The group that owns British Airways and Iberia, IAG, has announced that the fall in Sterling would shave off nearly £400 million from their final year profits. Despite the group’s Chief Executive acknowledging good performance in a ‘challenging environment’, today’s announcement brings the need for a solid hedging strategy to counteract the significant impact currency exchange rates have on the business’s bottom line sharply back into focus.
David Johnson, Director at Halo Financial, comments, “UK businesses trading overseas are all feeling the force of yo-yoing currency markets, in light of political and economic uncertainty worldwide. Those with exposure to the US Dollar and Euro are the worst affected, so IAG is feeling the pressure from all sides.”
“The airline industry, where most trade is conducted in US Dollars, is finding that profits are taking a significant hit, at the mercy of both fluctuating exchange rates and the ever-changing price of fuel – again, purchased in US Dollars. This highlights yet again the dramatic effects that volatile exchange rates and economic uncertainty have on a business in real terms. It boldly demonstrates the importance of careful and creative currency strategies and the advantages of strategic forward planning.”
In October, Easyjet and Ryanair both announced that they were revising profit forecasts in light of the falling Pound, which at that time had fallen 18% since the EU Referendum.
Easyjet suggested that, this financial year, weak Sterling would cost the company £90 million – doubling the estimate of this currency cost from their last forecast in July 2017, immediately post-referendum. This represents an almost 30% drop in annual profit for the airline from the nearly £700 million profit posted for 2015. That was the first drop in profits on an annual basis since the last financial crisis in 2009. Then, in January 2017, this figure was revised upwards to £105 million, despite rising passenger numbers, in turn causing investor uncertainty and dropping the company’s share price by almost 9%. Again, Easyjet’s CEO noted the ‘tough pricing and operating environment.’
Ryanair also reduced their profit forecasts in October as a result of weakening Sterling, saying that the fall in Sterling strength would cut fare revenues by 13%-15%, revising their net profit figure down 5% to £1.17bn-£1.2bn.
While IAG saw a decrease of 5.4% in revenues per passenger, they were able to offset some of these costs when fuel prices fell.
Easyjet seem to be experiencing the opposite business challenges to IAG: they have seen record passenger numbers, but at a lower ticket cost. This forms part of the ‘price wars’ with their low-cost airline competitors, such as Ryanair.
Ryanair’s chief, Michael O’Leary, commented in October that “better cost control and stronger growth would help to offset the impact”, admitting that the success of Ryanair depended heavily on the fortunes of the Pound and hopes that the UK currency would not continue to fall.
David Johnson reacted with the comment, “It isn’t always necessary to be a victim of currency movements. Thoughtful hedging strategies can offer a form of insurance against such risks without adding complexity.”
While it’s undoubtedly a challenging environment, companies can take steps to reduce currency risk and protect against heavy losses.