Soaring oil price could drive ‘weaker airlines’ out of business

The soaring oil price will drive “weaker” rivals out of business, easyJet claimed this morning, despite seeing its own losses treble over the last six months.

With oil hitting a new record of $122 a barrel yesterday, and Goldman Sachs forecasting it could hit $200 a barrel this year, easyJet predicted carnage in the airline industry.

“If the oil price stays high we will see a number of weaker airlines disappear over the next 12 to 24 months,” chief executive Andrew Harrison predicted.

The budget airline reported a 15% jump in passenger numbers for the six months to March 31, with revenue growing 24% to £892.2m. But its pre-tax losses spiralled to £57.5m, triple the loss it made a year ago. The loss, which was expected following the firm’s profit warning in March, was primarily caused by dearer jet fuel, which costs 80% more than a year ago.

Every $10 increase in the cost of a barrel of oil cuts around £2.5m off easyJet’s profits. Harrison claims the company’s relatively young fleet – its 157 planes are three years old on average – give it an edge.

“A quarter of Europe’s short-haul aircraft are at least 15 years old, so they burn 20% more fuel than our planes,” he said.

Rival airline Aer Lingus yesterday blamed fuel costs for an increase in its baggage charges. From tomorrow, it will cost £12 to check in a bag at the airport.

Shares in easyJet rose 1.3% this morning, gaining 4p to 301.5p. Yesterday it slumped by 8% following Goldman’s prediction and the latest record price, which analysts attributed to the weakening dollar and supply problems in Nigeria and Iraq.

With the summer holiday season approaching, easyJet is still confident of making a “very substantial” profit for the full year. Its forward bookings are slightly up on last year, and Harrison said it was not seeing any decline in demand despite the economic uncertainty.

But Andrew Fitchie, analyst at Collins Stewart, advised shareholders to sell. He said a material economic slowdown represented “a further risk to the airlines and low cost carriers in particular”.

Oil was slightly off yesterday’s record price this morning, trading at $121.55 a barrel in London. Harrison declined to speculate about how the price might move.

“Oil is highly unpredictable, and there are a wide range of predictions from the so-called experts,” he said.

The president of Indonesia, Susilo Bambang Yudhoyono, added to market jitters yesterday by predicting his company could quit Opec because it was no longer a net exporter of oil.

“Our wells are running dry,” he said.

Graeme Wearden
Wednesday May 7 2008

Source: Guardian

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