O’Leary warns of Ryanair profit slump as fuel and labour costs increase

Ryanair’s chief executive, Michael O’Leary, predicted yesterday that fuel and labour costs would cut profits this year at the airline, which is nevertheless aiming to expand its business to carry 200 million passengers a year.

The carrier believes its average fare will remain at the €39.40 to which it fell during its 2018 financial year, which ended on March 31st. Seat prices will have fallen by 3 per cent in the current quarter but should increase by 4 per cent in the summer.

Mr O’Leary said revenue from extras such as drinks, snacks and bag charges would not offset higher costs and lower fares, so Ryanair’s profits for the 12 months to March 31st, 2019, would fall from €1.45 billion to between €1.25 billion and €1.35 billion.

Oil prices have risen to about $80 a barrel from about $54 last year. Ryanair calculates that the oil price will add €400 million to its fuel bill in its current financial year. Mr O'Leary told the US business channel CNBC that $80-a-barrel oil threatened to close some of its rivals.

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"Some of those airlines who couldn't make money when oil was at $40 a barrel last year I don't think will survive this winter if oil remains at these elevated levels," he said. Any closures would follow the high-profile failures last year of Alitalia, the Italian flag carrier, and Air Berlin, in Germany.

Profit wipeout

The sharp rise in oil prices has upended the industry’s own predictions for profitability this year. The International Air Transport Association’s forecast that the sector globally would earn a surplus of $38.4 billion was based on crude prices of $60 a barrel in 2018. At $80 a barrel, analysts say, oil could wipe out most of those profits.

A shake-out of European airlines would benefit Ryanair in the long run, as it would leave the Irish player with less competition and more opportunities. It has frequently stepped in to serve routes abandoned after airline closures. It also built its business in Italy as Alitalia struggled in recent years.

Outside fuel, the airline expects costs to rise 6 per cent. Part of this will be annualising pay increases for pilots and cabin crew. The airline agreed to recognise unions last year and is in talks with groups across Europe. However, it is facing possible industrial action by pilots in coming weeks.

Another contributor to that 6 per cent hike in costs is Ryanair’s plan to grow passenger numbers to 200 million – 54 per cent more than its 2018 total of 130 million – and expand its fleet to 600 aircraft. The company plans to invest in its business to prepare for this.