Good morning, ladies and gentlemen, and welcome to the easyJet Q1 results call. My name is Dave, and I'll be your coordinator for today's conference. For the duration of the call, your lines will be on listen only. However, at the end of the presentation, there'll be an opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad, and you'll be connected to an operator. I'm now handing you over to Johan Lundgren to begin today's conference. Thank you.
Thank you everyone. Good morning to everyone, everybody in this room as well, and also everybody who is on the phone with us today. I have with me here my CFO, Andrew Findlay, as well as Stuart and Michael from our IR team as well, and a number of the analysts that covers easyJet as well that is here with me in this room as well. Just to go through the presentation. As you will see, we have issued two announcements today, one covering the Q1 trading and the other one announcing some changes to my top team. I will on this call first cover the Q1 trading, then I will touch on the second announcement later on this call as well. You should have been sent the slides along with the statement, which are also available on our corporate website.
As usual, we will review the Q1 results, then follow up with plenty of time for questions that anyone have. We'll start some questions inside the room, then we will move forward and take questions from those who are on the phone call as well. Looking at this slide and 2018 on slide number two as well, we have had a strong start. We delivered a strong performance in Q1, maintaining focus on our key strategic objectives, enabling us to continue to grow profitably and deliver return to our shareholders. Our growth plans are purposeful and disciplined and see easyJet building and strengthening market positions in key airports across Europe while delivering a positive revenue trend throughout the period. Cost control continues to be a key driver at easyJet. We have delivered a strong Q1 performance in line with our full year guidance.
This is despite the cost of the increased year-on-year weather disruption, as well as the incremental costs associated with an improved load factor. As you know, we have invested in the resilience of our operation through the summer, which is delivering results for the customer. Our Q1 OTP figures have improved with Gatwick North terminal being a key driver of overall improvement, increasing OTP for Q1 with seven percentage points, which I think is a fantastic achievement and improvement. Our market-leading digital offering is continuing to develop with our new website driving an increase in conversion and ancillary revenue. This is underpinned by the strength of our investment-grade balance sheet, which provides us with flexibility and ensures continued access to low-cost funding.
On the next slide, passengers increased by 8% to 18.8 million in the quarter, driven by an increase in capacity of 5.5% with load factor increasing by 2.1 percentage points to 92.1%. Revenue per seat to constant currency continues its improving momentum last year with RPS increasing by 6.6% for the quarter, which is slightly ahead of the guided increase of low to mid-single digits. This includes a very strong performance from ancillary revenue, increasing by 12.3% on a revenue per seat basis as we provide customers with more of what they want, spending more on the full range of our products from hire cars to allocated seats to Hands Free bag and Fever-Tree tonic. We saw over GBP 900,000 of sales throughout the quarter.
Cost control remains strong with headline cost per seat at constant currency including fuel decreasing by 3.3%, aided by a lower effective fuel price as well as continued delivery of easyJet Lean projects. On capacity, excluding our Tegel operation, easyJet grew capacity by 5.5% in the quarter and is expected to grow by circa 5% for the half. This growth continues our discipline and sustainable approach to deploying aircraft into strong positions throughout the network. As you can see in the graph on the left of the slide, growth on easyJet markets in H1 has been lower than last year, which is mainly due to the impact from Monarch, Ryanair, and Aer Lingus capacity decreases. In terms of expectations for H2 growth in the market, it is still too early to get a clear picture.
What we do know is that IAG purchased the vacant Monarch slots at Gatwick, and for this summer plan on using BA to fly around 50% of those slots to a number of short-haul European routes that compete head-to-head with us. Also, we are planning on that basis that Ryanair will fly a full summer schedule following the capacity decreases seen over winter. Regarding easyJet's growth, on the right-hand side, we can see that we have continued our strategy to reinforce our leading positions in the U.K. and Switzerland to reinforce our strong number two position behind the legacy carrier in France, which together with a city focus strategy in Italy, the Netherlands, and Germany, is working. As you know, we deliver our lean basing initiatives out of Spain and Portugal. Moving on to the revenue.
Our strong revenue performance in the quarter was driven by a number of factors. Firstly, we continue to benefit from our winning business model comprising strong market positions, a leading network and schedule, and our award-winning customer service. This has been significantly helped in the quarter by the capacity decreases by competitors in the market. Ancillary revenue increased by 12.3% on a per seat basis at constant currency, making up circa 20% of the total revenue for the quarter and was driven by products such as our new bag offering as well as yield management and growth in the take-up of allocated seating, both of which were helped by the increase in load factor up 2.1 percentage points for the period. Our strategy will be to continue innovating and offering customers the product and services that they want, which will enable easyJet to continue to build on this strong performance.
These factors were supported by solid demand across the easyJet network and a disciplined approach to aircraft allocation as well. On slide six, costs. Focusing on costs continues to be a key strategic objective for easyJet to ensure we maintain our competitive advantage. Headline cost per seat decreased by 3.3% at constant currency, while headline cost per seat excluding fuel at constant currency increased by 1 percentage, which was mainly driven by underlying inflation such as crew costs. This is a strong performance considering we experienced a 2 percentage point increase in load factor and the impact of disruption and de-icing costs of severe adverse weather experienced during the quarter.
This was highlighted by cancellations for the first quarter increasing by 550 compared to last year. We had actually cancellations that were in excess of 1,000 cancellations for the Q1 versus the 500 that we seen the year before. Despite the cost including that, we kept to our guidance on that. Our underlying cost performance has been strong, resulting from volume-driven contracts with airports, navigation charge price benefits, and the benefits from fleet up-gauging with our average seat gauge in Q1 this year increasing from 167 to 170 seats per aircraft. easyJet Lean continues to be the driving force behind these cost savings and has already delivered GBP 28 million of sustainable savings so far this year. Let's see. I also got to say that on the cost side as well, because it's an important critical factor for the success of this business.
This is something that I will, together with the team and with Andrew, be focusing relentlessly on as well in order to be able to continue to offer extremely low fares for the customers that we have as well. Moving on to slide seven. easyJet is always trying to make things easier for our customers and deliver a robust operational service. We know that airport and airspace congestion will not change overnight, we are investing in the tools to ensure better performance and improve our on-time performance. We have invested in the resilience of the schedule and the operations over the past 18 months, which is delivering results evidenced by our Q1 OTP being above 80%, which continues the improving trend seen through the previous financial year.
We are working together with DHL to disrupt the ground handling model and transform what we do at Gatwick Airport. Since starting in November, they have provided quality service, new ideas, innovation and a razor-sharp approach to efficiency and consistency, which has been the driving force behind the 7 percentage point increase in our OTP at the airport in Q1 as well. On the Tegel operation and moving on to some details around that. I'm happy to inform you that while it's still early days and with the first flight on Friday, January 5th, the initial flying schedule is running along smoothly with the transition to wet-leased aircraft happening as we speak and capacity gradually building up through the year as highlighted at our full year results in November.
Our services out of Tegel has been warmly received by the Berliners. We've had fantastic feedback from our customers since the start of the 5th of January. Considering the winter schedule was released around a month ago, we are in the very early days. Trading so far has been in line with our expectation and has been supported by significant positive PR on the day of launch. The summer schedule is due to be released by the end of the month. We will update you at our H1 results. The headline loss of the new 2018 Tegel flying schedule is expected to be GBP 60 million. We will update you in more detail at our half year results when we have more visibility on summer bookings.
Regarding the transition to full easyJet operation in winter 2018, I'm pleased to say that we are on track to deliver this. Dry-leased aircraft have been secured under easyJet terms and conditions. The conversion process has also commenced. The first group of ex-Air Berlin crew have completed their training. There's a strong pipeline of candidates in line to complete training throughout the year. The anticipated non-headline PBT impact of the transition to an easyJet operation is up to GBP 100 million, which is no change to the guidance that we have previously provided. As a reminder, we expect that our Tegel operation will be PBT accretive in 2019. I'm sure you remember the next slide from our full year results that we had in November. This was a walk from the consensus at the time, taking into account updates to trading, fuel, and FX.
We've seen a strong start to the year, which is highlighted by a further GBP 35 million net trading improvement since we last updated the market. It is important to note that this trading upside is somewhat underpinned by the benefits arising from current lower capacity where we operate. However, it is also reflecting higher costs, such as those relating to increased loads, disruption, and also de-icing costs that are also factors contributing to this. Taking these factors into account would leave us with a pre-Tegel operation PBT of around GBP 530 million, when we take into account the unchanged GBP 60 million PBT impact from our 2018 Tegel operations as well. When flowing through this in a consensus model, the net of the cost of the Tegel operation, this leaves a full-year 2018 headline PBT consensus figure of around GBP 475 million.
Regarding second half revenues, as you know, it is way too early to make assumptions at this stage. What we do know is that Easter partly moves into H1 this year. As a result, you should expect the Q3 RPS to be down on the year. Competitive capacity plans are still very much unknown. Any free slot capacity currently in the market from Munich and Berlin is highly likely to be filled for the summer. BA flights from Munich slots to Spain and Gatwick Airport being a good example of that. Looking at the forward bookings. Customer demand is strong with encouraging levels of forward bookings. As you can see, bookings are slightly ahead, which reflect building earlier loads than last year, as well as an earlier schedule release this year.
There are still around 40% of seats to be booked in Q2, which is 5% in front of the same time last year. Having a quick look on the second half of the year, the summer capacity outlook is still yet to be confirmed, and with only 20% of our seats booked at this stage, you can understand the uncertainty that currently exists with the revenue guidance for this period. Moving on to fuel and FX. This slide summarizes our forward jet and currency hedge positions. Although increases in fuel price impact us in the short term, our strong hedge position sets us in a good stead over the medium term versus the number of our competitors. Moving on to slide 12. We plan to grow full-year capacity in 2018, measured in seats flown by between 5% to 6% before disruptions.
We expect revenue per seat at constant currency to increase by mid to high single digits in quarter two, which is an increase to the previous guidance that we provided. Headline cost per seat, excluding fuel and at constant currency, is expected to increase by circa 1% for the full year, assuming normal levels of disruption. Our FX and fuel guidance is changing slightly, taking into account market updates since our full-year results announcement in November, with an expected favorable FX impact of circa GBP 5 million and expected favorable unit fuel impact of between GBP 80 million to GBP 100 million. Finally, the expected headline loss related to our Tegel flying has not changed from the circa GBP 60 million adverse impact on headline PBT. Slide 13.
In summary, I've been in the business now since the start of December, and I spend a lot of time meeting people, seeing people across the network in the organization at our bases, suppliers, shareholders, some investors as well, and I must say that my impression of this is that this is a company with a really strong strategic framework. A framework with a strategy that clearly is working, as you can tell by the results that we announced this morning as well, and also not only the strategy but also with the depth and knowledge of hugely talented people. People are really committed, really passionate about moving this company forward as well. Just a reflection on what I've seen from this company from the outset, both as a competitor previously and also as a customer.
This was always a company that I think focused a lot on the customer, and that comes through in everything that we're doing, which is really impressive. What we also can tell by that, and summarizing what we're seeing, that is that this is flowing through into the results as well. The strategy we have of the point-to-point primary airports taking number 1 and number 2 positions, really strong position, together with that absolute focus on the cost to make sure that the cost base is as low as it possibly can be in order for us to continue to offer extremely low fares to our customers. That will continue to be a focus of myself and Andrew and the team going forward. Those are the things that really stands out to me, and there's a number of things we're going to deliver also in 2018 as well.
Tegel being a massive focus for ourselves. We want to execute that because it's a 25-plane operation that we're doing, and we come off to a good start. As I said earlier, the feedback from the customer has been fantastic on that. Berlin is by far the biggest city in Germany as well, and together with the operation that we already have in Schönefeld, I think it's an amazing position to continue to build on. We're going to move from 80 million to 90 million passengers this year. We're going to take into the fleet also the A321s starting in the summer. We are transitioning also the fleet over from the A319s to the A320neos, which should also deliver better fuel performance for ourselves as well.
There's really a lot to look forward to, and there's a number of these important milestones in 2018 that I just wanted to point out as well. I just wanted to touch base before we kick off also with some questions here about the changes that I've done in the structure, which we also announced on this morning as well. One of the key things that I've done since I started was actually really trying to get to know the teams, really trying to get to know the people, the structure, understanding how we do things, why we do things the way we do. I see that we are quite advanced in a number of areas. There's one position that I have decided to announce that we have started looking for immediately, and that is the one of a Chief Data Officer.
When I look around in our business today, we do a lot of things when it comes to the data science as well, but I want to have one position at the A M B level reporting into to myself who basic takes a view about what do we do with all these half a billion data points that we have in the company. How do we make sure that we know what data to collect, how we maintain that data, how we explore that data in order to drive further efficiencies in the companies, drive revenues, and also the way we engage with our customers. I think that also, having up-to-date data will also allow us to have a better consumer insight and allows us to better take quality decisions based on what the data is providing us as well.
That's a position that I wanted to create. When I also looked down through the structure of the company, I decided I wanted to move the revenue and the pricing and the yield piece that was previously sitting within our Chief Commercial Officer's area. I wanted to move that out and bring it into the scheduling, where the areas of the responsibility for the scheduling lies, which is quite normal in the industry. The reason why that is the case is that it allows you to get a more holistic view of everything from when you plan your aircraft, where they're going to fly and how they're going to fly, to also know what is the revenue intake you can plan and forecast based on that as well.
I wanted to do that, and that also fits very well with the experience and the knowledge of Robert Carey, who's in charge of our scheduling and strategy at the moment, that he should be doing this as well. As part of those changes, that means that that current position of a Chief Commercial Officer basically wasn't there. The role became redundant. As a result of that, Peter Duffy has left the business. I'm now going to work together with the rest of his team, which is in marketing, digital, customer experience, and CRM to work what is the best structure to formalize that, perhaps into also one position as well that will report into myself. That will allow me to get closer also to those issues. I don't expect any other board changes at this moment in time.
Like I said, this is not only about the board. It's a huge talent, massive strength in the team and in the organization as well, and we're building on that. I think with this structure, we're getting ourselves in a better position to take advantage of the opportunities that exist going forward. I think that concludes the presentation. We are happy to take some questions first from the room, I believe.
Can you just make sure you speak up so they can hear you from the back, please?
Thank you. It's Jarrod Castle from UBS. I'll ask three, if I may.
Okay.
Just to get a color on why you took the easyJet role and what do you think you bring that perhaps the previous CEO wasn't bringing? Secondly, just any kind of views on when you look at CapEx and growth, if there's any initial changes that you foresee? Maybe just one for Andrew. Just can you give us a sensitivity now where things stand with currency and fuel in terms of changes and Thanks.
I'll do the first one, and you can do the two other ones as well. Why I took the role. As you know, I used to work at TUI. I left TUI in May 2015. I had this relationship with easyJet, both as a customer. It was, dare I say, a favorite airline of myself on the route that we didn't operate clearly within TUI to travel with. I think it was something about the company that it was actually had been transforming the way that people travel. The different price point that was out there in a different way, engaging with customers in a different way that I just thought was contemporary. I always loved the company as a customer. As a competitor, I was quite impressed by it and by looking at the growth and looking at what it was doing.
When the opportunity came up, I thought that this is something where I can contribute. I had worked extensively, as some of you know as well, with setting up and working through Pan-European structures. We're on our way now also with the expansion we've seen in Tegel and German as well to grow that European part. U.K. will continue to be absolutely critical for us. It's big, it's huge. We get more opportunities there as well. I also think with the European background that I've had, that this will come into play. I also have focused a lot in my previous jobs that really putting the customer at the center of what we do, finding things that differentiate ourselves from others.
I think that this is something that's been working well within the company in terms of having that price point, the low-cost base, point-to-point flying to the primary airport and really engaging with the customers in a way that I don't think anybody else is doing. That sits very close to me, and that's what I will continue to do.
Yeah. On CapEx, no change. Clearly, with the investment in Tegel, that will have an off-balance-sheet impact, obviously, from a capitalized perspective, because we are seeing significant growth there. Underlying, no change. As you know, we've got six A321s coming in this year at the end of the year, which we brought forward from 2019 into 2018, so we get the benefit of the year, but no change from that perspective. With respect to currency, I'd say around $10 on fuel is circa GBP 3 million-GBP 5 million impact. On EUR, it depends on the time of the year, but we'll give you some more guidance on that at the half. I think it's fair to say, given the fluctuations, what we've given guidance on is a reflection of what we think the likelihood of that will be going forward.
As you can see from our hedging position, we're in a strong place with both this year and FY 2019, and we'll continue to hedge forward. One thing, we are building up our position on Tegel flying when it comes to fuel. The tables that you see there don't include that. The impact of it is marginal on our % coverage.
Yeah. Stephen Furlong from Davy. Just two. One for Andrew. Just on Easter, what's the effect of, it's just funny times
Yeah
obviously in terms of Q2 in RPS, would you say roughly?
Yeah. I'll give you the absolute numbers. We estimate, and I'll just be clear, it's very difficult to estimate Easter, as we found last year. We didn't get it quite right because it has an impact of how close Easter is to the Whitsun holiday as well. We estimate it around between GBP 35 million and GBP 40 million on Q3 into Q2. What that does for the quarter is about 3% impact. Obviously, that will give us a bolster in Q2, but obviously detrimentally impacts in Q3.
Can I just ask a follow-up? Just on the French market, can you just talk about that? How attractive do you see that market? I know Ryanair's making noises of moving in there as well.
We got a strong position in France. We are second after Air France in terms of consideration from customers in the market. It's a long way away from the number 3. We believe that we still have plenty to go after France. We're opening the Bordeaux base coming up in this summer as well. Yes, I've seen the announcements of Ryanair as well, and I'm not sleepless over that. They will struggle to get into Orly, as an example. They fly from Bordeaux. I actually think that actually highlights the difference in the strategies, where we fly from those main airports, the primary airports, rather than the secondary airports as well. With anything, you watch out for competitors. The one thing of focusing on what you do well, we'll continue success going forward.
Thanks.
Hi. It's James Onions from Exane. Two from me. On full year capacity, I think you were guiding 6%, you're now 5-6. Is that just because Q1 had some disruptions or is there anything else within that small pullback? Second one is on Berlin Tegel. I was wondering if there are any sort of surprises, be they good or bad, what you've seen so far, whether it's cost of leases, staff recruitment, et cetera. Then third one's for more generally. I imagine a lot of your time at TUI was spent discussing disintermediation both as clearly a risk to the business strategically as well as potential upsell for the airline. Even you've now made the 180-degree turn on [audio distortion] standard on that. Can you just let us know how you used to think about it and maybe how you feel about it now?
Do you want to do the capacity?
Yeah. Capacity, you're absolutely right. It just affects around disruption, and we make sure we reflect that in the numbers. We think it's going to be nearer six, but we just make sure we give you a range between five and six. Touch about Berlin?
Yeah.
Yep.
I can take Berlin as well. There's no surprise into the cost that we have there as well. Clearly, we put the program on sale in beginning of December as well, and it takes some time to get the loads up and the yields up there as well since the start in 5th of January. The guidance we had on the PBT headline number for GBP 60 million still stands, and the one-off, the GBP 100 million as well as with transfer and setting up the bases, that still stands as well. We think that that is realistic. Like I said, from the trading and yield point, we're very early into that. So far, it goes as we expected it to be. In terms of that disintermediation, on the contrary, this is great.
It's not mean they can go between us because we are the ones who's going to take customers from one place to another one. It's different if you're sitting in a vertically integrated travel group where you can have companies who comes in and take different parts of your value chain. This is the value chain. I think that having the assets, whether that is the airline and the airplane itself actually to do that as well, that is a massive benefit. You can have views on who's going to distribute that. I think that our direct model that we have is working really well, and that will continue to do so. I feel very comfortable in my new job on that.
Daniel Roeska from Bernstein. The first question, you're coming in the industry at an exciting time. Industry's consolidating, arguably will continue down that path in Europe for the foreseeable future. Where would you like to see easyJet among all those competitors at the end then? I'm pretty sure you want it to still be there, but how do you think the industry will look and what will easyJet's role be?
It touched a little bit on distribution. Second question, how would you see distribution changing now that all the legacies also are moving away from the GDSs? Doesn't that also pose some risk of disintermediation in the end if you think about Google, TripAdvisor, Facebook? Maybe also with your view from TUI, how did you think about this at TUI? How do you think about it at easyJet, where you see the selling of that capacity? How will that go forward? Lastly, on your comments towards the cost reduction, any specific areas you'd highlight where you think you can bring value to the company? How does that also relate to IT and the CDO role? Any specific areas where you'd say, look, this is something where easyJet could do better?
Yeah. Okay. On the first one as well, I think we are in a very strong position looking at the European short-haul market. There's no doubt about that. We still have a market share of 10% only. If you're comparing some of the other markets, and you would know this well, looking at the U.S. who has a more consolidated picture as well, the European market is still quite fragmented. With 10% of market share as well, we believe that there's still a lot of way to go just looking at this organically as well. You know what? Take a look at 2017. Monarch, Alitalia, Air Berlin, all the changes that happened in there as well. I would also say that that was partly a result of what we have been doing well, what the company has been doing well as well.
I think that just underlines my belief that if you're focusing on the things that you do really well, that is appreciated by the customers, that they come back to you more often than other ones, you will stand a good chance of succeeding. Having said that as also that, because of our strength that we have in the company, financial strength, we can take the opportunity when others are in problems as well, as we have done with Air Berlin as well. I think there's the mix to continue to grow organically, which we've got scope to do, as well as also making sure that we do explore opportunities that exist because of other failures. I think the second question was about the distribution piece as well.
I think distribution piece is very much for us who has a direct model, that's how we engage even closer to the customers. One thing that is the beauty of not having any agencies in between or not having others in between is that engagement and that direct relationship that you can have with the customer. That is the key thing. That's the key thing for the success of how we can continue to do that. Not if other ones is moving out of the GDS, is coming to direct model as well. It's actually on how good you are with engaging with the customers at the right point in time. You can fill in also on the cost side as well.
I do think that we got more to do in response to this, how we use the data as an example, in terms of becoming more efficient in the way we do things, in the terms of getting better quality for decision-making, in terms of not having to reconcile data, which will make sure that we do things and have processes in the company that is even leaner. There's a number of initiatives going forward as well in terms of reducing the cost, as you've seen, GBP 28 million coming through in the Q1 on the easyJet Lean projects as well. It's absolutely a critical thing that we continue to do so. That's what's been a success of what got this company where it is today, and it will continue to be a success factor of where the company will be tomorrow. I don't know, do you want to add anything?
Yeah. Clear opportunities are around the structure management, the OTP simulation, how you can use data and machine learning to better simulate the operation of the network. You've got opportunities around predictive maintenance, which we talked about earlier. We can take that a step further. There's quite a few things in the operations area that we're not quite leveraging at the moment. From a cost perspective, that's a big opportunity. The revenue opportunity, clearly, it's all around leveraging our customer data and, as we said earlier, around packaging up deals to better leverage that. I think from a cost opportunity, there's a huge amount that we could crack on with. We've already started. What we need to do is really boss that team.
I think from the organization, this move has been welcomed because everyone realizes the opportunity we now have with the stuff we've done with data science and the team that already exists, what more we could do.
Yeah.
Hi, Andrew Glenn from Credit Suisse. Can I ask, Dan, just briefly. The first one is obviously a volatile industry, and clearly you are sort of a crack away at the moment. How effective and how appropriate do you think the medium-term targets, whether they be margin, whether they be ROCE, will ultimately be for this business over the cycle? Second question, the entire media is obviously hot and noisy. There's an interview with a joint statement from IAG and Alitalia. Can you rule that out or anything else to say on that? Then third question, back to the French question earlier. France, I think the only one of the only big markets that you operate in which hasn't benefited from consolidation. I'm just interested, is revenue per seat underperforming other areas of the market understandably there? Are trends also positive?
On the targets, fill in here, Andrew, it's one of the things where you feel comfortable giving the targets where you have visibility or where you have to. Like I said, you're looking at the summer as well, only 20% sold in there as well. We saw the momentum at the end of last year. That has continued in there. There's no doubt that that has also been because of the easiness in some of the competitive pressure that exists in there. I believe that in terms of looking at the midterm and the longer terms targets, that's an opportunity that me and Andrew and the team will have a chance to sit down and look at more here in the spring. I've only been two months in the business as well. Do you want to give them?
I think it's fair to say we are in consultation with our shareholders around the new EPS target for the purposes. I think it's absolutely right, Johan and staff have a chance to come and figure out exactly what targets we'd like to set internally, we'll consider what we might publish externally as well.
Alitalia, extraordinary boring answer. I can't comment on that. We did express in November, I think it was, or even earlier, that we had engaged with the commissioners on the issue of looking at part of the Alitalia assets, that's just where things stand at the moment.
Would you cancel that?
I can't comment on it. The third thing was?
Just back to France.
Obviously consolidation benefiting everywhere else, is France also a pretty good at the moment?
Yeah. We're really pleased with our performance in a number of markets. We've been encouraged by it, therefore launching the Bordeaux base as well. It's definitely a market where we continue to see opportunities, yeah.
Andrew.
Hi, Andrew Logan, HSBC. I was going to ask about the decision not to pursue aggressively the Monarch asset. Given the key strategic focus of building leadership positions and exercising fortress, why would you let Wizz take more in your home base or let IAG take more Gatwick? A second question would be around Brexit. Quite soon, the airline industry will be wanting to sell summer 2019. It's not that we'll have full knowledge of what the traffic rights are at that time. How are you going to manage the risks of selling into an environment with unclear traffic rights? Within that, how do you sustain consumer confidence? If you say too much, then you will rattle consumer confidence, and that could be a self-fulfilling problem for you and the industry. It's not good for you.
On the Monarch piece, there was done prior to myself as well, there was something that the company looked at, they made a call commercially on it as well. We didn't think it was viable to continue off the interest that we had in there as well. I just want to say as well that if you're looking at that, you take Gatwick as an example. That's 9 aircrafts. The operation that we have integrated is 25. We couldn't do both at the same time. The Air Berlin transaction strategically makes more sense for us. We believe it's a full-scale operation that gets us into that strong position that we have. We already have a strong position in Gatwick, it's a bigger one, it fits into that thing about coming into markets, in this case, Berlin is a fantastic big market as well.
I just think it strategically makes much more sense to do. If you're looking at Luton as an example, there were 4 aircrafts. I think Wizz has taken over them, the only overlapping route I've seen that they've had is the one that they collided with us from Luton to Reykjavik. The other 9 planes that they had in Manchester has gone back into the slot pool. We don't know to what full extent BA and IAG will now sell the former 9 aircrafts. I think they put 50% on sale for the summer. It remains to be seen what they're going to do with that. I think it would have been an absolute missed opportunity not to do the Air Berlin transaction in Berlin so we can build on that.
On the Brexit one, there are still companies, I think some companies have actually started selling already. The tour operators are on sale as well. We're confident that there will be a deal. I met with the aviation minister in U.K. here the last week as well. After that meeting, I'm still very confident that there will be a deal as well, there are time on it. They said that aviation will be a priority in the trade talks here in March or April, when they will start as well. There's nothing that tells us that we won't see a deal. I'm not concerned about it at the moment. You want to?
I think from a point of view of Brexit, I think it's fair to say that the package tour operators are going to be ahead of us when it comes to the schedule release anyway. To a certain extent, we won't be a leader, we'll be more of a follower in that situation. We'll be very interested to see how they manage that, and we'll learn from that as well as Johan said, we believe that there will be a solution. With respect to Monarch, I think, look, we've got to make decisions with respect to how we allocate our assets. I think it's fair to say that Air Berlin was an opportunity that really we believe wouldn't come around again very quickly. Getting ourselves to a number one position in Berlin absolutely fits with our strategy. So far, so good.
The operation is working very well. We went through a lot of scenarios with respect to Monarch and the assets there around a number of scenarios of who and what would happen there. Frankly, we baked in a scenario that is actually slightly worse than what IAG are doing now, and we concluded it was still the right thing to go and do Air Berlin. Frankly, what BA are doing to a certain extent is holding the slots. It'll be very interesting to see what they do longer term, because we still believe that that will be a long-haul solution against Norwegian for them. We expected this short-haul capacity to come in. Frankly, having somebody like BA against us is a better position from an RPS perspective than a Monarch. We went through all the scenarios.
With respect to Luton, again, as Johan said, we looked at exactly where, who, and what the likely outcomes would be. We expected that the outcome there, and again, to be fair, it's landed as we expected. Finally, the price that we know that IAG paid was well above anything that we would have considered anyway for Gatwick as well. There was definitely long-haul pricing for those slots. All in all, it made absolute sense to focus on Berlin, land Berlin, get number one there, and far, so good.
Alex Paterson from Investec. Three questions, please. Just in your sort of expectations for the year, I would guess that you're assuming roughly flattish yield. Is that not a bit conservative given what we've seen in the first quarter?
Secondly, DHL looks like it's working very well in Gatwick. Are there other airports that you might think about deploying them? I know there were sort of transition costs as you move to them, but are there cost savings coming through as well? Finally, on the Tegel integration, have you had any snags? Are there any challenges that you can see with doing that?
You do the first one. Yeah. I think it's fair to say on Q1, we've been exceptionally supported by the actions of Monarch Airlines and the actions of Ryanair and Air Berlin capacity coming out of the market. That's obviously underpinned our performance. Q2, there'll be a bit of a roll forward and obviously splitting into Q2. Q3 and Q4, it's very hard to see exactly what the capacity for the IAG stats aren't out. We fully expect Ryanair to reinstate their domestic. Obviously, that will be an impact on the domestic flying in the U.K. Obviously, we know that now IAG are coming back in with about 50% of their capacity in U.K. to Spain. Frankly, there's an element of uncertainty. We've only got 20% bookings for the second half.
From that perspective, we are, as you'd expect at this point in the year, still making sure that we don't overcook any expectation for the market. I think for us, landing Q1 is a great result. It gives us momentum into the market. Q2, great. Q3 and Q4, still uncertainty, and we do expect capacity to grow far more than it has done in the first quarters of the year. From that perspective, I think where we're positioning is absolutely right. I think our focus is on making sure that we grab the opportunities as they arise and as things pan out over the coming quarters. I think what we've said in the presentations absolutely appropriate for what we can see in the market.
In regards to DHL, I think it's fantastic work that's been done there by Chris Browne and the operations team in there. I think that the efficiencies and the costs that we will get benefit from. There actually have been two benefits on that one. You look at the improvement in the OTP in Gatwick, that's 7%. That represents a cost saving. Apart from that, it also represents a huge improvement for our customers. They actually believe that we do fly on time as well. We are definitely looking in other ways how we can take this model together with DHL or together with others to make sure that we can drive some of the learnings out of this one. Now, having said that, it's in the wintertime.
We know there are less capacity out there as well. That's a good start, we can get that operation going. We did have the busy Christmas and New Year in there as well. They worked really, really well for us. The main thing is to make sure now that we're getting in for the summer, that that is still something that continues to deliver. I'm spending a lot of time myself together with the team looking at the scheduling, looking at the way we can avoid disruptions, looking at the way things we can change things internally also in order to reduce the disruption that we have because it brings annoyed customers and cost to the company. It's simple as that. We kicked off now for 2019, in particular, to really take a holistic approach on this one.
2018 is very much planned at the moment. We hope to see improvements on there as well. That it's got to be a focus for us. On the Tegel, no, there's nothing in there that stands out. It's been exceptionally well planned, I think, by the team, in a very short period of time, as you know, since we engaged in this deal. People have been working relentlessly. I met with a lot of the ex-Air Berlin crew as well as part of the training, both the cabin crew and the pilots. As you can imagine, they are extraordinarily excited to come from what has been a huge period of uncertainty in their working life to come and join us as well.
I think that they actually. I spoke to one of them here just the other week who had been on flight as well. They said it just feels like you want to bring out that spirit and the enthusiasm that they have to the customers there as well. I think that's fantastic to see. There's nothing else from the operations side.
No, I think it's fair to say we went in with a bit of trepidation to the extent that we had wet leases going in. We expect competitively you're selling on an easyJet website, customers turn up. It's not an easyJet aircraft. Actually, ironically, the feedback has been pretty good.
Yeah. It's been more easyJet, really.
Yeah. To the extent that we've got some BA146s flying from WDL, which is a wet lease operator.
Yeah.
Actually, they're German-speaking individuals, and all the domestic flying passengers love the fact that they're German speakers.
It couldn't have gone better, frankly.
Great OTP.
I think for us, like the underlying business, the uncertainty still lies in Q4. We haven't released the schedule for summer yet. That's coming out next week. As soon as we receive visibility on bookings, that will give us more visibility around exactly where that GBP 60 million will land. Again, it's uncertainty like the others. Operationally, so far, so good, and the airport have lent in and been very supportive on setting ourselves up.
Thank you.
Damian.
Yeah. Damian Brewer from Bank of America. A few questions. First of all, just on the on-time performance at Gatwick, you're up to seven percentage points. Historically, when you've had significant material movements in OTP, how has that translated into either your net promoter or your repeat custom scores? How long is the lag between that turning up in a structural rather than a cyclical change in your revenue base as customers' preparedness to pay or travel changes? If you could just talk a little bit more about that would be very useful. Secondly, on the airport side, could you give us some feel of how many passengers on either end of the route now touch airports where you have volume-centric deals?
Therefore, with the consolidation in the market and the nervousness around some airports, where there's headroom to do more of those kind of deals going forward?
Sorry, what's happened is.
The volume-driven airport deals.
Right.
More volume at a better rate. Very finally, on the unit revenue, could you just elaborate a little bit more on Q1, in terms of whether it's been very broad-based or whether there's any particular areas you'd want to call out as being stronger or weaker than average? Thank you.
I have to admit, I don't know the answer on the first question because it's too early for me to see what effect. The OTP is really critical for us. I don't know what effect those points have in terms of customer retention and how they come back. I'm sure it's there, but that's definitely something that I will get into moving forward. It has an effect. We know that in terms of the general perception of a flight, we know that going on time is one of the key parameters in there. It does have an impact.
Yeah. I think there's a clear correlation between OTP and our CSAT scores. The two key areas of CSAT driver are OTP in-flight and boarding processes. The boarding is one of the areas, another area of focus is boarding and baggage as well. Clear correlation. The correlation is pretty rapid. You improve OTP, your CSAT improves. To the extent that leads on to obviously improved return customers. Clearly, there's a lag, but having a happy customer flying and leaving on time will obviously have an impact on our return customer base. That's why OTP is so important for us to focus on and the reason why we invested in a relationship with DHL to improve that OTP in Gatwick, because as you know, if Gatwick gets a flu, the rest of the network gets the ripple.
Yeah. To talk about volume centric. A fair proportion of our deals that we, even in some of our regulated airports where we can have some kind of market-sensitive relationship are volume-centric. To the extent whether it might be a gauge mix or pax numbers, departing pax or total passengers, has some form of elements of volume. That's how we manage to leverage our scale in these airports with respect to getting the best deal. I think it's fair to say that one of the things that is one of our big areas of focus is absolutely leveraging our growth in the airports that we can to generate those deals that reward growth and reward flying to new destinations or driving business passengers or passengers to new routes. That's the fundamentals of what we do with respect to the airport deals.
Should I talk about revenue as well?
Yeah.
With respect to revenue in the quarter, it's pretty much network-wide. Obviously Germany has benefited from Air Berlin. We've had benefits from U.K. from Monarch Airlines and Ryanair flying to Spain, again, Monarch Airlines. France, obviously, it was annualized against some of the impact that we saw prior years from all the disruption that we saw in France. One area in Q1 being very transparent, we've seen slightly slower performances on ski, but that's a relatively small part of the revenue in Q1. It obviously builds in Q2 as the holiday season starts. We suspect that's because last year it was quite rainy in the Alps rather than snow, and actually there's more snow now. Week on week, we've seen that improve as we progress through Q1 as bookings ramp up because obviously it's almost too much snow now in the Alps.
That's been one area, but the rest of it has been pretty uniform good performance. Okay, Dave, we'll hand over to you for questions from the conference call.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad. We have a question from Savanthi Syth from Raymond James. Please go ahead.
To follow up on the improved revenue outlook, I was just curious, my first question was, what versus November, where you saw the real improvement? Because I'm guessing, capacity was about what you were expecting. Curious where the improvement came from. Also, a second question. I was wondering if you could provide an update on the ancillary revenue. I know there were some bad finishes last year. Do we start lapping them? When do we see the hybrid FCP system rollout coming on? Thanks for taking my question.
Yeah. Hi, Savi. It's Andrew. On capacity, actually, if you look at our previous charts, actually capacity in half one has actually reduced as we've gone through the first half. That's a result of clarity around what's happened with Aer Lingus and clarity around Monarch and Ryan. That has had an impact on Q1 clearly and Q2 as we got clarity in it. I think for us, as you know, there's uncertainty until we get clarity around schedules and schedule releases from other airlines, clarity around exactly what the capacity number will be going forward has an impact on our expectations. Obviously, Easter, we've got better clarity around Easter and Easter bookings, which has helped in Q2, but obviously detrimented Q3. That's fundamentally the underpin for what we've seen in the performance of Q2.
One other thing, if you look at the slide deck, you'll see that we've got slightly more bookings in the period than we have previously, and that's because we bought our schedule release date slightly earlier. We were on sale slightly earlier. We've got slightly better visibility than we did last time around.
Got it.
That's it. Ancillaries, it's fair to say that we did quite a lot of work, at the end of last financial year, around ancillaries and our charging structures and our baggage. I don't know if you've seen that in the quarter just gone, we have changed our baggage policy. We've got a split policy, two weights, with variable pricing on, which has been very successful. That will annualize through in Q4, so effectively you'll saw a step up into Q4 through to Q1, and that will annualize throughout in the second half of the year. Fundamentally, we have seen an increased conversion rate as a result of our front-end improvements on. We've got two steps to FCP, which are the front-end website. We've seen conversion rates improve, particularly around some of our ancillary products. We've seen improvement actually on board as well.
With respect to FCP, that's going to be progressed over the year. We'll see releases as we go throughout this financial year. A lot of the front-end impacts from a customer perspective is already in place. The bit that we still looking at, which kind of falls into the whole concept of why we're focused on data, is linking that with our CRM to better drive bundles and drive ancillary products even further. That is likely to impact more FY 2019 and beyond rather than FY 2018.
Just to add to that as well, I do think it's a continuous opportunity to keep developing ancillaries of choice to customers what they want. If you're looking at the inside picture as we have an example, we talked about the Fever-Tree as an example, 900,000 units sold over one quarter as well. This provided a great uplift. It shows also a reflection of the customers we have, that they are willing to buy the ancillaries we have because they think they provide a great choice and also that you can provide quality ancillaries that also contributes to the overall experience of what easyJet stands for. I think we're definitely going to continue to drive that and 20% uplift, a bigger part of that uplift, and it takes a bigger part of the overall revenue as well.
I think it's a good one because it provides choice and it's something that also makes customers more satisfied with what they're getting.
Absolutely. That's very helpful. Thank you.
Thank you.
We have a question from Mark Simpson from Goodbody. Please go ahead, Mark.
Yeah, good morning. I have two questions. First off, just on the Tegel process, you've kept the operational cost or loss expected this year up to GBP 60 million. Any change to the exceptional numbers? You gave us GBP 100 million. I wonder if you could say, A, if there's any change and can you actually break that number down to a bit more detail? That wasn't given in the last release, but it's a pretty big number, so good to understand that. Secondly, I'd like to return to the sort of targets and return within the LTIP. You've got in the last report on accounts five years of history, LTIP awards from December 2012, December 2016. Can you tell us if an award has been agreed with regards to be made in December 2017 for the three years to 2020?
Mm-hmm. Yep. Hi there, Mark. On Tegel, I think as I said earlier, we were very clear at the start, we've got an underlying impact. We'll get better clarity on that once we release the summer schedule. At this stage, GBP 60 million feels about right based on what we can see. We will update at half one. With respect to the one-off, we've kept the guidance GBP 100 million, but frankly, if anything, we believe we'll come in below that. The cost associated with fundamentally ramping up the business. It's associated with non-flying. As you know, we are starting the wet leases. In the process of signing up dry leases. Those dry leases aircraft need to be converted to easyJet safety standards, which we've already started. We also have to ramp up and train the crews.
There is an onboarding element of that's one-off, that we incurred. We're recruiting around 1,000 new colleagues in the operation within Tegel. There's an element of that. There's an element of obviously the work we need to do to set the operations up in the business. There also will be an element of wet leasing as well, which is non-flying wet leasing in there. The mix between the two, in total you've got GBP 160 million, the mix between two might shift slightly. Fundamentally, that GBP 100 million is likely to be lower, we've kept the guidance there just to ensure that any unforeseen issues, and we'll give you more clarity around that in the second half. The majority of that relates to signing up the crew and converting the aircraft and effectively setting up the operations within the business.
Also in that cost is the element of the operating lease charge for the aircraft whilst they're not flying. Obviously whilst they're not flying, on the ground, until we actually get them flying, they'll become part of the trading performance of the business. All of that will go for FY 2019. We expect the Tegel operation to be profitable. The GBP 100 million is a one-off. The GBP 60 million is effectively the ramp-up of the operations. We expect to be profitable in FY 2019. With the LTIPs, yes, there has been an award. I think it's part of the AGM notice that's gone out. There has been award made in December for 2020. Is that what you ask?
That's great. Yeah. I mean, obviously, the question on the actual thresholds as established, significant reduction. In terms of the previous comment in targets, to some extent, given a better environment, you assume that we've seen a trough in terms of those levels that in order to vest. If you look at the December 2016 award, vesting started at 9% return on capital, which is hardly a demanding target in terms of your business.
I think it's fair to say that all of these are subject to consultation with our shareholders as per normal. Our RemCo chair will consult with our shareholders with respect to those, and we'll adjust accordingly and take feedback accordingly. That's the process that we've gone through every year, and will continue to do so. I think, as I said earlier, we have introduced a new measure for the next, which is a more balanced TSR, EPS, and return on capital employed. Those measures again have been consulted with shareholders as part of the process.
Fair enough. All right. Thanks for that.
We have a question from Victoria Moores from ATW. Please go ahead.
Good morning, gentlemen. Thank you for the call this morning. My question for Johan is, what do you see as the main challenge in being CEO of easyJet at this time? Thank you.
I actually see the main challenge is to choose from all the opportunities we have. No, look, there's a number of things happening in 2019 we want to make sure land. We want to make sure that the Tegel operation, that we execute that one properly. We want to make sure that we take deliveries of the A321s, which is a new aircraft type within the Airbus family, that we do that correctly, that comes successfully into operation. We stay, as you know, very focused to the Brexit situation. We are confident there will be a deal as well, That is definitely an important thing to do. Then the continuous focus on the costs, the FCP, which you know about, the Future Commercial Platform as well.
Those are things that it's in there, and they provide also, in many cases, some of them also tremendous opportunities for us. I don't think that there's a number of things we have to go at. I think that the key thing for us will be to prioritize. The key thing for us to make sure that we actually continue to do what we do well and really put a laser-sharp focus on these things that really matters for our customers, that really delivers returns for our shareholders. That's what I can spend my time on. There's nothing in here, coming into the organization, nothing in here that you're thinking, "Okay, we need to change that," or, "That doesn't work." You know that as well. This is a company that is in great shape as well, Now the opportunity is to move that forward.
Dave, could we just get one more question, please?
That's currently all the questions coming through.
Right. Okay. With that as well, thank you everybody who was on the line as well, and thank you all in this room as well. Hereby conclude this presentation. Thank you.
Ladies and gentlemen, thank you for joining today's conference. You may now replace your handsets. Thank you.