EasyJet became the latest airline to fall victim to the soaring cost of fuel yesterday as it issued a severe profit warning. Shares in Europe's second largest budget carrier fell 9.53%, dragging other airline stocks with it, after it said it would miss full-year profit targets if fuel stayed at the current price.
Ryanair, Europe's largest no-frills carrier, also blamed the escalating cost of oil when it warned on profits last month. However, Ryanair received better news yesterday when Europe's second highest court refused Aer Lingus an interim injunction to force its rival to divest its minority shareholding in Ireland's flag carrier.
EasyJet warned that at current oil prices its fuel costs would rise by £45m in the second half of its financial year, in effect reducing profit growth to zero. Andy Harrison, easyJet chief executive, said the airline industry faced a "challenging" time if oil stayed at more than $100 per barrel.
"It will be a period where the strong will win at the expense of the weak," he said. "EasyJet is a strong airline with a strong balance sheet and new, fuel efficient aircraft." However, Harrison indicated last week that easyJet's cost structure would not able to absorb a prolonged rise in oil prices, after he warned that there was no flexibility to absorb a rise in landing fees at Gatwick airport.
EasyJet said in a statement that: "It is unlikely that such a large and immediate fuel increase could be mitigated in the short term by revenue improvements and cost actions." It has taken some shelter from high fuel costs through hedging, which involved buying its fuel needs at a fixed price over a period of months. It has hedged 40% of its fuel for the rest of the financial year, which ends in September, at between $75 and $80 per barrel. Analysts estimate that it has covered only 10% of its fuel needs after that, leaving the carrier exposed to market prices that are putting airline balance sheets under pressure.
British Airways also issued a profit warning this month, but both airlines are optimistic about customer demand despite fears that the credit crisis will have a serious impact. EasyJet said its load factor, a measure of how many seats its sells per flight, had risen to 84.8% and added that trading for Easter remained "on track".
Meanwhile, the president of the European court of first instance rejected a request from Aer Lingus for an injunction to prevent Ryanair from exercising its voting rights. Ryanair holds 29.4% in Aer Lingus. The judge ruled that Aer Lingus had failed to establish a prima facie case or to show that interim measures were required to avoid serious and irreparable harm, saying the airline's arguments were "largely hypothetical and unsubstantiated".
His ruling, to be followed by a definitive CFI judgment later this year, is the latest stage in a bitter battle between the two Irish carriers dating back to the privatisation of Aer Lingus in 2006. Ryanair launched a takeover bid in October 2006 which the European commission outlawed in November last year as incompatible with EU competition rules. But Brussels refused Aer Lingus's demand that Ryanair sell off its shareholding in its rival on the grounds that the holding did not give it de jure or de facto control. Ryanair has twice tried to force Aer Lingus to hold an extraordinary meeting over its decision to abandon its Shannon-Heathrow route but has been blocked on both occasions.
"There was no justification for the commission's nakedly political decision to prohibit this merger between two Irish airlines which between them account for just 5% of EU air travel."
guardian.co.uk © Guardian Newspapers Limited 2008
