Low-cost Irish airline Ryanair has scaled back its expansion plans in the face of high fuel prices and expects a wave of deal-making as weak airlines seek wealthy backers.
With airlines facing $100 a barrel (U.S.) oil, the low-cost carrier said there would be a period of consolidation in which four large airline groups would dominate the continental market in a few years. Fuel cost Ryanair €140-million more in the three months to June than in the same period a year ago, a 50 per cent increase.
International Airlines Group, formed of the 2010 merger of BA and Iberia, is rumoured to be interested in TAP, the Portuguese Airline, while Lufthansa has been tipped to purchase SAS, the Scandinavian carrier.
Howard Millar, Ryanair's chief financial officer, said: "Once we get over $100 a barrel, it's a tipping point. We expect the consolidation process to continue and capacity to come out of the airline industry.
"We believe we are into an era of high oil prices. Nobody believes we will see $20 or $30 a barrel again."
Ryanair shares slipped 1.65 per cent to close at €3.41 as it admitted that "stubbornly high" fuel costs had squeezed its own profits' growth and it expects passenger numbers to fall for the first time in its history this winter.
The company missed analysts' forecasts of €151-million with net profits up just 1 per cent to €139.3-million in the three months to June 30. But in spite of the setback, Ryanair maintained its full-year profit forecast of €400-million and said its fuel requirements for the year were 90 per cent hedged at $820 a tonne.
While confirming there would be short-term pain as the industry contracts, Ryanair said rivals' fuel price surcharges and the tough economic backdrop were making its own fares more attractive. "Generally we love a good recession," Mr. Millar said.
Passenger numbers rose 18 per cent to 21 million in the three months to June, although the comparisons with last year's total were flattered by the impact of the Icelandic ash cloud in April 2010, which grounded 9,400 of its flights across Europe.
Passenger growth was expected to slow to 4 per cent in the winter, said the airline, but it would offset the impact on profits by grounding 80 aircraft over the winter and raising ticket prices this year and in 2012. Average fares rose 11 per cent to €43 a seat – still lower than its 2007 price of €45 a seat – but are expected to rise further this summer.
Ryanair has been increasing the proportion of revenues from add-on services such as baggage check-in fees and priority boarding.
Ancillary sales grew 22 per cent to €248-million in the quarter and now make up 21 per cent of total revenues. As part of that strategy, and like Easyjet, its rival, which is targeting business customers, the carrier said it was trying reserved seating on selected routes at a cost of €5 for positions with extra legroom at the front of the aircraft or by escape hatches.
The airline was quick to counter criticisms of its baggage levy, saying the charge had been brought in to lighten loads and to consolidate its environmental position. "We've got to change consumer habits. We've got Mrs. Millar down from seven pairs of shoes down to three pairs of shoes," Mr. Millar said.
Ryanair also said it had plans to sue BAA, the UK airports operator, for what it contends are inflated charges at London's Stansted airport. "The Stansted cost base has been artificially boosted. We think they have been increasing their costs so they can jack up the charges on us," Mr. Millar said.
BAA said: "As of Friday we hadn't received anything from Ryanair. We'd obviously need to see what their case is before we could properly respond. Our charges are set by our regulator, the Civil Aviation Authority, so it's difficult to understand what case Ryanair could have."
The soaring price of fuel offset large increases in revenues and passenger numbers at Ryanair, forcing the Irish low-cost airline to miss analysts' profit forecasts.
Net profit at the Dublin-based carrier rose by 1 per cent, in spite of passenger numbers jumping 18 per cent to 21.3 million in the three months to June 30.
Revenues grew by almost 30 per cent to €1.2-billion ($1.7-billion), driven by an 11 per cent increase in fares and an 18 per cent jump in traffic at the group, which operates more than 1,500 flights a day.
The increase in traffic was flattered by the comparative period in 2010, when Ryanair was forced to cancel 9,400 flights due to the Icelandic volcanic eruption.
However, fuel costs rose by almost half to €427-million at Europe's largest low-cost airline by passenger numbers, biting into net profit which edged up from €138.5-million to €139.3-million year-on-year but missed analysts' consensus forecasts of €156.8-million.
In spite of the setback, Ryanair maintained its full-year profit forecast of €400-million and said its fuel requirements for the year were 90 per cent hedged at $860 a tonne.
"This result is testimony to the strength of Ryanair's lowest fares/lowest cost model, which continues to deliver profit and traffic growth despite the recession and high oil prices," said Michael O'Leary, chief executive.
Ancillary sales – fees for checked baggage, priority boarding and debit and credit card charges – grew 22 per cent to €248-million.
Earlier this month, the British government's Office of Fair Trading called for an end to the debit card surcharges imposed by travel companies, which are often added at the final stage of a transaction. Budget airlines, including Ryanair, are opposed to the proposal, but are developing other ways to boost turnover.
"We have recently started trials of 'reserved seating' for 21 extra legroom seats on selected routes for a fee of €10 per seat," Mr O'Leary said. "If successful we will roll out reserved seating across more of our network this winter."
Mr O'Leary also bemoaned a 40 per cent jump in charges imposed on airlines operating from Dublin airport "which has led to winter capacity cuts by Ryanair and many other carriers," he said.
Shares in Ryanair, which have fallen by 14 per cent over the past 12 months, on Monday slipped 8.2 cents, or 2.4 per cent, to €3.38 in early Dublin trading.