Ryanair's confidence grounded by sky-high fuel costs

Published on Saturday 31 May 2008 14:33

MICHAEL O'Leary, Ryanair chief, is expected to warn of a difficult year ahead for the budget airline this week as it faces a squeeze from rising oil prices.

O'Leary, who usually gives a belligerent performance at annual results, has been slightly more muted about the company's prospects over the past few months, saying in February that the airline industry is facing a two-pronged attack from soaring oil costs and failing consumer confidence.

Although 2007 figures are expected to show an increase of up to 18% in earnings before interest and tax to ?559m (440m), UBS analysts predict profits over the coming year could fall to a third of that as oil prices continue to climb.

Ryanair is understood to be particularly exposed to rising oil prices as it had been hedged at $68 a barrel until March. At the end of last month, the price of light sweet crude oil was $135 a barrel.

Unlike some of its competitors, Ryanair has not passed the cost onto customers and has so far avoided fuel surcharges. But according to UBS analyst Tim Marshall, it is inevitable that all airlines will have to raise prices this year. "Demand elasticity will be the key issue to focus on in the results," he said.

"All airlines will need to increase prices to offset the higher fuel cost, and the extent to which this impacts demand will likely determine profitability. As low fares have stimulated demand, higher fares will presumably have the opposite impact."

The fortunes of Ryanair's senior managers in particular depend on how oil prices play out for the rest of the year.

The airline is reviewing all of its major costs, including staffing levels, and O'Leary has imposed a pay freeze on the top 36 managers until oil prices fall.

Chief executive of Morrisons Marc Bolland will deliver his first trading update since the departure of Sir Ken Morrison as chairman in March, when the firm also announced a 66% hike in annual profits to 612m.

The supermarket chain is thought to have kept up the momentum, and the latest market share data from TNS Worldpanel shows it has continued to make inroads against its main rivals.

Its market share rose to 11.4% in the 12 weeks to May, and analysts expect an optimistic update on Thursday.

Less cheer is expected from Ian Cheshire, chief executive of B&Q owner Kingfisher, when he reports first-quarter trading figures on Wednesday. Cheshire, who took over from Gerry Murphy in January, has had a tough start to the job, and was forced to slash the group's dividend by half in March after it racked up its third successive fall in underlying annual profits.

The City has given Cheshire's turnaround plans, which include a reshaped management structure and targeting investment towards projects that will offer the best returns, a lukewarm reception. He has also had to contend with poor weather in March and April, which affects sales at DIY and outdoor leisure stores.

Investec analyst David Jeary is predicting a 7% drop in Kingfisher's overall retail profits to 82.5m, with like-for-like sales at B&Q also down 7%.

He said: "With UK and French consumer confidence still falling, we think the outlook still looks gloomy."

Better results are expected from car parts and bicycle retailer Halfords on Thursday when it reports full-year figures.

Underlying like-for-like sales growth for the seven weeks to March 14 came in marginally above analyst expectations at 3.2%.

Sam Hart of Charles Stanley is predicting profits of 88m, up from 83.8m in 2006.

Week ahead

TOMORROW

Acal, Chloride, Detica, e2v technologies (finals)

TUESDAY

Penna Consulting, Ryanair, United Utilities (finals)

WEDNESDAY

FKI, Northumbrian Water (finals); Kingfisher (trading update); Wolfson Microelectronics (AGM)

THURSDAY

Halfords, Helical Bar, Johnson Matthey, Severn Trent, (finals); Jelf (interims); PZ Cussons, WH Smith (trading updates); Morrisons, Moss Bros (AGMs)

FRIDAY

Hornby (finals); Signet (AGM)