“There is no oil shortage.” , Michael O’Leary, CEO of Ryanair

Ryanair is Europe’s largest low-cost carrier and the airline’s chief executive Michael O’Leary, who is always good for a surprise, is about to conclude the company’s biggest deal ever – an order of 400 new aircraft with deliveries starting in 2013. Ryanair is known for ordering new planes at times when the aviation industry is in a crisis because of the stronger position in negotiations with the planemakers. In the aftermath of the 9/11 terrorist attacks, Ryanair ordered most of the planes that are now in service. They got an extremely competitive price and now benefit from the high efficiency of the very young fleet.

Now, the aviation industry is in an even deeper crisis than in 2001 and this crisis cannot be compared with any other that preceded because the major threat to the survival of many airlines is the skyrocketed price of oil. Expenses for jet fuel make up the largest share of the total spending of a low-cost airline. They have already reduced all other services to a minimum in order to be able to offer extremely competitive fares, but with soaring jet fuel costs, especially low-cost carriers struggle.

The announcement that Ryanair were in talks with both, Airbus and Boeing, planning to order 400 planes, was kind of a sensation as first, the Irish airline has until now a fleet of 166 planes which are solely from Boeing, second,  Ryanair could face its first loss since 1989, after a profit of nearly half a billion euros in 2007. In part, Mr. O’Leary himself is responsible for the profit slump as he considered fuel hedging unnecessary until last year. Starting in January, Ryanair will use fuel hedging to protect itself from oil price fluctuations. Besides, Ryanair feels the pain of more reluctance on the side of the travelers. Ryanair’s fares are up considerably and unless the price of oil goes down, Ryanair will have to hike up prices by up to 40%. But Michael O’Leary seems to be pretty optimistic about the future development of the aviation market and the development of the oil price. He expects oil prices to fall below $100 a barrel as he thinks that demand is declining. Moreover, ordering planes today is cheap because of the weak U.S. dollar. Mr. O’Leary said that planes are “about half as expensive as a few years ago.” This time, however, Mr. O’Leary might err. He already mentioned that if oil prices remain high, only 3 to 5 European carriers will survive, amongst Ryanair, of course, which he expects to draw businessmen traveling on a budget from the big flag carriers. The 400 planes would be used to replace numerous older ones and to be part of O’Leary’s massive expansion plan. Nevertheless, Ryanair already had to give up some airports in Central and Eastern Europe and lay down some jets to increase profitability and avoid overcapacities in the winter season. In addition to the worsening conditions of the aviation sector due to soaring operating costs and the economic downturn, the EU’s stupid cap-and-trade emissions trading scheme which will unfortunately include the aviation industry, will be yet another challenge.

But the point is that oil prices will remain high, due to the OPEC cartel, fundamentals of supply and demand as well as the fact that oil resources are finite.

Has the bubble popped?

The EU decided to include airlines operating in Europe into emissions trading overburdening an industry already struggling

Dull ambience at IATA’s general annual meeting in Istanbul: the airline industry faces a severe crisis

http://www.irishtimes.com/newspaper/breaking/2008/0806/breaking25.htm

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