Ryanair reports record profit on ‘cheap’ fuel hedges and sees strong industry consolidation

Ryanair on Monday reported full-year net income of 1.43 billion euros ($1.55 billion), helped by resurgent traffic and tariffs and favorable oil hedging positions.

Despite a difficult first quarter of 2022 due to the Russian invasion of Ukraine, travel demand recovered over the year. The Irish low-cost airline reported a 74% increase in traffic for the full year to 168.6 million customers, while fares rose 10% compared to pre-Corona levels.

Operating expenses rose 75% to €9.2 billion on a 113% increase in fuel costs. However, the airline said “cheap” hedging helped offset this, while unit costs stood at €31 per passenger, significantly lower than other European competitors.

“Our industry-leading fuel hedging (over 80% hedged at approximately 64 barrels per barrel) contributed significantly to the final FY23 earnings result, saving the group over €1.4 billion,” CEO Michael O’Leary said in Monday’s earnings report.

Airlines hedge against the risk of a potential rise in oil prices by using futures contracts to purchase a specified quantity of fuel at a fixed price for future delivery.

International scale Brent crude oil was trading at just over $75 a barrel on Monday morning.

Ryanair is 85% hedged at $89 a barrel this year, and the company’s chief financial officer, Neil Sorohan, told CNBC on Monday that this will add about an additional $1 billion to this year’s fuel bill. But he said Ryanair is confident of covering the rise in costs and growing profit “modestly” year-on-year.

“Our balance sheet is one of the strongest in the industry with a BBB+ credit rating and year-end gross cash position of €4.7 billion, despite a €850 million bond redemption in March 2023,” O’Leary said in the report.

“Nearly all of the group’s B737 fleet is owned and 99% unencumbered, which significantly increases our cost advantage as interest rates and leasing costs for competitors continue to rise.”

Ryanair earlier this month signed an agreement to purchase 300 new Boeing 737 MAX-10 aircraft – 150 firm orders and 150 future options – with phased deliveries between 2027 and 2033. The purchase, which was delayed in 2021 due to a price dispute, relates Ryanair aims to carry 300 million passengers annually by 2034.

“Alongside the significant revenue growth, the additional seats (coupled with higher fuel, CO2 and noise efficiencies) will further extend Ryanair’s significant unit cost advantage over all European rival airlines,” O’Leary said in Monday’s report.

CFO Sorohan said the airline’s low cost base is its biggest asset as it looks to expand its footprint and market share across Europe, but said the biggest risk to this growth strategy is the airline industry itself.

“Every few years something always goes wrong, but because we have the balance sheet and cost base that we have, we will be able to weather any storms that come our way,” he added.

Consolidation “inevitable”

The capacity of all European airlines has undergone a “systemic shift” in the face of the Covid-19 pandemic, Sorohan said, as many airlines are forced to downsize. Meanwhile, OEMs (original equipment manufacturers) are struggling to meet demand and leasing companies have been hit by sanctions against Russia.

But data shows that travel is a high priority for people, Sorohan said, which is why Ryanair feels comfortable placing an order for 300 aircraft this month, setting ambitious targets for traffic growth.

However, he emphasized that the consolidation of the entire industry in Europe was “inevitable” – and in fact “has already started”.

“Norwegian is half the size it used to be, but if you look at Italy, 40% has been consolidated from ITA, formerly Alitalia, to Lufthansa to reach 100%. TAP in Portugal is for sale, inevitably some capacity will come out on the basis of that and there will still be more left,” he said.

“I wouldn’t be surprised if two of the other low-cost airlines in Europe were consolidated in the next few years. I think it’s also inevitable that more of that will come together and we’ll move more like the US model where just four or five major airlines effectively handle 80% of Europe’s traffic.”

Major European former ‘flag carrier’ airlines have suffered a major slump during the pandemic, with some bolstered by controversial state aid from their respective governments.

The EU court earlier this month annulled the German government’s €6 billion Lufthansa recapitalization package (originally approved by the European Commission) and the Swedish and Danish governments’ €1 billion package SASand held that the state aid unduly shifted competition in favor of Ryanair’s competitors.

“We’ve seen a systemic shift in capacity and I think we’re going to stay with some of the historic big flagship airlines – Air France KLM’s“, Lufthansa’s – but ultimately, Ryanair will play a key role on the short-haul, point-to-point,” Sorohan added.