Volatile fuel costs force airlines to consider their options and drive industry rationalization

Source:Global Times Published: 2019/1/7 18:48:40

Risky bets on the price of oil will drive European airline merger and acquisition (M&A) in 2019. The price of a barrel of crude is unusually volatile heading into the New Year. The majority of airlines are hedged against significant price rises, but it's equally possible Brent will bottom out well below the 2018 peaks.

How things pan out regarding fuels costs will dictate how many weaker airlines may get taken out. The cost of refueling is crippling some Europe's airlines. Over the past three years, the cost of a barrel of jet fuel has doubled to nearly $75, according to data from the International Air Transport Association (IATA). For the year ahead, airlines are bracing themselves for further pain, with easyJet, Ryanair, IAG, Deutsche Lufthansa and Air France KLM having already warned that their fuel bills will rise by hundreds of millions of euros. Although rising fuel prices are hardly a new phenomenon, they follow increased competition for increasingly larger planes, thus making it harder for carriers to raise airfares to shoulder some of the pain.

For 2019, a number of large carriers have decided to pay up to take the risks off the table. Michael O'Leary's budget airline Ryanair has hedged 90 percent of its fuel bill. Similarly, German carrier Lufthansa has hedged 77 percent of its fuel costs.

Contrast that with highly levered players like Norwegian Air, which has no such buffer - it has only hedged 15 percent. Smaller airline Wizz Air also looks exposed having only hedged 41 percent. With Brent having fallen precipitously in the last few months of 2018 to below $60 a barrel, these companies willing to take a chance do currently look smart.

Those who have bought pricey hedges, meanwhile, risk having spent precious shareholder funds for nothing. Still, if President Donald Trump decides to enforce Iranian sanctions in earnest, oil prices could snap up again as a chunk of supply is removed from the market. If so, Ryanair looks well placed to pounce should any unhedged peers get into trouble. Its shoestring budget and jam-packed planes will deliver an operating margin of 25 percent in 2019, according to Refinitiv data, and its debt is still relatively low.

As costs rise, it can take on new routes and even buy up smaller airlines should they collapse. Lufthansa, although on a lower margin, is hoping to charge more for first class passengers to manage extra costs, but says it is also on the prowl for acquisitions. If oil prices do snap back up, opportunities will appear.

The author is Aimee Donnellan, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn



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