$80 oil price could destroy airline

The rising price of oil is likely to bring about the demise of numerous low cost airlines with tight profit margins, Michael O’Leary, the chief executive of Irish budget airline Ryanair, said.

Speaking to Bloomberg TV after his airline issued a profit warning for the first time in five years, O’Leary warned that a significant “shake out” is coming in the aviation sector as a result of oil’s huge surge over the past year or so.

“A lot depends on what happens with oil. We’re well hedged for the next 12 months out to March 2019,” O’Leary said.

“Spot prices close to $80 a barrel are going to lead to a significant shakeout in the industry as early as this winter,” he added.

“While US Shale production remains strong, world demand for oil is growing, and a number of short term political factors in Venezuela, Libya and Iran, suggests that prices will continue to be elevated for the coming year. Air fares tend to follow oil prices (as they have downwards over the last 3 years) but with a lag of up to 12 months before higher oil prices feed through to higher air fares,” said Ryanair. The low-cost airline also noted that the European airline industry is consolidating.

Speaking to CNBC on Monday, O’Leary said: “Clearly $80 a barrel oil is going to bring casualties in Europe this winter.”

“Oil is going to be a driver but I think it will be a driver of change to the competition landscape in Europe. Some of those airlines who couldn’t make money when oil was at $40 a barrel last year, I don’t think will survive this winter if oil remains up at these elevated levels,” Ryanair’s chief executive said.

According to Platts data and the International Air Transport Association (IATA), as of May 11, 2018, jet fuel prices globally were 54.2 percent higher than at the same time last year, 5.4 percent higher compared to a month ago, and 3.7 percent higher than the previous week.