UK: Oil price leads to turbulence for airlines

MICHAEL O’LEARY’S fear that the rising oil price could cause a “bloodbath” among airlines is also felt by other carriers.

Oil analysts are reporting that some airlines are shopping around for hedging insurance as far forward as 2007 — a recognition that the high price is here to stay.

Rising fuel costs are eating into profits, forcing many carriers, such as British Airways, to impose surcharges on fares.

Based on an average of three million passengers a month, the £2.50 a trip surcharge imposed by BA would generate £75 million by next March. This is half the £150 million increase in fuel costs BA expects this year.

BA has about 45 per cent of future fuel needs hedged. Last month Goldman Sachs estimated that BA’s operating earnings for the current year would be down about 16 per cent because of higher oil prices. At Ryanair, which has about 80-90 per cent of future needs hedged, Goldman estimates operating earnings will be down by about 4 per cent.

Many of Ryanair’s low-cost competitors are seen as being more at threat from fuel rises because this forms a far greater share of their overall costs.

Hedging does not necessarily save money, but is done to smooth out cashflow and reduce volatility. In an increasingly uncertain global oil market even this insurance may not be enough.

Morgan Stanley estimates that in the wake of the Iraq war last year, many carriers cut hedging because they expected the price to fall.

Many airlines increased their exposure to market volatility and recent attempts to hedge future fuel requirements would have been done at increasingly higher prices.