Tuesday, 31 July 2012

Interview: Howard Millar, Ryanair CFO

Ryanair defends hedges despite higher Q1 fuel bill

Ryanair will continue to hedge fuel costs with the same swap instruments that prompted heavy mark-to-market losses for the industry in 2008/09, despite taking an apparent hit on its fuel risk management strategy in the first quarter, says chief financial officer Howard Millar.

The airline's average fuel price increased by 21% year-on-year during the first quarter, rising from $820 per metric tonne (pmt) last year to $998pmt in Q1 2012/13.

This came despite a 6% reduction in average jet fuel prices across all benchmarks over the corresponding period, according to global energy information provider Platts. Average global prices between April and June stood at $994pmt, data from Platts shows, compared with $1,057pmt during the same months last year.

Rising fuel expenditure in a declining jet fuel environment typically indicates that a company's hedges have become less price competitive.

Asked whether the $998pmt figure amounted to a hedging loss, Millar says: "Some years it's a plus, and some years a minus. You generally get it wrong with hedging. When the price is rising very quickly, your weighted average price moves up slowly, and when prices are falling very quickly you're on the other side of that curve. Your weighted average is falling slowly.

"But over a period of time it should balance out. Whether it's plus or minus, really at the end of the day it doesn't make any difference to us."

Ryanair hedges solely with swaps, Millar says, despite the reputation such instruments acquired following the global financial crisis. Ryanair was among numerous carriers to incur heavy losses on their hedging bets in 2008/09, after locking in prices through swaps only to see spot prices plummet.

Many airlines have since diversified their hedging strategies with collars and options, which offer greater flexibility across a range of price environments. "We never use them," Millar insists, however. "We do the boring, straightforward, plain vanilla swap contract."

The recent downturn in underlying oil prices has already seen several carriers write down the value of their Q1 fuel hedging contracts. Air France recorded paper hedging losses of €372 million this month, while Delta Air Lines put its mark-to-market hedging losses at $561 million.

Fuel costs accounted for 47% of Ryanair's cost base during the first quarter. That reflects a €117 million ($143 million) increase in fuel expenditure to €544 million - 27% higher than in Q1 2011/12 - which factors in greater volume consumption arising from a 4% increase in hours flown. The airline is 90% hedged for full-year 2012/13 at "approximately $1,000pmt".

First quarter profits fell 29% year-on-year to $98.8 million against a backdrop of higher fuel expenditure, the airline said in its Q1 results presentation today.

Ryanair downplays appeal of Aer Lingus long-haul fleet

Ryanair is unlikely to use Aer Lingus's fleet of seven widebody aircraft as a springboard into the low-cost, long-haul market should its third takeover bid for the Irish flag carrier succeed, says chief financial officer Howard Millar.

"Aer Lingus is a niche player," the CFO insisted at Ryanair's first quarter results briefing. "It flies mainly Irish Americans back and forward. I wouldn't see it as a vehicle for that."

Describing entry into the long-haul market as merely an "aspirational" goal for the low-cost carrier, Millar says that high fuel costs and aircraft valuations make any such development a distant prospect.

"Long-haul is just a little bit of the Holy Grail. I've looked at it quite a few times, and I really can't make it work.

"The building blocks on a long-haul cost base are much different to a short-haul cost base," he explains. "Even if you can turn your aircraft around in 25 minutes it doesn't make any difference on a long-haul flight, because a long-haul flight is seven hours, so you can't get any more utilisation of your plane."

Rather than using Dublin as a transatlantic gateway for any such venture, Millar conjectures that mainland European hubs such as Frankfurt might be more appealing.

The advent of composite technology in the Boeing 787 as well as more efficient engines on the Airbus A350 would go some way to making low-cost, long-haul a reality, he adds. But even with reduced fuel burn, Millar highlights branding challenges associated with incorporating high-yielding premium cabins.

"Somebody will eventually crack it," he insists. "But at the moment it's not for us. We don't want to contaminate our existing business, which runs very, very successfully."

Turning his attention to Ryanair's present-day European operations, the CFO says its new bases at Warsaw Modlin and Budapest Ferenc Liszt airports have encountered tough pricing landscapes in spite of high load factors.

"It's very competitive in eastern Europe. We're competing with the likes of Wizz Air, LOT and others ... Load factor is good but unfortunately [we have] lower yields."

Millar reiterates his criticism of Spanish airports operator AENA, which has doubled airport departure taxes at Madrid Barajas and Barcelona El Prat airports. Ryanair has responded by reducing capacity increases at the two gateways - on top of its plans to ground 80 aircraft during the winter season.

Referring to the seasonal reduction in capacity, he says: "With very high oil prices, in the winter it doesn't make commercial sense to run some of these routes ... The more you're flying, the more you lose."