Ladies and gentlemen, thank you for standing by. I am Gail, your Chorus Call operator. Welcome, and thank you for joining the Aegean Airlines conference call to present and discuss the full year 2018 financial results. All participants will be in listen only mode, the conference is being recorded. The presentation will be followed by a question and answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. Eftichios Vassilakis, Chairman. Mr. Vassilakis, you may now proceed.
Yes, good afternoon, everybody. Welcome to our annual results call. Once again, beyond me, we have in attendance both Mr. Kouveliotis, our CFO, and Mrs. Dimaraki, our Treasury and Investor Relations Director. Welcome. 2018 was a difficult year because we had two headwinds going against us. One was a significant increase of competitive capacity to our markets, which was between 14%-17%, depending if you consider Athens or the regions or the overall Greek capacity situation. Of course, a significant increase in the price of fuel. Despite those two effects, we followed a modest expansionary policy with 4%-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.
Through those two prudent acts and the maturing of our organization and brand, we did achieve a 5% increase of revenue to EUR 1.19 billion, very close to 14 million passengers, an increase of earnings before tax by 15%, an increase of earnings after tax of 13%. 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. Especially within such adverse environment of increases of competitive capacity and increase of fuel price. Once again, the company stayed true 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 U.S., that 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 Ryanair, Wizz, and Volotea substantially increased their investment in international capacity to Athens and to Greece broadly.
In 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 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 increase of the fuel price, were the elements that put together allowed us to produce such a positive result in, as I mentioned, a very difficult market environment.
For me, it is very important to see that Aegean can affect improvement in outcome even as it takes a much more moderate approach to growth, especially in the years leading into the fleet change, the fleet renewal, which require not only investment, 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, can bring a successful outcome. We are starting this year very much, let's say, strengthened by the consistency of our performance the last two years. We're happy to see also looking forward into 2019, 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, it's actually a little bit down, and if you take Athens, it's a little bit up. The overall investment of the total competitors to Athens International, to our country, is actually zero 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 two 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 new aircraft that will start arriving late 2019 or early 2020 into our company. Our organization is still very much focused on the preparation of doing that correctly, redefining our product, 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 the scholarship programs for new pilots, we are continuing full speed with the development of our plans to build a new facility in the airport, which will house expanded maintenance capabilities, new training school, and simulator facility for our people, and also the chance for the different departments of our company to finally be unified in one area, saving lots of time for our different departments. It's been a year where a lot of groundwork has been done to prepare for the future and to be able to achieve also an improvement of results 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 Aegean's results have allowed us very recently to proceed very successfully to the issuance of a EUR 200 million seven-year bond here in the Greek market, securing an additional EUR 200 million for the company. EUR 200 million that will allow us to be much more effective in our negotiation with the ultimate financing partners of the aircraft or for our aircraft by reducing significantly our reliance to them in the predelivery payment phase for the jets. This is again, a very consistent step in the performance of Aegean, building the performance of Aegean for the future. We have become only the second company to offer a seven-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 the next four or five years again. 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 and 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 costs in the future, and for taking the first steps to improve our financing cost prospects by getting the independence that the EUR 200 million bonds allows us against predeliveries and our ability to openly negotiate with financiers going forward. A very good year despite the headwinds.
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. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press star and two. Please use your handset when asking your question for better quality. Anyone who has a question may press star and one at this time. One moment for the first question, please. As a reminder, if you would like to ask a question, please press star and one on your telephone. The first question is from the line of Kumar Achal with HSBC. Please go ahead.
Yeah, hi. First of all, congratulations on the good set of numbers. Just wanted to understand, 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 now, and the macro picture is improving, and yet the domestic market, I can see the traffic in the fourth quarter, domestic traffic was down year-over-year. So how should I look at or expect the domestic market in 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 regards to impact to Aegean is that Aegean is a company that flies to England essentially only from Athens. So we fly to two or three destinations, three 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 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 partial pushing back of bookings, because we only connect Athens to three U.K. destinations, and 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% VAT that we've had for the last 2.5 Years, up from 8% before the crisis and 13% up till 2016. That puts too much distance between what we collect and what the customers pay, all together with airport charges as well. The domestic market has been a source of Are you still there?
Yeah, I'm here.
Okay. Sorry. The domestic market has been a source of very little of our profitability in the last few years. We don't see that changing in the near future. As a matter of fact, what we see is that the economics of the domestic market are so difficult at this stage that people like Ryanair have decided to leave the domestic market. 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 Volotea, that has decided to fly some of the domestic routes from 2017 and mostly from 2018. Not very much positive expectation in the short term of the domestic market. We're achieving the results that you see with very few exceptions, loss-making domestic routes.
Perfect. Just want to understand a few more things. One, of course, in terms of the cost pressure, as you said, the airport cost and everything. The costs are rising, especially recently, Frankfurt, oh, I'm so sorry, Fraport management said that they have increased the airport charges on the three airports by about 42%. I understand that airport charges are increasing on the other side, maintenance costs. I mean, of course, we've been discussing in the past that with the new fleet, your maintenance cost will decline as you enter the new agreement and all. At the moment, maintenance costs remains high. Overall, in terms of cost pressure, how do you see for yourself in 2019? Secondly, I want to understand about the market competitiveness. Previously, you said that international market remains competitive, and that remains the story at the moment.
In the domestic market, Ryanair is cutting, in the international market, you see a lot of pressure, a lot of competition pressure. How do you see market competitiveness at the moment in terms of international market, and how that could impact the overall yield? 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 2017- 2018. 2018 saw a 14%-17% increase to competitive capacity to Greece. What is now in the systems for 2019 for Greece overall is less than 1% increase from 2018. 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%-17% ratio of increase last year. That's a big, big Delta of reduction in the increase. Practically, it's stable. If you break it down, you will see that there is a 5% increase of competitive capacity to Aegean in Athens, and there is a 4%-5% reduction of capacity to the regions.
The average international increase this year, much, much lower than the year before. Also the case for the summer, that the 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. If you look at our winter competition, let's say November 2018 to November 2017, the average probably would be in certain markets, 20%, 25%, 30% higher. The average for the whole market would be around 12%-15% higher, whereas in the summer, from May and on, practically the overall capacity in the domestic market by competition is the same.
The process of entering competitors for now seems to be completed 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. 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. This is very important because I think that this comes as a reaction to the competition placing too much capacity last year to Greece. What happened is there are very, very few companies that got back the number of, in terms of passengers, the Delta they put in terms of capacity. Aegean did.
Aegean, as a matter of fact, got a load factor increase of 1% despite what was going on. Other companies did not. The average is not investing with the same vigor to our market. 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. About the cost, please?
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 airports that we fly to in Greece. If there are increases, they will be on the passenger charges from one or two 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. They're allowed to charge EUR 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. For this year, for 2019, I don't expect any significant Greek airport charge increases.
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 radical increase in the price of the U.S. dollar.
Right. Perfect. Thank you. I have got a few more questions. I will give opportunity to others. I will come back in the queue. Thanks.
The next question is from the line of Stamatios Draziotis with Eurobank Equities. Please go ahead. Mr. Draziotis has taken his question, withdrawn his question. We will continue with our next questioner. Please hold. The next question, it is a follow-up question from Mr. Kumar Achal with HSBC. Please go ahead.
Thank you so much. I am sorry for taking so much of time.
You seem to be more interested than others. No problem. No worry.
No, thank you so much for your time, I'm really sorry for taking so much of time from you. No. Just want to understand about the aircraft financing. I mean, historically, you've been saying that you will sort of continue to follow the model which you've been following, more aircraft on leases and then less on balance sheet. Has that changed, or how should we look at in terms of aircraft financing going forward? Secondly, I wanted to understand about the dividend payments. This year you paid EUR 0.60. I mean, now going forward, should we expect the sort of similar sort of dividend payment, or would that come down due to your commitments towards aircraft pre-delivery payments and all those sort of things? These two things I want to understand, please.
Yeah. Okay. I think dividend policy obviously depends on results, roughly, the payout ratio, we are trying to maintain pretty much constant, we don't think that the Delta in the dividend policy, assuming similar profitability going forward, is going to be significantly affected by our investment program. The answer is, we believe that there is no reason to change the payout policy so long as our profitability remains at the level that it is or, of course, increases. The payouts around about 60% 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, going to aircraft financing, we have indicated that we will change our model of the past, incorporating roughly 25%-30%, we have said, of aircraft that we will aim to acquire ownership of.
That means that in a fleet, which is now 60 aircraft, as you know, we have only four that are effectively owned. If we expect that fleet to become, for instance, 70 aircraft four years from now, we should expect that four years from now, that 25% or 30% of that 70 aircraft fleet will be owned. We identifying this as an important change of policy for us. We have seen that it can produce significantly lower costs. 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 taking another action with one of these aircraft if we need to, rather than discontinuing a long-term lease, which is the alternative.
Our expectation is that if we, for instance, have an overall fleet of circa 70 aircraft, let's say three, four years from now. Let's 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 25-30 aircraft to be the result of sale leasebacks, and another 15-20 aircraft to be the result of direct leases from orders of the lessors. 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 are a 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 leverage and they take advantage of to provide you with higher lease rates. In this scenario that I have proposed to you, where around about 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 EUR 12 million and EUR 15 million. We're talking about cash flow wise to require to commit between 2022 and 2025, essentially an amount that will be the multiplication of 20 x 12 or 20 x1 5, depending on the loan to value that you need to secure.
In the meantime, as you know, we have to procure for predelivery payments, which is the main reason that we have secured the bond which we issued, which covers, I would say at least 65%, possibly higher of the needs that we will need to have covered for predelivery payments. This is a short version of my answer for financing the aircraft in terms of direction and of potential cash requirements.
Perfect. Thank you so much. The last question I wanted to understand, if you can give us any guidance on the capacity growth as well as the CapEx for 2019, please.
Yes. Let's start from the easy part. Predelivery payments for the existing orders are negligible this year. They stand at only EUR 13 million. From EUR 48 million, sorry, EUR 48 million paid last year for predelivery payments in the first part of the order when we signed the signing part, we fall to less than a 1/3 of that. In that sense, predelivery payments are much lower. Unless there is another transaction that takes place, our CapEx is going to be low this year. 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's tax. Because of our increase of profitability, significant increase of profitability 2016 to 2017. Essentially, we paid another EUR 16 million extra last year, which we will not need to pay in 2019.
Our cash flow for 2019 will be improved due to, A, lower PDP payments by about EUR 30 million, and B, lower tax payout advance to the Greek state by about EUR 15 million. Capacity. Yes, I'm sorry. I missed the last one. Capacity, we expect to be about 5% up in terms of seats and between 5% and 6% in terms of ASKs. You will see the bulk of this additional capacity taking place in Q2 relative to last year. 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, 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.
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The next question is from the line of Draziotis Stamatios with Eurobank Equities. Please go ahead.
Hi there from my side as well. Apologies, I got cut off before. Just two very quick questions, if I may, please. Firstly, just following up on the capacity question. Your international scheduled revenues per passenger seem to have been kind of flat-ish in 2018, excluding ancillary revenues, that is. Just wondering, against the background of the more tame capacity growth which you describe as far as the international market is concerned, should we actually hope for some growth on a unit basis, please, on a per passenger basis, let's say, for international revenues? 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 seat 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 fares, which did not fall despite the increase of the capacity of the competition. It gives you some hope that, as you said, with much lower increase of capacity of competition in 2019, this may come to a positive outcome in fares. 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 in fares.
I would hope that we will be able to get, as an objective, a retention again of revenue per passenger, 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 yield downward by increasing capacity faster in the second quarter as opposed to waiting more for the third quarter. I would say that the improvement should come from increased utilization and hopefully increased load factors 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 believe I need to have a utilization and load factor more than fare.
Finally, in terms of, what was the other question? Ancillary revenues.
Ancillary, yes.
There are no new initiatives that are expected for 2019 that will affect the summer period. We have some thoughts for the winter about changing some things in the structure of our fares, but this has not been finalized yet, so I cannot give information on something we haven't decided to 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. 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 better loyalty, hopefully the chance as we get more customer information, to be able to use that information with the consent always of the customer, under the new rules, to target not only retaining the customer but also selling more ancillary services to them. The quick answer, is there something that has changed for the summer of 2019? No, there is nothing that is different relative to the summer of 2018, 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 Con Zouzoulas with AXIA Ventures. Please go ahead.
Yeah, good afternoon. From my side, I'd like to ask about the underlying demand for the Greek market that you're seeing, if you could elaborate on potentially some bookings, although too early in the year, but the trends that you currently see. Also if you could discuss the available hedges, both on effects 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. It is the demand for Athens and through Athens for the islands that determines the bulk of the Aegean 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 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. 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.
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 Crete or Rhodes, perhaps we could be feeling a decline in bookings, we don't see that because our operations out of there are a small part of the whole, because also while there is potentially a small decrease in the demand to these islands, as I explained earlier on, the capacity of airlines 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 of less or second tier or third 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. In a nutshell, I don't see anything with regards to the demand towards Aegean 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. As you say, of course, two months 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 tourism 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 Athens 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.
Can you discuss the levels?
The levels are around about 119 in the U.S. dollar and around about $650, $660 in FOB Med in the jet oil.
Thank you very much. One last question. Mostly on the domestic market, we saw that in the last couple of months of the previous year as well as in the beginning of this year, some very strong increases in terms of number of flights. 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 the likes of SKY express that we discussed earlier, or where did this increase stem from? Thank you.
If you're talking about increases, first of all, to be clear, in the first 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. Aegean is actually positive in the first three 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.
As a result, yes, there is a big increase 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 counts, even though we are actually flying for the first three months less flights than the year before.
Thank you.
Once again, to register for a question, please press star and one on your telephone. As a final reminder, to register for a question, please press star and one on your telephone. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Vassilakis 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. Very happy that we are progressing well with our fleet program and our investment on the skill development of our people. Also very proud of the fact that we have managed to produce this result in a very big capacity increase on the environment on the competition in 2018. Looking forward to a rather less, as I said, slower increase of capacity from the competition in 2019, which hopefully should produce a good mix for us, assuming demand conditions stay stable. 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. 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. You may disconnect your telephone. Thank you for calling, have a pleasant evening.