Good morning, ladies and gentlemen. Welcome to Ryanair's Q1 results conference call. I am joined as usual by Neil Sorahan, our CFO.
Morning.
We are going to take it as read that everybody has seen this morning's press release for the Q1 numbers, in which we announced a 20% cut in profit after tax to EUR 319 million as previously guided. The key drivers of this was reasonably strong traffic growth of 7%. Average fares fell by 4% in the quarter, largely due to the first half of Easter being in Q4 of last year and out in Q1 this year. Our cost performance, both in terms of principally fuel costs, staff costs, and EU Regulation 261/2004 costs arising from over 2,500 European ATC-related cancellations in the quarter, has been adverse. As usual on the Q1 results, we are not going to waste too much time on the press release.
We are going to go straight to the results presentation. Then we will do a brief Q&A. As you will see this morning, Ryanair remains the lowest cost, lowest fare operator carrier in Europe. We are number one for traffic. On target to carry 139 million guests this year. Number one for coverage. We fly across 37 states from 86 bases and over 220 airports, the vast majority of which are primary airports. Our service continues to improve with our 2018 Always Getting Better developments. We look forward to the delivery of the first five of our 210 Boeing MAX aircraft, the first five of which arrives in spring 2019, and our full year guidance remains unchanged in a range of between EUR 1.25 billion to EUR 1.35 billion.
Average fares in Ryanair continue to fall in the first quarter, now down to EUR 38. We see this as a positive, significantly lower than any other airline in Europe, which is what underpins our traffic growth. In terms of cost, we continue to have an enormous unit cost leadership over every other European airline. Excluding fuel and our cost for EUR 27 per passenger. In terms of coverage, we operate across 86 bases, 37 states. We are operating over 1,800 routes and on target this year to carry 139 million passengers. Our market share continues to build in most of Europe's largest markets. We are now the number one or number two in most of the main European markets, including now number one in the Central and Eastern European market, having displaced Wizz as the number one in that marketplace. Neil, you want to take us through the results?
Michael, I will. Thank you very much. In the quarter, we saw our passenger numbers, our guests increased by 7%, just under 38 million customers at an industry-leading load factor of 96%. This was driven by a 4% reduction in average fare. However, ancillaries performed very strongly, and as a result, total revenue was just under EUR 2.1 billion in the quarter. Costs, however, as Michael has said, driven by higher fuel, staff, and EU Regulation 261/2004, were up 10% in the quarter, and as a result, profit after tax fell by 20% to EUR 319 million. In relation to our balance sheets, we continue to have one of the strongest balance sheets in the sector, a BBB+ rated balance sheet.
We saw our net debt drop from just over EUR 280 million at year-end in March to EUR 250 million at the end of this quarter, and that was after EUR 465 million of capital expenditure and EUR 265 million of share buybacks.
In terms of current developments, we see weaker fares. We certainly did separate ourselves from the general market consensus that pricing and fares would be strong. In Q1 and across Q2, we attribute that to a heat wave in Northern Europe, which tends to make people less anxious to travel. The impact of the World Cup, which thankfully is now over, and also in certain markets, most notably in Ireland and possibly in Spain and Portugal, an impact on pricing of some fears over pilot and cabin crew strikes. Strong ancillary performance, as Neil has said, mainly in areas like priority boarding, reserved seating, where Ryanair Labs and our ability to sell these services across mobile, all our digital platforms is increasing the uptake. Air traffic control, staff shortages and strikes in the first quarter were very damaging.
We canceled about 2,500 flights in Q1, less than many of our smaller competitors, but that still meant we lost about 450,000 guests in the quarter. We've also seen a very substantial increase of 40% in quarter one in our EU Regulation 261/2004 costs, both right to care for passengers during ATC cancellations, which are outside of our control, but also a spike upwards in flights delayed by more than three hours. Punctuality in Q1 has fallen from 89% in the prior year to a, by our standards, poor 75% in the current year, but almost all of this is due to daily staffing shortages, largely within U.K., German, and French ATC. Spot oil prices has risen to $80 a barrel in the quarter, which affects our 10% unhedged. Higher oil prices are in the short term reasonably good for our business.
We expect it will lead to further airline failures and consolidation across Europe this winter, which we think ultimately over the medium term will be a good thing. We've had a number of strikes by 25%, a quarter of our Irish pilots. We've had the first two of those in the last two weeks. They proved to have not much impact. They resulted in cancellation of less than 10% of our flights to and from Ireland. Next week, we face a larger strike by cabin crew across Spain, Portugal, and Belgium, we expect that we have pre-canceled about 12% of our flights on the Wednesday and the Thursday so that we can re-accommodate passengers in the seven days prior to those two days of strikes and the seven days after those two days of strikes.
The key thing here is we must and we will take on strikes and face them down. We will not make concessions that would damage either our low cost leadership or our people productivity, we want to minimize the impact of these strikes on customers, and so far, that seems to be working out reasonably well. In Laudamotion, the losses, its first year losses have risen. We now expect losses of about EUR 150 million, up from EUR 100 million during the full year results. Most of that is due to higher spot oil prices because Laudamotion was unhedged, the late release of Laudamotion's summer schedules because of the disputes between Lufthansa and Laudamotion, and anti-competitive and damaging behavior, we believe, by Lufthansa, which is already the subject of a competition complaint by Ryanair and Laudamotion to the European Commission.
In Brexit, we continue to be concerned about the rising possibility of a hard Brexit. We hope it will be resolved with the 21-month transition deal, the political situation in the U.K. is somewhat uncertain at the moment, therefore, we think the danger of a hard Brexit is being underestimated and is rising. I'll touch briefly on the unions. As we have said this year or in previous, we have already agreed very large 20% pay increases with over 90% of our pilots and almost all of our cabin crew. Those form part of five-year pay deals with pilots and cabin crew. We've also signed up our first union recognition agreements with pilots and cabin crew in the U.K. and Italy, our two largest markets.
As recently as last week, we signed a cabin crew recognition agreement with the ver.di Union in Germany, which we think is a notable achievement. There is an active engagement ongoing with our workforce and unions in other countries. There are some countries, most notably Germany and Ireland, where we have difficulties with the pilots unions, where we believe the process is being interfered in by a tiny handful of competitor union pilots. As you've seen, we've had two days of pilot strikes here in Ireland. They were supported by just 25% of our Irish-based pilots. 75% of our Irish-based pilots continued to work normally, which is why we were able to complete over 90% of the flying program on those days. We do expect that there will be more strikes.
We expect that these will be reasonably minor and that we will be able to manage them sensibly in the interest of our customers by judiciously canceling flights, hopefully to set at least seven days in advance so that we can either re-accommodate or refund our customers. We want and are actively engaged in trying to resolve some of these issues, but in some cases, particularly in Ireland, where you have a very small bunch of senior pilots striking over seniority with issues which, A, they can't explain, and B, don't even affect them because they're already senior pilots. I'm afraid we expect to face more strikes because it's important that we defend both the low-cost model and also the high productivity model.
If these continue, certainly in those countries where they continue, most notably Ireland, possibly Portugal, possibly Germany, we will look at reallocating aircraft for the winter season, and we cannot rule out that there may be significant reductions in aircraft based in Ireland, in Portugal, or in Germany, which may lead to job losses. We're hoping to avoid that by reaching agreement with the unions and our employees in those countries. Looking over the medium term, again, we would point you to the impact of the game changer aircraft, the MAX 200s, which the first flight will come in 2019.
They will significantly lower our operating cost per seat because they have more seats, therefore more revenue per flight, but also significantly lower fuel consumption, 16% lower fuel consumption per seat, which at a time when spot oil prices are in the mid-$70 will be a key feature of our cost base going forward. Neil, you want to touch on guidance?
Okay, Michael. Thanks. We're retaining our traffic target of 139 million customers for this year, which is a 7% increase on last year. While Q1 fares were marginally better than anticipated, we would expect due to the weaker pricing environment that Michael talked about, Q2 fares will be only up 1%, which is lower than the 4% previously guided. As is always the case at this time of the year, very limited visibility into H2. There's a lot of unknowns into winter. However, we're going to retain our broadly flat H2 fare guidance. There are risks clearly around yield and strikes, but this will damage just the fares, not the traffic. We see our fuel bill increasing significantly this year. It will be up at least EUR 430 million as a result of the high oil prices and indeed the expensive carbon credits.
Ex fuel unit costs are going to increase by 6% as we see pilot pay increases annualize over the course of the year and the investing growth with the MAX arriving next year. As a result, we've kept our guidance unchanged in the range of EUR 1.25 billion-EUR 1.35 billion. This, of course, as is always the case, is very dependent on close in peak summer bookings, crew strikes, and ATC disruptions, of which we had a lot of those in the first quarter. Michael?
Okay. Thanks, Neil. We'll do a quick Q&A.
Q1 PAT up 7%, fares were 4% lower. Will this weaker trend continue?
Yes, I think it will. We've seen impact on fares in the last couple of weeks, primarily due to the heat wave in Northern Europe, the World Cup, and indeed uncertainty surrounding our own crew strikes. I would expect that Q2 fares will now be up 1%, which is below the 4% that we previously guided.
What's the outlook for H2 fares? The market sentiment is positive.
Yeah, I think market sentiment is overdone. We continue to be cautious on second half airfares. We're guiding flat. The key drivers of that would be continued capacity growth in Europe. We're also, I think, facing continuing agency staff shortages and possible strikes. I think the impact of pilot and cabin crew strikes on our own business will result in lower yields. It won't damage passenger numbers, but we may have to engage in more seat sales to keep our 95%-96% load factor up there.
Is your 139 million guest target at risk this year?
No, not at all. We're a low active yield passive airline, we will push for the 139 million passengers.
Is there any risk to your FY 2024 EUR 200 million target?
No, we think we're still on track to hit that figure by 2024, and we have plenty of room in the plenty of capacity there, particularly with the arrival of 210 MAX game changers over the next eight years.
Ancillary growth 25% in Q1. Why?
Yeah. Strong performance and a couple of moving parts there where they were flattered slightly by the new accounting standard on revenue recognition, IFRS 15, which delivered about a EUR 25 million timing benefit in the quarter. This will time out over the second half of the year. When we look at the underlying ancillary products, we saw strong performance on reserved seating and priority boarding, which were a strong performance in the fourth quarter of last year, continued into the first quarter of this year. Interestingly, travel insurance also had a modest increase, which is encouraging given that it was dropping for the past couple of years. I think we've made good progress on ancillary.
How is car hire progressing?
It's developed well. Penetration has risen over this summer period. A notable development is we're selling car hire services to customers of competitor airlines, which is interesting and something we want to develop. The contract with the car hire provider comes up for renewal in September. We're in discussions with CarTrawler on that contract. We hope to reach agreement with them shortly or we may be going back to the market to re-tender the business.
Is the 34% increase in Q1 staff costs entirely due to the pilot pay increases?
No, not entirely. A big element is clearly down to the 20% pay increases for pilots, which are now starting to annualize in the quarter. We had a 9% increase in block hours in the quarter. We've also added headcount into the likes of our rostering, customer service, and engineering departments. Of course, we awarded 3% pay increase to our non-flight staff earlier this year in April.
What caused the 23% rise in the fuel bill in the quarter?
Three things. There was a 9% increase in block hours. Our 10% of unhedged fuel jumped dramatically to almost $80 per barrel in Q1. We've seen a 300% tripling of the cost of EU carbon credits from EUR 4 last year to EUR 16 this year.
What caused the 29% rise in marketing distribution and others in Q1?
It's primarily down to an increase in the EU261 right to care cost, which spiked by 40% as a result of 2,500 flight cancellations that we had in the quarter due to ATC staff shortages and strikes. When we looked at the actual marketing distribution themselves, they moved broadly in line with the customer traffic increase.
What caused the 37% rise in maintenance materials and repairs?
The fleet is 12% larger in Q1. More of the aircraft are now eight years old, which leads to more scheduled checks than last year in Q1. It's also Q1 is particularly affected by the timing of these handbacks.
Is there any change to the guided 6% increase in ex-fuel unit cost for FY 2019?
No. We're still comfortable with that guidance.
What does your fuel hedging look like?
Well, as you know, we're 90% hedged for the current year out to March 2019 at $58 per barrel. We're now 35% hedged for H1 of FY 2020, but at a much higher rate, $69 per barrel, which although higher, is well below the current spot price, which is somewhere in the mid-$70s.
What's the impact of current high fuel prices on FY 2019?
When we factor in the higher spot prices now, the hedging that we have, which is higher than what we paid last year, and the high carbon credit costs, we're looking at at least a EUR 430 million increase on our fuel bill this year.
Do you expect further consolidation in European short-haul?
Certainly oil remains up around $80 a barrel, and we think there will be more European airline failures this autumn. We expect that to lead to further consolidation. We continue to believe the longer-term trend is that Europe will consolidate to five major carriers, and that process will be accelerated by the higher oil prices.
How is Ryanair Sun developing?
It's performing well. It's in line with expectations. They're flying five aircraft this summer in the Polish charter market, and we would expect them to make a modest profit in the first year of operations.
What's the latest on Laudamotion?
Laudamotion, we're pleased that the EU competition authorities last week approved our proposal to increase our stake from 25% to 75% shareholding. We're finalizing details of that with Niki Lauda and his team. The trading performance has got slightly worse this year. It's now going to lose about EUR 150 million in the year to March 2019, as opposed to it was just over EUR 100 million at the full-year results. That is almost all due to lower-than-expected airfares this summer and much higher oil prices than originally budgeted with oil at $80 a barrel. We're allowing for a fare wars in Vienna this winter, where Laudamotion will be open and will be growing the base in Vienna to almost eight aircraft. At a time of intense competition in Vienna with other new arrival airlines like Wizz and IAG Level.
We expect there to be intense price war in Vienna this winter.
How is the union recognition progress going?
At this stage, about 90% of our pilots have taken 20% pay increase on a five-year pay agreements. We've made good progress in Italy and in the U.K., our largest markets, where we've signed recognition agreements for both our pilots and cabin crews. That accounts for about 45% of our flight crews across the network. Unfortunately, progress has been a little bit slower in some of the smaller markets, particularly the likes of Ireland and Germany, where we're seeing competitor pilot unions interfering with the process, which has slowed things down quite significantly and led to some disruptions.
What was the impact of the pilot strikes in Ireland?
Well, there will be 25% pilot strikes in Ireland. As you've seen thus far, the impact has been somewhat limited, thanks primarily to the fact that 75% of our Irish pilots are working normally. We've had to cancel less than 10% of our flights on the two days of strikes called so far. I think our focus in this is to minimize disruptions for our customers. We hope to be able to resolve these issues. Or rather, it's hard to resolve the issue with the Irish pilots because they can't explain what it is they actually want in terms of seniority or how seniority will affect them. Nevertheless, if it continues, and these disruptions continue in Ireland, we would certainly have to look at reducing the number of aircraft based here this winter.
We hope to avoid that possibility. We want to keep offering a lot of capacity at low fare to and from Ireland. Frankly, if we're going to be disrupted by a small minority of our Irish pilots, who themselves are misled by a handful of Aer Lingus pilots , frankly, there will be aircraft being moved elsewhere. There will be job losses here in Ireland this winter.
Do you expect further strikes?
I think they can't be ruled out. There's a likelihood of more strikes into the peak summer months and potentially over winter as well. It's like our competitors, IAG and Lufthansa. If it means protecting our models, and we've got a low-cost, high-productivity model, then in some instances, we'll have to take strikes. What was the impact of the ATC staff shortages and ATC strikes in Q1?
The strikes in Q1 caused us to cancel over 2,500 flights. That was a loss of 450,000 guests, primarily as a result of French ATC strikes on nine of 13 weekends in April, May, and June. More damaging, however, is the daily staff shortages, particularly in British, German, and French ATC, which on a daily basis are causing between 10% and 15% of our first-wave flights to run late, and those delays are knocking on through the rest of the day. As a result of that, we've seen our Q1 punctuality fall from 89% in 2017 to just 75% in 2018. Still industry-leading, but at a much lower level. We've seen a dramatic 40% uptick in EU261 costs, paying for right to care and compensation in cases where we have no control over the situation.
It's why we and other airlines in A4E are campaigning hard to persuade the European Union at least to take over the upper space sky over Europe, so that if the French are striking, it shouldn't affect flights that are overflying France. It should affect the local French or domestic flights instead.
What are you doing to address this issue?
Well, as Michael just said, we're very actively involved with the Airlines for Europe in campaigning for the overflight rights. We were also, along with a number of other airlines, taking legal action against the French government, in relation to the high number and frequency of French ATC strikes. I think it's hugely important that the EU address these issues. It impacts millions of customers across Europe, sadly every summer. This is something that needs to be addressed very quickly. What's the latest update on Brexit?
I think we remain concerned. Like everybody else, we hope that there will be a 21-month transition agreement from April 2019 to December 2020. As you know, the political situation in the U.K. is somewhat fraught and difficult at the moment, and therefore, we are worried that the risk of a hard Brexit in March 2019 is being underestimated. We think the risk of a hard Brexit is rising, we hope it will be avoided, at least with the transition agreement, which would mean no change for a 21-month period. As we've previously advised, if there is a hard Brexit, we will be required to disenfranchise all non-EU shareholders, which would principally be our U.S. and British shareholders after April 2019 for a period of time so to ensure that we ensure that Ryanair remains both EU-owned and controlled in the event of a hard Brexit.
Did your balance sheet strengthen further in the quarter?
Yeah, we've got a very strong balance sheet as currently plus rated by both Fitch and S&P. We have over 400 aircraft in the fleet at this stage, and a lot of equity built up in those aircraft. Over 55% of them are debt-free, and we expect that percentage to increase over time as we take more aircraft into the fleet. We continue to be very cash generative in the business, generating over EUR 750 million from our operations in the quarter just ended, this financed EUR 460 million of capital expenditure and almost EUR 265 million of share buybacks. At the same time, we saw our net debt drop from over EUR 280 million at year-end in March to just over EUR 250 million at the end of the quarter. How's the EUR 750 million share buyback progressing?
It's almost 70% complete at this stage. We've spent just over EUR 500 million at an average price of just under EUR 16 per share. We're on track to complete the planned program by the end of October, which will take us to a total of EUR 6 billion returned to shareholders over the last decade.
When is the next buyback?
We have another 30% to do on the current one, which will see us get to the end of October before that's finished. The board, as is always the case, keep shareholder distributions under review. However, they're very aware that we're guiding profits down this year. They know we've got a large CapEx program and that we're trying to manage a broadly flat net cash, net debt position. All of these things will have to be taken into account when they make their next call on distributions. What's your full-year guidance for FY 2019?
Continues to be cautious. Our guidance remains unchanged within a range of EUR 1.25 billion-EUR 1.35 billion. That is slightly down on last year's EUR 1.45 billion return. The components of that are slightly more modest fare expectations in Q2. We think they'll rise 1% compared to previously guided up 4%. H2 fares we expect to be flat, as we know, we have very little visibility of that. What we do know for certain is that our fuel bill will rise this year by more than EUR 430 million. Ex-fuel unit cost will rise by 6%. Much of that is the pilot and cabin crew pay increases we've agreed earlier this year. Therefore, we maintain an unchanged full-year guidance of a range of EUR 1.25 billion-EUR 1.35 billion.
Is Laudamotion in the FY 2019 guidance?
No, it's not. We're now expecting their losses somewhere in the region of about EUR 150 million. They're unhedged, so they're taking high spot prices, close to USD 80 a barrel at the moment. They were also late getting the schedules into the market for the summer, so fares are weak. Of course, they've got expensive leases in their fleet at the moment. We would anticipate this year will be difficult for them. However, they should break even by the back end of year three. Michael, thank you very much.
Thank you.
Pleasure.
Thank you.