Ryanair admit they hedged fuel too early at too high a price

coylemj

In today's Q3 results, Ryanair admit that they hedged 2016 and 2017 fuel at prices that now look too high i.e. they used their financial muscle to hedge early but it's proved a costly mistake and will affect FY earnings because other airlines (who hedged less or not at all) will pay less and this will drive down fares.

In true Ryanair fashion, they blame the mistake on the fact they could afford to hedge whereas their weak opposition (who couldn't afford to hedge) will now benefit by getting cheaper fuel in the next couple of years.

Cautionary Outlook:

We would counsel shareholders and analysts to temper expectations for FY16. While we are still finalising our budget, we believe that any growth in profits will be modest as our fuel is hedged at $92 pbl whereas some competitors (whose weak balance sheets rendered them unable to hedge forward) will be significant beneficiaries of lower oil prices and this may lead to downward pressure on airfares in 2015/16. Ryanair’s over-riding strategy remains, to be “load factor active - yield passive” so it is important that analysts are mindful of this likely increased price competition when revising their forecasts. As lower oil prices kick in over the next two years, Ryanair intends to pass on much, if not all, of these savings to our rapidly growing customer base in the form of lower fares and therefore our profit growth expectations will be modest in FY16

http://corporate.ryanair.com/investors/2015/

0lddog

This was announced last year .:)

See http://www.boards.ie/vbulletin/showthread.php?t=2057340321 ( post 12 )

If Ryanair had 20/20 vision for oil futures I've no doubt that they would flog off the airline:eek: and go into the futures game :P

christy c

Hedging at a higher price wasn't a mistake, it was risk management- it provided certainty over future fuel prices.

Many homeowners pay house insurance, if they don't claim it doesn't mean that paying their premium was a financial mistake

coylemj

0lddog wrote: »

This was announced last year .:)

See http://www.boards.ie/vbulletin/showthread.php?t=2057340321 ( post 12 )

When you posted that quote it was already over a year old - Ryanair's 'FY14' refers to their financial year ending in March 2014 and that piece you quoted was from their Q2 results announced in November 2013. Though the document you quoted from is titled 'Q2 2014', that actually refers to the second quarter in their year ending March 2014 so it refers to July-Sept 2013.

Ryanair are hedging all the time - oil and dollars. The difference this time is that they are now admitting that the fuel hedging was done too early and will give their (unhedged) competitors an advantage.

Victor

The dollar thing is important,as the dollar-euro price has shifted a lot. The euro has dropped 20% over the last year: http://www.x-rates.com/graph/ so oil isn't as cheap in euros as one might think.

Crumbs868

coylemj wrote: »

Ryanair are hedging all the time - oil and dollars. The difference this time is that they are now admitting that the fuel hedging was done too early and will give their (unhedged) competitors an advantage.

I wonder are they? I reckon most other airlines jumped on a hedge similar to Ryanair, just happens Ryanair have made their quarterly release a bit sooner than other airlines

windowspotter

Victor wrote: »

The dollar thing is important,as the dollar-euro price has shifted a lot. The euro has dropped 20% over the last year: http://www.x-rates.com/graph/ so oil isn't as cheap in euros as one might think.

Maybe they forward purchased dollars too which would cancel out their losses on fuel? Although assume they just purchase fuel locally in local currency?

coylemj

windowspotter wrote: »

Maybe they forward purchased dollars too which would cancel out their losses on fuel? Although assume they just purchase fuel locally in local currency?

They quote fuel hedging in dollar prices so by the looks of it they take their chances with the dollar for fuel since any FX movement will affect their competitors the same. Double hedging might be a gamble too far - if the Euro went west and the (USD) price of fuel went east they could be in serious trouble.

It looks like they hedge dollars during a time of fleet replacement such as is happening at the moment with a few hundred 737-800s on the order books. They said in the latest quarterly report that they have hedged all of their capital expenditure (capex) to Sept 2017 at $1.35

martinsvi

Victor wrote: »

The dollar thing is important,as the dollar-euro price has shifted a lot. The euro has dropped 20% over the last year: http://www.x-rates.com/graph/ so oil isn't as cheap in euros as one might think.

if you compare euro and usd to other currencies, it's not euro that has dropped, it's the USD that's risen

Victor

The thing is, oil is priced in dollars.