Hello, welcome to the Ryanair H1 FY 2018 results call. Throughout the call, all participants will be in a listen-only mode. Afterwards there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present Michael O'Leary. Please begin your meeting.
Thank you. Good morning, ladies and gentlemen. Welcome to the Ryanair H1 conference call. As you have seen this morning on the ryanair.com website, we published the H1 press release, the MD&A, and a comprehensive Q&A section as well. I invite you all to look at those. We can allocate more time for Q&A, I suppose just do opening remarks rather than reading you through the press release. I think we have gone through another successful half year. Average fares fell 5%. That is delivered as an 11% growth in traffic and an 11% increase in profitability. This is mainly due to a 5% fall in ex-fuel unit cost. It demonstrates yet again the robust nature of the Ryanair model. In the half year, we opened up three new bases and 80 new routes. We took delivery of 35 new Boeing 737s.
Ancillary revenues grew by 14% as customer spend rose by 2%. The H1 unit cost fell 5%, including fuel. Excluding fuel was flat. It would have fallen 2% without the EU261 provision in September. Balance sheet remains very strong. We generated over EUR 900 million of net cash in the half year. We used that for net CapEx of EUR 675 million, share buybacks of EUR 640 million. According net debt rose slightly to EUR 600 million at the half year. We plan to reduce that to 0 at the end of the full year. This is a business that continues to execute. We continue to roll out customer initiatives. ryanair.com has become the world's largest search engine. We expect we are over 30 million members in myRyanair in September. We expect that to grow to 40 million by March.
Over half our customers now choose their preferred seat on board. The Plus fares now account for 70% of all seats sold. The new flight connections project at Rome Fiumicino and Milan Bergamo are working well. Our hotels inventory now exceeds 250,000 hotels worldwide with over seven and a half million rooms. I think the key trend in the half year has been the accelerated progress toward consolidation in Europe. Monarch Airlines had 5 million passengers in the U.K. and mainly at U.K. P airports and bankrupt in September. It was followed by Air Berlin with about 29 million passengers in Germany in October. Alitalia with 24 million passengers remains in bankruptcy.
There are other financially troubled EU airlines who we will believe follow them, some as soon as this winter, others within the next 12 to 18 months, particularly as oil prices begin to tick back up towards Brent Spot at $60 a barrel. These trends, particularly where they allow high fare airlines of Lufthansa, BA, and Air France to acquire local competitors, then constrain capacity and raise prices can only be good for Ryanair's traffic growth and our yield over the next few years as our fleet rises to 600 aircraft. We remain concerned about the developments in Brexit or the lack of developments in Brexit. The deal between the U.K. or U.K.-EU bilateral is being held up while the divorce talks drag on. We worry that time is running short for the U.K. to develop this bilateral solution.
We worry the U.K. government continues to underestimate the likelihood of such a flight or flight disruptions from April 2019, an outcome that was specifically highlighted by Air France's CEO in an interview with The Observer as recently as two weeks ago. These results cover the six-month period where we suffered a material rostering failure in September. We are not short of crews, nor are we short of pilots. We have more than sufficient pilots. Due to very bad planning of an excessive winter leave in September, October, November, and December, as we cut across or do a nine-month transition period on pilot leave to get to a new calendar year from January to December 2018, we created a shortage that impacted our punctuality in the first two weeks of September.
We took some very tough and very painful decisions to cancel 50 flights a day out of our less than 2% of our flights over the six weeks of September and October, then by grounding 25 aircraft for the remainder of the winter period, November through to March, to correct that problem. It has now corrected itself. Punctuality has now been restored. There have been no more cancellations since the end of September. Our punctuality in, as recently as this weekend, was over 90% on all three days of the busy bank holiday weekend. However, we did disrupt a lot of passengers. We did suffer reputational damage. We are working hard both with our passengers through low fare initiatives, offering those passengers who were disrupted travel vouchers which they can use in October.
We have taken a EUR 25 million hit on EU261 costs, re-accommodating passengers, providing them with compensation, and meeting their reasonable disruption costs. All of those charges have been taken in September. This experience has also, I think, highlighted the need for us to improve pilot pay within Ryanair. We are competitive with Jet2 and Norwegian, but we should be better than them. That's why we're rolling out significant pay increases of up to EUR 22,000 for captains, EUR 11,000 for first officers. Those deals are being considered on a base-by-base basis at the moment. We now have over 15 of the bases have accepted those increases. A number of the bases, most notably Stansted, have turned down those increases. We continue to engage with the ERCs at those airports.
It's important that they understand that there won't be another or better offer, but if they, and as is their right under the collective bargaining process within Ryanair, they're perfectly free to turn down the pay increases. If they turn down the pay increases, then they remain on their existing five-year pay deal for the next number of years. In Stansted, the deal runs out to 2020. We have also addressed the management within the rostering and operations area, where there'll be new operations management. Peter Bellew will shortly return from his stint as CEO of Malaysia Airlines. He becomes our new Chief Operating Officer from the 1st of December. Having said that, I also want to thank our people who have performed heroically in recent weeks.
Pilots offering to work their days off as a cabin crew, and our operations and engineering people have done a great job in keeping the operation going while we fix the screw-up we had within the rostering division. There's undoubtedly this mistake has been used by competitor pilot unions as an opportunity to generate some negative PR for Ryanair. It has happened in the past. It will happen again. All it is is PR. We continue to be an excellent employer of pilots. We pay more than the competition.
Our pilots enjoy the best rosters in the business with the most rapid promotions and the newest aircraft, and that is demonstrated by the flood of applications we have had in recent months, both from Monarch pilots who were made redundant, Air Berlin pilots who are being made redundant, and also pilots from Norwegian and Jet2 who want to share in the pay increases that our people are now enjoying. None of this should take away from the fact that, yes, we had a screw-up in one area of the management in September. We have addressed it, we have fixed it, but the underlying business continues to execute and continues to execute very well. Having grown the H1 traffic by 11%, the grounding of 25 aircraft into H2 means growth will slow to about 4%.
As a result, full-year traffic will slow from 131 million passengers to 129 million customers this year. We are 2% better booked than we were at this time last year. Our load factors are currently 97%, but those bookings are at slightly lower fares. However, we expect that the full-year 2018 airfares will fall by between 4%-6%, which is slightly better than the previous guidance of -5% to -7%. Ancillary spend for the full year should rise by about 1% this year. Ex-fuel unit costs will be adversely affected by the EUR 25 million in non-recurring EU261 costs in September and up to EUR 45 million of additional pilot costs, higher pay if it's accepted by our pilots, some additional recruitment and training costs, exceptional recruitment training costs taken in H2 that arise as we fix the September rostering failure.
Accordingly, we now expect full-year unit costs to fall by about 2% this year. Ex-fuel unit costs will rise 3%. Based on the above and with the usual caveat on limited H2 visibility, we saw no reason to alter our full-year profit after tax guidance, which remains in a region of EUR 1.4 billion to EUR 1.45 billion. I think that's a very creditable performance. We'll continue to deliver record profitability this year despite taking a EUR 70 million hit on EU261 costs and additional pilot costs in the second half of the year. With that, I'm going to ask Neil Sorahan to add a couple of comments and maybe touch on the full-year guidance. Neil.
Thank you, Michael. As Michael already said, very strong and robust first half of the year with a profit of 11%, average fares down 5% as previously guided. Q2 fares down 9% as we'd indicated following a strong Q1. We are up 11 million customers. Costs in good shape despite the EUR 25 million one-off non-recurring EU261 costs. We saw costs down 5%, including fuel broadly flat on an ex-fuel basis and down 2% if we exclude the EUR 25 million. The balance sheet finished the quarter in a net debt position of EUR 600 million. This was after EUR 675 million of capital expenditure. We believe we'll have about EUR 1.5 billion of capital expenditure on a full-year basis this year. We also finished our EUR 600 million share buyback at the end of September, bringing distributions to EUR 639 million in the current financial year.
Our plan is now to manage down the net debt position to a broadly flat net cash net debt position by year end. On the guidance itself, while we saw our costs increase by EUR 70 million on the back of the EU261 EUR 25 million compensation payments and the EUR 45 million additional investment in pilots subject to all this accepting the deal, this has been offset by the improved ancillary performance with a 2% increase in ancillary spend per passenger in the first half of the year. Based on that, we're now guiding ancillaries up approximately 1% on a full-year basis, which is ahead of the broadly flat as we've guided before.
Based on the better visibility that we now have compared to last May when we came out with the full-year numbers, we're guiding fares down -4% to -6% on a full-year basis, which is broadly the same for the second half of the year. This is how we get to retain the EUR 1.4 billion to EUR 1.45 billion in the guidance this year. Fuel, we believe will deliver savings anywhere between EUR 70 million and EUR 80 million, depending on where spot goes over the next number of weeks, and indeed what the de-icing situation is going to be over the winter. Michael, back to you.
Thanks, Neil. We're now going to open up to Q&A. Obviously, we're on an open line. We are aware that there's a number of media and others who are on this call. Therefore, we're going to limit what we say, particularly in relation to the pilots and the unions or the pilots and the competitor unions, because we think this is best managed quietly and internally and not feeding the kind of wild speculation or the inaccurate press reporting that has took place to date. Within that context, let's open up for Q&A.
Thank you. Ladies and gentlemen, if you do wish to ask an audio question, please press 01 on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing 02 to cancel, there will be a brief pause whilst questions are being registered. Our first question comes from the line of Duane Pfennigwerth from Evercore ISI. Please go ahead. Your line is open.
Hey, good morning. Thank you. As we think about the slightly slower growth profile of the business into the back half of 2018 and fiscal 2019, how should we be thinking about the cost structure of the business, excluding any pilot changes?
It's too early to say yet. I think when the pilot deals are accepted across all of the bases, they will add something of the order of about EUR 80 million per year to the payroll. We're allowing another EUR 20 million for growth and for other areas within the company. I think it's helpful if you go back to the third or the fourth slide of pace, the slide presentation, which is our comparable unit cost advantage over all other airlines. On a per passenger basis, our staff costs are about EUR 5 per passenger. We think that may rise to maybe EUR 6 over the next year or two, but nothing that will close the already formidable and widening gap on per unit costs between us and every other competitor. That's ultimately the point. We have a huge cost leadership over everybody else.
We have suffered a rostering failure. In part, we're dealing with that by significantly stepping up pilot pay. I believe the pilots will accept those increased pay terms over the coming weeks and months, those that don't, that's fine. They'll continue on their existing pay.
Thanks, Michael. I don't know if you have a value handy for what the asset position on your hedge positions stands now and how much of that is the second half of this year versus 2019. Thanks for taking the questions.
On the fuel side, we're 90% hedged for the current financial year, Duane, at over $490 for metric tons. With euro-dollar hedge is about 112. If we look into next year on the fuel, we're 50% hedged in the first half at similar levels, so $490 for metric tons. Euro-dollar hedge, that's 115. As you look at the asset side, the CapEx, we're now up to 85% of our CapEx hedge, both options and firm aircraft and the like at about 124 on the euro dollar.
Thanks. I was just wondering what the value of that asset would be today if we marked that hedge book to market.
Look, I'm not going to go there, Duane.
No idea?
Yeah.
Okay. Thank you.
Next question, please.
Thank you. Our next question comes from the line of Savi Syth from Raymond James. Please go ahead. Your line is open.
Hey, good morning. 3 questions from me. Just first, I was a bit surprised that your fiscal year 2024 traffic targets have not changed, and I was just wondering if you could provide a little bit more color on the lease returns over the next few years or maybe even the kind of the year-end fleet count you expect for the next few years. The second one was on the hedge book. I'm a little surprised, maybe not a higher hedge % in fiscal 1Q for next year. Is there any change in hedging strategy here? Maybe a little bit more cautious given the run-up. Last one on Norwegian, that was on the connecting traffic. I know you were talking to Norwegian, and that didn't come to fruition.
Just wondering if that was kind of a strategic decision on your part or maybe just Norwegian thinking it's a better fit with easyJet where they're located in the airport. Thanks.
Yeah. Thanks, Savi. There's no reason for us to change the traffic targets for 2024. We will take all of the new Boeing MAX aircraft we have on order. There is a slight slowdown in growth this winter and through the summer of 2018. We're going to keep 10 backup aircraft for next summer. Ultimately, the underlying growth model remains unchanged. If you look at the underlying performance of this business through the fog or much of the noise of the last number of weeks, load factor is 97%, forward bookings are 2% ahead of where they were last year. The business continues to trundle on. The hedge book, we're a little light on fuel at the moment. Yeah, we are only 50% hedged for the first half of next year. We were hoping to see oil prices dip as we came out of the hurricane season.
They were oil prices spot were around mid-50s. It has risen now to kind of slightly towards $60 a barrel spot. We have resumed hedging in the last week or two at slightly higher prices. We will have a jump in fuel costs into next year if oil remains where it is at the moment. Much depends on the upcoming OPEC meeting in November. Norwegian, we have an issue with Norwegian. They couldn't get their IT team assembled to meet with our IT team. We have concerns over Norwegian's financial viability and whether they're a partner we want to be working with this time.
Yeah, just Savi, on the leasing. 33 aircraft in the fleet, or approximately 8% of the fleet are leased at this point in time. You'll recall that we extended some of those leases to the summer of 2018 and 2019. We've about 16 leases coming out before the back end of FY 2020. We've got seven coming out in 2021, and thereafter they taper off into 2022.
Got it. Thank you.
Thanks, Savi. Next question, please.
Thank you. Our next question comes from the line of Stephen Furlong from Davy. Please go ahead. Your line is now open.
Hi, guys. There's a lot of deals obviously being done at the moment in terms of Air Berlin and Alitalia and perhaps Monarch. What are the airports saying in Italy and Germany, perhaps also UK provincials, in terms of providing growth for them? Do you think that theory actually, the position actually is enhanced here that there's more market opportunity kind of going, continuing organically rather than buying these companies?
I think it's both. Without breaching the confidence of ongoing negotiations with those airports, there's an underlying concern certainly among the German, the UKP, and the Italian airports that there will be less capacity flown by the incumbents post whatever the transactions are. That is leading to slightly more advantageous growth proposals, I think, for David and the new routes team. I wouldn't want to put it any stronger than that. Germany is a market where we are growing strongly at a lot of airports who, as many of those airports, are dependent on Lufthansa and Air Berlin for up to 80% of their traffic. Here you have a transaction in which Air Berlin. A remarkable deal.
You have to admire Lufthansa's ability to pull off a deal where they can acquire their way from 68% control of the German domestic markets and 95% control of the German domestic market. In breach of almost every known competition consideration. Not alone did the German government wave it through, they actually lend them EUR 150 million so that it can be facilitated. It is what it is. I think it creates more opportunity for us in Germany. It certainly creates more opportunity for us in the UK P airports, and it's creating more opportunity for us in Italy as well. David, anything you want to add to that?
No. All of that is true, combine that with our relatively slower rate of growth, the competition between airports to secure their share of that growth is intensifying. It's a reasonably positive environment.
Great, David. Just one final one. Slots at Gatwick, does that interest you? No. Okay.
Besides, it's unclear anyway who owns the slots. They could well be going back into the pool and have no value whatsoever.
The issue for us is the slots tend to be militating against putting together a coherent schedule that was without leaving aircraft sitting on the ground for long periods of time. Okay, great. Thanks, Michael. Thanks, David. Thanks, Stephen. Next question, please.
Thank you. Our next question comes from the line of Neil Glynn from Credit Suisse. Please go ahead. Your line is open.
Morning. If I could ask three quick ones, please. The first one on Peter Bellew. Just interested in terms of your thoughts as to what he brings. I think there was some Irish media coverage about his strong relationships with staff, with labor at Malaysian, for example. I'm just thinking ahead in terms of your pilot deals expiring in 2020, 2021. I'm sure you're keen to head off any particular issue at that point in the interim. The second point, you mentioned you're better booked, of course, but I'm sure website visits presumably took a little bit of a hit in September. I'm just interested in any flavor you can provide as to whether we're back to normal levels now, albeit with a bit of fare discounting, as you touched on.
The final point, clearly negative publicity has been touched on, but just interested, how useful has myRyanair been in communicating to passengers as well as stimulating markets as you've touched on through this period?
Thanks, Neil. A couple of quick answers. Peter Bellew brings familiarity. He was the Director of Operations up to two years ago. He was actually responsible for a lot of the pilot recruitment, training, and interaction with pilot bases. He does give us somebody who the pilots are familiar with, but not a solution to any perceived problems to pilots. The best solution for the problems with the pilots is we pay them more money, and we fix the things that we have clearly mismanaged this summer. Like simple, stupid stuff. People applying for annual leave couldn't get a reply. People who wanted a day off couldn't get an acknowledgment. People who were being asked to work days off to cover holes in the roster that weren't apparent because we were being told the rosters were fully covered. I think he brings some experience.
He brings a face that the pilots and the operations will know. He doesn't walk on water either. We have underlying problems here that we have to fix, but we will. Eddie Wilson and the team are fixing the rosters, and we're well on the way to fixing the communications issues with the pilots as well. We're 2% better booked. Yes, we're 2% better booked. Honestly, we didn't see that much of a dip, even as we were announcing the cancellations. I mean, there's a couple of reasons for that. One, because we have 97% load factors close in. We manage the business so that we are highly booked close in. Then the second wave of cancellations, which was the November through to March, we announced those with more than five weeks notice. We handled that process better.
We did suffer an overreaction from the press and the media, but we deserve that. It's not one of our finest hours. It was a screw up on our part, and it's something that we have to make sure it doesn't happen again. Through all of the fog and the noise and some of the bullshit that gets reported, particularly in the written media. Our people are booking, they're flying. The punctuality is excellent again. We have fixed it. I think what we were famous for was low prices and reliability. I think our reliability has taken a reputational hit, but we restored that pretty quickly. The negative PR, myRyanair has been very helpful in the negative PR, in the same way it's been helpful as we continue to grow.
I think one of the most impressive things, not so much about just myRyanair as the membership continues to build, but also the ryanair.com website itself. It is now the world's largest travel website or the world's largest airline travel website. It has more customers than any other airline website, despite the fact there are three other airlines in the U.S. that are bigger than we are. I think it has been key. I think one of the key statistics that we are showing in this roadshow is that 95% of our customers come directly to that website. They're not being referred by search engines or paid for media or anything else. We don't pay Google, Facebook, or anybody a cent for references because frankly, if you're flying in Europe, A, you'll have heard of Ryanair, and B, you'll already know that we have the lowest airfares.
I think that will continue. I think this is one of these periods of time where you've got to look at the underlying business model. Is the underlying business model continuing to deliver? Yes, it is. Does it continue to execute? Yes, it is. Should this cope with the occasional fuck up? Yes, it can. I think that's what we're demonstrating today with these numbers and with it also demonstrates that we're willing to take very painful and difficult operational decisions if it's the right thing to do to protect the punctuality of the flight of the other 98% of customers who were unaffected by this at all. Very few customers were affected by these flight cancellations in terms of our overall size and scale.
That's not in any way to reduce or in any way minimize the inconvenience and the frustration we did cause to the people whose flights were disrupted. I'm pleased to say that the overwhelming majority of those passengers were reaccommodated on other Ryanair flights.
That's great. Thanks, Michael.
Thanks, Neil. Next question, please.
Thank you. Our next question comes from the line of Damian Brewer from RBC. Damian, please go ahead. Your line is open.
Hello, good morning, everybody. Three questions, if I can, quickly. First of all, could you tell us a little bit more about now we're a month into it or Q3 in terms of calendar. Sorry, your reporting Q3, in particular, not just the ticket prices, but also after the 3.9% lift for passenger and ancillaries, how that's trending, whether that's back down to the sort of 1% trend. Secondly, just want to explore a little bit more how you think about aircraft and balance sheet allocation. In particular on aircraft allocation for next summer, are you thinking of following where there are gaps from Monarch Airlines and Air Berlin, or really looking at where the GDP growth and demand is highest in places like Spain and Central East Europe?
With that in mind, how are you thinking about positioning your balance sheet into Brexit and also any opportunities that might arise should another major carrier, you guys seem to point to Norwegian Air Shuttle, fail, how do you sort of preserve balance sheet capacity to do that?
Okay, thanks. I don't think, Damian, we'll give you any guidance on Q3 pricing. I think we've already given sufficient guidance into the second half of the year. We expect yield for H2 to be minus four to minus six. That's better than the minus five to minus seven. I'm not willing at this stage to split that out between Q3 and Q4. How will the aircraft be allocated? As always in Ryanair, opportunistically. David and the routes team are running around the UKPs, the German, the Italian airports, but also some airports in Central Europe and in Spain and Portugal as well, where we're seeing some capacity being shifted away from there back to places like Turkey and Egypt next year. Our opportunity at the aircraft allocations will be opportunistic. How do we gear the balance sheet for Brexit? We don't.
We think Brexit is a potential large crisis. The aviation sector will be first up because we'll be six months before almost every other sector. We will try our best to work our way through it as best we can around this time next year. I can't give you any better guidance at the moment other than we worry that the U.K. government is completely underestimating the difficulties or the extent to which the Europeans want to cause a disruption to flights, because it may be the earliest way of putting pressure on the British economy. If there's another large bankruptcy, we will again approach it opportunistically as we do all of these developments. We have an underlying growth plan.
David and the team are kind of rolling that forward over a 12 and 18-month period, but we will always be opportunistic, and if needs be and some opportunities arise, we'll flip aircraft around, and we'll move them around, and that will continue to be the case.
Okay, thanks very much.
Thanks, Damian. Next question, please.
Thank you. Our next question comes from the line of Andrew Sheridan from Deutsche Bank. Please go ahead. Your line is open.
Yeah. Hi. Morning, guys.
Morning.
I've just got a couple of questions, please. Could you walk through the reasoning behind pushing back, I think it's the EUR 6 second bag fee? I guess it's just now is not a great time to put that in. Just wanted to check if there's anything else. Secondly, can you update on internet on board? A lot of your competitors are planning to do it. Given the ancillary ambitions are unchanged, is there a risk you're left behind if you don't start to move on that? Very lastly, some other airlines in Europe are talking about sharing revenues with airports. I would have thought actually that's very applicable for you given the growth you can offer. Are these in any of your discussions at all? Thank you.
Okay. We pushed back the introduction of the second bag or the second bag being put in the hold for the non-priority passengers to the middle of January. We just felt from a kind of a PR and from a customer point of view, the 1st of November was the wrong time to launch this given the issues we're dealing with here. I think it's important after the rostering failure in September that we demonstrate through October and November that that has been fixed. There's still a worry or maybe a concern out there there'll be more cancellations. There won't be. Internet on board, I'm not a great fan. I'm very happy. We'll have Wi-Fi on board whenever we can put it on board without a large fuel penalty. I don't see much demand for people to pay for Wi-Fi on board short-haul flights.
If we can provide them with Wi-Fi free of charge, they'll be happy to take it, but until the technology exists to provide it to them free of charge, I don't see it on Ryanair. Are we looking to share revenue at airports? We, I think, have been doing that for about 25 years, sharing revenue with airports. We think it is something that will continue, particularly with the Ryanair mobile app. I think it's an opportunity we have of encouraging more of our customers to engage with the airport retail, where we get some kind of a fee or some kind of a share of commission back. We're at the foothills of those kind of developments at the moment. I wouldn't be putting it into any model for the next 12 or 18 months.
Can I just ask on the internet stuff? myRyanair for the. You have more members than anyone else I would have thought in Europe. Presumably the quality of the data is still reasonably light.
No. The quality of the data is very impressive, but we're not monetizing it yet. I think we've been focused more on continuing to build membership and continuing to deliver value to customers who are using myRyanair. It is certainly playing a key role, though, in our ability, particularly to convert people to mobile and to get them to take up things like airport parking, reserved seating. I mean, even the priority boarding can now be bought 40 minutes prior to scheduled departure. If you want to bring your second bag on board from January onwards, if you haven't got priority boarding, you can do it on the mobile now. It's just 40 minutes. I think we want to kind of monetize our own services first. The data we have and are able to capture is pretty impressive.
Okay. Thanks very much. Cheers.
Thanks for that. Next question, please.
Thank you. Our next question comes from the line of James Hollins from Exane BNP Paribas. Please go ahead. Your line is open.
Hi. Morning.
Please go ahead.
Yeah. One on cost and one on pilots. Just on the first one, unless my math has gone a bit awry, we're looking at H2 guidance on extra unit cost up 7%. I think that means incremental year-on-year growth of over EUR 100 million. Clearly EUR 45 is given on the pilots. I'm just wondering what else there was to watch for. Is it just Forex, given the weaker euro against dollar and sterling? Sort of linked to that, is that EUR 45 million, does that assume all pay deals are accepted pretty much as of now? If they're accepted later, are they going to be backdated? Then just certainly a point of clarification. As far as I'm aware, Monarch and Alitalia don't really fly 737s. I was wondering how that's helping your recruitment. Thanks.
Okay. I'll deal with the second one first, and ask Neil to touch on the H2 fuel guidance. Firstly, yeah, the EUR 45 million assumes that all of the pilots' pay deals are agreed from the 1st of November. There's over 15 bases that now agreed those. I think to the extent that those deals are put in place, we're still in negotiation with a number of bases. Those bases that come over the line before we run, say, for example, I imagine the November payroll, which would be around sort of the 3rd week of November, would probably be run from the 1st of November. Those that don't, won't be backdated. If they're agreed in December, they'll run in December. If they're agreed later on, they will run later on.
The EUR 45 million might actually be reduced between now and the end of the year by some or other of those bases who don't yet agree or aren't willing to agree those pay deals. It's important. There's been quite a sea change in Stansted, for example, who this time last week were all full of fire and thunder over Mainly because they were misadvised by the unions. If you reject this 22% pay increase, then Ryanair come back with more. That's not the case. If you reject this pay increase, then you're not getting it. There won't be more. You'll simply stay on the deal you're on. That's helpful. I think one of the dynamics in Stansted is they're beginning to understand actually there isn't more money coming.
The only thing that's coming is 50 new pilots who are joining in Stansted in November who are on the higher pay. Because people who are joining us now, new joiners, new promoters, and base transfers are all getting the higher pay raise. I think that may be one of the issues that's facing pilots in Dublin, pilots in Stansted and some of the other bases who turned down the deal, is new people are joining at your base on the higher pay. Why don't you go back to BALPA and see what suggestion they have for remedying that? I mean, it's extraordinary the amount and extent to which organizations like BALPA, which have recently presided over 500, 400 job losses in Monarch, are now suggesting to our pilots that they, who are already well paid, they should turn down a EUR 22,000 pay deal.
What was the other element on the pilots?
Monarch.
Yeah. Monarch had about 50 737 pilots. Monarch were due to take 737-800s from Boeing in the spring of 2018. They had contracted about 50 pilots to Norwegian who were flying on Norwegian 737s to build up a kind of so that they had a core of 737 competence. Those guys have all, and girls, have applied directly to us. I think as of last weekend, we had already hired about 20 of them, and I think there's job offers out to about another 20. The attraction we offer those people is that we have bases largely at those UKP airports, and we will be adding capacity at some of those UKP airports, so they can simply walk across the road onto a Ryanair job that now pays EUR 20,000 a year more than Monarch were paying or than Jet2 or Norwegian are paying.
Alitalia, yes, Alitalia doesn't fly 737s. They mainly fly the mix and match 'em. There's clear concern down there, as there is in Air Berlin, who are generally an Airbus operator. People see their jobs disappearing. Remember Air Berlin, Lufthansa is not just taking out Air Berlin, but it's imposing very swingeing pay cuts on the Air Berlin pilots who want to transfer, who'll be given a choice of transferring into Eurowings. Eurowings now pays less than Ryanair does in the German market. We are seeing a significant uptick in applications from Air Berlin pilots, Monarch pilots, Alitalia pilots. Again, it allays this nonsense that we have to keep hearing in the, particularly in some of the more idiot sections of the media, that there's a shortage of pilots. I keep going back to the point.
We have 2,500 qualified pilots on a waiting list. We are hiring about 40 a week at the moment. In this year to date, we have hired over 900 pilots. There's another 2,500 waiting in the wings who want to join. Every year I think I've been in this business, some bloody union somewhere has produced a study that says there's a worldwide shortage of pilots. If there is, it might affect maybe some regional or turboprop operators. Never going to affect a jet operator like Ryanair that pays captains EUR 150,000 a year and promotes people from joining to captaincy, typically within a three to four-year period. Neil, do you want to touch on the H2 fuel unit?
Yeah. On the fuel guidance, James, we think fuel will be down on a full year basis, a saving of between EUR 70 million and EUR 80 million. This depends on where spot goes over the next few months. It also depends very much on where de-ice comes in over the winter months and into play. I notice that some of the analysts seem to be a little bit light in their numbers in relation to de-icing and into play. That may be where you're having a bit of a difference, but we're very clear, EUR 70 million savings on a full year.
Sorry, just coming back to that. I was actually talking about the ex-fuel unit cost, which I think again
Ex-fuel unit cost
Looking at +7% in H2, clearly you've got the EUR 45 million pilot costs. Just wondering, apart from Forex, what might it mean it's up over 7% year-on-year in H2?
Yeah. Well, Forex won't be a major impact as far as we affect sterling, because we're broadly flat on a year-on-year basis in there. We've got the EUR 70 million coming through. We've got a slightly shorter sector length than we had first half of the year, as we've taken some of the shorter domestic flights out, which has an impact there. We also have seen EU261 ran slightly ahead of expectations in the first half of the year. Otherwise, we're continuing on, as we had said, we'd originally guided that costs would be down about 1% on a full year basis. The slip is mainly just the EUR 70 million, and as I said, the slightly shorter sector length.
Okay, thanks very much.
Thanks, James. Next question please.
Thank you. Our next question comes from the line of Mark Simpson from Goodbody. Please go ahead. Your line is open.
Thanks. Hi. A couple of questions. I just want to pick that last question up actually, because I'm not quite sure that fully answers it. If you strip out the pilot costs, assume all EUR 45 million incurred in the second half, strip that out, that's still a 5% unit cost inflation ex-fuel. Actually, if you take your guidance line by line and plug that in, it looks like you're about EUR 50 million short of your full year profit guidance. I think that ex-fuel issue just needs some further clarification, because it doesn't quite sort of stack up at the moment. The other thing just on ancillary, we obviously saw a significant improvement in the Q2. I know you're guiding for plus one for the full year, but that suggests flat second half.
I'm just wondering if you can, having highlighted the fact of the advance seen on the seat booking, why should that fall away in the second half?
Is there a third one?
I'm sorry?
I thought you had three questions.
Well, third question is, I suppose it's just also checking the guidance or commentary. You said EU261 cost you EUR 25 million in the first half. If you strip that out, your cost base on a kind of clean base would have been down 1.2%. You highlighted it was down 2%. I'm just wondering if there's anything else in that over and above the EUR 25 million EU261 cost.
Okay, going to do the ancillaries. We think ancillaries will be a little bit less buoyant in the second half of the year. The postponing the new introduction of the baggage into January would mean slightly less priority boarding income over the next two or three months. I think on balance, it's more likely, we might feel a little bit better than that, but I think this is the time for cautious guidance, and we're generally guiding cautiously for the remainder of the year on ancillaries. The ex-fuel unit cost, Neil, do you want to address it here or get Shane to get back to you on it?
We can get back to them on it. Again, I'm happy to say, Mark, that the guidance where we effectively grow our ex-fuel costs, where they're up 3% on a full year basis, is driven by the sector length. We had already indicated the fact that costs will increase the second half of the year, having had the savings into Q1 and Q2 ex the EUR 25 million. There's nothing different or strange in these numbers other than what we've had guided previously with Q1 and the full year numbers. Sterling, as I said, won't have an adverse impact on us this winter, given that we had about 91% on the sterling over last year. There is nothing strange or different in these numbers other than we have the EUR 70 million in there for the pilots that we've won.
What are we gaining?
Second half.
What are we gaining ex-fuel unit cost on the second half, H2?
6%.
6% we're guiding.
Okay. As it is kind of implied, as Shane said, it implies 7% on the guidance you gave us, but you're saying 6%.
Yeah. Which gets us to the 3%, which we've identified.
That's the number.
Yeah. Okay. Then I'd say just on the EU261, EUR 25 million, but your minus EUR 2 million on a clean like-like base would suggest there's actually additional costs. Just wondering if you can sort of close that gap.
No. The EUR 25 million is the exception. There are other EU261 costs in the first half of the year as well.
Yeah, which were running less than last year.
Okay. That's over above. All right. Then, sorry, final question. Vouchers, are they being accounted for as a decline in yield, or will they be treated as a cost in the second half?
No, decline in yield.
Yeah. All right.
Great. Thanks.
Thanks, Mark. Next question, please.
Thank you. Once again, ladies and gentlemen, if you do have a question, please press 01 on your telephone keypad now, or press 02 to cancel. There will be a further poll for questions are being registered. Our next question comes from the line of Rishika Savjani from Barclays. Please go ahead. Your line is open.
Hi there. Good morning. I just wanted to ask about the slowdown in the rate of capacity growth for summer next year. It sounds to me that decision was primarily driven to build a bit more slack into the business. I wondered, with the labor cost pressures that you talked about and the fuel headwinds, is any part of the decision designed to protect yields? Then maybe secondly, just on the shareholder return policy and buybacks. Can we assume from next financial year that your ordinary policy of positive free cash flow will likely mean a resumption in previous history around share buybacks? Thank you.
Yeah, I think on the share buybacks, we'll continue to keep it under review. Policy will be to continue to spin back surplus cash to shareholders, probably through a mix of buybacks and dividends. It is unusual for us to be in a net-net situation of EUR 600 million, but at the half year because of the CapEx and the accelerated share buyback in the first half of the year, we want to make sure we're back at zero net debt at the end of the year. Summer 2018 capacity, I think we've had a bad experience this summer, particularly with air traffic control delays. I mean, enormous staffing problems within German ATC. Britain U.K. ATC was better than it was in summer of 2017, but still are in summer of 2016, but still quite a significant amount of problems.
I mean, our punctuality this year in the peak summer months was two or three percentage points below where it was this time last year. We ran the fleet of 400 aircraft with essentially seven backup aircraft in the middle of the week, but only about three backup aircraft at weekends. I think we feel for next summer, we want to see what the resilience of air traffic control staffing. We'll be putting a lot of pressure on the Germans in particular, who have mismanaged their ATC capacity all summer long. I suspect if there is a better degree of resilience in next summer, we will fly some of those aircraft. We're definitely going to operate next summer with some more spare aircraft backup than we did in the last couple of years. It's not for yield management purposes.
It is for punctuality and reliability purposes that we're keeping an extra 10 aircraft spare at this point in time for summer 2018.
Okay, great. Thank you.
Thanks. Next question, please.
Thank you. The next question comes from the line of Alexander Paterson from Investec. Please go ahead, Alex. Your line is open.
Morning, everyone. I think you said that pilots have accepted pay increases at 15 bases. Stansted has so far declined. Could you just say if any other bases have declined? Secondly, looking ahead to next financial year, it seems that for reasons of these bankruptcies, also higher fuel, it may be a more positive yield environment. Could you say if you think whether yields will be up in 2019 relative to 2018, please?
Okay. Firstly, I mean, we're not going to get into a which base have accepted, which base have rejected, because that kind of lends itself to the union agenda. There's over 15 bases that now accepted the pay increases. Stansted has rejected. There's a number of other bases that also turned down the pay increase. I think they have been surprised by the extent to which they are certainly disappointed that what they were promised by the pilot unions, is that Ryanair would be back with an improved offer hasn't materialized. Therefore, they have to find a way of returning to the table via their ERC to discuss the pay. We continue to engage with the Stansted pilots and their ERC. The door remains open to them and to a number of the others. Will there be some third party?
Are we going to sit down with some pilot unions or competitor pilot unions or this EERC, which is the latest construct of these competitor pilot unions? No, we won't. There won't be any discussions with them now or at any time in the future. We have a, what is it? An exhaustive collective bargaining process. I think it's important to understand. The pilots have participated in this collective bargaining process for over 30 years. It's no secret that the pilots at Stansted are on a five-year pay deal that runs to 2020 that they voted on a secret ballot and improved by an overwhelming majority. We're offering to improve those pay terms again. They're perfectly free using the ERC to reject that offer. That doesn't mean that there'll be an alternative offer.
We'll continue to engage with them and with any other bases that have turned down the deal and want to discuss it further. There won't be any more money on the table. I think what they are misunderstanding, and certainly what some of the media have misunderstood, is we're now offering pay terms that are EUR 20,000-EUR 25,000 more than any of the other 737 low-cost carriers. We have a flood of people who want to join us from bankrupt companies and from those other inferior pay airlines. We're hiring 40 new pilots a week. We are adding those pilots at those bases in Stansted and at other bases who have turned down the deals at the higher pay rates. That is where it will lie. We have seen all of the speculation about industrial action, none of which is backed up by any facts whatsoever.
If they wish to take industrial action, they're free to take industrial action. While the last people to take industrial action were the SAS unions in Copenhagen, to which we responded by closing the base in Copenhagen and moving the aircraft out of there, while still growing over an 18-month period to become the third largest airline in Copenhagen. I hasten to add if there's industrial action, we will not close bases. That would be too easy because that's what the competitor airline unions would want us to do. We will move some aircraft out of certain bases if there was industrial action. There will be consequences, and those consequences will not be to the advantage of those pilots. We're not at that stage. The relationship with the pilots is very good, despite what you might read in the papers.
It will continue to be good because we are paying them extraordinarily well. We're providing excellent job security. We're providing them with a roster that gives them a double bank holiday weekend at the end of every week of flying. We continue to welcome literally hundreds of pilots to Ryanair on an annualized basis, who are flying brand-new aircraft and building up their hours and getting rapid promotion to captain. I think the underlying, when you cut through the fog and the noise of the PR, I think there will be another six months of negative PR generated by pilot unions in whatever country they happen to be, their friends in the local media, who generally tend to be somewhat left-wing and pro-union. That's just where we are, nobody buys those newspapers anymore anyway. Frankly, our customers don't pay any attention to them.
Next year, it's too early to say. If oil continues to trend upward towards $60 a barrel or higher, then I think there is likely to be upward pressure on fares and yields next year. If other airlines go bankrupt, as I think will inevitably happen, will happen sooner rather than later if oil remains above $60 a barrel. Remember, some of these airlines haven't been able to make money when oil was at $40 a barrel. I continue to be generally bearish on pricing and yield. Our business is set up so that we are continuing to add new lower-cost aircraft from April of 2018 onwards. We have the MAX 200, which again, remember, have 4% more seats but 16% lower fuel consumption per seat than our existing fleet.
Our operating costs will continue to be flat or fall slightly, although we're now going to add some EUR 100 million a year in terms of additional pay for our people. By the way, the best way of guaranteeing that there won't be industrial action is to pay your people more than the competition. I would be surprised if we were to see industrial action from people who are on paid EUR 150,000 a year and who've been offered a EUR 22,000 pay increase. It would be particularly difficult challenge for their union to demonstrate why these people are disrupting thousands of members of the traveling public, when they're clearly well-paid and have a very attractive pay increase on the table at the moment.
Great. Thank you very much.
Thanks, Alex.
Thank you. Our next question comes from the line of Jarrod Castle from UBS. Please go ahead. Your line is open.
Jarrod, thank you. Good morning. 3 as well, please. Obviously, the fuel costs going up in 2019. You kind of alluded to some of the building blocks in terms of yield versus extra unit cost. How would you look to offset those in 2019? Secondly, just in terms of Catalonia, if you could kind of just give a bit of color in terms of what you're seeing there in terms of demand. Then also, lastly, you've kind of put all these slides saying, look, we are paying 20% more than some certain competitor airlines. One, why do you think it's necessary to be so competitive, Michael? And two, do you think you're going to shortly see competitors facing quite a big upward pressure in pilot costs? Thanks.
Thanks, Jarrod. Okay, fuel costs. We don't know where it'll get offset in 2019. We're not sure whether oil will stay at USD 60 a barrel. We're not in the forecasting business or predicting the future business. We deal with the reality at the moment. We were hoping as we came out of the hurricane season that oil prices would trend back down. Supply remains strong. Stocks are at record highs. If oil prices rise into 2019, I think it's inevitable that the flags in Europe will put on more-- You'll see the return of fuel surcharges, and there will be a more benign yield environment than there is currently. The troubles in Catalonia have undoubtedly affected yields. We are having to price discount a little bit more than we would normally on our operations to and from Catalonia. We operate 3 airports there, Barcelona, Girona, and Reus.
There is a political situation there. I don't think ultimately it affects people flying there, as long as it doesn't break our spill-over safety concerns. It is undoubtedly a little bit weaker. Our pricing there is weaker. Load factors remain strong. Why is it necessary to pay our pilots 20% more? I think it has always been part of the Ryanair mission that we will pay our people more than the competition, and we expect them to deliver us more productivity. I think we have allowed the gap, or we have allowed the likes of Norwegian and Jet2 in the last 12 or 18 months, who we don't see as serious long-term competitors anyway. Nevertheless, they are paying up to where we are, close to where we are in terms of pilot pay and remuneration.
I think it's important to us as we're going to grow from 400 to 600 aircraft in the next eight years. It is important that we reestablish that clear blue water between Ryanair pay and competitor alternatives. We expect our guys and girls to deliver us more productivity. I think it's also, though, there is a nice symmetry between ensuring that we restore a significant pay premium to Ryanair pilots over our competitors. It also makes it much more difficult for the unions of competitor airlines to whisper in our pilots' ears, "Don't accept this big pay increase because we will do something. We'll get you," I don't know, things like we got in Monarch Airlines or in Air Berlin. We are determined. We have been non-union company for 30 years.
We will remain a non-union company by paying our people more by fixing the broken elements of communication with pilots that undoubtedly broke this summer, where we fucked up their rosters, we messed up their days off, we didn't handle, and we haven't handled well, very reasonable requests for them for days off or leave or whatever it was. That should be a basic tenet in the operation of any company. It has always been within Ryanair. You may not like the answer we give you to a request, but at least you get an answer pretty quickly. Even that fell down this summer. I think that is a management failure. We have recognized it was a management failure, and we are investing very heavily, not just in pay.
This thing is not going to be addressed by just paying them more, although certainly paying them more is a good way to start off addressing it. Paying them more, fixing the rosters, which has now been done, and improving the way we communicate directly with pilots. I mean, to such an extent that in August, our pilots would send in a request to us to rostering, and they wouldn't get an answer at all. By the time we get to the end of November, they will have an individual that each pilot can communicate with, and their requests were guaranteed that all those requests will be answered within 48 hours.
We need to get a lot more professional and better at the way we service our pilots and our cabin crew, and fix the very silly and unnecessary grief we have caused them, certainly over the last six months.
Okay. Thank you.
Why is it necessary to pay them 20% more? It isn't. We want to pay our pilots more. We think they do a great job in Ryanair. I love Ryanair's pilots. I despise competitor airline pilot unions, but I love our pilots and have long since done so.
Thanks, Michael.
Thanks.
Thank you. Our last question comes from the line of Savanthi Syth from Raymond James. Please go ahead. Your line is open.
Hey, two quick follow-up. The first is on the debt repayments. I was just wondering what you're expecting for fiscal year 2018 and maybe over the next couple of years. Then the last question is on the contracting model. Historically, I think that's been a benefit because of the seasonality in the model. Is your kind of willingness to have more kind of a higher mix of employees a result of maybe flying out of more primary airports and less seasonality?
Just on the debts, we're going to be paying down about EUR 450 on debt per annum. We'll be debt-free by the time we get to FY 2024. At that point in time. There's a misunderstanding, again, peddled largely by competitor pilot unions about our contractor model. I'd say in 2017, a majority of Ryanair pilots will be direct employees. There is a minority of the captains who are contractors because they wish to be contractors. They earn more money. The contractors are paid more than the directly employed pilots. There is a majority of the first officers are contractors, and that is a convenience because as they move around and the second officers, the first officers move around more as promotional opportunities arise, it is easier to have them on contract, so they are more mobile.
It has always been our policy, as they get promoted to captain and return to the base where ultimately they want to live or lay down roots, if an Italian, say, finishing up in Italian bases, we're very happy to have them permanently employed on Ryanair contracts. There are two other things can I nail. We do not have zero-hour contracts. Our contractors are guaranteed a minimum number of flight hours. There are no zero-hour contracts in Ryanair. Secondly, there's this notion out there that somehow we're running some tax scam in Ireland by having people on Irish contracts. We have people on Irish contracts because we're required under Irish law. If you're flying an Irish aircraft managed in the state of Ireland, you have to pay your taxes in Ireland. It's an Irish fiscal requirement.
We'd be very happy to move it to local taxation around Europe because personal taxes in Ireland are very high, and they tend to be lower elsewhere in Europe. Ireland does have a bit of a reputation of being a sort of tax haven from a corporate point of view, but from a personal point of view, it's a penal tax environment. We would be very happy if that was moved, and people who are employed are paid in the country in which they live. There are mobile transport worker provisions in Europe that need to be addressed and resolved. We comply with European law, we comply with Irish law. There won't be any changes to those. I try to write the out of the Monford case or anything else. The contractor model doesn't provide us with any seasonality.
It doesn't provide us with anything other than we have some pilots who prefer to be contractors. It's more tax efficient for them to be contractors. It makes no difference to us, to Ryanair. We have first officers who are moving around and need more flexibility.
Copy. Yes.
Okay. Savi, thank you. Okay, ladies and gentlemen, thank you very much for participating in the call. We have an extensive roadshow. I think we have something like 12 teams on the road for the remainder of this week covering Ireland, the U.K., Europe, and the U.S., both East, Midwest, and West Coast. If anybody wants a meeting, we'll be very happy to facilitate it. You can arrange it through Davy or Citi. Again, apologies from me and from the management team for the rostering fuck up in September. We have fixed that screw up. It won't happen again. We will try to learn from this experience and ensure going forward that we continue to execute in a way that you would expect us to execute while we grow the underlying business and grow the profitability and grow the shareholder returns. Thank you very much, everybody. Bye-bye.
Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your line.