Ryanair Warns of Airline Shakeout as Fuel Costs Claim Weakest
(Bloomberg) -- Ryanair Holdings Plc warned that profit will slump for the first time in five years as rising labor costs compound a fuel-price surge that may force weaker competitors out of business.
Net income could fall as much as 14 percent in the year through next March, Ryanair said Monday. An increase in kerosene costs will pressure earnings in the short term but could also spur a new round of airline failures that will benefit the Irish company by eliminating competitors, it predicted.
“Spot prices close to $80 a barrel are going to lead to a significant shakeout in the industry as early as this winter,” Chief Executive Officer Michael O’Leary told Bloomberg Television. “Some of those loss-making airlines who couldn’t make money when oil was at $40 a barrel certainly can’t survive.”
Europe’s biggest discount airline is also grappling with higher expenses after a rostering foul-up left it short of pilots, forcing Ryanair to sweeten contracts and recognize trade unions. O’Leary said the outlook this year depends largely on whether the squeeze from fuel leads to the early exit of weaker carriers such as Norwegian Air Shuttle ASA, eliminating capacity and bolstering fares, or whether they’re acquired before they can go bust.
In the case of Norwegian Air, a “rescue” by British Airways owner IAG SA would bring far less benefit than a grounding, since it would only slow capacity growth, the CEO said. IAG has had two offers for the Scandinavian discounter rejected and its chief, Willie Walsh, said last week that he’s prepared to walk away if acceptable terms can’t be reached.
Norwegian dismissed O’Leary’s comments as having “no root in reality,” adding in an email that it’s actively focused on cost-saving initiatives and has methods to mitigate “any sudden risks.”
Shares of Ryanair traded 3.9 percent higher at 10:31 a.m. in London. The stock has gained 6.5 percent this year, valuing the company at 18.1 billion euros ($21.2 billion). Norwegian shares weren’t trading in Oslo on Monday because of a local holiday.
Net income rose 10 percent to 1.45 billion euros in the year ended March 31, Ryanair said in a statement. The figure will fall back to a range of 1.25 billion euros to 1.35 billion euros in the current 12 months, including 100 million euros of higher crew costs, the carrier said. Its forecast is “on the pessimistic side of cautious,” it said.
Ryanair was forced to scrap more than 20,000 flights in September after botched staff rotas left it without sufficient pilots to crew all of its planes. The crisis meant the carrier had to refund passengers and engage in talks over unions after suffering the first strike in its history.
The market for experienced pilots will “remain tight” for all European airlines over the next year, according to O’Leary. Ryanair said it has reached agreements with its U.K. and Italian pilots and made progress with cabin crew in Britain and Spain, while cautioning that there could be localized strikes as negotiations continue.
Unit costs will climb 6 percent over the next year -- or 9 percent including a 400 million-euro fuel headwind -- according to Ryanair, which also sees growth in passenger numbers slowing and occupancy levels staying flat.
The carrier also set out plans to scrap voting rights for U.K. shareholders in the case of a so-called hard Brexit which will avoid breaching European Union ownership rules for airlines.
©2018 Bloomberg L.P.