Small airlines face a brutal reckoning as oil prices surge, according to the CEO of Europe's biggest budget carrier

  • Rising oil prices could lead some smaller airlines to collapse, Ryanair CEO Michael O'Leary says.
  • "Spot prices close to $80 a barrel are going to lead to a significant shakeout in the industry as early as this winter," he said.
  • O'Leary spoke after Ryanair reported a 10% profit increase, but warned on future profits.
  • Fuel is one of the biggest costs for airlines, so when oil prices rise, they tend to face difficulties.

The rising price of oil is likely to bring about the demise of numerous low cost airlines with tight profit margins, Michael O'Leary, the chief executive of Irish budget airline Ryanair, said.

Speaking to Bloomberg TV after his airline issued a profit warning for the first time in five years, O'Leary warned that a significant "shake out" is coming in the aviation sector as a result of oil's huge surge over the past year or so.

9 best airlines in America
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9 best airlines in America

9. Hawaiian Airlines

Previous rank: 8

Why it's here: Hawaiian finished last on the TPG list. The Honolulu-based airline's premium ticket prices and Hawaii-centric route network fell victim to TPG new metrics which increased focus on airfare and network size.

8. JetBlue

Previous rank: 4

Why it's here: JetBlue suffered the most significant drop in this year's rankings. The New York-based airline struggled with on-time arrivals, baggage and change fees as well as customer satisfaction. JetBlue's position as a boutique carrier hurts it rankings with respect to the size of its route network as well as the lavishness of its frequent flyer program.

7. Spirit Airlines

Previous rank: 10

Why it's here: Spirit jumped three spots in the rankings due to its improvement in areas such as the number of lost baggage while also benefiting from the missteps of its rivals and the merger of Alaska and Virgin America.


6. American

Previous rank: 5

Why it's here: American Airlines didn't make many moves apart from a one spot from after the Virgin/Alaska merger. The airline struggled with on-time arrivals, fees, lost baggage, and customer satisfaction.


5. Frontier Airlines

Previous rank: 9

Why it's here: Frontier Airlines made a surprising jump up the rankings. The ultra-low-cost carrier benefitted from its route expansion and its improvement in baggage handling.

4. United Airlines

Previous rank: 2

Why it's here: United Airlines rocky 2017 caused it to fall two spots, but not for the reasons you'd expect. United saw marked improvement in operational effectiveness with the number customer complaints down 17% while also decreasing the number of people involuntarily bumped from flights. However, the airline couldn't keep up with its rivals in areas such as airfare and the quality of its airport lounges.

3. Delta Air Lines

Previous rank: 7

Why it's here: Delta made big strides in airfare, the involuntary bumps, and its frequent flyer program while maintaining its high rankings in on-time performance, lost baggage, and the size of its route network.

2. Southwest Airlines

Previous rank: 6

Why it's here: Southwest improved four spots over the past year thanks to lower airfare and the expansion of its sizable route network. The airline's stellar customer satisfaction score and its free checked baggage policy also helped.

1. Alaska Airlines

Previous rank: 1

Why it's here: Alaska Airlines maintained its top spot by scoring in the top three in several key criteria including airfare, on-time arrivals, customer satisfaction, baggage handling, and its frequent flyer program.


"A lot depends on what happens with oil. We're well hedged for the next 12 months out to March 2019," O'Leary said.

"Spot prices close to $80 a barrel are going to lead to a significant shakeout in the industry as early as this winter," he added.

"Some of those loss-making airlines who couldn’t make money when oil was at $40 a barrel certainly can’t survive this winter with oil at $80 a barrel." O'Leary did not specify any particular airlines he thinks are at risk.

Oil passed above the $80 per barrel mark last week, as a continuing squeeze by the OPEC nations lessens global supply. Saudi Arabia, the de facto head of OPEC is keen to increase oil prices as it prepares for the IPO of Saudi Aramco, the kingdom's state oil company. For Aramco, the higher the oil price, the more money it can raise from its IPO.

O'Leary made the comments as his airline reported a 10% rise in profits, but warned that a combination of rising wages for staff, aggressive competition to have the cheapest fares, and rising oil prices, could dent the company's profitability going forward.

"After a strong 2018, with profits +10%, the worse outlook is being pinned on rising staff costs, now that it is recognising unions, and falling air fares amid fierce price competition, both likely to eat into 2019 profits," Artjom Hatsaturjants, an analyst with Accendo Markets wrote in an email Monday.

"With falling fares, control of costs is paramount. It may sound like great news that 90% of 2019 fuel needs are hedged at $58/barrel, but higher oil prices are still adding €400M to the bill."

"And this hedge does nothing to prevent the other newer cost pressure (higher pay for pilots and cabin crew), which is projected to add another €200M and other ex-fuel costs +6%," he concluded.

Airlines hedge their fuel costs, locking in prices far ahead of time to try and mitigate the possibility for rising oil prices in future.

Back in April the CEO of American Airlines warned passengers to expect the rise in oil prices to lead to higher fares, with the possibility of less profitable routes being cut altogether.

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