Rising fuel costs may wipe out airline profits

OPERATING PROFITS at Aer Lingus and Ryanair will be almost wiped out in the current year due to the soaring price of fuel, according to research published yesterday by stockbroker Merrion Landsbanki.

Analyst John Mattimoe forecast that the airlines would end their financial years at just above break-even, based on his assumption that fuel prices would remain at their current level of $1,340 (€861) per tonne.

Mr Mattimoe estimates that Aer Lingus's 2008 fuel bill will be €62 million higher than he previously forecast. This will be "nearly enough to wipe out our previous operating profit forecast of €65 million if all else were unchanged".

He also predicted that Aer Lingus would "stand down" 10 per cent of its capacity in each of the next two winters. Merrion said this would benefit Aer Lingus's short-haul unit revenue.

"The net effect of these assumption-changes results in a revised 2008 operating profit forecast of €11 million," he said.

"Were it not for the partial shelter from fuel hedging previously in place , it is likely that Aer Lingus would be loss-making at the operating level in 2008 on $1,340 per tonne [of] fuel."

If oil prices stay at the current level, Merrion said, Aer Lingus's 2009 fuel bill will be €117 million higher than this year.

In spite of this, Mr Mattimoe believes that cuts in capacity and stronger yields should help achieve an operating profit of €6 million next year.

He said investors could take comfort from Aer Lingus's cash balances of €757 million, a net book value of €1.42 billion and the value of its 23 slot pairs in Heathrow, which it says could be worth €350 to €650 million.

On Ryanair, which has no fuel hedging, Merrion said the spike in oil prices was likely to cost the airline €371 million more than its original prediction.

However, it expects Ryanair to cut capacity by 15 per cent, which would lessen the impact on its yield and reduce its fuel consumption by 7.5 per cent.

"The net effect of these assumption-changes reduces our full year 2009 Ebit from €260 million to €51 million with an earnings per share projection of three cent, down from 15 cent."

Mr Mattimoe has forecast that Ryanair's earnings will bounce back in the year to the end of March 2010.