Earnings Call: Q3 2019

Feb 4, 2019

Good morning, ladies and gentlemen. Welcome to the Q3 Ryanair results presentation. I'm Michael O'Leary, Chief Executive of Ryanair, joined again today by Niels Soren, our CFO. We'll take you straight through, as is usual, the On slide presentation, we'll then run through a quick Q and A session. And obviously, we'll be holding a conference call later on this morning where we'll be able to answer any detailed questions we don't cover in our this presentation. So Ryanair remains Europe's lowest cost, lowest fare airline. We are number 1 for traffic. We expect this year to grow to 142,000,000 guests, 9% up on previous year, mainly on the back of lower airfares. We cover more airports and we offer more routes than any on EU Airline. And the key trend at the moment is that EU Airlines are consolidating the number of failures and the airlines up for sale is rising in recent months and it's due to the combination of higher oil prices and lower airfares. We expect to take delivery of 210 MAX aircraft Over the next 5 years, the first five of these aircraft, which bring us more seats, considerably lower fuel consumption will come in April, May June of next year. Unfortunately, the risk of a no deal Brexit or a hard Brexit is rising and we remain concerned about that, but we have steps in place to mitigate those risks. But the key thing to remember at all is in the short term, in the medium and in the long term. In this industry, lowest cost, lowest price wins and that means Ryanair wins. Over the last quarter, average fares have fallen by 6% under €30 per passenger. The key thing, however, is The gap between us and our competitors on costs and ex fuel costs is widening. We are considerably lower than Easyjet on staff costs, Considerably lower than them on airports and handling costs as we are with Wizz. Wizz talk a lot about these bigger, lower, cheaper aircraft. But as they add more of these aircraft, their aircraft and ownership costs rise faster than their traffic growth, and we are considerably cheaper than them on aircraft ownership and maintenance. And overall, Ryanair operates with a €27 ex fuel cost per unit cost, considerably lower than any other European airline and the gap is getting wider. And that is the key to our continuing success and our continuing strong growth in difficult Over the last quarter, we've operated from 84 bases. We now serve 234 airports with over 2,100 routes. And as we've repeatedly said, we're about to take delivery of the first of the MAX aircraft, which will enable us to grow, we believe, to 200,000,000 passengers by 2024. We continue to build very strong market positions in all of the major EU markets, where the number 1 or number 2. Again, whiz keep talking about being number 1 in Central and Eastern Europe. They have a unique geographical definition of what Central Europe Eastern Europe is, but we are number 1 in that market too. Our results, Neil? Michael, thank you. Q3 was a difficult enough quarter. Guests grew strongly, however, up 8% to 33,000,000 customers in the 3 months. Average fare, however, was down 6% to €30 for customer. Our ancillaries, however, performed very strongly, driven by the likes of our priority boarding and allocated seating. And as a result, total revenue per passenger was up 1%. However, when we take the high fuel costs and the 6% increase in unit costs ex fuel, We reported a loss of £20,000,000 in the quarter, which is well down on the previous quarter last year. Michael? Well, John, Quick runs for current developments. We think the industry in Europe is characterized by excess capacity. We have had 2 profit warnings in the last 6 months, But both of those have been driven by lower than expected airfares. There isn't a cost issue here. There isn't a growth issue. Fares have been lower than we had expected into the winter period. And as you know, the Ryanair philosophy is to be low factor active, price passive. But what we have seen in that weaker price environment is an enormous surge of airline failures, Consolidation accelerating airlines up for sale. We've made very good progress in our union discussions over the last 6 months, Most recently with recognition agreements voted on by overwhelming majorities by both the German pilots and the Spanish cabin crew, and that process of negotiation agreement continues. As I said, we're taking delivery of the first five of the MAX game changer aircraft in April, May June next year. In December, we completed the 100% takeover of Laudamotion by buying out the remaining 25% that was held by Niki Laudamotion and his family. Laudamotion is now on a very exciting growth trajectory. We have today announced a new group structure mirrored on that we believe the better features of an IAG Group structure, which will see us over the next number of years develop 4 independent airline subsidiaries, Ryanair DAC being the Irish based airline Laudamotion Ryanair Sun, the growing Polish based airline and Ryanair U. K, which has recently received its AOC. I've agreed to sign a new 5 year contract to become the group CEO of Ryanair Holdings. And by the end of 2019, I will We will appoint a new Chief Executive of Ryanair DAC, the airline, and each of the individual airline CEOs will then report to me under this group structure going forward. We're today also announcing a Board succession plan and we're keeping our FY 'nineteen guidance unchanged, But we remain very cautious about the summer 'nineteen airfares, while some of our competitors have been, we believe, somewhat optimistic in recent at Weeks. Just touch briefly on the consolidation acceleration in the last 6 months. We've seen airline failures. Premera, a 20 aircraft airline based in Stanset and Spain, small planet Azure and Skyworks in Germany, Cello, Cobalt and VLM. A number of larger airlines are also for sale at the moment, Huawei and Iceland, Flybe in the U. K. And Germania, a 30 aircraft airline loss making airline in Germany. We've also seen though some of the bigger airlines announced significant base closures and base cuts this winter. The most dramatic has been Norwegian, which has announced plans to Closed bases, many of which are in a short haul competition with Ryanair in Rome, Fumacino, Las Palmas, Palma, Tenere South, Edinburgh, Belfast. And they've announced recently also that their Dublin base, which is 6 aircraft, will be cut to 1 Aircraft in October this year. We ourselves have announced closures of loss making bases in Bremen, in Eindhoven, and we've also cut capacity, unprofitable capacity in Han and in Niederhein as well. Can we rule out further cuts? No, we can't. If Oil prices keep rising or our fair fares keep falling, we will have to keep trimming capacity or keep switching capacity away from those bases that are unprofitable and reallocating more capacity to those bases that are profitable. We're not alone in this. Wizz have closed base in Poznan in the last 6 months. Lufthansa have announced Enclosure there, Dusseldorf base at Even Easyjet has announced significant cuts in their Porto base in Portugal where they compete head to head with Ryanair. The key trend in all of these decisions is that these airlines cannot compete with Ryanair on price or on cost. And in difficult times, they tend to withdraw. The game changers we believe will be create a new 5 year horizon for operating cost efficiencies and unit cost reductions in 9 Air. We have 220 aircraft on orders. We take 50 deliveries over the next 12 months up to summer 2020. All of those orders have been hedged. The CapEx has been hedged at $1.24 to the euro in the order book. These Aircraft critically offer us 4% more seats, saw a significant revenue upside, a 16% fuel saving, which is key at a time when Oil prices are have in the last 12 months trended up towards $85 a barrel. And from an environmental point of view, they're very friendly, 40% less noise emissions, which will be we think will facilitate more late night flying at curfew restricted airports across Europe. The key thing is that these aircraft and this new fleet will help us to continue to drive unit cost savings. And remember, by summer 2020, The MAX aircraft will account for 10% of our total fleet. Laudamotion, we've now moved to 100% ownership. We have in discussion with Nicky Laud and his family also agreed to step up the growth. There are opportunities at the main base in Vienna. There's also slot opportunities in airports in Dusseldorf and Stuttgart and in Palma, where Laudamotion or Niki Lauda has a long history of serving that German market to Palma. In its 1st year of operation, it's been very difficult because of the late release of seats, very low airfares last summer and very expensive aircraft leases from Lufthansa. Those aircraft have been returned by agreement to Lufthansa this winter. And we are set loud emotion on a rapid growth course that will take us from 4,000,000 passengers and a loss of about 140,000,000 In the 1st 12 months to over 7,500,000 passengers and profitability within the next 2 years. We're very excited about the Laudamotion opportunity. It demonstrates that Ryanair can get involved in small scale M and A, and we can bring our low cost technology, particularly to an airline in a different jurisdiction, but the one that's operating Airbus aircraft as well. To touch briefly on the group structure, We're moving in the next 12 months to replicate the successful IAG Group structure. I will lead that as the Group CEO with a very small team of legal and financial resources at the group level. Ryanair Holdings and the group structure We'll drive capital allocation, aircraft allocations, cost efficiency by encouraging those airlines to compete with each other for resources and also small scale M and A if other opportunities like Laudamotion present themselves. The group will see the emergence of 4 independent airlines, Ryanair DAC being the Irish based airline, Laudamotion, Ryanair Sun in Poland and Ryanair UK, which we've recently secured an AOC for should in the event of a hard Brexit. There will be a CEO and management for each of those individual airlines, but all of the 4 airlines CEOs will report directly to me as the group CEO. We're also pleased today to unveil the Board succession plan that was promised at the we promised at the AGM last year will be unveiled before the September 2019 AGM. I'm pleased to announce that our long serving Chairman, David Bonderman and our Senior Independent Director, Kieran McLaughlin, have agreed to our request to serve 1 more year until summer 2020, but both have expressed the wish that they don't wish to be I'll go forward or be reconsidered for reelection at the September 2020 AGM. At that stage, David will have served 24 years as a Non Executive Director and Kieran, 18 years. In order to manage a smooth transition at Board level, We're happy to announce that Stan McCarthy, the former Chief Executive of Kery Group Plc, joined Joined the Board of Ryanair as a non executive in 2017, has agreed to take up the position of Deputy Chairman from April 2019 this year. And upon David stepping down in the summer of 2020, Stan has agreed to succeed him as Chairman, although Obviously, a legend like David Bondeville will be a hard act to succeed even for someone of Stan's undoubted international experience, skills and expertise. We look forward to working with Stan as he guides the board through this succession plan over the next 18 months. Okay. Just on guidance for the rest of the year, we expect H2 fares to be down 7%. Traffic will continue to grow strongly. We're looking at a 9% increase in traffic of €142,000,000 for the Ryanair Group for the full year FY 'nineteen, ancillaries continue to be strong into the 4th quarter with priority boarding and seats driving that. However, as you will be aware, We've got the IFRS 15 revenue accounting standard unwinding into the last quarter. So that will offset that somewhat. Unit costs are marginally better than Previously indicated back at the half year, primarily due to lower spot fuel prices on our unhedged fuel. And we expect our unit costs ex fuel to be up approximately 6% as previously guided. So as a result of all of that, our profit after tax will be in a range of SEK1 1,000,000,000 To GBP 1,100,000,000 excluding the exceptional year 1 set of losses of GBP 140,000,000 in Laudamotion. This, of course, is subject to the outcome of Brexit around which there is huge uncertainty at the moment on any security developments. We would also, I suppose point out while it's early in the year and we haven't done our budgets, we don't share the optimism of our competitors. We would be somewhat I'm cautious on fares over the coming months and into the summer at this point in time. Michael? Yes. Thanks, Neil. I think just on that final point, I think we To add, we've seen commentary from some low cost competitors who have very few bookings in place for the summer 2019 season, promising Enormous fare growth or enormous increases in average fares. Frankly, with overcapacity in the European market, we don't see that. We don't share that optimism. They have been overoptimistic before. At the moment, as of today's date, we have about 17% of the seats sold through the 6 months from April to September 2019. And the average fare is about 1% down on last year. Now that's not to say The closer in fares will be stronger, but on balance, we think we should be cautious and we do not share the optimism, in some cases, the irrational optimism and expressed by some competitors in recent weeks. Now we'll turn it over to questions and answers. Shane? Q3 revenue per passenger rose just 1% to €1,530,000,000 well behind 8% traffic growth. Why? The key reason for this, despite the fact that we had a large increase in passengers, an 8% increase in the quarter, average fares were down 6% It's just on the €30, so that's the key reason really for the drop. Shield 3 fares fell 6%. Will this trend continue? We think it will. We're guiding that H2 fares will be down 7%. Some of that is accounted for by the fact that there's no Easter in Q4. Easter will appear in Q1 of next year. But as I've said about we have about 17% of the bookings already in the bag for the 6 months to September of 20 in 'eighteen and even including Easter in Q1, average fares at the moment are tracking about 1% behind where they were this year. So We don't expect a similar scale, a 6% or 7% decline in average airfares into next year, but we would still be cautious. We think fares will be flat to slightly downish as long as the current short haul overcapacity in Europe continues. Ancillary rose 26% to €557,000,000 in in 3. Why and what's the outlook for the full year? Well, strong performance as you pointed out there. I would point out priority boarding and Allocated ceilings as the key drivers of the increase in the year to date. I would expect that to continue into the Q4, Although we will see a little bit of an offset from IFRS 15 against that. So year on year ancillaries will be strong. Is Ryanair Room contributing to the ancillary performance yet? It is, but I mean the contribution is small because what's driving the volume growth in Ryanair rooms is that we're giving away most of the commission that we receive to Customers are guests taking up the Ryanair room service. But it is building volume strongly, but not making a major contribution to the net profit line. Why did you close Ryanair Hovlich? It was a very niche product and wasn't really contributing a huge amount to the bottom line. We've got more to do with the resources that we have and we felt we could make more profit concentrating on other ancillary products. Do you expect EU shortfall consolidation to continue? We do. As you've seen, we've set out the kind of cuts that have been recently been announced by Norwegian and among others, Airline failures, airlines currently up for sale. I mean, Germania is one that we've seen a lot of, for example, pilots and cabin crew applying to Ryanair to join. We expect that to continue. The rate and timing of the consolidation, I think, will be driven by oil prices. At the moment in recent months in Q3, oil settled back fell back from $84 a barrel to just under $60 a barrel. If that were to spike back up to $84, dollars 85 a barrel, I think there would be great or more distress in European Shorthole. But I think over the next 12 to 18 months, we will see more EU short haul airlines go to the wall, consolidate or sell. And there will be, I believe, a downward pressure on capacity growth going forward, although not in Ryanair. We intend to take all of the aircraft we have in order. And we intend to keep the pressure, price pressure on the competition because it's those low fares that are driving our traffic growth. Following your base closures and downsizing in November, will you reduce capacity further? It can't be ruled out. With fares guided down 7% if we see further declines in fares or fuel increases and that's something we'll have to give serious consideration to. How are the airports reacting to this environment? We're seeing more and more airports, both Primary and secondary, redoubling their efforts to persuade Ryanair to either open new routes or to open bases at their airports. And this Trend has now been extended to our Laudamotion subsidiary as well. It has a very good growth deal in place with its main base in Vienna Airport. Vienna Airport, thanks to Laudamotion's growth after a number of years of stagnation is growing very strongly. And both Laudamotion and Ryanair and are in active negotiations with a number of new base new potential airport bases for winter 2019 summer 2020 even as we speak. Where is the growth in FY 'twenty? There's a huge amount of opportunities for Ryanair across Europe. I would highlight new bases that we've already Announced for next summer the likes of Bordeaux and Marseille in France and a low cost base deal in South End in London. But as I said, huge opportunities as we start to take Access and growth to 200,000,000 customers over the next few years. How is Ryanair Sun performing? Very well. There's a very good management team in Ryanair Sun in based in Warsaw. This year, it completed a 1st successful charter program. It's been profitable in its 1st year of operation To such an extent that actually we've transferred the fleet this year, we'll grow from 5 aircraft last year to 24 aircraft in summer 'nineteen As we've transferred much of Ryanair's short haul or its aircraft our aircraft based in Poland into Ryanair Sun, which will now operate a mix of our charters and schedules on behalf of Ryanair in summer 'nineteen. What is the latest update on Brexit? Well, I'm I'm afraid the risk of a no deal Brexit is worryingly high. We've taken all plans to make sure that we can deal with a hard Brexit in the event that it happens. We've received our U. K. Air Operator Certificate, which means that our domestic U. K. Routes are secured. And indeed, in the event of a hard Brexit, we have plans to restrict the voting Rights of our non EU shareholders, which will secure our EU majority ownership and control. We'll also limit their ability, The non EU shareholders to sell shares to non EU nationals. So that's the best strategy, I think, out there in relation to a hard Brexit. Michael, is there any update on the group structure? There is we've announced today a group structure which will mirror much of the success of the IAG group structure going forward. I'm going to move to become from being Chief Executive of Ryanair of the airline to become Chief Executive of the group, our Chief Executive of Ryanair Holdings being the group holdings company. Under that, we will have 4 active operating airlines, Ryanair DAC, which is the Irish airline, which will appoint a replacement for me as Chief Executive for the end of the year, Laudamotion, Ryanair Sun in Poland and Ryanair U. K. In the U. K. Each of The 4 Chief Executors will report into me as the Group's CEO. And I believe that this group structure will enable us to focus on cost reduction, Efficient allocation of capital and aircraft going forward and also to take up or create space for other small scale M and A on opportunities if they arise much like the Laudamotion. We will not be engaging in large scale or expensive M and A. We have 210 Max aircraft to deliver over the next 5 years. So our organic growth is set in place. But the group structure will enable us to do small scale opportunities like Laudamotion if such opportunities arise. What about your own contracts? In that, I've now signed up A new 5 year contract as the group CEO, you'll be happy to know that I'm doing that on a reduced basic pay and on lower bonus going forward. Therefore, I'll be leading by example in continuing to deliver a low cost product for Ryanair and the Ryanair Group. Yes. So any update on Board succession? Yes. As we've said, both David Bonderman and Kieran McLaughlin, who have served respectively 24 years 17, 18 years on the Board, have agreed to our request to serve 1 more year until summer of 2020. Neither of them wish to be considered for reelection at the September 2020 AGM. And to ensure a smooth succession, Stan McCarthy, a distinguished and experienced and former Group CEO of Kari Group, who joined the Ryanair Board in 2017, has agreed to take up the position of Deputy Chairman from April Dean, and he will succeed David Bonderman as Chairman of the Board sometime in the summer of 2020 in advance of the September 2020 AGM. I think that clarifies the Board's succession. It addresses all of the concerns that were raised about long serving directors and the management succession plan as well. Ex fuel and unit costs rose 6% in Q3. What are the drivers of this? This is a year of growth for Ryanair. We're investing in the growth before we take the MAXs in The spring and the summer. So as a result, we've seen our pilot costs increased by 20%. These are the pay increases that we agreed With our people over the past number of months, we also invested heavily in training for our pilots and cabin crew. We're taking on a large number of engineers to man our new hangars and facilities across Europe. And unfortunately, like all airlines, we've seen our EU 261 compensation costs increased quite significantly due to the high level of ATC disruptions this year. Will these increased costs continue? Not at this rate. We expect over the next 12 months that unit costs will be flat to slightly down, particularly as we take more and more of the new MAX game changer aircraft into the operation and build towards our summer 2020 schedule when the MAX This aircraft will account for 10% of the fleet. Have you increased your fuel hedging? We have. We're now 90% hedged on jet out to the end of FY 2020 At about $71 a barrel and indeed we put a little bit of cover in place since the Q1 of FY 2021, 13% at about $63 a barrel. Could the EU261 costs increase further in FY 2020? We expect they will. We like most other airlines in Europe, we are expecting A torrid time with ATC staff shortages and disruptions as a result, particularly among German ATC, U. K. NATs and French ATC, particularly in the months of March, April, May June this year. There has been short staffing among NAFs even in the months of January in December January when they're not particularly busy. So we think the disruptions will continue. It will be particularly painful for airlines and customers in Europe in in March, April, May June of this year. And that's why we're continuing to campaign forcibly with our other partners in the Airlines for Europe Group, to call on the European Commission to take action. Now the states are not willing to reform the very inefficient and badly run ATC Services. So we need the European Commission to step in and do it. They need to put the needs of consumers ahead of the narrow vested interest of tiny numbers of air traffic controllers. Has on time performance improved? It has. It's much improved. We spent a lot of time working on the issues within our control. So I'm happy to say that in January, Excluding ATC disruptions, we had over 90% on time performance, which I think is a big improvement on where we were last summer. Do you expect these air truck control disruptions into that summer? Yes. And we think, sadly, they'd be worse than they were last summer, particularly the shorter months of March, April, May June. When did you start flying the new MAX aircraft and what are the benefits? We have 5 of them coming into the fleet between May June of this year. And they're fantastic aircrafts, and we've called them the game changer because they're going to be the next step change in cost evolution for Ryanair. It's 16% less fuel Than the current fleet, 40% less emissions and 4% more seats, which means we'll be spreading our fixed costs over more customers, but also getting more opportunities He's on the ancillary side. So I think this is a big and important step in the cost control within the Ryanair Group. In a difficult trading environment, would you consider deferring some deliveries? No. In fact, if anything, I would accelerate with the MAX aircraft deliveries partly because they offer us more seats, Lower unit costs and a 16% fuel saving per seat. We think these are the aircraft that will deliver the next 5 years of unit cost leadership and widened the unit cost leadership gap we have over all other EU airlines. Why has your net debt increased at period end? We've had a large capital expenditure in the 1st 9 months of the year over €1,200,000,000 primarily for aircraft, but we've also been investing in simulators, spare New hangars as we arrange for growth over the next few years. At the same time, we've returned EUR 560,000,000 to shareholders through It's through buybacks and of course profitability is down. Would you consider another aircraft order? We would if the price was right And there's no doubt that pricing is currently weakening, I think, in the marketplace. There's not much availability of close in of new aircraft for deliveries in 2021 or 2022. But I think you have seen a lot of airlines defer orders and cancel Deliveries further out. I think the notable development we've seen, particularly in Laudamotion, has been a quite a significant decline in the monthly lease rentals for very young secondhand Airbus A320 aircraft. And with that, Laudamotion has been very successful in securing Fleet growth from 19 aircraft 19 Airbus aircraft in summer 2020 summer 2019, They will rise to about 30 Airbus aircraft in summer 2020. And those LOIs are already signed at lower monthly lease rents then the first 19 aircraft we had done. So we see further opportunities for reasonably low cost fleet growth within Laudamotion on the Airbus side in the next couple of years. What's the latest full year guidance? We expect average fares to be down 7% over the second half of the year. However, this will drive strong traffic growth, which will Rise of 142,000,000 customers in the current year. Ancillaries will continue to perform strongly, driven by priority boarding and allocated seating, Although there will be an offset from the IFRS 15 accounting standard in Q4, unit costs are marginally better, Primarily due to weaker fuel on our own heads, fuel in the Q4, unit cost ex fuel up about 6% on a full year basis. So as a result of all of that, we're guiding profit after tax in a range of SEK1 billion to SEK1.1 billion excluding Lauda. It's very early in the year, but do you have any thoughts on FY 2020? Well, you're right. We're just doing the budgets at the moment. So we're getting ahead around The numbers. But that said, we've heard a lot of commentary from our competitor airlines talking pricing up into the summer. We're not seeing that. We would be somewhat cautious, Particularly due to the overcapacity in the market at the moment. So failing a large fall over of 1 of the airlines, I think pricing will remain under pressure for the coming months. Is Lauda in the FY 2019 guidance? No, it's not in the FY 2019 guidance. So we're pleased to report today that the Expected loss, 1st year start up loss in Laudamotion has been reduced from £150,000,000 to £140,000,000 due to a better unit cost performance in the winter period. Looking forward into the 2nd year of operation, Lauda will grow to carry just over 6,000,000 passengers. We're working on a budget that shows a materially lower loss, something between a loss of €50,000,000 all the way to breakeven, Depending on what airfares and yields will be like in summer of 2019. And in the case of Laudamotion, their fares in summer 2019 are materially up on where they were in summer 2018, but that was because their summer 2018s capacity was released so late into the market that they were effectively dumping those prices most of summer last year. Strong forward bookings, particularly in the German Spanish market into summer 2019. And we think a very successfully or a successful and growing city market with a strong base out of Vienna, where Laudamotion is competing with both Level and Wizz, but Level appear to have given up on Vienna. And Wizz have arrested their Somewhat optimistic growth plans for Vienna now that Laudamotion is growing much faster and will be much bigger than Wizz in Vienna. Michael, Neil, thank you very much. Thank you.