The price of US crude oil fell 8.64% to $99.80 a barrel yesterday – the biggest one day fall since the height of the global financial crisis. Brent crude fell 9.78% to $109.02. The sharp increase in oil price was unsustainable at current levels as the high prices for air and car travel due to fuel price and duties deterred many from traveling and caused the slump in demand for oil thus lowering the price in a general fall in the commodities market yesterday. Although this is a large fall, the price of oil is not expected to fall much more dramatically as it will always be in high demand. Yesterday’s drop is more of a correction in the market to account for the high level of speculation that was occurring in the commodity markets over the past few years. But if nothing else it shows how hedging fuel costs at more than $100 a barrel is a risky play.
High fuel costs were just one of the reasons Aer Lingus cited for its profits warning issued yesterday. The airline also stated that low winter demand and hard-pressed consumers have forced it to plan on further cost-cutting measures to ensure it maintains a profit trajectory.
Aer Lingus posted a first quarter pre-exceptional operating loss of €53.7 million, some 42% worse than it reported in the first three months of 2010. A €2.2 million spend on IT systems during the latest period drove the total operating loss to almost €56 million.
Chief executive Christoph Mueller said the airline still expects to post a pre-exceptional operating profit in 2011, but at a “much lower” level than in 2010, when the figure was €57.6 million. Analysts put the 2011 operating profit at around €17 million.
Unions have reacted badly to the news of further cost cutting measures. IMPACT official Niall Shanahan said that members have been left in the dark amid an “information vacuum” regarding management plans for more cuts. Aer Lingus lost €15 million in lost passenger and ancillary revenues due to recent strike action by the IMPACT union and was forced to spend €7.3 million hiring aircraft and crews during the strike.
First quarter revenue at the airline was 5.6% lower year on year at €217.9 million despite capacity having been cut by 11%. Short-haul revenues were down 3.4% to €132.2 million and long-haul revenue 4.1% lower at €42.3 million.
Aer Lingus says it will be is examining proposals to address the “significant seasonality” inherent in its business model, which may entail grounding of aircraft and crews during winter months and leasing out aircraft during that season.
There is no doubt that we are witnessing the collapse of European-based airline profits due to fuel and remaining overcapacity. When will there be further consolidation in Europe and when will the European Commission begin to support efforts of airlines to merge? We are at this time only able to confirm that something has to start happening or the red ink will lead to failures, there is no Chapter 11 protection in this region after all.