European low-cost carriers Ryanair and Norwegian are finding that their past prudence on fuel-hedging is coming back to bite them as oil prices continue to hover at unforeseen low levels. A double negative for Norwegian and further contributing to its significant full-year 2014 losses was the hefty financial impact of its ongoing wait for US government approval to serve the country with low fares service.
Norwegian incurred a full-year net loss in 2014 of more than NKr1 billion ($131 million), compared with the NKr321.6 million net profit it posted in 2013. The Oslo-based carrier incurred net losses of NKr958.4 million in the fourth quarter alone. This was “mainly caused by fuel hedging”, says Norwegian, but the carrier adds that it also incurred costs related to “the delayed US Department of Transportation approval” of its long-haul expansion plan to the tune of NKr54 million in the fourth quarter.
The airline’s disappointing figures came despite increasing its full-year revenues by a quarter to NKr19.5 billion.
“There is no denying that 2014 has been a weak year for Norwegian,” says chief executive Bjorn Kjos in a full-year earnings statement. “Last year was characterized by the continued international expansion, not least the launch of new long-haul routes.”
Nevertheless, Kjos expresses optimism for 2015, noting that, “We see a satisfactory demand for quality flights at affordable fares and are already in the first quarter benefiting from the low oil price.”
But Norwegian’s plans to bring those low fares to routes linking Europe with points in the USA continue to be stymied by fierce opposition from US airlines and labor groups. Kjos appears ready to wait it out and told delegates attending the World Low Cost Airlines Congress in London back in September that DOT approval may not be forthcoming until after the 2016 US presidential election because the issue had become so politically charged.
Fellow European budget operator Ryanair posted much healthier results for its fiscal third quarter, ended 31 December 2014, but also sounded a warning bell for the coming fiscal year because of the fuel hedges it put in place before the recent plummeting of oil prices.
Ryanair credited its “Always Getting Better” improved customer service plan with helping to post a fiscal third-quarter net profit of €49 million ($55 million). This compares with the €35 million net loss incurred by the carrier in the same quarter of its previous fiscal year. Passenger numbers in the third quarter rose 14% to 20.8 million, load factor leapt six percentage points to 88% and revenue increased by 17% to reach €1.1 billion. All of these factors led Ryanair to raise its fiscal full-year 2015 profit guidance to €840-850 million from the previously indicated €810-830 million.
However, the carrier has warned analysts to temper their expectations for FY2016 as a result of the fuel hedges it has in place. Ryanair has hedged 90% of its fuel at $92 per barrel for FY2016 and 35% of its FY2017 fuel at $68 per barrel. The price of a barrel of crude is currently trading at just over $60.
“We believe that any growth in profits will be modest as our fuel is hedged at $92 pbl, whereas some competitors…will be significant beneficiaries of lower oil prices, and this may lead to downward pressure on airfares in 2015/16,” says Ryanair.
“As lower oil prices kick in over the next two years, Ryanair intends to pass on much, if not all, of these savings to our rapidly growing customer base in the form of lower fares and, therefore, our profit growth expectations will be modest in FY16.”
Meanwhile, arch-rival EasyJet said in a 31 December trading statement that it expects to narrow its first-half pre-tax loss to between £10 million ($15.4 million) and £30 million, “assuming normal levels of disruption”, from the £53 million pre-tax loss reported in the first half of its previous fiscal year. EasyJet’s fiscal year ends on 31 March.
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