Ladies and gentlemen, thank you for standing by. I am Gaili, your Chorus Call operator. Welcome and thank you for joining Daigia Airlines conference call. To present and discuss the full year 2018 financial results. All participants will be in listen only mode and the conference is being recorded.
The presentation will be followed At this time, I would like to turn the conference over to Mr. Espicius Vasilakis' Chairman. Mr. Vasilakis, you may now proceed.
Yes. Good afternoon, everybody. Welcome to our annual results call. Once again, beyond me, we have an attendance both Mr. Puagiotis, our CFO, Mrs.
Maraki, our treasury and, Investor Relations director. So welcome. 2018 was a difficult year because we had 2 headwinds going against us. 1 was a significant increase of competitive capacity to our market, which was between 14% 17% depending if you consider, Athens or the regions. Or the overall grid capacity situation.
And of course, a significant increase in the price of fuel. Despite those 2 effects, we followed a modest expansionary policy with 4% to 5% higher ASKs than the year before and only 1% of flying refocusing our flying where it makes more sense for our profitability and for our network effects and through those 2 prudent act, and the maturing of our organization and brand. We did achieve a 5% increase of revenue to 1,190,000,000, very close to 14,000,000 passengers, an increase of earnings before tax by 15%, an increase of earnings after tax of 13%. So we certainly consider this was a very successful year, to deliver a second significant increase of earnings after a very substantial increase of earnings from 2016 to 2017. And as especially within such a, at this environment of increases of competitive capacity and increase of fuel price.
Once again, the company stayed through to its strategy of emphasizing the quality of its product and trying to gain international acceptance through that. Once again, it was a very big year in terms of recognition for the company, and its products by different organizations, both in Europe and the United States. Help us, convince the customer base indeed that our product is maturing and improving as we go along. Beyond that, it was also a year where we once again focused in our network, in Athens, trying to make the best of the network synergies and the connectivity flows that allow us to compete effectively within a significantly higher capacity from the competition and particularly a year where both Reiner Whiz and Volotia substantially increased their investment in international capacity to Athens and to Greece broadly. And also 2018, we introduced some additional ancillary, revenue opportunities or charges, which helped us, again, make sure that we can collect a little more from our passengers, but offer them also choices as to how exactly to define their product within the aircraft or before the flight.
These actions taken together, the network further network rationalization and investment and focus around Athens, the ancillary efforts and the effort around quality, which is persistent together with a very, effective fuel hedging policy, which allowed us to mitigate partially to take away a third of the actual effect of the effect of the increase of the fuel price where the elements that put together allowed us to produce such a positive result. And as I mentioned, a very difficult market environment. For me, it is very important to see that a GM can affect improvement in outcome, even as it takes a much more moderate approach to growth, especially in the years leading into the fleet's, change, the fleet renewal, which require not only investments but more than the actual financial investment, a very big focus in the organization about how to prepare. About the introduction and the contracting of the new aircraft, not only about the choice of aircraft between Airbus and Boeing, also about the choice of the engines between Pratt and CFM and most importantly about the contracting around the protection of the cost escalation of the engines that drives maintenance costs in the future, which, as you know, has been one of the issues that we've had to deal with in the past and one which has increased our costs to this day.
As a result, we're happy to see that a moderate capacity increase of ours, only 1% more flying within a very adverse environment and bring a successful outcome. And we are starting this year very much let's say, strengthened by the consistency of our performance the last 2 years. And we're happy to see also looking forward into 20 19, despite the fact that we expect a lower increase of tourism demand, a significantly different increase of capacity by the competitors to our market, which is basically aggregating Athens and the regions pretty much stable. If you take the regions actually a little bit down and if you take Athens, it's a little bit up. But the overall investment of the total competitors to Athens International to our country is actually 0 this year with whatever increase there is coming only to Athens.
That means that we have defended our, let's call it, turf of land well. We have performed better than the average of our competitors, even in international, even though a lot of these companies are significantly larger than us and that we're starting this year encouraged by the results of the last 2 years and facing a significantly lower capacity increase from the competition than we did the year before and the year before that. Naturally, last year was the year that we made, the big commitment on, aircraft or new aircraft, aircraft that will start arriving late 2019 or early 2020 into our company. Our organization is still very much focused in the preparation of doing that correctly, redefining our products, our in flight service, but also very much, as I said earlier on, the contracting, under the aircraft, to secure the costs going forward, particularly in maintenance not only ownership. At the same time, 2018 was a year of significant investment in the development of our people We have started already these scholarship programs for new pilots.
And we are continuing full speed with the development of our plan to build a new facility in the airport with full house, expanded maintenance capabilities new training school, and simulator facility for our people. And also the chance for the different level, the different departments of our company to finally be unified in one area, saving lots of time for our, for our different departments. So it's been a year where a lot of ground work has been done to prepare for the future and to be able to achieve also an improvement of result during such a year, is very positive for us. Beyond that, what I need to say is that, the stability of Greece and the stability and evolution of AGM's results have allowed us very recently to proceed very successfully to the issuance of a 200,000,000 7 year bond, here in the Greek market, securing an additional 200,000,000 for the company. $200,000,000 that will allow us to be much more effective in our negotiation with the ultimate financing partners of the aircraft or core aircraft with by reducing significantly our reliance to them in the pre delivery, phase, pre delivery payment phase, for the Jets.
So this is again a very, a very consistent step in the performance of the GM, building the performance of the GM for the future. And we are we have become only the 2nd company to offer a 7 year instrument, which is the appropriate length, and we think we did it also at a reasonably good time for the Greek market. Building also as a first, listed bond, beginning to build a track record that could be helpful for our future in our company if we choose to, issue similar instruments in, in, the next 4 or 5 years again. So all in all, a successful year from the point of view of the response of customers, to us, in international recognition about our service, in our financial results, despite the headwinds of capacity in fuel, And in the long term directions for the company, whether it is for the selection of the aircraft for the securing of the contracts for the managing the maintenance cost in the future and for taking the first steps to improve our finance our financing cost prospects by, getting the independence that the 200,000,000 bonds allows us again, free deliveries and our ability to openly negotiate the financiers going forward.
So a very good year, despite the headwinds. And that's the opening I'd like to give you before accepting your questions. Which hopefully will be interesting for all of us to answer. Thank you very much.
Ladies and gentlemen, at this time we will begin the question and answer session. Questions. The first question is from the line of Kumar Agal with HSBC. Please go ahead.
Yes, hi. First of all, congratulations on the good set of numbers. Just wanted to understand, about first of all, about the changing environment in Europe and the uncertainties due to the Brexit, how do you see that impacting, you in 2019? Secondly, I also wanted to understand about, the domestic market. Obviously, I can understand that overall Greece has been improving.
I mean, the macro picture is improving and yet the the domestic market, I can see the the the traffic in the fourth quarter, domestic traffic was was down year on year. So how how should I how should I look at or expect the domestic market into her 2019?
Thank you for your questions. Well, I was recently in England for a couple of days and I tried to understand what's going to happen with Brexit. I think my information is not any better than anybody else's. What I can say with regard to impact to AGN is that AGN is a company that flies to England, essentially only from Athens. So we fly to 2 or 3 destinations, 3 destinations from Athens, London, of course, being the overwhelming majority of our traffic.
We have not felt a significant delta up till now other than a certain, tendency to delay bookings a little bit from the English side and wait until the last few weeks before the flights. That is the only difference we have felt. That has not impacted up till now load factors. Just, as I said, a little bit of the booking profile, which is not strange for us because when Greece was also in some kind of uncertainty people used to make, delay taking decisions of travel. But in the case of England, of course, up till now, we haven't had an effect to the spending power of the British.
It's only the, certitude with which people look at the future. So, other than some a partial pushing back of bookings, because we only connect Athens to, 3 UK destinations in London is the most important one. We haven't felt any significant impact, to date. For the domestic market, the domestic market you very correctly said is not developing positively, it's growing a little bit every year, but it's mostly growing because of stimulation from competition and from capacity. So the rates have tended to be lower.
The revenues from the domestic market have tended to be lower in the last few years. This is accentuated by 24% VIP that we've had for the last, two and a half years. Up from 8% before the crisis and 13% up till 2016. And it puts too much distance between what we call and what the customers pay altogether with airport charges as well. So the domestic market has been a source of Are you still there?
Yes, I'm here. I'm here.
I'm here. Okay. Sorry. Sorry. So the domestic market has been a source of very little of our profitability in the last few years.
And we don't see that changing in the near future. As a matter of fact, what we see is that the that the the the economics of the domestic market are so difficult that at this stage, that, people like Ryanair have decided to leave the domestic market. So the competition that we have now, is basically from, a couple of smaller Greek carriers, which have expanded in the last few years, despite the weaknesses of the domestic market, Sky Express being the most important of them. And Volatao that has decided to fly some of the domestic routes from last from 2017 and mostly from 2018. So not very much positive expectations in the short term of the domestic market.
We are achieving the results that you see, with largely with very few exceptions, loss making domestic routes.
Perfect. Just want to understand a few more things. 1, of course, in terms of the cost pressure, as you said, the the airport cost and everything, you know, so the costs are rising, especially recently Frankfurt or it's, I'm sorry, Fraport management said that, they have increased the airport charges, on the 3 airports by about 42% And then so so I understand that airport charges are increasing on the other side maintenance costs. I mean, of course, we've been discussing in this past in the past that, with the new fleet, your maintenance cost will decline as as you enter the new agreement and all, but at the moment, maintenance costs are are remains high. So overall, in terms of cost pressure, how do you see, for yourself in 2019?
Secondly, on the I want to understand about the market competitiveness. Previously, you said that international market remains competitive and and that remains the story at the moment. So, in the domestic market, when it's cutting, yes, but in the international market, you see a lot of pressure, a lot of competition pressure, So how do you see market competitiveness at the moment in terms of international market and how that could impact the overall yield. So those are two things I want to understand. If you could please help.
I don't think you understood my comment on the international market, correctly. What I said about the international market to Greece was that there was a tremendous increase of capacity 17 to 18. So 18. So 14% to 17% increase to competitive capacity degrees. Yes.
What is now in the systems for 2019 for Greece overall is less than 1% increased from 2018. So we have a if you take the aggregate of international capacity to all Greek airports, we see only a 1% increase this year relative to last year compared to a 14% to 17% ratio of increase last year. So that's a big, big delta of reduction in the increase practically stable. And if you break it down, you will see that there is a 5% increase of competitive capacity to a GM in Athens. And there is a 4% to 5% reduction of capacity to the regions.
So the average international increase this year, much, much lower than the year before. Also domestic capacity increases of competitors this summer relative to last summer, much, much smaller Why? Because last year, competitors were gradually entering different markets around Greece throughout 2018, So if you look at our winter, com, competition, let's say November 18 to November 17, the average probably would be in certain markets, 20%, 25%, 30% higher. The average for the whole market would be around 12% to 15% higher, whereas in the summer from May by competition is the same. So the process of entering competitors for now seems to be completed around around May, meaning that from May and on, we will go to a capacity environment in the domestic market, which is roughly constant to what it was last year.
And so for this for these two reasons, we actually expect from May and on to have a significant improvement in our relative, competitive environment on a run trend of capacity increase from the competition, both to international and to domestic. And this is, very important because I think that this comes as a reaction to the competition placing too much capacity last year to Greece. So what happened is there are very, very few companies that got back the number of in terms of passengers, the delta they put in, in terms of capacity. A GM did a GM as a matter of fact, got a load factor increase of 1% despite what was going on. Other companies did not.
Therefore, the average is not, investing with the same vigor to our market. So I hope I've clarified that the competitive capacity situation growth this year is much milder, particularly away from Athens, but also in Athens relative to last year.
Sure. And about the cost, please?
The cost side, the cost side we don't expect on the average anything significant to be added to unit costs of the airline. This year, if we take the aggregate of airport that we fly to increase. If there are increases, there will be on the passenger charges from 1 or 2 of the Fraport airports that reach what is known as let's say the improved state they need to have in terms of quality for the passengers. So they're allowed to charge €4 more per passenger, but this is on the ticket. This is not a landing parking or other charge that the airline would have to pay.
So for this year, for 2019, I don't expect any significant Greek airport charge increases.
And the maintenance, please?
The maintenance is not expected to increase on a unitary basis this year as well. The only thing that could possibly challenge that is a a radical increase in the price of the
but I'll give opportunity to others. I'll come back in the queue then.
The next question is from the line of Rajo Tomas with Eurobank Equities. Please go ahead. Mister Gonziotis has taking his question with John's question. We will continue with our next question or hold. Please hold.
The next question is a follow-up question from Mr. Kumar Achal with HSBC. Please go ahead.
Oh, thank you so much. And I'm sorry for taking so much of time. Just, have You
seem to be more interested than others. No problem.
No. Thank you so much for your time. And I'm really sorry for taking so much of time from you. No. So just wanna understand about about the aircraft financing.
I mean, historically, you've been saying that, you will sort of continue to, to follow the model which you're being followed So more aircraft in on on on leases and then less on a balance sheet. So, is that is that changed or has that changed, or or how house of how do we how should we look at in terms of aircraft financing going forward? And secondly, I wanted to understand about the dividend payments of this area you paid 60¢. I mean, so now going forward, I mean, do you expect do we do should we expect the sort of similar sort of dividend payment, or would that be sort of would that come down due to your, commitments towards, aircraft previously repayments and all those sort of things? So so these two things I want to understand, please.
Yes. Okay. I think dividend policy obviously depends on results, but roughly the payout issue, we are ability going forward is going to be significantly affected by our investment program. So, the answer is, We believe that there is no reason to change the payout policy so long as our profitability remains at the level of what it is or of course increases. And the payouts around about 60 percent, around about 60 percent of earnings after tax should be expected for the next couple of years, assuming always of course that we have the same profitability or higher profitability levels.
Now, the, the, going to aircraft financing, we have indicated that we will change our model of the past, incorporating roughly 25% to 30%. We have said of aircraft that we will aim to acquire ownership of. So that means that in a fleet, which is now 60 aircraft. As you know, we have only 4 that are effectively owned. And if we expect that fleet to become, for instance, 70 aircraft 4 years from now, then we should expect that 4 years from now, that 25% or 30% of that 70 aircraft fleet will be owned.
And we identifying this as an important change of policy for us We have seen that it can produce significantly lower costs and also Frankly, it can also provide us the flexibility if we are investing in a very liquid aircraft type to change the size of our company much more easily by selling or I'm taking another action with one of these aircraft. If we need to rather than discontinuing a long term lease, which is the alternative. So our expectation is that if we, for instance, have an overall fleet of circa 70 aircraft, let's say, 3, 4 years, 4 years from now. Let say that this is an assumption. I'm not saying the fleet will be at that level, but if it were at that level, we would expect something like, 20 aircraft to be owned around 30 aircraft to be 25 to 30 aircraft to be the result of sale leasebacks.
And another 15 to 20 aircraft to be the result of direct leases from orders of the lessors. Now what is clear is that a sale leaseback is a much cheaper alternative for AGM because it employs the terms and the slots that we have secured. And therefore, it becomes a cheaper alternative than direct leases. On the other hand, direct leases our way to accelerate the entry of the aircraft into our fleet because lessors that have ordered aircraft years before AGM also tend to have earlier slots. Which, however, they, they leverage, and they, take advantage of to, to provide you with higher lease rates.
So in this, scenario that I have proposed to you, where roundabout 20 aircraft, are owned, The company from its cash flows would have to, provide for the equity portion of these aircraft, which typically is expected to be between $12,000,000 $15,000,000. So we're talking about cash flow wise to be to require to commit between 20222025 essentially an amount that will be the multiplication of 20 times 12 or 20 times to 15 depending depending on the loan to value that you need to secure. In the meantime, as you know, we have to procure for pre delivery payments, which is the main reason that we have secured the bonds which we issued, which covers, I would say at least 65% possibly higher of the needs that we will need to have covered for the delivery payments. So this is a short version of my answer for finance, for financing the aircraft in terms of direction and of, potential cash requirements.
Perfect. Thank you so much. And the last question I wanted to understand if you can, give us any guidance on the capacity growth as well as the as a CapEx for 2019, please?
Yes. Let's start from the easy part. Pre delivery payments pre delivery payments for the existing orders, are negligible this year. They stand at only $13,000,000. So, from 48,000,000 sorry, 1,000,000 paid last year for, pre delivery payments in the first part of the order when we signed, the signing part We fall to less than a third of that.
So in that sense, free delivery payments are much lower. Unless there is another transaction that takes place our CapEx, is going to be low this year. And also what is going to be less, adverse for the company is the cash outflow for income taxes. Because in Greece, you prepay also for, next year tax. And because of our increase of profitability, significant increase of availability, 16 to 17.
Essentially, we paid another 16,000,000 extra last year, which we will not need to, to pay in 20 19. So, our cash flow for 2019 will be improved due to, A, lower PDP payments by about, $30,000,000. And be lower, tax payout advanced to the Greek state by about 1,000,000. Capacity. Yes, I'm sorry.
I missed the last one. Capacity, we expect it to be about 5% up in terms of seats and between 5% 6% in terms of ASKs. You will see the bulk of this additional capacity taking place in Q2 relative to last year. So the increase of capacity will be in Q1, but more so in Q2, less so in Q3 and somewhat higher in Q4. Basically, we are using the same number of aircraft in 2019 that we had in 2018, but we are flying the aircraft more in Q2 So the biggest part of the delta is going to be Q2 and in the winter months.
Perfect. Thank you so much for your time. Thank you so much. Welcome.
The next question is from the line of Frasios Desjardins with Eurobank Equities. Please go ahead.
From my side as well. Apologies. I got got off for just two very quick questions, if I may please. Firstly, just wondering, you're following up on the capacity question. Your international schedules revenues per passenger seem to have been kind of flattish in 2018, excluding ancillary revenue that is.
Just wondering against the background of a more tame capacity, growth, which you described, as far as the international market, is concerned. Should we actually hope for some growth on a on a unit basis, please, on a per passenger base, let's say, for international revenues? And second question, ancillary, we saw those increasing somewhat in 2018. If you could just elaborate a bit on the type of ancillary initiatives that are being considered for this year and the uplift you hope to achieve this year or maybe in the coming years, please. Thank you.
Okay. First of all, yes, I think that the fact that the revenue per available 6 kilometer actually did increase by a little bit in 2018, despite the substantial increase of capacity last year. Which was a combination of basically load factor and, let's call it strength in international affairs, which did not fall, despite the increase of the, of the, of the capacity of the competition, it gives you some hope that, as you said, with much lower increase in capacity of competition in 2019. This may come to a positive accrual environment fares, but we have been trained to expect that usually when we're able to compete within an environment of lower capacity delta, we get the improvement more in load factors rather than fares. So, I would hope that we will be able to get, as an objective a retention again of revenue per passenger, a further increase a further increase in load factor, an increase of utilization in the aircraft because of our policy to fly more in the second quarter of the year, in other words, to start the summer a little bit earlier, which, however, would tend to pressure yields downward by increasing capacity faster in the second quarter as opposed to waiting more for the third quarter.
So I would say that the improvement should come from increased utilization and hopefully increased load factor. Rather than from the increase of fares. We would be happy again to have an environment where fares simply did not fall. Now hope is a word that one can use safely, but belief, I need to have a utilization and load factor more than fair. Finally, in terms of there are no new initiatives that are expected for 2019 that will affect the summer the summer period.
We have some thoughts for the winter about changing some things in the structure of our affairs, but this has not been finalized yet. So I cannot, I cannot give information on something we haven't decided do yet. Do we think there is room from ancillary revenues? Yes, substantial room This has to do with also our commercial, our e commerce, let's say sophistication What I did not mention in my initial, presentation at the beginning of the call that 2018 was also a very successful year In terms of additional shift to direct sources of sales, our direct sales increased at three times the pace of our overall sales. So our direct penetration continues to increase.
This is a trend that we see further strengthening also in the beginning of this year. This is important because it gives us more direct access to the customer, hopefully, hopefully better loyalty, hopefully the chance as we get more customer information to be able to use that information with the consent always or the customer under the new rules to target not only retaining the customer, but also selling more ancillary services to them. But the quick answer Is there something that has changed for the summer of 'nineteen? No. There is nothing that is different relative to the summer of 'eighteen.
Other than the penetration of e commerce, which in itself allows us to sell more ancillaries. The more direct we have, the more ancillaries typically we sell.
That's very helpful. Thank you so much.
The next question is from the line of Coles Arias with AXA Ventures Please go ahead.
Yes, good afternoon. From my side, I'd like to ask about the underlying demand for the Greek market that you're seeing. And if you could elaborate on some, potentially some bookings although too early in the year, but the trends that you currently see. And also if you could discuss the available hedges, both on FX and fuel and the levels. Thank you.
Yes. To be clear, first of all, we have to remember that the majority of our activity is centered around Athens. So, it is the demand for Athens and through Athens for the islands that determines the bulk of the GM relevant demand. That demand continues to be growing relative to the year before. The capacity that we have placed to the market for the summer months appear appears to bring bookings at least at the pace of each seat that we put to the market of the month, the year before, perhaps even one click better And this is not a factor of demand.
This is a factor of relative supply. As I explained to you, earlier on, because the delta in competitive supply is not as intense as it was the year before. So we don't see anything today particularly to the bulk of our demand which comes to Athens, which is worrisome relative to the year before. If we had a significantly higher part of our operation to the regions, particularly to Crite or roads, perhaps we could be feeling a decline in bookings, but we don't see that because our operations out of there are a small part of the whole. And because also while there is potentially a small decrease in the demand to these islands, As I explained earlier on, the capacity of airline flying to these islands is also somewhat reduced relative to the year before.
This is also because there have been, as you may have read, several airline failures in, of less to 2nd tier or 3rd tier airlines around Europe, but some of these airlines, were active also towards the Greek islands in the summer. And therefore, the stronger players, whether it is the main LCCs or whether it is more resilient local people like ourselves seem to be collecting a small benefit out of that. So in the nutshell, I don't see anything with regards to the demand, towards the GM that is worrisome at the moment. We are doing at least as well in terms of pre bookings as we were doing last year at this time and our additional capacity seems to be absorbed well. But as you say, of course, 2 months from now, from now, we will know that in a much more effective way.
That does not mean that different regions of Greece cannot have a decline in tourist arrivals. To be clear, we are not representative of the average let's say, airline or hotel operator or whatever operator around Greece because as I said, we are much more at and centric. Now, regards to the hedging coverage, we have for 2019, circa 60% of our U. S. Dollar needs hedged and circa 75% of our fuel needs hedged.
Tom? The levels are around about 1.19 in the in the in the, dollar and, around about 6.50 660, in, fob med in the, in the jet oil.
You very much. And one last question, where most of the domestic market we showed in the last couple of months, with the previous year, as well as in the beginning of this year, some very strong increases in terms of number of lights. If my if I'm reading the data correctly, we're showing double digit increase in number of flights and, in passengers. Is this exclusively attributed to, to the likes of, a Sky Express that we discussed earlier or how did this turn, where did this increase stem from? Thank you.
If you're talking about increases, first of all, To be clear, in the 1st few months of the year, this is not relevant. In the 1st few months of the year, this year, there is an increase in the domestic markets. We have an increase of traffic and other people have an increase of traffic the increase of traffic of other people is higher as percentage than ours, obviously, because they are newer in the market. But AGM is actually positive in the 1st 3 months of the year in terms of domestic traffic. Even though it's actually flying a few times less, but it's flying with bigger planes whereas other people, our average competitor is flying with a significantly smaller aircraft.
And as a result, yes, there is a big increase in the flight number, in the number of flights for the competition. And for the market, but there is a significantly smaller increase in the percentage of total customers. And we are still increasing our domestic passenger accounts, even though we are actually flying for the 1st 3 months, less flights than the year before.
Thank you.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Guthilakis for any closing comments. Thank you.
Thank you all for attending the conference. Very happy that we have a second year of increased profitability after 2017 also in 2018. I'm very happy that we are progressing well with our fleet program and our investment on the skill development of our people. And also very proud of the fact that we have managed to produce this result in a very big capacity increase of the environment on the competition in 2018. Looking forward to a rather less As I said, a slower increase of capacity from a competition in 2019, which hopefully should produce a good mix for us, assuming demand conditions, stay stable.
And this will allow us also to progress in the effort that we have in the next couple of years to reduce our costs which I expect will have significant effect as of 2021 and on. Thank you for attending the call. And we'll be glad to follow-up with you in the next few months when we discuss our next results. Thank you very much.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling and have a pleasant evening.