Feb. 27 (Bloomberg) -- EasyJet Plc, Europe's second-biggest low-cost airline, is under pressure from rising oil costs and is already buying contracts for jet fuel at ``a much higher'' price for next year, Chief Executive Officer Andy Harrison said.

``If oil prices remain at the current level, it's going to put enormous pressure on all airlines,'' Harrison said in an interview yesterday. ``We are hedging now for next year, but it's at a much higher price.''

Fuel is EasyJet's single biggest cost and oil has traded at more than $100 a barrel during five of the last seven days on the New York Mercantile Exchange. The airline is targeting 20 percent growth in pretax profit in the fiscal year through Sept. 30 and is 40 percent hedged at about $735 a metric ton of jet fuel this summer, compared with an average of $688 last year.

``The company is clearly working hard on its non-fuel costs,'' Harrison said yesterday at the carrier's base at London Luton airport. ``When oil goes up, you don't suddenly come up with a whole load of new opportunities to cut costs.''

The airline's strategy is to be 50 percent hedged, meaning the carrier buys contracts that guarantee a fuel price, on a rolling 12-month basis, Harrison said. The approach is better than trying to guess the direction of oil, the CEO said.

``Our aim is not to take a view on the market,'' according to Harrison, who says the airline will buy about 1.3 million metric tons of jet fuel this year. ``Hedging is merely to smooth the impact of market changes.''

Stock Declines

EasyJet fell 12.5 pence, or 2.8 percent, to 442.5 pence today in London, its biggest drop in 20 days. It was the worst performer on the Bloomberg Airlines Index today. The company is valued at 1.86 billion pounds ($3.7 billion).

The stock has declined 33 percent in the last 12 months, compared with a 26 percent drop in the European airlines index and a 40 percent plunge for Ryanair Holdings Plc, Europe's biggest low-cost carrier.

Dublin-based Ryanair said last month that higher fuel prices may cause profit in the next fiscal year, when the airline is largely unhedged, to fall by as much as 50 percent. EasyJet has not given profit guidance for the next fiscal year.

``Most published estimates for airlines don't have oil at $95 to $100 a barrel -- the outcome would probably be materially worse for many,'' said Chris Avery, an analyst at JPMorgan in London with an ``overweight'' rating on EasyJet.

Every $10 increase in the price of a barrel of oil adds as much as 60 million pounds ($119 million) to the airline's costs, Harrison said. Expensive oil might allow EasyJet to make an ``opportunistic'' acquisition, similar to its purchase of GB Airways Ltd., completed in January, according to the CEO.

`Tougher Period'

``It's quite clear that with higher oil prices and a weaker consumer economy that it is going to be a much tougher period for all airlines and I think the sort of Darwinian rules will apply,'' he said. ``The weak will have to restructure, merge, shrink or disappear.''

The ``bulk'' of profit growth will come from increases in capacity and ``some margin enhancement,'' through cutting costs or raising fares, Harrison said. EasyJet aims to expand seating by about 15 percent a year.

``Either he believes that yields will be higher next year to offset the rising cost of fuel or he doesn't believe yields will rise, in which case profits may decline,'' said Joe Gill, an analyst at Goodbody Stockbrokers in Dublin who recommends buying EasyJet shares.

EasyJet's first-quarter profit advanced 14 percent. Yields, or revenue per seat, should rise at least 3 percent this month and Easter bookings are ``encouraging,'' the carrier said Feb. 19.

To contact the reporter on this story: Tracy Alloway in London at talloway@bloomberg.net

Last Updated: February 27, 2008 12:31 EST