A Hard Winter In Store For Airlines

Love them or hate them, Irish budget airline Ryanair, run a very streamlined business which has meant they have been hugely successful. Earlier this week, they announced they would cutting a number of services from London Stansted by around 14% and as a result, operations at seven airports would cease.

Virtually all airlines ‘hedge’ the fuel purchases. In simple terms this means they agree a price with a supplier for several months supply. This means that fluctuations in the price of oil don’t instantly affect them so in turn, they can keep their air fares stable for a period of time. Not so long ago, a barrel of oil cost around $70 a barrel and many airlines have ‘hedged’ their purchases for this summer at around this figure. However, Ryanair do not hedge their fuel purchases and with oil hitting more than $140 a barrel, they are feeling the squeeze.

That said, there is no talk of Ryanair collapsing and they will survive. However, not all airlines are run as efficiently as Ryanair and eventually, their ‘hedged’ oil deals at around $70 a barrel will run out. After that, they will be paying the going rate so what will happen? The summer is generally a good time for airlines with passenger numbers higher than in the winter but once the sun starts to head south and autumn moves in, I believe some airlines will start to struggle.

Since December last year, we have seen nearly a dozen airlines go bust worldwide, many blaming the rising cost of oil. As their ‘hedged’ deals run out, their fuel costs will rise so it would suggest that more airlines are likely to run into trouble.

A Hard Winter In Store For Airlines