Welcome to the Wizz Air 2019 first quarter results. For the first part of today's call, all participants will be on listen-only mode, and afterwards there will be a Q&A session. Please note that today's conference call is being recorded. I would now like to hand over to József Váradi, CEO of Wizz Air. Please begin your meeting.
Hi. Good morning, everyone. Thank you for joining this conference. Let me just start by recapping the announcement that we are making today. We are reporting on the first quarter of our fiscal 2019 year, in which we delivered record passenger numbers with record revenue. We delivered 20% growth, which is quite high compared to the balance of the industry. Net profit came in as EUR 50 million, I think if you take into account the Easter impact when you compare the two years, as well as the operational disruptions and related costs. We believe that this EUR 50 million net profit performance is a solid performance and in line with management's expectations. We continue to be very disciplined on managing our costs. Probably we are one of the very few airlines still seeing actual cost decline in our business.
We clearly believe that our costs are under control, and again, unlike some of the other carriers. We started operating Wizz Air UK in May. As you know, the airline got licensed by the U.K. authorities, and we received the AOC, and we started operations in May. Very quickly, we have scaled up operations to seven aircraft. We've already announced an eighth aircraft operation, so one more to come, and you might be expecting more news coming out of the pipeline in the coming days and weeks. Also, we started the Vienna base, which is the first step of a major expansion in Vienna, and clearly you see that it is becoming an overheated market. Nevertheless, we are very confident in our strategic ability to compete and win, given that we are bringing the lowest cost production to the market in significant scale.
We believe that after the dust settles down, you will see a few structural winners, and we will be one of them. We reached the 100-aircraft milestone in the reporting period. At the moment, we have 104 aircraft flying the fleet. I think it's a good milestone to pass, but obviously we remain very focused on delivering further growth in the business. Based on this performance and the visibility, what we have on the current trading environment, we are reconfirming our previous guidance. Moving on to the second slide, you see the operating metrics. Significant growth, obviously that was followed by staff growth as well. We have 1,000 more people, 25% more people today than what we had a year ago. We ramped up load factor with an additional point to 92%.
Clearly where we suffered the pain is punctuality, this is simply resulting from a much tougher operating environment than ever before. Mainly driven by ATC issues, strikes, closures, congestions, airport issues. It has not done any favor to the industry. If you move on to the next slide, just to dimensionalize the issues what we are suffering, but I think this is pretty much in line with what other airlines are seeing. The cancellation rate quadrupled in the period. We had to cancel 145 flights as the result of some external forces. As said, punctuality is down seven points to 74%, and long delays doubled in the period. If you think about it, of the 8.6 million passengers we carried in the period, 26% of them were not delivered to their destination on time within 15 minutes.
Essentially all these disruptions have been affecting over 2 million passengers. This is very significant and very fundamental, this is clearly triggering the initiative what we put forward with other airlines to raise our noise on the matter, because this is undermining not only airline performance, but the whole performance of the industry vis-a-vis the customer. This is not what customers expect, this is not what people want, the industry needs to change and needs to adapt. When you look at the cost side of the problem from our perspective, our disruption-related compensation cost tripled to EUR 9 million in this period versus a year ago. Moving on to the next slide. Just a few words on the network design of growth. The pattern has not changed fundamentally.
You see that almost 90%, 88% of the growth capacity has been deployed on increasing frequencies on existing services, or joining existing airports, joining the dots. We launched 11 new airport pairs of existing airports. We were increasing frequencies on 79 routes. At the same time, we kept carrying the local swag to new airports and new countries. We opened up five new airports in the network, we also entered into new countries, namely Austria and Estonia, in the reporting period. You can also see the geographical split of the new capacity allocation. Obviously, we remain very intact on building connections between Central Eastern Europe and Western Europe. At the same time, we have been developing some other links inside Central Eastern Europe and from CEE, or Western Europe, to further east to other markets.
With that, I would just pass over to Ian, who is going to take us through the financial insights.
Morning, everyone. I don't want to downplay the sort of operational challenges. Essentially, the world hasn't really changed since we last came to the market about 8 weeks ago. Our business is in great shape. Yes, we are seeing a little bit of cost headwind on disruption costs to the tune of EUR 1 million-EUR 1.5 million per month. This is probably going to be more, one would hope, a seasonal effect. Clearly, the skies are congested during the summer, but as we go into winter, hopefully that pressure will ease. In that context, the world hasn't really changed. Our business is in great shape. We were able to deliver 20% passenger growth. We were able to get more passengers on airplanes, so we increased our load factor to 92%. We knew there was going to be no Easter effect.
The Easter effect, we've always sort of highlighted, is around about EUR 15 million-EUR 20 million per Easter. We've also been signaling that we have been having some headwinds on our ancillary. I think we underestimated it to some extent, but we've made the actions accordingly, and we're starting to see that coming through, certainly in the ancillary revenue. Obviously, the more that that gets flowing, we'll start seeing the reversal of that. Putting that in context and maybe a little bit of a profit bridge, last year we made EUR 58 million. If you apply a growth rate of 20%, you're looking at EUR 70 million of net profit. Knock off the Easter effect, EUR 17 million or so, and EUR 2 million on the disruption. That gets you to EUR 49 million-EUR 50 million, which is pretty much bang on line.
To reinforce József's point that actually Q1 came pretty much in line, and all of our businesses are performing very, very well. Moving on to the revenue slide, to slide seven. Again, I think in the context of what we've achieved, we were pointing to around about flattish RASK for the first quarter, and we delivered -1.4%. That's a really good result given there's no Easter. We are growing at 20%, but growing much faster than the competition. Load factors are higher. We're taking larger aircraft. This year we've got 31 A321 versus last year, 19. An extra 10% of our seats are supplied by these much larger aircraft. We took 19, so year-on-year, we have 19 additional aircraft versus Q1 last year.
We're flying further, so an additional 1%, so we're over 1,600 kilometers, which again, is 25%-30% longer than the competition as well. In the backdrop of all of these pressures for the business, you're seeing the demand, and to be able to deliver a flattish RASK, I think, is a very strong performance. On top of that, you are seeing the disruptions. The disruptions themselves, in terms of the revenue environment, where it really starts to impact is the late booker market. By simply having to rebook passengers onto another 145 flights, essentially, you're losing that last-minute high-yield traffic. That's just a bit of an annoyance. As we've been flagging that the unit revenue in our bags has been declining because we changed our cabin bag policy last October. The annual effect will start to reverse come October.
We've also taken some new initiatives back in June. We introduced a new policy with our WIZZ Priority boarding. You're certainly starting to see some improvement on that one coming forward. On the whole, I think in terms of the revenue environment, it remains very robust, and we're very pleased with what we saw in Q1. Looking ahead, there's no reason to say that we see other things otherwise. Moving on to the next slide, my favorite slide on the cost side of the equation. I think, again, a very strong performance. I don't think there's many airlines out there that can say that we can continue to drive our costs lower. This is even before we started to look at the neo aircraft, which we take into delivery in Q4 of this year. Those engines burn 16% less, or at least 16% less fuel.
On the ex-fuel cost, the ownership side of the equation still looks incredibly compelling. More to come on that further in the year. The only item I would highlight is on staff cost. Again, we signaled that taking 17 aircraft in 17 weeks requires a significant ramp-up in the organization, and at the same time, creating a brand new airline in terms of Wizz UK requires additional training and recruitment for that U.K. business. We always expected a slight increase on staff cost. That should start to normalize as our delivery schedule, I would say, smoothens out and our U.K. business starts to operate normally. The only item to flag then is on the other expenses, which is where you're seeing that incremental, or that trebling of disruption costs. On the whole, a very strong performance on the cost side of the equation.
On to slide nine, on the ancillary. I think it's fair to say we slightly underestimated the impact on the checked-in bag. We knew that by removing the charged cabin bag, what the impact would be. Essentially what was happening is everybody was turning up to the gate with their bag. Given that we want fast turnaround time, essentially that checked-in bag was suffering. We have changed the policy. We are seeing the impact. Will it be sufficient to fully compensate for the bag? Unlikely. I think certainly from October of this year, we'll start to see positive territory on our net ancillary. What is also important to highlight is that 80% of our ancillary now is essentially what people want to pay for. People never really like paying for the bags. They consider it punitive. Again, another strong performance on the value add.
Moving on to slide 10. I think this is something more for the future in terms of the strength of our balance sheet and what we can do with that, the firepower in terms of potentially owning aircraft. As I said, in calendar year next year, we'll be taking 13 neos, 20 the following year. There's certainly a lot of benefit coming through from that. It's still undecided in terms of how to purchase those aircraft or to lease those aircraft. What I would say is that the investment grade that we were awarded at the beginning of the year is having a significant impact on the financial community, who are now seeing the increased strength of the business. Cash generation remains very strong. It's a very cash-generative business.
Maybe on to the last slide in terms of guidance, one thing to flag is we have seen fuel prices grind higher into Q1. As a result, we've decided that we will trim our capacity into the fourth quarter, a little bit certainly in the third quarter as well. We don't grow for the sake of growth. I think we've always said that 15% is probably the long-term structural growth rate. That's what's reflected in our delivery schedule. Clearly, we'll be looking to grow as fast as we can to maintain margin. We are seeing a little bit of margin pressure purely driven from the fuel cost. As a result, we're trimming a little bit of capacity in the fourth quarter. I think you should take that as a positive signal that we are showing some financial discipline.
We've always said that if we have a phenomenal summer, then we'll always grow a little bit faster in the winter. If you see a few pressures on the horizon, then we'll obviously trim that a touch. I think still delivering an 18% year-on-year growth I think is a fantastic target to achieve. With that, operator, maybe I'll hand over to Q&A.
Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. The first question is from Mark Simpson. If you would please announce your company as well, your line is now open.
Yeah. Morning, guys. Goodbody. In terms of just a couple of questions on the unit sort of cost improvement, obviously stuck with the -1% for the year. Labor, we saw 14% unit cost inflation in the Q1. I think previously, you talked about 8%-9% for the year, and on the depreciation, a 5% unit cost improvement for the year. I wonder if you could just take us through some of the line items in terms of expectations behind that overall -1% improvement. On the ancillary side, you've obviously changed the bag policy. I'm wondering if you can tell us on the ground what's happening in terms of your premium ticket sales, penetration rates, and what you think may happen on that front.
Sure. Okay. Thanks, Mark. Morning. On the unit cost side, on labor, no change. We always knew we had these 17 aircraft coming. We always knew that the training period had been extended because essentially it's an awful lot of pressure on the operations. We always knew that we had WizzUK and the UK CAA had slightly different training requirements, so we knew that there would be additional training on that. I think in terms of modeling, unchanged from that guidance that we gave a couple of weeks ago.
I think it's important to know that when you look at labor cost, it is inflated in a way because it is not structural labor cost increase. You are seeing some of it is structural because we had to increase pay to pilots and that sort of stuff. A significant part of it is related to the WizzUK ramp up. You recall we had this program of seven aircraft for 17 weeks, and we had to hire a significant number of pilots and cabin crew for that program in advance of the deliveries, obviously inflating labor cost in the reporting period. Once we are kind of phasing that program out and as we will have completed the deliveries of those aircraft, you will see that issue moving away from us.
On the depreciation, it's a fairly fine calculation. I think we're trimming a little bit of capacity. You may see a little bit off, but I would just stick with exactly what we guided eight weeks ago.
On the ground in terms of penetration rates and the premium?
I think very positive. Certainly, essentially just for those that don't know, essentially, if you want to take your bag with you through the entire journey, you have to pay for WIZZ Priority. That was implemented on the 20th of June, if I remember. I would say we've seen a more than doubling of that product, so a very positive effect. I think there's still going to be some refinements in terms of ensuring that there's less checked-in bags or bags that are coming to the gate. We're having conversations with the ground handlers to make sure that policy's enforced. That should also start to accrue on the checked-in bags. Generally speaking, a more than doubling of that product.
To a penetration rate of?
26%.
26%. Great. Final question to follow up on just the labor side. Staff retention rates or churn rates on the pilots, not the expansion of the network, but in terms of where you're at on that. Are you kind of close to the 5% that you'd like to be?
A little above that. We are expecting to be around six and a half. It's a little better than what we used to have, but a little worse than what we are targeting.
Okay. That's great. Thanks.
The next question is from Damian Burt. If you could also announce your company, please. Your line is now open.
Damian Burt, Royal Bank of Canada. Three questions, please. First of all, just coming back to the labor question, could you give us some idea of what the steady state labor unit cost growth is, please? Secondly, you highlight the disruption costs, but your aircrafts or your sectors per aircraft looked like they were down slightly in Q1. Could you talk a little bit about the way the board or the management think about the sort of trade-off between increased crewing and decreased utilization? Versus the EU261 costs you can incur. How do you strike that balance? The very final question, it seems like your incremental net profit per ASK was up something like 6% if we look at the calendar first half of the year, you grew ASK is 21%, net profits 27% year-on-year.
Your guidance for fiscal 2018-2019 at mid-range has about 18% growth and 18% net profit growth. Apart from fuel, is there anything else in there that we need to be aware of in terms of seasonal cost effects that could affect the remaining three quarters of the year? Thank you.
Thanks. Maybe I'll take the last one and the first one. I actually missed part of the second one. In terms of the last one, I think your observation is correct. On the season effect, not really. I think there's nothing. Fuel is probably the big headwind, or rather the question mark, I should say. Last year, we did actually have fairly significant disruption costs in terms of de-icing cancellations, et cetera, because of the weather. If we have a slightly milder winter, then maybe we'll see a little bit of upside on that. The reality is no, there's nothing on the horizon. On the labor cost, I suppose maybe the starting point is the A321. You still need two pilots, just one extra cabin crew for that aircraft. You're seeing a 17.8% unit cost improvement because of the A321.
Do we expect to see some inflation continue? Probably. We believe that the aircraft and as we take more of the A321s, and the A321neo has another nine seats again. Again, you'll start seeing some improvement from that. From a crew cost perspective, we believe we can absorb any inflationary pressures coming from the industry with these newer aircraft.
Okay. Maybe I take the disruption cost related method and how we strike a balance vis-à-vis Regulation 261. The problem here is that obviously asset utilization, asset utilization is inherent to the business model, and this is very core to our strategic approach to the business. Definitely we want to maintain the model what we have been deploying today. I think we need to strike balances is around creating reserves in the system. You can do it in different ways, and this is exactly what we are doing to see how to create a greater degree of ability to recover from disruptions. This is a very defined model. It's a highly optimized model which works very well under normal circumstances. Once the circumstances change and they become sub-optimal, obviously that could break down the model.
I think that's what we need to figure out here. Certainly, we are not trying to ease the utilization model. I think it's very important that we stay intact on that. There is one particular issue which I think has been affecting us recently, and this is the Airbus delivery performance. We have suffered some delivery delays versus the contracted program. As a result, that made quite a significant impact on our ability to operate. We did not want to change the schedule last minute. We upgraded the schedule, essentially because we didn't get the aircraft delivered, we didn't have any spare capacity to recover from operational disruptions, creating further issues. As we are resuming more of a normal delivery schedule now, that issue should be going away.
Okay. Thank you very much.
The next question is from James Hollins of Exane. Your line is now open.
Hi, it's James from Exane, as noted. Three from me, please. On Q2 RASK, I was wondering, I don't know if I missed it, if you could give some guidance. You helpfully gave Q1 at full year. Particularly if you could maybe split out July, August, September in terms of how you're seeing the trends. Secondly, any particular area you'll be reducing your growth 20% down to 18%, is it maybe from Vienna or any particular area where that's coming out? Thirdly, a sort of more generic question. You're the first guys and girls I've spoken to since the legal action was pitted to the EC using the sort of legal precedent of Spanish farmers, I believe. I was wondering if you could sort of let us know, maybe not quantitatively, but sort of chances of success of that.
Have you as a group of European airlines had a warm feeling that using this legal precedent, et cetera, would actually potentially give any grounds for success in actually getting the European Union to do something about the ATC strikes? Thanks.
I'll take the RASK question. I think Q2, I mean, back, we guide around about up 3% on the RASK environment in Q2. I think that's a fairly safe assumption. In terms of breakdown, July was slightly softer. I don't think we can really play the World Cup card because Hungary, Romania, Bulgaria, Ukraine weren't in the World Cup. Poland got knocked out quite quickly. I wouldn't say that there's a particular World Cup effect. I think when you look at it on a quarterly basis, I think there'll be no change to that. H2, we were guiding around about 4% increase in RASK. If you trim capacity a touch, maybe there's a little bit of upside on that one. That's how I'd look at the RASK environment. The world hasn't significantly changed since we last spoke to you.
With regard to the growth question, how we are trimming capacity, we are not particularly targeting a market. I mean, certainly not Vienna. I mean, when we compete, we compete hard and formidably. Actually we are quite excited about the Vienna market as we are bringing in the most efficient aircraft at the lowest operating cost compared to our competitors. We are very confident that we are well-positioned strategically and structurally for bringing that marketplace. Yes, it is overcapacity at the moment, I think the dust is going to get settled at one point, and we will come out stronger from that. We are very committed to Vienna, and we will continue to push that. Certainly, we are not going to take any capacity out of that market.
This is just a genuine trimming of sort of the overcapacity to make sure that we protect the profitability of the business, but we are not targeting particular markets. With regard to the commission claim or the EU claim, I think the starting point is that we believe that we have a system operating the aviation infrastructure in Europe, which is very unfair. If you think about it, ATCs, which are state monopolies, and many of the airports, which are also controlled by the state, can do whatever they do without really taking responsibility for that. The entire financial burden is put on the airline operators, and they suffer the consequences vis-a-vis the consumers. Essentially, the airlines have no ability to recut the cake in a significant way to really address this issue.
It is, I think, just right to raise the voice and raise the game from the airline standpoint that this issue has to be dealt with. Not for the benefit of the airlines necessarily, but for the benefit of the consumers, the many hundreds of millions of consumers. Just in the reporting period, 2.2 million of Wizz Air customers got affected. If you look at it industry-wide, the current situation affects probably around a bit over 100 million people. Those people are also voters of countries and voters of European Parliament. I think there is a significant stakeholder which needs to be recognized by the various stakeholders. Likelihood of success? I don't know.
This is truly not going to be an easy process, but it is a way of starting building pressure on the system to really address the structural deficits of the way our European aviation infrastructure is operated.
That's very useful. Thanks very much. Appreciate it.
Thank you.
Next question is from Andrew Lobbenberg. If you could please announce your company as well. Your line is now open.
Oh, hi there. It's Andrew from HSBC. Can I ask something about the decision to pull back the capacity? I see the logic in it. I think in your prepared remarks, you mentioned about fuel grinding higher, and yet compared to where fuel was at the time of the full-year results, it's in the same place or marginally down. Just what's motivating the pullback in that context? Can I ask a question about the Brexit? What are you thinking about in terms of managing the ownership and control risks? Ryanair talking about disenfranchising non-EU shareholders. How do you think you will go about managing the EU ownership and control requirements post-Brexit? A third question on Ryanair Sun, which has got 5 incremental aircraft into Poland this summer and is now going to have 10 incremental aircraft for the coming winter.
I appreciate you're not a charter airline. You are flying on some competing routes down to the beaches. Are you seeing any competitive tension from the growth of Ryanair in that Polish market?
Well, maybe I'll take the first bit, Andrew. Morning. The pullback in capacity, the way I would look at it, we want to grow this business as fast as we can but maintain margins. Essentially, that's what we said. If we see we have a great summer, we'll grow faster in winter. I think if you go back and reflect, your fuel price, I said it was higher. That was in Q1. Bearing in mind before that, I think fuel prices in liquid terms was up 20%. I think if we go back, let's say 3, 4 months ago, it was around about 615. When we came out with guidance, we were at 685 in terms of our numbers. I think you challenged us on that, but the market price was 730. It sort of persisted around that.
Yes, today it's dipped down again. The reality is that those decisions during Q1 to pull back capacity are such. Again, I think let's put it in context. 18% growth is still a phenomenal growth rate, and we want to grow this business profitably and maintain margins. I think trimming the fourth quarter growth to a modest 16%, I think, is still a pretty good result.
With regard to Brexit ownership and control, I think it is still a process which is unknown to anyone. Certainly, it's unknown how the terms and conditions of Brexit will get defined, and everyone is now forming a view and opinionating the whole topic. I don't want to fall into that trap. Nevertheless, the most important action that we have taken so far was to set up Wizz Air UK, a U.K. licensed airline, to make sure that actually we have an operating model at both sides of the aviation, to make sure that we can allocate capacity according to possible regulatory changes with the objective of continuing to operate between the United Kingdom and other countries, being European Union countries or non-European Union countries. We are obviously working on contingencies and looking at issues like ownership and control.
I just don't want to go ahead of this decision. Whenever we have a firm action what we are taking, we will make announcements. I can tell you now that we are looking at it. As far as we are concerned, we made a big step forward with the establishment of Wizz Air UK. With regard to Ryanair Sun, we have been competing with Ryanair for about 10 years in Poland now. Not only in Poland, but also elsewhere in our market. What's really important, as far as I'm concerned, if you look at the cost performance of the two airlines in the reporting period, now we are taking the cost leadership position in Europe. We are the lowest cost measured on CASK airline in the whole of Europe. We believe that our costs are still under control while other airlines are increasing quite significantly.
We are very confident in our overall ability to compete with whichever airline, including Ryanair. As you noted, Ryanair Sun is targeting a different market segment. What you need to know is that Poland is quite a unique country in Central and Eastern Europe with regards to the charter market. It is huge. In certain airports, actually, charter capacity is more than scheduled capacity. I'm not surprised that someone gets attracted to that market from that perspective. We remain very focused on our business model, we want to be a scheduled brand. We are not offering charter capacity to tour operators, we are going to stick to that model, we will continue to enhance our competitive positions on cost and brand. That will be the focus going forward as well.
That, Ian alluded to, we haven't even deployed the aircraft of the neo delivery program. Obviously, once that happens, I believe that it's going to be even more competitive in the marketplace. I don't think that triggers any strategic change in our mind how we should go about the market or how we should go about Poland in particular.
Thanks, József. Thanks, Ian. Can I just come back on the ownership and control? Unless I'm going even deafer than I thought, I didn't hear an answer to my question. Are you telling me you've got a plan for ownership and control, and you're not going to tell us, or is it still being formulated?
No, it is being formulated, and when we have the plan, we'll tell you.
I think you already know, Andrew, is that we've actually been slightly ahead of the curve. Our articles already allow for what other airlines are running around busily trying to get in place. Yes, we have a U.K. airline, in terms of our articles, we also have all those actually already in place. I think it's fair to say we've been slightly ahead of the curve. Again, there's a lot of unknowns, and we're kicking off those as we speak.
All right. Thanks.
The next question is from Shikha Sijani of Barclays. Your line is now open. Please go ahead.
Hi there. Good morning. It's Shikha from Barclays. Just a couple of questions on the capacity trims. Now that you're growing Q4 capacity by about 15%, is there any more downside risk on that if fuel rises any further? What's the lowest rate of capacity growth that you would be willing to consider in the winter period? Secondly, could you also comment on the competitive capacity environment? Are you seeing any indications of capacity trimming into the winter from other carriers in your competing markets, or is that a little bit too early still? That'd be very helpful. Thank you.
Yeah. I think I'll take the first question. On the winter capacity, essentially, that trimming really reflects the environment we see today. If you're seeing slightly higher fuel prices and maybe slightly stronger dollar, the financial performance of some of those routes, rather than flying five a week, maybe you'll fly four a week in terms of a frequency, just as an example. I think if there are any fundamental changes, then obviously we need to adjust our business model accordingly and maybe trim. The flip side is a lot of that is already on schedule. If we start to see things reverse, then actually, maybe we're in a position to actually accelerate growth. I think we remain nimble, and obviously, we need to be able to react as the market dictates.
Yeah, exactly. I think we are reacting to the market as we understand the market today. Coming to your second question, how we are seeing the capacity environment. I don't think we have full visibility on that yet. Typically, what you see is that airlines publish their winter schedule, and then they start adjusting the winter schedule when actually they are approaching the period. I think we'll have a much stronger visibility on that in around September time. Obviously, we are hearing some news of some underperforming businesses not being able to pay bills to suppliers. If anything, we may see some upsides for our business coming out of this, but we have not been planning for that, and we have not included anything of that in our forecast. If something happens which could represent an opportunity for us, that will come as an upside.
Great. Thank you.
The next question is from Mark Gluck. If you could please announce your company as well. Your line is now open. Mark Blott. Perhaps you put yourself on mute. We can't hear you at the moment. Your line is now open. I will go on to the next question. If you still have a question, please press 01 on your telephone keypad. The next question is from Ross Harvey. If you could please announce your company as well. Your line is now open.
Hi there, Ross Harvey from Davy. Just two questions from me. One has been slightly answered in the prior question. On the increase in terms of value-added services within the ancillaries to EUR 2.1, can you just remark on how much of that related to priority boarding, given that you changed the cabin baggage policy? Into winter then, I guess, how much of the RASK improvement is dependent on ancillaries maybe hitting an inflection point and maybe turning positive, and how much of it is on basic fare? I understand that H1 is clearly where the basic fare does a lot of the heavy lifting while the ancillaries are still on a downward curve. Secondly, just to clarify on a question that was asked before.
In terms of the RASK improvement through winter, if we're looking at a figure which is slightly higher than the 3% overall for the year, how much of that depends on competitors pulling out more capacity? I think you implied from the prior answer that as you look at the market now, you don't really need any competitive reaction into this winter to achieve that 4%, and it's all really upside if you begin to see some people rolling back on their capacity.
Hi, Ross. Morning. Jump in if I've missed some of your questions. In terms of the priority boarding, that was introduced back on the 20th of June, so you won't see any of that or hardly any of that in Q1. What you're starting to see, as I highlighted, is that's more than doubled in terms of our priority products. In terms of the number, you can probably model about 0.7 of an increase coming through from that.
This is year-to-date maturing initiatives, this is not the full potential. We are expecting significantly more than that, but this is where we are at right now.
Your last question in terms of winter RASK, I think we've been highlighting around about 4% is what you should be expecting in H2. Yes, I think what you'll be seeing is you should start to see the ancillary will start contributing to that. I wouldn't specifically say what blend of it, because sometimes you get cannibalization between products. For net now, I think modeling 4% RASK for H2, I think is a reasonable assumption. As you mentioned, cutting a bit of capacity, maybe there's a little bit of upside, but I think 4% is a fairly safe place to go today. Your second question, could you repeat?
Yeah. Actually, you've covered off the two of them really, which is on a priority boarding. Just in terms of that point on cannibalization, do you think that you've recovered some basic fares in the first quarter given the change in baggage policy? Given the mix between those two, do you think there was an increase in basic fare which might necessarily replicate itself once you annualize that change in baggage policy?
Yeah, I think it's fair to say. Again, to be able to deliver virtually a flattish RASK and still give back over EUR 2 per pax on the bags, yes, it's fair to say that we've probably been able to capture some of that.
That's fair. Thanks very much.
The next question is from Charles Carpenter of Flow and Robinson. Your line is now open. Please go ahead.
Hi, thanks for taking my question. In your annual report, you talk about your optimism over the next 12 months, and you've said that higher fuel prices are supporting stronger fare environments. You've said that normally ticket prices might follow fuel prices with an 8 to 12 to 18-month lag. Could you tell us sort of on the ground whether you're seeing your competitors raise ticket prices on higher fuel prices and lack of hedging? Perhaps if not, why not, or when do you expect that impact to start kicking in? Thank you.
Yeah, hi Charles. Thanks for the question. I think the reality is that you do see fuel prices or input prices as dollars also an important input cost. They do flow through to the fare environment, and a good example is Q1. As I mentioned, there's no Easter effect yet. We were still able to deliver a flattish RASK, which means, yes, definitely year-over-year, you are starting to see fuel prices flow through. I wouldn't say there's the mechanism of adjusting prices. That's market-driven. What you are seeing is you're seeing, I would say, moderating of capacity or RASK growth coming through from airlines. I mean, less so from us, but this year, rather than growing 23%-24%, we're going to be looking to grow 18%. As a result, essentially, there's less seats supplying that additional demand. It's certainly flowing through.
The timing of that is like a million-dollar question. I think it tends to be slightly harder during the summer because everybody wants to fly. I would say there's probably less elasticity in the summer, but certainly as you go into the second half, I think you probably would see that. It's ultimately capacity and how airlines adjust capacity and maybe reflecting on one of the questions earlier, what are we seeing in terms of the competitive environment? You're not seeing waves of capacity and you're seeing more discipline, but it's simply because other airlines can't profitably grow. Whereas with them and our cost base, we can. I think that's hopefully something you'll continue to see.
I think it'll start to get a little bit exciting as we go to the end of the summer where airlines start to lose a lot of money, or rather the weaker airlines, I should say, start to lose a lot of money, and Joe highlighted that maybe there's some opportunities for us. Yes, you are starting to see fuel prices flow through ticket prices, and that's why we're saying 3% for the full year, and with a bit more at the back end with slightly less growth.
Thank you.
The next question is from Alex Patterson. If you could please announce your company as well, your line is now open.
Good morning, it's Investec. Sorry, two questions, please. The first one, you've talked quite a lot around, I didn't quite catch the bit that you said in the prepared remarks. On the ancillary revenues, were you saying that you expected growth from the second half of this year? Was it another period? The second question is just on slide 10, you were talking about multiple aircraft financing options. I just wondered if there was any preference you had for any particular type of financing or whether you'd expect to use a mixture of different financing. I might do a corporate bond and also aircraft leases or sale and lease backs or something like that.
Let me take the aircraft financing question, Ian takes the ancillary. With regards to aircraft finance, I think what we have been communicating before, we are sticking to, that we are exploring various options, including bond financing, sale and lease back, even purchasing aircraft or whatever. We're going to compare notes, and we decide what the best way is for taking advantage of the market situation. Quite likely, given the scale of the delivery program, we will be ending up with a mix of financing vehicles. I think it would be premature to commit ourselves to a particular one. As said, we are looking at basically all available options to try to understand how they work and how they affect the financials on aircraft ownership and how that affects the business, short and longer term. We haven't made decisions yet.
Let's not forget that we made a principal position, or we made a principal decision by taking a position that for so long as we continue to take deliveries of the current CEO aircraft technology, we would not be financing those aircraft on balance sheet. The moment we start taking deliveries of the newer aircraft, we would be exploring those options as well. We have the first new aircraft scheduled for delivery in January. As time is approaching, we are going to get into it, obviously, once we conclude a deal, then we will announce it. At the moment, we are just exploring options.
Yeah. Morning, Alex. I think just to add to that, I think we are very well-positioned. I mean, with EUR 1.3 billion of cash on your balance sheet and investment-grade credit rating. We're keeping all these institutions very honest. I think we're certainly going to be well-positioned as we go into next year. Your first question, yes, on the ancillary, I think maybe a couple of points. We've always been guiding EUR 1 per pax per year increase. Are we going to achieve that this year? I think it's going to be challenging. With the summer certainly starting to disappear. The anniversary of that change in bag policy kicks in in October. Mathematically, one would expect to see the value add continue to increase.
If you then start to see all the incremental on the priority boarding kick in as well, you should start to see the recovery coming through in Q3. It's fair to say in Q2, there'll still be headwinds. We'll probably be having the same comment at our half-year results. Certainly, what we're looking at today is that the second half is when you should start to see the recovery of that, and we would hope earlier in Q3.
Great. Thank you.
The next question is from Michael Kuhn of Societe Generale. Your line is now open.
Yes, good morning. Essentially follow-ups, one more, sorry, on ancillaries. Would you think that at this EUR 5 per passenger level, you've reached the bottom on the baggage side, or would you see that further coming down and on your EUR 1 increase per annum target? Do you think you will be back on that run rate in the second half of the year, or could that be still below that level and you're only back on the run rate, let's say, next year? On capacity, you sometimes comment on your capacity growth versus competition. How does that look in the current summer, and what are the current indications for winter? Obviously knowing that there are still some uncertainties for the upcoming winter. Last, not least, on the new deliveries, you mentioned the first one scheduled for January.
Are you confident you will get your neos on time, or is there a risk of delays? Thank you.
Thanks, Michael. I'll take the first one. I think you know I've been calling the bottom of our unit bag revenue decline for a couple of years now. I'm fairly confident that removing the last cabin bag, hopefully we'll start seeing the bottom of that. I think in that respect, yes, we should start to see that coming through. In terms of the run rate, so net, we should start to see the positive effect kicking in October. We delivered over EUR 2 on the value add, so one would hope certainly we'll start to see North of EUR 1 in the second half. Will that compensate for the full year? Given the importance of the summer, I think it's unlikely. Flattish for the full year, I think is probably a safe assumption.
In terms of next year, yes, we'll certainly start to be looking to try and achieve that EUR 1 per pax per year.
In terms of capacity, competitive capacity, I think it is fairly benign, to be honest, in Central and Eastern Europe. If I look at competitive overlaps compared to any other airlines, not a lot has changed. You are seeing some notable changes. Look for the airline growing like crazy. You see kind of a battlefield developing in Vienna. Other than that, I think business is pretty much as usual, and we are not seeing a significant change going into winter either. Again, as said, we are seeing some airline weaknesses which could translate into capacity cuts, which could benefit our business, but we have not been provisioning for that. With regard to the new deliveries, where we have a contract in place with Airbus. Our understanding is that, actually, Airbus will do reasonably well in the first half of calendar 2019.
There may be some delay, but more like weeks than months. We have not been notified of any of those, so we are still holding the lines as per the contract. We are also planning on contingencies should we have any delays. You may have captured it, but actually we have extended a few leases of existing aircraft just to make sure that we have an insurance policy in place. If we do not get delivery, that we still have the capacity needed to deploy the commercial program. We have some concerns, but I think we have also got the plans to cover up those concerns. Our understanding is that the first half of 2019 should be reasonably okay from the perspective of Airbus's ability to deliver the aircraft as contracted or with a slight delay.
Excellent. Thank you.
Thank you.
The next question is from Peter Tester. If you could please state your company as well, your line is now open.
Hi. Thank you. It's Peter Tester from One Investments. Just the very last thing on delivery. You made a comment of EUR 0.7 benefit on the bag. I wasn't sure whether that was what you were seeing in the current quarter, the current picture. Maybe you could talk a bit about that, please. The second question is just on cost overall. You've done quite a good job in other lines, the cost to offset the disruption cost. I was wondering whether there are any timing factors in that or what opportunities you had to do similar as the disruption carries on going forward. Maybe also as the Airbus stress and delivery becomes a bit less and the bag stress at the gate becomes a bit less.
The last cost question, sorry, is just looking at the overall associated disruption costs. When trying to understand how your comment that you felt it would be a bit less disruptive in the less stressed period of H2, what that really means in terms of cost per kilometer. Thank you.
Okay. Maybe I'll sort of just go three, then two, then one. In terms of the overall, the run rate I was flagging, you're talking about EUR 1 million-EUR 1.5 million per month. That's essentially what we've been seeing the past few months, including July. That's the run rate. If you see a less stressed environment, of course, you tend to see strikes and issues happening when it really hurts the passengers the most. One would think that actually it's going to be the summer that they get their biggest bang for buck. Going into the winter period, there's less congested skies. One would hope that that starts to moderate back to normalized levels. In terms of a run rate, I would say you can add EUR 1 million-EUR 1.5 million per month for the remainder of the summer.
In terms of the cost, I think what's important is that every year has a slightly different story. We model everything. Last year, we saw an increase in depreciation. The depreciation also was increased the year before that. As a result, you need to move the leads in your business. Essentially, I think last year we did a very good job on the airport mix to essentially compensate for that. This year, it's almost gone the other way. We're actually seeing some relief on the depreciation because of the timing of some of our maintenance events, therefore, you can invest a little bit more in some of those airports. That's why the Viennas, the Lutons, the Frankfurts, the Berlins, those sort of types of airports you can actually put into your portfolio. We don't look at it sort of quarter by quarter.
You sort of model what's coming down the line over the next couple of years, where you can invest and where you can't. I wouldn't look at and say, "Which line can you squeeze the most?" The reality is, I think it's all part of one big initiative to we want to constantly drive our extra cash flow up. Where we can, we will. Obviously, we want to make sure that we're driving the business as well.
Clearly, just looking at it from a structural standpoint, we have a few headwinds, I think those headwinds will continue to affect the business. Labor inflation pressure is there. Disruption costs are there, they may get eased to some extent, I think they are just looming over the whole industry, actually, obviously we are not immune to that. I think where we come in in terms of mitigating those headwinds, clearly we have the A321 program. Fairly quickly towards the end of this year, towards the end of calendar year 2019, we will have every second seat flown on A321. That's huge. If you think about it, we are converting the business from a 180-seater business to a 230-seater business. That gives us very significant efficiency and cost advantage.
As Tibor was discussing the aircraft financing options, we are clearly going to benefit from our credit standing and the broadly available set of options for aircraft finance to materially affect ownership costs in the business. Simply, when you look at our cost base compared to our competitors, this is the one line where we are beaten by our competitors. On every other line, essentially, we are outperforming the industry, we are going to be able to close the gap on that. Obviously, that's a slow motion because it has to feed through the process delivery by delivery. After it kind of builds up to a reasonable size, this is going to become meaningful. The A321 program is already very meaningful. As I've said, half of the fleets will be flown on A321 towards the end of the year.
Just elaborating on that. I'm not sure of any other airline that essentially can almost re-fleet from an A320ceo technology to an A321neo technology. Structurally, you've got the larger aircraft coming. You've got even another nine seats on the neo, which is a 239-seater. You've got the financing, which again, is a significant drop. You've got neo engines, which are burning at least 16% less fuel. If you think about structurally the runway ahead, it's a very exciting proposition.
Okay. The last question was around just the 0.7 on bags and how that works throughout a quarter, the rest of the balance of the year, and opportunities to improve that with better management of the opportunity.
That policy was changed on the 20th of June, I think, from memory. You won't see any of that or very little of that in June. Essentially, that will start kicking in from then on. You'll start seeing that coming through. We'll need to do there a couple of airports that resisted it. In terms of actually improving the operational side of it and making sure that we get full penetration, but also improving that. I think the awareness is getting more as well. As I mentioned, I think it was 26% is the conversion rate, but we should certainly be seeing more than that coming through. I think you should start to expect to see some of that in Q2, maybe the full impact of that coming through in Q3, and hopefully maybe a little bit more outside.
Okay. Sorry, the 0.7 number was for what? Sorry.
Incremental. The incremental what we're seeing today versus somebody. Before the policy, what we were seeing people pay for, and after the policy, what we're now seeing people pay for. That's an increment.
Okay. Maybe overall on ancillary, do you think on the balance of the last nine months of the year, that can get back to flat per pax?
Yeah. I think the team are going to be challenged with that. I think the challenge you have is summer, which is an important part of the business. I think achieving the EUR 1 per pax per year-on-year, I think will be unlikely. Flattish, essentially, that's what we'll be targeting.
Yeah. Great. Thank you very much.
The next question is from Jarrod Castle. If you could please announce your company as well. Your line is now open.
Thanks. It's Jarrod Castle from UBS. Just a couple of questions. One, can you just kind of come back to ATC? What is your understanding of what they actually want? What will that mean in terms of navigation charges if they get what they want? Secondly, just kind of coming back to Q4 capacity. What is your thinking in 2019 at the moment regarding the U.K., given the Brexit? Is some of the capacity reduction related to the U.K.? Lastly, I know it doesn't sound like you're ever that serious about it, but just any thoughts on current consolidation and M&A? It seems like it's more have a look rather than anything that you take seriously in terms of actually doing something. Thanks. With regard to ATC, I don't know what it really means.
I'm not in charge of calculating their charges. ATC is protected by law that on a cost-plus basis, whatever report they have, they can push it across and charge it on the industry. This is against a growing industry. I don't know what it would really mean. I'm almost certain that even if there is a bit of an ATC charge increase arising from full stopping and fixing all that disruption and operational issues, we would be a net beneficiary of that because we would be saving a lot on disruption cost and compensation cost. I think ATC needs to be fixed. We don't fully understand what cost it brings to the system. I think the overall cost in the system would come down as a result of fixing ATC. With regards to the U.K., I think we remain very upbeat on the U.K.
We think the market is very robust. We have been growing. We have been growing double digits, more than double digits in London. We have been growing across the whole of the U.K. this year compared to last year. This is against the backdrop of a very big pound. The pound is still nowhere near where it was prior to the Brexit vote. We have a lot of trust in the market and there's a desire to continue to develop our business there. We understand that the market itself is not really growing. It's fairly flat in terms of capacity. We are probably one of the few players, if not the only one, who continues to push for more capacity. Obviously, this is a sign of success and a sign of solid financial performance there.
With regard to consolidation, I think it's interesting, it's topical, as far as we are concerned, we are not involved in anything concrete. Obviously, we keep an eye on what's going on. As we have said before, we don't really have an interest in buying or acquiring failed businesses, or failed airlines. We would have more interest in acquiring markets, or getting into markets backfilling failed businesses, or failed airlines.
Okay. Thank you.
Okay. Could we have maybe one last question? If there are no more questions, I think we'll draw to a close.
We have one last question from Catherine Lillard of MainFirst. Your line is now open.
Hi. Sorry, just two very brief follow-ups. I was just wondering, just on the financing options for the neo aircraft that you've mentioned through the call. I just wondered whether you could give us any flavor on directionally what pricing is doing in those markets for financing and what's that? You've clearly got a lot of options there, and you've spoken historically about maybe a sort of 200, 300 basis points improvement there. I just wondered if you're still seeing that, or you're seeing the direction of improvement. Just on disruption, and the commentary and the statement, and the commentary on the call about that looking like it will continue into the autumn. Just wondering whether you could update us at all on what you're seeing in the second quarter thus far.
You talk about that run rate statistic, is it fair to assume that the run rate in the increase in the three-hour-plus disruptions continuing for July and August? Thank you.
Hi, Catherine. On the financing, I would say the direction is going in the right direction. I think getting our investment grade has certainly made them sharpen their pencils, whichever institutions we're talking to. I would say, I think in the past what we've said there's a bit of a financing charge on the leases. You compare that to a bond, you're seeing a good two, 2.5%, 3% improvement pick up on the bond. I think the direction is probably getting even better. On that, I'm very excited about sort of the ownership side of the equation, but I think it's a bit too early yet. We are testing the market. What's important, I think to one of József's comment, is that we're taking quite a few aircraft.
As long as we make sure we have every avenue of financing open to us, and we get the best possible pricing, we'll be taking the opportunities at the right time. In terms of disruptions, yes. I would say Q1 was actually particularly fierce in terms of, or severe, I should say. We are still seeing the issues. We're not seeing on-time performance improve as of yet. In terms of cancellations, I think it's probably a little bit less so far in July, but they're certainly happening. I think the run rate certainly going into Q2, similar to that of Q1, is probably a good assumption.
Okay, great. Sorry, just one follow-up to the financing question. I know it's a little bit early, but you've spoken a lot on the call about the structural drivers in addition to ownership, in terms of the cost base and CASK in the next sort of 3-5 years. How should we be thinking about that sort of for next year? Obviously, you're welcome to say it's too early for that. What sort of areas, including or excluding ownership costs, what magnitude should we perhaps be thinking about?
I think the size of the aircraft is mathematics. Essentially, you need two pilots to fly an A321 versus an A320, so that's an extra 28% of seat capacity. You need one extra cabin crew. By definition on the crew side, we're seeing a 17.8% unit cost improvement on the crew alone. That's enough to absorb. I think on the structural, these are things that we're seeing. That's why it's exciting because these are coming through just because of the math. What you can do is you can go down all of those line items. You essentially were saying an A320 versus an A321 is a 10% or a 9.8% unit cost improving aircraft, both on the fuel and also on the all-in cost.
There are some costs like en route costs where you wouldn't see the full impact because it's a slightly heavier aircraft. There are areas like the crew where you'll see a slightly higher structural cost. What you can do is you can go down every line item, and you'll see some general benefits. On the whole, the A321 is a 10% lower unit cost, in half the aircraft. You add the neo, another nine extra seats, so 3% extra capacity versus the A320. You add the fuel element, which is a higher, much more efficient engine. You're seeing another 10%. An A321neo versus an A320ceo, you're looking at 20% lower unit cost. That's before you've even started talking about ownership costs. Again, I think structurally, it's very exciting looking forward.
Great. That's really helpful. Thank you.
Well, thanks everybody. We'll be back online with our half-year results in November.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.