MOL mistake, our loss!
The Sunday Times - Business
The Sunday Times June 11, 2006
And finally . . . Oil spike teaches O'Leary a hard lesson in hedging
IT wasn’t supposed to be like this. When Michael O’Leary, the Ryanair boss, decided a few years ago to expand the fleet with hundreds of new Boeings, the assumption was the airline could grow profits in line with passenger numbers. But it hasn’t turned out that way. Though Ryanair carried 26% more people in the year to March 2006, profits advanced by only 12%.
The soaring cost of jet fuel is mostly to blame. If the price had remained static last year, Ryanair’s profits would have come in at about €400m instead of the €306m it posted. Ryanair’s fuel charge rose 76% year-on-year as O’Leary and shareholders paid the price for not hedging.
For many years, Ryanair’s bottom line had benefited from insuring against oil price increases. But in November 2003, when the oil price took off, Ryanair stopped its forward hedging policy. In June 2004, when it looked like the problems in the Middle East were abating, O’Leary was confident oil prices would return to 2003 levels. “It would be unwise to lock in at the current high forward rates,” he said. “Our view is prices will fall this winter or next year and only then will we hedge, in order to benefit from such reductions.”
By June 2005, the grim reality of rising oil prices had softened his cough and he locked in at $49 a barrel, though only from October 2005 to March 2006. Once again, he was hoping against hope that the price momentum would swing his way. Last Easter Ryanair was again unhedged and the price of a barrel of oil was more than $60 and rising. So O’Leary took the plunge again, hedging at $70 a barrel, but only until October.
O’Leary told shareholders last week: “We will continue to look for opportunities to hedge again, but only if suitable pricing opportunities present themselves.”
Someone should buy O’Leary a copy of Peak Oil so he will be fully apprised of what the world looks like without cheap fuel.