil prices are still adding €400M to the bill.”
“And this hedge does nothing to prevent the other newer cost pressure (higher pay for pilots and cabin crew), which is projected to add another €200M and other ex-fuel costs +6%,” he concluded.
Airlines hedge their fuel costs, locking in prices far ahead of time to try and mitigate the possibility for rising oil prices in future.
Back in April the CEO of American Airlines warned passengers to expect the rise in oil prices to lead to higher fares, with the possibility of less profitable routes being cut altogether.