This is a good time to be in the airline industry. Oil’s trading at rock bottom prices, while fears of another recession haven’t spoiled the taste for travel. But not everyone’s benefiting equally from cheap fuel.
Ryanair’s revenues rose 17% to €1.1bn (£825m) over the three months to December 31st, helped by boss Michael O'Leary's cuddlier strategy and pursuit of business passengers. At the same time, its fuel costs fell slightly, helping it make a €49m profit, up from a €35m loss in the same period last year. It also revised its profit guidance upwards (again) for the full year ending in March to €840m-850m, from €810m-830m.
That might sound positive, but think what might have been had Ryanair not decided to hedge 90% of its oil purchases at $95 a barrel for this year and $92 a barrel next year. Much like the tragically sensible figure who decided to stop buying lottery tickets only for their numbers to come up the next week, Ryanair will be looking ruefully at the boost others are getting from $50 oil.
Indeed, the airline said, investors should ‘temper expectations’ about its profits next year, particularly because some competitors ‘whose weak balance sheets rendered them unable to hedge forward’ have lucked out on the price war between sheikhs and frackers. That in turn ‘may lead to downward pressure on airfares in 2015/16’. Is that the scent of sour grapes?
Despite what are otherwise strong results from Ryanair – compare its €840m-850m profit guidance to the €523m it made last year and the €567m it made the year before – it seems investors have taken the airline at its word about expectations. Ryanair shares dropped 4.5% to €9.94 in the Irish Stock Exchange on this morning's announcement.
This is an especially significant sign of market disapproval, given Ryanair’s simultaneous announcement of a €520m special dividend to be paid out on February 27th, and a €400m share buyback to take place between February 12th and August 14th. Purchasing its own shares usually sends a company’s stock racing, both because of increased demand and because fewer shares means higher earnings per share.
Ryanair’s decision to return cash to shareholders is telling, given that it also boasted of having ‘one of the strongest’ balance sheets in the industry, with a €447m net cash balance. Anyone would think it was expecting a pay out from its 29% share of Aer Lingus, which rival IAG is looking to buy.
‘Since Ryanair has received no formal approach,’ it said, ‘we will not engage in any speculation about this proposal’, other than to confirm it would ‘carefully consider any such offer’. With its coffers depleted by the share buyback , it seems likely Ryanair will consider IAG’s offer very carefully indeed.