Tight Rope Walk for Europe’s EasyJet as Oil Prices Rally
EasyJet Plc is the second largest low cost airline of Europe which has to do a tight rope walk in the face of rising fuel prices in the market. According to Andy Harrison, the Chief Executive officer of EasyJet the low cost air carrier is under pressure which has prompted the company to purchase contracts for jet fuel at great prices for the next year. The CEO said that if the fuel prices maintain their current price levels it will cause a great stress on almost all airlines during an interview on Wednesday. He further said that the company at present is hedging for the next year but the price it has to pay is much higher.
The single largest cost for EasyJet is fuel and oil which has been over $100 a barrel over the five of last seven days at the Mercantile Exchange in New York. EasyJet is planning a 20% increase in its pretax profit for the financial year from September 30 and it is 40 percent hedged at about $735 a metric ton of jet fuel when evaluated against its last year’s average of $688. The CEO, Harrison while speaking at the company’s base at London Luton airport said that EasyJet is striving hard on its non fuel expenditure, he further said that it is difficult to immediately come up with new ways of cost cutting when the fuel prices rise. The company plans a 50% hedge which means that the airline will purchase contracts which promise a constant fuel price on a regular twelve month basis, the CEO further explained. This strategy of the company according to the CEO is safer and better than guessing about the direction the oil prices will take to.
The CEO also added that the aim of the company is not to have an outlook of the market and said that the company will be purchasing 1.3 million metric tons of jet fuel for the current year. The strategy of hedging is in place to ensure that there is a cushioning against the volatility of the oil prices in the market. In the stock market the shares of EasyJet also recorded a drop as they declined by 2.8% or by 12.5 pence to 442.5% and this was the share’s greatest decline in 20 days.
The shares of EasyJet were the most unsuccessful shares on the Bloomberg Airlines Index for the day. The net worth of EasyJet is about 1.86 billion pounds or $3.7 billion. In the last 12 months the stocks dropped by 33% as against the 26% decline on the European airlines index. The largest low cost airline of Europe, Ryanair Holdings Plc jumped by 49% at the market. An analyst with Ryanair Holdings Plc Chris Avery said that many of the published forecasts for the airlines do not state a barrel of oil at $95 to $100 and the fallout can be financially bad for many carriers. EasyJet CEO Harrison also pointed out that each ten dollar rise for the oil barrel results in 60 million pounds or $119 million in the operating costs of the airlines.
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