Earnings Call: Q3 2020

Feb 3, 2020

Okay. Good morning, ladies and gentlemen. You're welcome to the Ryanair Q3 results presentation. I'm Michael O'Leary. I'm the Group's CEO, and I'm joined this morning by Neil Soren, our Group CFO. You have seen the strong Q3 numbers we published this morning on the ryanair.com website. We reported a Q3 net profit of €88,000,000 up from a Q3 loss in the prior year. We'll take that as well, and we're going to run straight through the slide presentation, which we'll move to now. So as you will see, Ryanair remains Europe's favorite airline group. We have the lowest costs. We have the lowest fares of any airline operating across Europe. We're number 1 for traffic, 154,000,000 guests, up 8%, number 1 for coverage. Lower growth is driving slightly higher fares both this winter, and we think that trend will continue into the summer of 2020. EU airline failures and sales reorganizations are Accelerating, we've seen that trend over the winter period. Ryanair is proud to be Europe's greenest, keenest airline, and we're about to invest upwards of €20,000,000,000 in the fleet of new Boeing Aircraft, which will significantly increase the manufacturers we carry per flight while reducing fuel consumption. Ryanair is and remains the lowest cost operator in Europe, and we will be the structural winner. This slide is submitted to everybody. It sets out our 82 basis, 241 airports, and I Draw your attention that in summer 2020, we have new routes in Katowice in Poland, Sadar of Croatia, a new country in Armenia, and in total, we'll offer open 111 new routes this summer. We'll continue and commit ourselves to offering Europe's lowest airfares, which is why other airlines, Our competitors can't compete with Ryanair's prices, nor can they compete with our costs. Other airlines claim to have lower costs on some RASM or CASM basis. It's simply not true. If you look and compare us on a unit cost basis, per passenger excluding fuel, we beat everybody. We're significantly cheaper, for example, than Easyjet on airports and handling costs, It's about onethree of their costs. And in aircraft ownership, we're significantly cheaper than Wizz. In total, however, Our unit costs ex fuel are more than 34% lower than our nearest competitor, which enables Ryanair to continue to grow offering lower fares than any other airline and sustaining those load fairs. Neil, the results. Yes. Q3 showed a strong performance. The guests were up 6% to 36,000,000 customers. Revenue per passenger performed strong year, 13% improvement, thanks to strong close in bookings on Christmas and the New Year. We saw a 9% increase in average fare. Our priority boarding and Oceros season continued to drive a strong performance in our ancillary revenues, which were up 21%. Unit costs, despite the fact that we haven't got any MAXs in Our fleet is only up 1% in the quarter. And as Michael already said, we recorded a profit of CHF 88,000,000 in the quarter, which compares with the loss of €66,000,000 in the prior year. Interestingly, our earnings per share is tracking ahead of that, thanks to the buybacks that we've been doing over the past year. In terms of current developments, so clearly the MAX 200s are today, Boeing themselves will say The return to service, they expect the grounded MAX to return to service in June. The certification of the MAX 200 is running at least 2 months beyond that. So frankly, we're too busy in July August. So we've now reduced cut back our summer 2020 schedule, taking out the 10 MAX aircraft we had hoped to receive. And therefore, our growth ratio will be slightly lower, but that should help the underlying airfare proposition this summer. Our cost leadership is being maintained, as Neil has said, despite the fact that we don't have 55 MAX aircraft in this winter fleet. We're still seeing our tremendous unit cost discipline up only 1%. We believe the slower capacity growth by Ryanair and our competitors, and higher fuel will continue to drive consolidation. We've seen that this winter with the failure of Thomas Cook, among Adria, among others. There will be slightly higher Lauda losses due to the price war with Lufthansa subsidiaries in both the German and the Austrian market, we believe they are engaged in below cost selling, but we are the lowest cost operator, so we'll continue to meet and beat them on price. We're continuing to make significant environmental progress, and we're pleased to announce today we've appointed our 1st Director of Sustainability, who will be the focus of our delivery of these ambitious environmental targets. Of the €700,000,000 share buyback, we have about €440,000,000 now complete. Is about €260,000,000 to go. We expect to run that program, I'll say, longer now, completely by the end of July. And as you have seen in early January, we raised our full year guidance from an old range of €800,000,000 to €900,000,000 The new range is now It's from an old range of €800,000,000 to €900,000,000 The new range is now €950,000,000 to €1,050,000,000 The MAX update. So we have 210 aircraft on orders. They will be delayed now until the winter of 2020. And that means slower FY 'twenty one growth. We're reducing it from $162,000,000 to probably about $160,000,000 $56,000,000 over the next 12 months. Most Growth will be delivered by the additional A320s in Lauda. It has led regrettably to some base closures this winter because we've had a constrained capacity with fewer aircrafts. So we've closed bases in Arecipi, in the Canary Islands, Belfast, Hamburg, Las Palmas, Nuremberg, Stockholm's Gapsa and Tenere South. We've frozen our PDP payments to Boeing. We do want to restart those PDP payments, but only once we have certainty on our MAX delivery program. We continue to look through, though, the current noise, and we believe this is a great aircraft. It does carry 4% more Passengers per flight at 16% lower fuel consumption, our senior pilots, our training pilots have been in the MAX simulators. They've been in the NG simulator that we've recreated, and they're very confident that this is a great aircraft. It handles brilliantly and that our customers are going to really like it when we start taking it on board. But the result of this delayed delivery means we're now moving out our target of 200,000,000 guests will be delayed from currently FY 'twenty four to now be FY 'twenty five or FY 'twenty six depending on when we can take the deliveries of all 210 leased aircraft. Consolidations continue. In recent months, we've seen the failure of Ernst Airlines in Italy, Adria in Slovenia, Thomas Cook, the charter It has been the big failure last autumn. TAP is currently for sale, so it's Croatia Air. Air Europa and Condor have been sold. Alitalia, FlyBE and Tarim are now in receipt of state aid. And even in Vienna, where Laudamotion is losing money, we've seen Eurowings Significantly cut back their program. In fact, they're closing their Vienna base. Leva has cut back its program and Easyjet has failed to grow. The latter losses have increased marginally from €80,000,000 to €90,000,000 this winter, average fare, but it's entirely an average fare issue. Fares have been lower than expected and significantly lower than budget. That's because it's engaged in a freight war with Lufthansa subsidiaries in both Germany and Austria who are engaged in below cost selling and both Eurowings and Austrian Airways are losing money themselves. This year, Lada will carry about 6,500,000 guests. We expect that to grow in the next 12 months to about 10,000,000 guests. This summer, the fleet will rise from 23 to 36 aircraft, with most of that growth taking place in Vienna, the main base in Vienna. We will also open a 5th base in Zadar this summer. And as a result of those investments for Longer term, losses will grow from €80,000,000 to about €90,000,000 this year. The management team are now engaged in a line by line detailed cost review and are continuing to roll out cost reduction measures through this winter and moving into next summer. In terms of our environmental proposition, we are We're going to publish our monthly CO2 emissions. We've now appointed Thomas Fowler as the Director of Sustainability. He will be charged with delivering the very ambitious targets that we've set out in our environmental statement. We are already one of Europe's greenest airlines. Passengers switching to Ryanair from high fare legacy European airlines can reduce their emissions by up to 50%. We're not content with that. We have a plan to cut our emissions further by another 10% over the next decade, and much of that will be delivered by the Boeing MAX Aircraft deliveries. We've committed ourselves to being plastic free in 5 years' time. We're ahead of target now. We're up to 60% plastic free, both in head office and on board. We're raising the voluntary carbon offset. This summer from April, it will rise from €1,000,000 to €2,000,000 per flight. It doesn't offset all of our carbon emissions, but it is an indication Those customers who want to offset or make a contribution towards carbon offsetting their price can do so. And critically, we're on the dawn of taking delivery of 210 new Boeing 737 aircraft, which will cut our fuel consumption while carry and cut our noise emissions while carrying 4% more passengers. Ian, do you want to say the guidance? I will, Michael. Thank you. So as guided to the market on the 10th January, We expect approximately in a new range of €500,000,000 to €1,050,000,000 Moving parts in there, you'll see our guests, our traffic increased by 8% to €154,000,000 Revenue per passenger, thanks to the strong performance on ancillaries and a slightly better than expected average fares We'll be up approximately somewhere between 3% 4%. Unit costs ex fuel will be up just 2% and that's with no MAXs in the fleet this year. Our fuel bill at current spot prices will be somewhere in the region about £440,000,000 higher than last year. So a good performance for the year. This, of course, as is always the case, is Very much dependent on closing bookings for the rest of the quarter and the absence of security events. And before anybody asks, We won't be giving any guidance this morning. We'll move it out on the full year in May. Okay. Now we'll open for questions and answers. Revenue per passenger was up 13% in Q3. Why? We had stronger close in bookings over the Christmas and New Year holiday period at higher than expected airfares. Average fares in the Q3 were up 9%. That was supplemented by very strong performance on ancillary revenues, which were up 21%, largely as a result of the success of our priority boarding and assigned seating services. Will the ancillary performance continue in Q4? We expect them to continue to perform well, but they won't be growing as fast as they were in prior quarters. We've now annualized The bag policy that we brought in November 'eighteen that annualized in November, but we would anticipate that we'll continue to grow ahead of traffic growth. We're working now hard with our labs on the likes of personalization, increasing conversion and revenue. How are fares performing in Q4? Bookings at the moment are only about 1% ahead of where they were the same day last year at modestly better than expected airfares. However, we would caution last year's Q4 was the comps were particularly soft, it was a particularly weak period. So we would continue to be cautious. And we don't have any presence of Easter at the back end of March. Is the yield improvement Ryanair specific or an improving environment? It's a combination of the 2. Clearly, the capacity coming out of the market has been helpful. We've seen a number of consolidations and failures. And of course, The MAX deliveries haven't made their way into Europe over the course of the last year into our fleet. We've taken a number of steps ourselves to Reduced underperforming basis and routes over the winter. And we're also seeing the benefit of the new 10 kilograms bag product, the Chegg's 10 kilograms bag, we introduced last year in the scheduled revenue numbers. Pardon? Any new developments from Labs? Lam successfully rolled out the new digital platform in November. We've seen that continue to deliver superior conversion on some of the optional customer services like priority boarding and reserved seating. Lampton now focused on increasing personalization, particularly of the ancillary offers to guests. And car rental became our new Carhartt partner in late 2019, and we believe they will help to grow revenues strongly in the Carhartt sector or segment over the next 3 years. How did the cost perform in Q3? Relatively well. We saw 1% increase in unit costs Ex fuel, the reasons for the increase are staff costs, where pilot pay increased or continuing to annualize. We've also seen a slowdown in resignations and an increase in crewing ratios due to the non delivery of the MAX aircraft. The MAX is also having an adverse impact on our maintenance costs as we were flying over the aircraft for longer, having to ship shop visit them more frequently. On the plus side, all the hard work that our ops and engineering team have done over the past year to improve on time performance, which is now running at over 90% excluding ATC, That's a great improvement in our EU261 compensation, and that's thankfully down to the new handling arrangements in Stansted in Poland and in Spain. And your take number 2, hedging. Yes. As you know, we're 90% hedged in the current year to the end of March 2020 at about $71 per barrel. We took advantage of the recent dip in prices. So we've now can announce that we're 90% hedged for FY 'twenty 1, at a fraction over $60 per barrel. Are you seeing any customer reactions from the environmental focus recently? Yes. Our flights are fully booked 96% load factors, and we're about 1% better booked than we were at this time last year. I think a big element for this is people realizing that they can halve their CO2 emissions by switching from the legacy carriers To Ryanair, we have the lowest CO2 capacity per kilometer of any airline in Europe. And indeed, more of our customers, over 3% sits on that, We are opting for the voluntary carbon offsets with a particularly high percentage of our German customers doing so. You You appointed the Director of Sustainability in December. What will they do? Yes. His primary task, immediate task is going to be improving fuel efficiency and to develop sustain lead our project to develop sustainable aviation fuel supplies into the future. He's also charged on a monthly basis with reporting on our Ambitious emissions and green initiatives that we set out in our 2019 environmental policy document, which has the full support of the Board of Ryanair Holdings Plc. Is there any update on the environmental taxes? Well, the French tax has already come in, in January. The German with APD was an 80% increase, It comes in, in April of this year. I think an opportunity is being missed here to reflect and reward High performing airlines like ourselves with high load factors and young fleets with relatively low fuel burn and instead, exempting Connecting traffic for legacy carriers, which tends to burn more fuel. I think a lot of people list the fact that Ryanair customers are paying 11% of your ticket price in aviation taxes already, which is about £630,000,000 on an annualized basis. So there's a big opportunity here. Aviation accounts for 2% of CO2 in Europe, which compares to about 6% on shipping. But there's a big opportunity here to encourage Airlines like ourselves to invest in new technology like the MAX, which has 16% lower fuel burn rather than exempting Connecting traffic and effectively giving subsidies to legacy carriers. How about the group airlines development? They're developing strongly. This summer, in the summer of 2020, for example, Lauda will grow to 36 aircraft in the fleet. It will open a new base in Zadar. Buzz in Poland will have globally to over 50 aircraft, 7 of which will be in the Polish charter market. The balance will be flying, operating Our sub services for Ryanair at most of our Central and Eastern European bases. And Air Malta is growing Strongly, it is taking over most of the Ryanair bases in Italy, Germany and France and will rise to a fleet of almost 100 aircraft by the summer of 2020. Would you consider M and A? It wouldn't be the first thing on our list. We plan to grow organically over the next few years with 210 Aircraft coming into the fleet and that's what we do well. That said, I think there will be opportunities where there's competition overlap as more airlines Either go out of business or consolidate over the next number of months years. We already have a process in Italy We're Alitalia, up for sale, TAP in Portugal. And recently, we've seen the likes of Airline It's in Italy, we're out of business. So there will be opportunities, but we'll firmly grow organically. Michael, with Eddie Wilson and the other airline CEOs now in situ, what's your day to day focus? Principally my focus in 4 key areas: 1, management development, getting the new airline management teams in place and working well 2, driving cost efficiencies And we're charging up the group with delivering on cost cutting initiatives, the timing and delivery of the MAX aircraft and the Boeing relationship recently back in Chicago where we met the new team in Boeing. And on and fourthly, capital allocation going forward. Where should the aircraft and the capital best be invested? Who can deliver us at the lowest cost lift and the most efficient prices. Yes, Ron, your take on the MAX aircraft? Well, it looks now as if it will be the middle of the year before the MAX returns to service, which Well, sadly, it means we won't see any MAXs in our fleet this summer. We're looking at least September or October before we take a look at the 1st aircraft, which means we're looking at 2% increase in traffic this year, which will be the difference primarily from our Airbus fleet. Boeing will close the 7 37 MAX production line. Will this impact your long term growth? We can delay it. There's 2 issues here. Firstly, when will we we're now running 12 months behind the original delivery schedule. We had hoped to have 55 aircraft in the fleet for the summer of 2020. We'll have none. I think what's likely is that, that will push out that delivery profile with Boeing by at least 12 months. So we would hope to get 55 aircraft in for the summer trading 1 schedule in 'twenty two, 'twenty three and 'twenty four. At best, that means we will have to kind of roll forward our plan to reach 200,000,000 passengers for the year. It was probably going to be delayed at least 12 months, possibly 24. So we'll now move out to either FY 'twenty 5 or FY 'twenty 6. You closed some bases this year due to the MAX delays. Is there a risk of more closures? Look, it can never be ruled out. How quickly can you take MAX deliveries when the aircraft is ungrounded? Well, we can take them reasonably quickly because we're one of the few airlines that has its own Boeing MAX simulators. But the challenge for us, we've never taken more than 8 aircraft in a after the month before. That's really as many aircraft as we would want to take. And so I think our camp would be taking 8 deliveries a month and no more than 50 aircraft in time for the next summer peak. So I think it's reasonable we're working on a plan now, 50 aircraft for summer 'twenty one, 50 for summer 'twenty two and thereafter. How is Telstra Boeing going? They're going well. As I said, we've been to Chicago to meet the new management team. Our focus on theirs is to get the Boeing Max back into service as quickly as possible, hopefully by the end of June this year. Then to certify the MAX 200s, which are the stretched versions that we take delivery of. And we would hope to take the first deliveries of those in September or October of this year. That is more than sufficient time for us to take 50 aircraft for the summer of 2021. We are having discussions then with Boeing both on the pricing of those aircraft and also on Boeing reimbursing Ryanair, our Costs and losses for these delayed deliveries and those discussions continue, but they can't really be finalized until we have a revised delivery schedule. That's real incredible because the aircraft are backflied. Yes. What is the impact of IFRS 16 lease accounting standard on your balance sheet It was very modest in Ryanair, only 6% of our fleet is leased at this point in time. So the impact at the end of the quarter was €230,000,000 Increased our net debt. But our net debt having a take the impact of IFRS 16,000,000 €370,000,000 of share buybacks was just €700,000,000 at the end of the quarter. What is your CapEx guidance for FY 'twenty and FY 'twenty one? It's very difficult to be certain on the CapEx guidance at Until we have a certain or some degree of some confidence or certainty over the MAX delivery program. Clearly, we have postponed all PDP payments because of The delays, clearly, Pilots PD payment will restart once we have a schedule of deliveries, which we hope will start as early as September or October of this year. And then we'll update the market with a at that point in time with an up to date view relative on our CapEx for for the next number of years. Yes, I think that's fair. And we're probably going to be into CapEx over the next 12 to 18 months, but we'll give you more color on that in May. How is the buyback progressing? It's going well. We're about €440,000,000 through the buyback at this point in time. However, As we wait for a firm delivery schedules on the MAX, as we start to focus on the repayment of debt, particularly our first bonds in 2021, We think we'll slow down the buyback program. So this one will run out to the end of July, and then we'll start to focus on debt. We have an opportunity over the next 18 months to pay down about €1,300,000,000 of debt, which will strengthen up the balance sheet and take some of the more expensive Interest off the P and L, about 2% interest rate. So that again will be positive for the numbers coming through. Can you update on FY 'twenty guidance? Yes. We guided on the 10th January, so we expect our profit after tax to be in the new range Now €0.95,000,000 to €1,050,000,000 Based on current trading, we're probably somewhere close to the middle of that range. Traffic will grow by about 8% to 154,000,000 guests. Our fuel bill will be up about 440,000,000 on a full year basis. Unit costs ex fuel will be up just 2% despite the fact that we haven't taken delivery of any MAXs yet. And depending on where close in bookings end up, we think revenue driven by the strong ancillaries will be up somewhere between plus €1,000,000,000 plus 4% on a full year basis. And this, as always, is predicated on no unforeseen events in the market. Can you provide any guidance for FY 'twenty one? No, it's far too early still to be looking at guidance for FY 'twenty one. We're still working on finalizing the budget. We hope to have that done maybe in the next month or 2. But it's very I mean, it's very it's a move at least based on the outcome of the MAX delivery discussions. And I think we would hope to be in a position to update the market on the timing of the full year results in May, but again to be heavily driven by the date on whether we take delivery of the MAX aircraft and how many MAX aircraft we can take over the next financial year to March 2021. Michael Neal, thank you. Thank you. Welcome.