Earnings Call: Q1 2019

Jul 23, 2018

Good morning, ladies and gentlemen. Welcome to Ryner's Q1 Results conference call. I'm joined as usual by Neil Soren, our CFO. We're 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 €319,000,000 as previously guided. The key drivers of this was reasonably strong traffic growth, up 7%, but average fares fell by 4% in the quarter, largely due to the first half of Easter being in Q4 of last year and out of Q1 this year. There's been a strong performance on ancillary revenues, for our cost performance, both in terms of principally fuel costs, staff costs and EU261 costs arising from over 2,500 European ATC related cancellations in the quarter has been adverse. We're now going to, as usual, on the Q1 results, We're not going to waste too much time on the press release. We're going to go straight to the results presentation and then we'll do a brief Q and A. So As you'll see this morning, Ryanair remains the lowest cost, lowest fare operator carrier in Europe. We're number 1 for traffic, on target to carry 139,000,000 guests this year, number 1 for COVID-nineteen. We offer a flight across 37 states from 86 bases and over 220 airports, the vast majority of which are primary airports. Service continues to improve with our 2018 ATB developments. We look forward to the delivery of the first five of our to our 210 MAX Boeing MAX aircraft, the first flight of which arrives in spring 'nineteen. And our full year guidance remains unchanged in a range between €1,250,000,000 to €1,350,000,000 Average fares in Ryanair continued to fall in the Q1, now down at €38 And we see this as a positive, significantly lower than any other airline in Europe, which is what underpins our traffic growth. In terms of costs. We continue to have an enormous unit cost leadership over every other European airline, excluding fuel and our costs were €27 per passenger. In In terms of coverage, we operate across 86 bases, 37 states. We are operating over 1800 routes and on target this year to carry 139,000,000 passengers. Our market share continues to build in most of Europe's largest markets. We're now the number 1 or number 2 in most of the main European markets, including now number 1 in the Central and Eastern European market, having just placed Wizz as the number 1 in that marketplace. Lee, do you want to take a few minutes? Hi, Todd. I will thank you very much. In the quarter, we saw our past new numbers, our guests increased by 7%, just under of 38,000,000 customers, 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 €2,100,000,000 in the quarter. Costs, however, as Michael has said, is driven by higher fuel staff in 261, were up 10% in the quarter. And as a result, profit after tax call. It fell by 20% to €319,000,000 In relation to our balance sheet, we continue to become the strongest balance sheets in the sector, BBB cost related balance sheet. We saw our net cash or sorry, our net debt drop from just over €280,000,000 at year end in March That's €250,000,000 at the end of this quarter. And that was after €465,000,000 of capital expenditure and €265,000,000 of share buybacks. So in terms of current developments, we see weaker fares. We certainly did Separate ourselves from the general market consensus that pricing and fares will 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 frankly is now over. And also in certain markets, most notably in Ireland and possibly in Spain and Portugal. An impact on pricing of sudden fears over pilot strikes or pilot and cabin crew strikes. Strong brand security performance, as Neil has said, mainly in areas of our priority boarding reserve seating where Ryanair Labs and our ability to sell these Services across mobile and all our digital platforms is increasing the uptake. Air traffic control staff shortages and strikes in the Q1 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, 40% in quarter 1 in our EU261 costs, both right to care for passengers during cancellations, ATC cancellations, which are outside of our control, but also a spike upwards in flights to date by more than 3 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 PTC. While spot oil prices has risen to $80 a barrel in the quarter, where that affects our 10% to 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 ultimate year over medium term will be a good thing. We've had a number of Irish strikes by 25 percent a quarter of our Irish pilots. We've had the first two of those in the last 2 weeks. They proved to have not much impact. The CAM results in the 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, And we expect that we have pre canceled about 12% of our flights on the Wednesday and Thursday so that we can reaccommodate passengers in the 7 days prior to those 2 days of strikes and the 7 days after those 2 days of strikes. The key thing here is we must and we will take on strikes that face them down. We will not make concessions that would damage either our low cost leadership or our product that people productivity. But we want to minimize the calculated strides on customers. And so far, that seemed to be working out reasonably well. In Laudamotion, the losses, its 1st year losses have risen. We now expect of about £150,000,000 up from £100,000,000 at the during the full year results. Most of that is due to higher spot oil prices call because Laudamotion was unhedged. The late release of Laudamotion's summer schedules because of the disputes with between the Khamzap and Laudamotion and anticompetitive and damaging behavior, we believe, by Lufthansa, which is already the subject of a competition complaint by Reiner to the end without motion to the European Commission. In Brexit, we continue to be concerned about the likely or the possibility, we believe the rising possibility of a hard Brexit. We hope it will be resolved with the 21 month transition deal, but the political situation in the U. K. Is somewhat uncertain at the moment. And therefore, We think the danger of our heartbreak is being underestimated and is rising. I'll touch briefly on the unions. As we have said This year, our previous, we have already agreed paying very large 20% pay increases in over 90% of our pilots and almost all of our cabin crew. Those fall part of 5 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 2 largest markets. And as recently as last week, we signed a cabin crew recognition agreement with Caverdi union in Germany, which we think is a notable achievement. We are there is an active engagement ongoing with our workforce and unions in other Countries. But there are some countries, most notably Germany and Ireland, where the pilots unions 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 2 days of pilot strikes here in Ireland. They were supported by just 25% of our Irish based pilots. 75% of our Irish based pilots continue 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 7 days in advance so that we can either reaccommodate 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 play. And we don't even affect them because they're already senior pilots, then I'm afraid we expect to face more strikes because we're It's important that we defend both the low cost model and also the high productivity model. If these continue, and 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, but we're hoping to avoid that by reaching agreement with the unions and our employees in those countries. Looking over the medium term, and 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 I've signed when spot oil prices are in the mid-seventy dollars will be a key feature of our cost base going forward. And Neil, do you want to touch on guidance? All right, Michael. Thanks. We're retaining our traffic target of 739,000,000 customers for this year, which is a 7% increase on last year. While Q1 FERS 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. We've, as is always the case at this time of the year, Very, very limited visibility into H2. There's a lot of unknowns into the winter. However, we're going to retain our broadly flat H2 fair 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 €430,000,000 as a result of the high oil prices and indeed expensive carbon credits. Ex fuel unit costs are going to increase by 6% as we see pilot pay increases annualized over the course of the year and the investment growth with the tax arriving next year. So as a result, we've kept our guidance unchanged in the range of €1,250,000,000 to 1,350,000,000 This, of course, as is always the case, is a very intense and close in peak summer bookings, crude strikes and ATC disruptions, of which we had a lot call. Okay. Thanks, Ian. Now we'll do a quick Q and A. Conference. Q1 PAX Up 7%, but FERS 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. Call. So I would expect that Q2 fares will now be up 1%, which has been over 4% that we previously guided. What's the outlook for H2 first? Is market sentiment just positive? Yes, I think market sentiment is overdone. We continue to be cautious on second half airfares regarding flat. The key drivers of that would be continued capacity growth in Europe. We're also, I think, facing continuing ATC staff And I think the impact of pilot and cabin crew strikes on our own business will result in lower yields. It won't damage pass through numbers, But we may have to engage in more seed sales to keep our 95% or 96% load factor up there. Did you run 139,000,000 Get tired at risk this year? No, not at all. We're allowed actively in passive airlines, so we'll push for the 139,000,000 passengers. Conference. Is there any risk to your FY 'twenty four, 200,000,000 target? No. We think we're still on track to hit that figure by 2024, and we have plenty of room in the Capacity there, particularly with the arrival of 2 10 MAX game shakers over the next 8 years. And delivery growth 25% in Q1. Why? Yes, strong performance and a couple of moving parts. They were flattered slightly by the new accounting standard on revenue recognition. IFRS 15, which delivered about of $5,000,000 timing benefit in the quarter. Now this will time out over the second half of the year. When we look at The underlying ancillary products, we saw strong performance on recert seating and priority boarding, which were a strong performance in the Q4 of last Continued into the Q1 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. So I think we've made good progress on silver. How is the hard part progressing? It's developed well. Penetration has risen over the summer period. And the notable development is we're now We're selling car hire services to customers of competitor airlines, which is interesting and something we want to develop. The contract with the Carhartt provider comes up for renewal in September, and we're looking at we're in discussions with Carharttrol on that contract. And we hope to make agreements with them shortly or we may be going back to the market to retender the business. It's a 34% increase in Q1 start 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, but 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. And of course, we awarded 3 8% pay increase to our non flight staff earlier this year in April. What caused the 23% rise in the field in the quarter? Three things. There was a 9% increase in block on orders. The unhedged our 10% of unhedged fuel jumped dramatically to almost $80 per barrel in Q1. And, Lucina, 300 percent tripling of the cost of EU carbon credits from €4 last year to €16 this year. Call. What caused the 29% rise in marks in distribution and others in Q1? It's primarily down to an increase call. That we had in the quarter due to ATC staff shortages and strikes. When we looked at the actual marketing distribution and sales, they moved broadly in line with the customer traffic increase. The increase is 12% larger in Q1. More of these aircraft are now 8 years old, which leads to more seasonal checks than last year in Crafts are now 8 years old, which leads to more seasonal checks than last year in Q1. And it's also Q1 is particularly affected by the timing of lease handbacks. Call. Is there any change to the guided 6% increase in ex fuel unit cost for FY 'nineteen? No, we're still conference call. What does your Q1 hedging look like? 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 'twenty, but at a much higher rate, dollars 69 per barrel, We saw the 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 'nineteen? 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 least a $430,000,000 increase on our fuel bill this year. Do you expect for the consolidation in the European short haul? Certainly, volume remains at around $80 a barrel. We think there will be more call. European airline failures this autumn. We expect that to lead to further consolidation. We continue to The longer term trend is that Europe was consolidating to 5 major carriers, and that process will be accelerated Hi, thanks for Harry Wood, places. How is Ryanair Sun developing? It's performing well. It's in line with expectations there for 5 aircraft this summer in in the Polish charter market, and we're expecting to make a modest profit in the 1st year of operations. What's the latest on Lava Motion? I like a motion. We are pleased that the EU competition authorities last week approved our proposal to increase our stake from 25% to 70 5% shareholding. We're finalizing details of that with Nicky Lau and his team. The trading performance has got slightly worse this year. It's now reduced about €150,000,000 in the year to March 2019 as opposed to it was just over €100,000,000 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. And we're allowing for a fair wars in Vienna this winter where NADA Motion will be open and will be growing the base in Vienna to almost 8 aircraft. At a time of intense competition in Vienna with other new arrival airlines like Wizz and IAG level. So we expect there to be intense price war in the end of this winter. How do you and your recognitions look after? At this stage, about 90% of our pilots have taken a 10% pay increase from 5 year pay agreements. We've made good progress Initially, Hans, in the U. K, our largest markets where we signed recognition agreements for our pilots and cabin crews, that accounts for 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 Competitor pilot unions interfering with the process, which will just slow things down quite significantly and that led to some disruptions. Conference. What was the impact of the pilot strikes in Ireland? Well, they were the 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 had to cancel less than 10% of our flights on the 2 days of strikes call so far. I think our focus in this is to minimize disruptions for our customers. We hope to be able to resolve these issues with the however, 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 Nevertheless, if it continues and these disruptions continues in Ireland, we would certainly have to look at reducing the number of aircraft based here this winter. We want to avoid that possibility. And we want to keep offering a lot of capacity at low 30 to 1,000,000 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, call. And frankly, there will be aircraft being moved elsewhere and there will be job losses here in Ireland this winter. Do you expect further strikes? Yes. I think it can't be ruled out. There's a likelihood of more strikes since the peak summer months and potentially over the winter as well. So it's like call. 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 will have to take strikes. Call. What was the impact of the ATC staff shortages and ATC strikes in Q1? Well, 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 9 or 13 weekends in in April, May June. More damaging, however, is the daily staff shortages, particularly in British, in German and French ATC, which on a daily basis are causing between 10% 15% of our first wave counts to run late, And those delays are not going on through the rest of the day. As a result of that, we've seen our Q1 neutrality fall from 89% in 2017 to Just 75% in 2018, still industry leading but at a much lower level. And we've seen a dramatic 40% uptick in AU261 costs, Paying for right to care and compensation in cases where we have no control over this situation, and it's why we and other airlines in A4E Our campaigning hard to persuade the European Union at least to take over the upper space sky over Europe so that if the French are It shouldn't affect flights that are overflowing France. It should affect the local French or domestic flights instead. What are you doing to address this issue? It's Michael. Just to add, we're very actively involved with the airlines for Europe in campaigning for the overflight rights. We were also on a number of other arms taking legal action against the French government in relation to the high number and frequency of French ATC strikes. I I think it's hugely important that the EU address these issues. It impacts millions of customers across Europe, sadly, every summer. So this is something that needs to be addressed very quickly. What's the latest update on Rice? I think we remain concerned. We like everybody else. We hope that there will be a 21 month transition agreement from April 2019 to December 2020. However, as you know, the political situation in the U. K. Is Somewhat short 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, but we hope it will be avoided at least with the transition agreement, which would mean no change for the 2021 month period. As we've previously advised, if there is a hard Brexit, we will be required to disenfranchise all non EU shareholders, which principally be our U. S. And British shareholders after April 2019 for a period of time to ensure that we ensure that Sure that Ryanair remains both EU owned and controlled in the event of a high Brexit. Did your balance sheet strengthen further in the quarter? Yes. We've got a very strong balance sheet, it's going to be plus rated, right, both Fitch and S and T. And we have over 400 aircraft in the fleet This stage, there's a lot of equity built up in those aircrafts. Over 55% of them are debt free, and I would expect that percentage to increase over time as we take more aircraft call. We continue to be very cash generative in the business, generating over $750,000,000 from operations in the quarter just ended, and this financed So $460,000,000 of capital expenditure and almost $265,000,000 of share buybacks. And at the same time, we saw our net debt drop from over $280,000,000 At year end in March, just took over €250,000,000 at the end of the quarter. How's the €750,000,000 share buyback progressing? It's almost 70% complete at this stage. We spent just over €500,000,000 at an average price of just under €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 €6,000,000,000 return to shareholders conference. Over the last decade. When is the next buyback? Look, we have another 30% due on the current one, which will see us get to the end of October before that's finished. The Board, as it always case, keep shareholder distributions under review. However, they're very aware that we're guiding profits down this year. As you know, we've got a large CapEx program and that we're trying to manage a broadly flat net cash net debt position. So one of these things will have to take into account When you make our next call on distributions. What's your full year guidance for FY 'nineteen? It continues to be cautious. Our guidance remains unchanged within the range of €1,250,000,000 to €1,350,000,000 That is slightly down on last year's 1.45 Billing, I'll turn. The components of Manjar, slightly more modest fare expectations in Q2. We think they rise 1% compared to previously guided up 4%. H2 fares, we expect to be flat, but as we know, we have very little visibility of that. What we do know for certain is that our fuel will rise this year by more than €430,000,000 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. And therefore, we maintain unchanged Full year guidance of range of €1,250,000,000 to €1,350,000,000 Is that a motion in the FY 'nineteen guidance? No, it's not. And we're now Expecting their losses to be somewhere in the region about €150,000,000 They're unhedged. So they're taking high spot prices close to €80 a barrel at the moment. We're also late getting the schedules into the market for the summer. So, fares are weak and, of course, have got expensive leases At the moment, so we would anticipate this year will be difficult for them. However, I think they should breakeven by the back end of year 3. Call. Yes, Michael. Thanks very much. Thank you. Pleasure. Thank you.