The US-Iran conflict has come as a brutal shock to Europe’s budget airlines. EasyJet (LON:EZJ) recently revealed a 70% drop in profits, attributed primarily to increasing fuel costs and later bookings. The company reported a pre-tax profit of £85 million between April and June compared to £286 million during the prior year period.
Ryanair (NASDAQ:RYAAY), on the other hand, reported a 34% drop in its pre-tax profits to €593m (£503m) between April and June, with sales remaining flat as the airline was forced to cut fares to stimulate demand. Ryanair (NASDAQ:RYAAY) also anticipates summer fares to be slightly lower compared to last year, mainly due to “consumer hesitancy” surrounding air travel.
The weak quarterly results for both airlines can be read as the latest sign of how the US-Iran conflict is exerting pressure on the companies, with oil prices remaining high and peace talks continuing. The pressure on Europe’s budget airlines could persist if geopolitical tensions continue to support higher oil prices. Investors are closely watching developments in the Middle East because sustained increases in jet fuel prices have historically weighed on airline profitability.
While fuel costs are hurting both airlines, their responses to the crisis could determine which stock emerges stronger when travel demand normalizes.
Bull Case
Between April and June, Ryanair’s (NASDAQ:RYAAY) revenue went up 1% to €4.4 billion between April and June, and the Easter holiday in April helped increase passenger numbers by 6% to 6.1 million. However, fares dropped by 6% as the airline brought fares down to entice flyers concerned about the Iran war.
In contrast, non-fuel costs for EasyJet (LON:EZJ) performed in line with expectations, with Q3 CASK ex fuel rising by 3% year-on-year. This performance was stronger when you remove the previous year credit from buying aircraft back. EasyJet (LON:EZJ) also reported that inflight retail, within ancillary revenue, is continuing to strengthen, with PBT per seat up 14% YoY in the quarter.
For fiscal Q1, Ryanair (NASDAQ:RYAAY) reported after-tax profit of €538 million ($616 million), down 34% from the prior year and short of a forecast of €579 million in a company poll of analysts. The company believes it is too early to map out a profit forecast for the whole year, as that would significantly depend on last-minute bookings over the rest of the summer.
However, Ryanair (NASDAQ:RYAAY) stated that it is better positioned than most rivals because 80% of its fuel requirements to the end of March 2027 are hedged at $67 per barrel. It also stepped in to hedge 15% of its fuel needs for the coming year at $85 per barrel during the recent interim ceasefire. This fuel hedging allows Ryanair (NASDAQ:RYAAY) to lock in fuel prices in advance, shielding itself against sudden price increases. Its only exposure comes from the remaining unhedged portion. Ryanair’s (NASDAQ:RYAAY) extensive fuel hedging strategy thus provides greater protection against near-term fuel price volatility.
