Monday 2 February 2015

Ryan Air caught by hedging madness, Labour next?

Not often that a canny, if awful, company like Ryan Air get caught. However, in its annual results today Ryan Air has had to announce that the coming year will be a tough one. This is because it has bought the whole of 2015 and, er 2016, ahead of time in terms of fuel cost at a price of $95 per barrel. see below

We have taken advantage of recent dips in oil prices to further extend our fuel hedges into FY17. We are 90% hedged for FY15 at $95 pbl and FY16 at $92 pbl and are 35% hedged in FY17 at approx. $68 pbl. Our US$ op-ex is 90% hedged at $1.33 in FY16, and 60% hedged at $1.21 in FY17. If current rates continue this would deliver an indicative reduction in our fuel cost per passenger of approx. 8% in FY16 and approx. 16% in FY17. Our capex programme is fully hedged to September 2017 at a rate of $1.35, which locks in significantly lower cost aircraft deliveries over the next 2 years."

So in effect, they have managed to miss the price drop entirely. Given 12 month contracts are the norm in the industry they must have signed a really good deal for 2 years just before prices started falling in the middle of last year. This would equate to say a 10% discount to the prices at the time, which sounds about right for such a large order. Why they quote the Brent price is a bit mystifying when they are buying jet fuel (where the price has fallen from around $115 to $80 in the same period).

Anyway, they won't be flying cheaply for long against any companies that have not hedged to such a crazy degree. Hedging at its core is a sensible risk management strategy, all Ryan Air have done is been caught out like most of the world by the rapid price collapse in commodities.

Which makes it even weirder that the Labour Party are about to campaign in an election period in 'freezing' energy prices that supply domestic households in the UK. Just at a time when the prices should be falling substantially. Now the companies have hedged the other way, to make sure they can be profitable for the future in a price frozen world. This is now locked in, whether Labour win the election or not, the Big Six energy companies will be unable to track the market in a more meaningful way. So Labour have achieved one aim, there will be no price rises for some time - unfortunately they have managed to lock in the highest prices we are likely to see for the next 3 or 4 years.

Remember when Labour thought they were so clever selling Gold at the bottom of the market - well, here we are, they have done it again and they are not even in Government this time!


Nick Drew said...

for a company with a business model like Ryanair, with mostly short-term forward pricing and few if any long-term fixed-forward sales contracts (maybe some to charter holiday firms, but way short of 90% of the business)

then fixing ahead like that is almost pure spec

hey, you win some you lose some: as I endlessly recount, John Browne of equivocal memory called the bottom @ $10 in 1998, bought Amoco + Arco + BurmahCastrol and doubled the size of BP

genius! but pure spec nonetheless: at the time the Economist famously said the botton could be $6, and then where would he have been ?

Anonymous said...

Simple - just serve free bottled water to passengers, and double or triple the cost of using the onboard loo. Should be able to spend a penny or two after that.

BE said...

*buys Easyjet shares*

Anonymous said...

If you want to see real stupidity, ask why the Seahawks threw a 1 yrd pass with 20 seconds to go.
Why not rush ?

1 yard?

Patriots intercepted..and then scored to win the superbowl.

Suffragent said...

Can't stand flying with Ryanair and would happily pay double the rate just to avoid the hassle and their "customer Service". Unfortunately they are the only ones who fly from where you are to where you want to go. The rest use the hub system which is such a waste of time and a pain in the ass (as you have another round of cavity searches).If your going to have a relaxing long weekend away, you don't want to spend 16 hours of it waiting in an airport for what accounts to a couple of 2hour direct flights.

Budgie said...

I don't fly often, but I am happy with Ryanair. I think 2017 hedging at $68 pbl is very astute.

Nick Drew said...

that would be speculation then, Budgie, not hedging

Budgie said...

ND, you (appear to) quote Ryanair thus: "We have taken advantage of recent dips in oil prices to further extend our fuel hedges into FY17. We are ... 35% hedged in FY17 at approx. $68 pbl."

So Ryanair think they are hedging not speculating. Now in one sense all hedging is speculation because none of us knows what will actually happen in the future. So, ND, would you care to explain the difference as you see it?