O'Leary warns of 'perfect storm' in airline sector

Never a man for understatement, Ryanair chief Michael O'Leary's warning of a "perfect storm" in the European airline sector is in line with previous drastic warnings about poor conditions in the airline business.

But with hedging contracts that have insulated Ryanair from the 40 per cent spike in oil set to expire at the end of next month, there is no escaping the fact that the airline will have a significantly higher cost burden in the coming fiscal year.

Ryanair plans to increase capacity by 20 per cent in the coming year, so it will be very much at the mercy of the international energy markets.

Oil currently costs some $90 per barrel. At his most optimistic, Mr O'Leary says Ryanair's profits could grow 6 per cent if the price falls to $75.

At his most "conservative", Mr O'Leary says a price of just $10 per barrel higher than that, ie $85, could halve profits if combined with waning consumer confidence and sterling's weakness.

If sterling's fall is already eroding valuable British revenues, a weakening of consumer confidence means ticket prices will have to fall to boost sales.

This cuts Ryanair's yield from an already depressed market.

Quarterly results yesterday show that yields fell 4 per cent in the three months to December, when adjusted after-tax profits fell 27 per cent to €35 million in spite of a 21 per cent rise in revenues to €569 million.

This trend seems likely to continue. In January, for example, Ryanair's load factor declined by 2 percentage points year-on-year to 69 per cent even though the number of passengers carried rose 17 per cent to 3.68 million.

While Mr O'Leary took the opportunity to criticise increases in airport charges at Dublin and Stansted, he has also had to recruit new flight crews in line with EU rules on the time staff spend at work.

While all of this suggests that Mr O'Leary's difficulties are mounting by the day, Ryanair is not alone.

If conditions in the airline sector at large support the view that the European market is heading into a cyclical downturn, Mr O'Leary sees upside for Ryanair in that it will be better protected than its rivals thanks to its lower cost base.

However, nice comparisons are no substitute for profit growth, even if Ryanair sees opportunities to crush its rivals amid the storm.