Aer Lingus Profits At Risk From Fuel Prices

February 28, 2011

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Ireland's Aer Lingus could further cut capacity in 2011 if high fuel prices persist, as the airline fears rising costs and higher airport charges will derail the recovery it enjoyed in the past year.

The airline said on Monday it had hedged 62 percent of its fuel needs for 2011 but would need to review certain cost-sensitive routes if the cost of fuel did not come down.

At current fuel prices, its 2011 operating profit would be significantly below its 2010 figure, it said.

The group also warned that it could be constrained in its ability to pass on rising costs via fuel surcharges because its domestic market was so weak, after the country turned to the European Union and International Monetary Fund for a bailout.

"We expect significant challenges in 2011, with trading for the year likely to be impacted by fuel price inflation and increased airport charges in combination with difficult conditions in our home market," chief executive Christoph Mueller said.

"We do not expect that improvements in yield performance and ongoing cost savings can offset these increased costs. If current fuel prices persist, we expect that 2011 operating profit will be significantly below that of 2010."

AHEAD OF FORECASTS

Aer Lingus said it had posted a 2010 operating profit of EUR€57.6 million (USD$79.3 million), a swing in profitability of EUR€139 million and ahead of forecasts, despite bad weather and the volcanic ash cloud which severely disrupted its flights.

The improved performance followed cost cuts and 12 percent increase in average yield per passenger.

Airlines including International Airlines Group, recently formed by the merger of British Airways and Iberia, have warned that ticket prices could rise again as political instability in the Middle East pushes up fuel prices.

Aer Lingus, which said it expected its 2011 fuel bill to be substantially higher than in 2010, posted full-year revenue of EUR€1.22 billion. Operating profit was ahead of average forecasts of EUR€42 million.

Another area of uncertainty for Aer Lingus was over its ownership. The previous Irish government had shielded the airline from rival Ryanair, saying it would only sell its 25 percent in the carrier to a party that can guarantee its independence.

Mueller said he expected the new Irish government, which was voted in at the weekend, to not change anything on that front.

"The Aer Lingus share is currently still undervalued," he said. "The government would certainly be ill-advised to sell at a time when the outcome won't be optimal for taxpayers."

(Reuters)