Ryanair Holdings: Airline - or Energy Bear Fund?

| About: Ryanair Holdings (RYAAY)

Ryanair (NASDAQ:RYAAY) was down about 25% yesterday after it warned that it would miss expectations for Q1 and would probably post a loss for 2008.  The reason?  They deliberately refused to hedge their exposure to oil prices…

Ryanair said last year that it would not hedge against the rising cost of oil last year, unless fuel prices fell below $100 a barrel.

…oh, until now, that is:

However on Monday, O’Leary said the airline was now hedged 90.0% for September, at $129 a barrel, and 80.0% hedged for the quarter ending in December. The airline is unhedged for the final quarter, ending in March 2009. “We continue to believe that oil prices remain subject to irrational exuberance,” added O’Leary. 

Ryanair’s fuel bill doubled in the last quarter, and now represents half of their total operating costs.

What the heck?  Is Ryanair an airline or an energy trading desk?  See, those two types of organizations have (or should have) very different relationships to the price of oil.  One organization attempts to profit from changes in oil prices; the other tries to profit by filling planes with people, and otherwise tries to reduce its exposure to those price changes.  By not hedging their exposure to oil prices, Ryanair seem to have confused themselves with Enron or Amaranth.  And wouldn’t you know it, they’re not any better at speculating on energy than those firms were.

Even worse, they’re now compounding the problem by substantially hedging their exposure for the next two quarters, which is precisely the period in which many analysts are looking for prices to moderate.  So, having already borne the brunt of the price runup, they’re now going to lock in prices here and miss out any forthcoming decline.  Keep in mind that their fuel bill recently doubled, and, with the new hedges in place, is likely to stay about that high even if spot crude declines.

Options in this name are way too illiquid to bother with.  But the stock itself is worth a look on the short side: the $25 level has acted as support throughout 2008, and was the launching off point for the impressive run from October 2006 to February 2007, during which the stock doubled.  There should be a lot of support around 25, but if that price doesn’t hold, look out below.

Disclaimer: We once flew from Glasgow to Dublin for £1 on Ryanair.  And for all you know, our skill at making directional stock picks might be worth about that much.