February 2, 2015 / 6:23 AM / 4 years ago

Ryanair sees cheap oil fuelling competition on fares

DUBLIN/LONDON (Reuters) - Ryanair (RYA.I) cautioned on Monday that profits would only rise modestly in the year ahead as low oil prices help rivals to cut fares, taking the shine off its third profit upgrade in as many months for the year ending in March.

A model airplane rests on a table during an announcement of the commitment for Ryanair to purchase aircraft from Boeing, in New York March 19, 2013. REUTERS/Lucas Jackson

Ryanair, Europe’s largest airline by passenger numbers, has increased its profit forecast for the current financial year by over 30 percent since it reported stellar half-year results three months ago, due to improvements in its much berated customer service that have boosted fares and passenger numbers.

That helped it to announce a new 400 million-euro share buyback programme on Monday but the Irish airline cautioned that it was braced for greater competition on fares in the year ahead from rivals who are already benefiting from the drop in the oil price, whereas Ryanair is locked into a higher price because of its forward buying scheme.

Its shares were down 4 percent at 9.97 euros by 0944 GMT.

Ryanair has hedged 90 percent of fuel needs for the year ending March 2016 at $92 per barrel, about double the current price after the plunge in benchmark Brent crude LCOc1 in recent months, meaning it will only benefit slightly from lower jet fuel costs this year.

It has hedged 35 percent of its full-year 2017 needs at a much lower $68 per barrel but it noted on Monday that many rivals who do not hedge out as far may be able to lower their prices further, leading to lower overall fares in 2015/16.

“In our view, (the share buy back) emphasises the ongoing strength of Ryanair’s balance sheet and cash generation, even if management wants to inject some caution into the outlook for 2016,” analysts at Liberum said.

Other major European airlines typically hedge up to between 60 and 85 percent of their fuel needs for the coming year on a rolling basis. Locking in prices gives them certainty over what is one of their biggest cost items and helps to smooth out fluctuations.

For this year, however, Ryanair has seen strong demand, helping it to lift its net profit forecast to between 840 million euros and 850 million euros ($949-$961 million) for the year ending in March, up from a previous forecast of 810 million euros to 830 million euros.

It had predicted a net profit of up to 650 million euros as recently as September.

It said it expects traffic to grow by 25 percent in the three months to the end of March, up from a prior estimate of 20 percent, while fares would fall by 6-8 percent.

Ryanair said it also intends to pass on much, if not all, of next year’s forecast 8 percent fall in fuel costs per passenger in the form of lower fares, raising the prospect of intense price competition among European airlines in the coming months.

“Some of the weaker guys will get an immediate reprieve but they still have the fundamental other issues in their business,” Ryanair’s chief financial officer Neil Sorahan told Reuters in a telephone interview.

“They still don’t have the advantage that we have of a very, very low ex-fuel cost per passenger, some 70 percent lower than the next closest, easyJet(EZJ.L). Hedging is all about certainty.”

Additional reporting by Victoria Bryan in Berlin; Editing by Greg Mahlich

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