Almost without exception the word most commonly used by carriers reporting their second quarter results was "tough". It was a quarter when fuel prices began their steep ascent from the $100 a barrel mark towards a peak of almost $150 by July.
The red ink did not flow for many, but the struggle to remain anywhere near budget or meet the expectations of just six months ago was profound. It was of relatively little comfort that revenues continued to rise strongly for many.
The language of the management teams at rival Irish carriers Aer Lingus and Ryanair perfectly illustrates what is needed next. Commenting on its loss in the quarter, Aer Lingus chief executive Dermot Mannion said: "It is now clear that we will require further fundamental changes in our operating cost base in order to minimise losses in 2009 and to help ensure the long-term viability of the business."
Even Ryanair, for so long one of the world's most profitable carriers, is not immune. "We will continue to absorb high oil costs, even if it means short-term losses," said Michael O'Leary, the carrier's chief executive. Its fuel bill almost doubled to €367 million ($522 million) in the quarter slashing its profit by 85% compared to the same period in 2007. At the net level Ryanair took a €93 million hit to reflect the fall in the Aer Lingus share price. The carrier has a 29% stake in its rival and is not about to give up its now long-running attempt to take over Aer Lingus.
Restructuring
"What we are planning is very fundamental, very big and will happen quickly," said Enda Corneille, director corporate strategy at Aer Lingus. "We hope to minimise losses in 2009 but by no means will this put us back in profit." The carrier has made major strides in cutting its cost base such as in areas like distribution. "We've done lots, but the fuel increases just gobbled it up," he said.
The spotlight at Aer Lingus will focus on "how we deliver the product", said Corneille, with the most attention going on staff costs. The key will be to ensure the carrier has a step change in its cost base so that it can go some way to matching the roughly €40 it costs Ryanair to produce a short-haul seat. At present the equivalent cost at Aer Lingus is something over €80, with easyJet estimated to be between the two at €60. "The easyJet number is something we feel is possible because our business models are similar," said Corneille.
Aer Lingus believes the price of oil will settle around $110 a barrel for the forseeable future and is "gearing up to deliver profits at this level", said Corneille. It currently needs oil between $95 and $100 a barrel to breakeven.
With fuel prices expected to remain high and with most European countries either in recession or near to it, the outlook for the rest of its fiscal year to March 2009 is poor, said Ryanair. "There is no doubt about it - we are headed for a horrendous winter," said Howard Millar, deputy chief executive and chief financial officer at the carrier.
"If oil is at $100 or $130 it doesn't really matter, it is simply just on the scale of badness. Remember most were paying $50-60 [a barrel] last year," said Millar. Such a sharp rise will force more carriers out of the industry, said Millar, something Ryanair has been predicting for the past 18 months or so.
"There are airlines out there with very weak balances sheets and no cash," said Millar. Once the word starts to creep out that an airline is in trouble the downward spiral is fast. "Suppliers begin demanding cash up front and it becomes a self-fulfilling prophecy," he said.
Some of the bottom-tier carriers will go to the wall, said Millar. The recent demise of Irish and UK based leisure carriers Futura and XL Airways is already the "equivalent of a fairly sizeable operator going out of business", he said.
We will absorb high fuel costs, even if it means short-term losses
Source: Airline Business
