Ryanair Holdings PLC Q4 FY2020 Earnings Call

Hello, and welcome to the Ryanair Full Year Results Conference Call. Throughout the call, all participants will be in a listen-only mode. Afterwards, there will be a question-and-answer session. And just to remind you, this conference call is being recorded. Today, I'm pleased to present Michael O'Leary, CEO. Please go ahead with your meeting.

Good morning, everyone, and thank you for joining the full year results conference call. This morning, we released our results at 7 AM alongside a Q&A video featuring myself and Neil Sorahan, our Group CFO. I'm here in Dublin with the entire team and would like to welcome Tracey McCann, recently appointed as the CFO of Ryanair DAC. Congratulations on your well-deserved appointment, Tracey. Reflecting on today's numbers, we were on track for a strong full year ending in March 2020, which COVID-19 disrupted in March. Without that disruption, we could have seen traffic grow to approximately 154 million passengers, with net profits ranging between 1 billion and 1.5 billion euros. Instead, the pandemic and government-mandated fleet groundings from mid-March meant we carried 149 million passengers, down 4% from the previous year, with profits just over €1 billion at the higher end of our current range. However, those numbers are now part of history, so I won't linger on them. On the current COVID situation, we're fully grounded and expect to remain so through April, May, and June. We're projecting a Q1 loss of between €200 million and €300 million. We've already indicated our plans to resume some level of flying starting on July 1. Currently, we're promoting about 1,000 flights daily, which is around 40% of our typical operations. Over the weekend, we were encouraged by the evolving situation, particularly as Italy has reopened its economy for tourism from June 3, removing the ineffective 14-day isolation period that has been challenging to manage. We're advocating for effective health measures, such as mandatory face masks on public transport, in train stations, at airports, and on flights, as they significantly reduce the risk of COVID-19 spread. Since our last announcement, we have noticed a considerable surge in bookings. While I don't want to get overly optimistic, our bookings over the past weekend were up 60% compared to the previous weekend, albeit from a low base. We’re seeing a notable increase in search inquiries, especially from families planning two-week summer vacations in Italy, Spain, Portugal, and other destinations where COVID-19 cases are much lower in tourist areas than in cities. We're hopeful for a reasonable relaxation of restrictions in the coming weeks, which would facilitate passenger movements from July 1, still six weeks away. We haven't initiated aggressive pricing promotions yet; instead, we're focusing on encouraging health preventive measures. It's important to note there will be short-term challenges in the airline industry. We anticipate a load factor of about 50% in the second quarter and possibly 75% in the winter, though these are estimates. Traffic for the full year may be less than 80 million passengers, but we cannot accurately predict this at the moment. Once travel restrictions ease, we believe the traffic can recover quickly, driven by aggressive pricing from airlines and tourism providers looking to salvage the remaining tourist season. This could mean returning traffic volumes but at significantly lower airfares. We're navigating uncertain times. We aim to resume operations on July 1, and we believe traffic volumes will return swiftly, albeit with pricing challenges. I expect many of the first questions on this call will concern our yield outlook for the year and anticipated profit losses, but I must clarify that we have no solid vision on this matter. We’ll not speculate, but we can share our guidance. In the medium term, we see a significant opportunity. Ryanair has entered this period in a comparatively stable situation. We had €3.8 billion in cash at the end of March, now increased to €4.1 billion, largely thanks to a €600 million drawdown from the UK government. Our current cash burn is about €60 million a week, primarily due to fuel hedge payments, but our cash usage has dropped to near zero in recent weeks, allowing us to sustain operations for one to two years under current conditions. We want to resume business operations and expect that if we achieve a load factor of 50% or 60%, we can operate close to breakeven. However, this relies heavily on yield and ancillary sales assumptions as we return to flying. The medium-term presents substantial opportunities; we expect lower oil prices, competitive airport discounts due to lost traffic, and a reduced payroll bill. Unfortunately, this also means significant job losses among pilots and cabin crews since carrying just 80 million passengers this year would mean around 50% of our usual volume. Several countries have already begun this process, which is a harsh reality for the industry. Unions often hesitate to recognize these circumstances, but we face an existential crisis. Job losses and pay cuts are unavoidable, and without quick agreement on pay cuts, we could see even greater losses, especially with the upcoming base closure in Vienna if issues regarding pilot and cabin crew agreements aren’t resolved. Despite these challenges, we were encouraged by the overwhelming support from our pilots and cabin crews in Vienna as over 95% of them have signed on for changes. However, without union approval, we cannot proceed. If the situation allows, we plan to operate with Ryanair aircraft in Vienna. Returning to the key issue, we see significant opportunities arising from the current environment. We're in discussions to renegotiate aircraft leases and potentially adjust delivery timelines for the MAX aircraft with Boeing. This could lead to substantial cost reductions over the next four to five years, positioning Ryanair favorably. However, we must capitalize on these opportunities amid a market that will be severely distorted for years to come. While well-managed airlines like Ryanair, EasyJet, and BA may emerge less affected, state-aided airlines such as SAS, Alitalia, Air France, and Lufthansa, which already struggled financially, could come out of this crisis with substantial support to engage in low-cost strategies or mergers to stifle competition. Looking ahead, we anticipate a rebound in passenger volumes, but we recognize we'll be operating in a pricing environment that has been weakened. It's crucial to engage collaboratively with unions, suppliers, airport operators, and aircraft manufacturers, as aggressive pricing competition will define our strategy in the coming years. Recently, Alitalia received €3 billion in state aid despite never turning a profit in its 75-year history. Such support highlights distortions within the market. We don’t oppose all forms of state aid but seek fairness for all airlines operating in Europe. Ryanair, armed with €4 billion in cash and a relatively low net cash burn, is well-positioned to weather the COVID-19 pandemic and emerge stronger with a more competitive cost structure and growth opportunities, albeit in a market characterized by significantly lower fares due to competition against state-supported airlines. As I said, we now expect Boeing to tell us that the Max return to service will take place in North America sometime in Q3, which is between August and September. We have a reasonable perspective that they would be able to deliver some of our Max aircraft to us in the fourth quarter this calendar year and the first quarter of next year. These are still great aircraft—they have 4% more seats and burn 60% less fuel. We're big fans of the Boeing Max 200. Furthermore, it’s critical for our growth that we are able to exploit growth opportunities in the summer of 2021, and we have active negotiations with airports who are concerned about the loss of traffic to failures or costs among legacy carriers. And that will create more growth opportunities going forward. For the remainder of this year, we can’t give you any guidance on traffic and the full year outturn other than we expect a Q1 loss of about €200 million. Q2, based on our current assumptions, could break even or show a loss, but again, that’s really in the lap of the gods. The more we see European governments roll back restrictions in the coming weeks, particularly by mid-June, the better positioning we'll have. We believe we will see further developments from the Spanish, Portuguese, and Greek governments in not imposing 14-day isolation. We also think the U.K. government will feel compelled to withdraw their isolation measures. It’s hard to ask international passengers arriving in Heathrow and Gatwick to isolate for 14 days during their travels — are you going to ask passengers on the Gatwick Express or London Underground to isolate? They will, of course, be made aware of how nonsensical that is when you dig into it. The current discourse appears to be heavily based on science until you probe for more practical explanations. It’s baffling to exempt the Irish from the 14-day lockdown; even we would struggle to find valid reasoning behind that. We aim to encourage better measures—such as public transport and mass transport requiring facemasks— which will eliminate a majority of risks.

Thanks, Michael. Relative to last year, I won’t dwell too long on this: 13% profit after tax before exceptionals and the balance sheets in very good shape, with 331 unencumbered Boeing 737s and a book value of what’s just over €7 billion. The market value is well in excess of that cash, which remains strong at €4.1 billion. The work we’ve been doing over the past months to get cash down has seen us go from €200 million a week to €60 million average, currently going out the door. A slight clarification on the fuel figure: it’s almost just under €25 million a week based on mark-to-market and fluctuating spots depending on the day. Our hedging effectiveness is down because we hedge 90% of our fuel coming into FY'21. A lot of that has now become ineffective as we’re not going to use that fuel. So we have an exceptional charge of about €390 million on jet fuel, offset by favorable currency primarily on delayed CapEx aircraft, providing a net charge of about €353 million in FY'20 accounts. There’ll be a little bit of volatility on the P&L this year as we adjust mark-to-market as those ineffective hedges settle.

Okay, great. Thank you very much. Juliusz, do you want to share anything on state aid before we open it up for questions?

Maybe just a word to add that we’ve been in touch with the European Commission for two months. We almost feel sorry for them facing pressure from capitals like Berlin, Paris, Rome, and so on, trying to bend existing rules and allow significant amounts of state aid to flat carrier airlines. We will be assisting the EU Commission with appeals of these decisions to the European Court, hoping that the court will accept our requests to expedite these matters.

Thank you, Juliusz. Before we open to questions, does anyone have a quick thought or commentary to offer?

Yes. We’ve been working over the last few months on minimizing the payroll cost through payroll support. We’re now beginning discussions with unions and will have to deal with this. Some protests are from unions believing that things will pass and that everything will be over by July, but it won’t be and we are likely heading into a very, very deep winter in terms of costs. We hope to use our experience with negotiations we had in locking away most of the contracts. We’re also working on airport deals; some airports haven’t come back to us yet, but we’re achieving real savings there.

Okay, thank you. We’ll open it up for questions. Please be aware, we need to get through as many as we can before 11 o'clock. So, one or one and a half question each. Please don’t ask me any questions about traffic, yield, or profits for the rest of the year—because we don’t know.

Our first question comes from Daniel Roeska from Bernstein. Please go ahead.

I hope everybody on the call and their families are safe and well. I'd like to limit myself to one. I guess in principle, your commitment to buybacks is unchanged. Under which circumstances would you consider reinstating the buyback program? Can that happen while still restructuring? How do you see capital allocation in that context if you are faced with that question in a couple of months when we’re closer to normal?

As you’ve seen, we canceled the buyback in mid-March. We did about €580 million to €700 million buyback prior to that, and we immediately canceled the remainder. We’ve already signaled to the market that there wouldn’t be a buyback in the next 12 months because our next big issue was repaying €850 million in bonds in June 21. That was going to be our next use of cash. So frankly, the issue of buybacks was off the table before we even entered COVID-19. We would also prioritize paying down debt next year. We still think, even with the impact of COVID, we would be able to repay that €850 million bond in June next year. Assuming some return to normality this winter and into summer 2021, cash flows are still very strong. I'm in favor of accelerating growth and capitalizing on opportunities to lower costs over share buybacks or distributions to shareholders. Shareholders, I'm the fourth-largest shareholder in the group, can wait in line while we work our way through what has been an unprecedented event in the industry. To put it in context, the 9/11 attacks grounded airlines for four days; COVID has grounded us for four months—this is unprecedented. Shareholders understand this fact, which is why I think we often preferred share buybacks over dividends.

The next question comes from the line of Savanthi Syth from Raymond James.

Hey, maybe two half-questions about cash burn. Neil, can I assume that everything mentioned by you incorporates debt? I’m curious about what you see in terms of refunds as well.

As I said earlier, the cash burn includes everything from OpEx to debt repayments to critical CapEx within the business like payroll, software, etc. We have about €300 million of refunds included since the start of this financial year, a combination of refunds out the door, vouchers, and free changes. So that's included in the cash burn figures we've provided.

On the aircraft front, we will need all the fleet of aircraft we currently have at the moment. Remember, we expect to carry 150 million passengers in the last 12 months. The growth opportunities present themselves, I believe. We are looking at extending those aircraft coming off lease. You’re talking about lease rates now down to €150,000 or €175,000 a month; they’ll be very cheap aircraft if we decide to extend those leases. We are approaching the possibility of new aircraft and, if required, taking more aircraft if required. I don’t see any rationale at the moment to increase the quantum of that order; we’ll be watching market conditions closely.

The next question comes from the line of Duane Pfennigwerth from Evercore.

Can you talk a little bit, Michael, about the sequence of reopening in Europe and your network planning lead times? Which countries do you expect would be the first to reopen aviation and what countries might be slow to reopen? How much lead time do you need to relaunch a market, including crew bidding lead times?

It’s really hard to tell. We see many European countries over the last week or ten days reopen—Germany, Austria, Portugal have lifted restrictions, and Switzerland is following suit at the weekend. It becomes a domino effect; the Spanish and the Portuguese will likely look to open up quickly as well. The Italians and Spanish, having been the first into the COVID crisis, are likely to emerge fastest from it. I think I would be reasonably optimistic there will be meaningful movement to allow passenger movement over the next two weeks as we approach the middle of June. Pan-Europe is pushing for Schengen wage treatment of passenger movements, and it's hard to restrict air travel when movement can still occur by train, bus, and car across borders. We announced we would resume flights on the 1st of July, based on our prediction that most restrictions will be eased across Europe by early to mid-June. This will stimulate a lot of reservations—we already see pent-up demand, especially from families looking to take those summer vacations in July and August. Business travel might be slower to recover due to those restrictions, but once we get going and get people moving, we are confident they’ll want to explore and enjoy their vacations, even with the use of masks. Once people start to move, I think we'll see a significant return based on that. As a note, the 50% or 60% load factor is also where we’d be operating close to breakeven.

Just for a quick follow-up, Michael. Has there been any progress behind the scenes on the Max return to service—are there any developments from a technical or regulatory perspective that give you more confidence?

We’ve worked closely with Boeing and the European Safety Agency. There's now a much higher degree of confidence that the return to service will take place in August or September of this year. The feedback received from regulators has been much more positive; the return to service issues related to software have presumably been addressed. Boeing seems to be on track to returning production by the end of the second or early third quarter. We have 20 to 25 of those aircraft already completed and waiting for delivery. I'm optimistic now that we will get them flying for Ryanair in the summer of 2021, which is our next operational goal, so I see positivity that we can see that return and deliver these additional aircraft. Regardless, we will need these aircraft to facilitate our planned grows in the summer of 2021.

Just want to clarify just comments you made; I think you said that you expect around a 50% load factor for Q2, or 55% load factor for the winter. Do I hear that correctly?

You didn’t quite catch it; I don’t want to be stuck on any numbers at this time. We’re forecasting under 80 million passengers for the rest of the year. The number we would hope for is that we get 50% traffic in July, which will be the first month back. I can't offer insights into how August or September will develop. I expect the second half of the year will yield significantly higher load factors than 75%. However, forecasting beyond that is markedly difficult; we are guessing without solid insight. In terms of our forecasting direction, we look to see bookings occurring in the latter half of the year, but expectations must be tempered given the market variables. We hope to have firmer direction by the time we get to Q1 results in the first week of August. It’s challenging to work these numbers without visibility of how moving pieces shake out towards the end of the year.

The exceptional costs will go toward any further inefficiencies incurred; I wouldn’t anticipate significant restructuring costs, maybe a few redundancies, but that covers it. Expect to see cost reductions on a unit labor basis going forward; similarly, we hope for airport handling charges to lead to unit savings as we negotiate for new deals at our airports. That said, we will see reductions as the Max starts to deliver. The restructuring costs won’t be significant.

We need not be too optimistic; the short-term situation remains bleak. By the second half of the year, we can revert to an analysis where prior competencies drop, and we must prepare for a year of recovery ahead. We will have, at best, half of previous year’s numbers. There is likely significant pent-up demand from customers eager to fly; we expect things to ramp up throughout next summer across the sector. We must evaluate and adjust our strategy as we make decisions accordingly—all I can emphasize is the need to engage our customer base with answers that they want to hear.

Just questions on Boeing, please. Would you see your negotiations with Boeing leading to an even bigger number of aircraft being secured? And, while we’re on this topic, nothing from the preceding statements indicates a need to impede your ability to turnaround the aircraft in 25 minutes.

I believe there will be no impediment to operational matters, as our turnarounds will be smooth. We are working to ensure we’re managing based on planned traffic flows to maintain our flying schedules. The overall operations across airlines are likely to support up to 50% to 60% of previous load factor expectations; we can accommodate expected indirect pressures related to temp checks and adherence to facemasks while facilitating an expeditious process. As for Boeing and pricing, our discussions proceed in a three-phase approach including compensation for delays and pricing arrangements which have yet to be finalized. However, we feel favorable about maintaining a strong connection with Boeing as we focus our operational vision.

The next question comes from the line of Jarrod Castle from UBS.

Two questions: first, I believe you currently have seven planes available for sale. Is it realistic that you can sell them within the next 12 months given current market conditions? Secondly, state aid legal actions—would you hope to achieve a reversal of state aid given to competitors? What would success look like for Ryanair in that context?

The seven aircraft are available for sale, but given the pricing environment, we wouldn’t be surprised at the prospect of selling them in the next 12 to 18 months—if things do not work out as we hope. We want to operate those aircraft hard, primarily through this period; we don’t see much point in a policy of price setting for the next year. As for state aid from governments, we would hope to ensure fairness and clarity in future exchanges that prevent illegal or discriminatory actions; we want something transparent that all airlines can benefit from equally, rather than excessively favoring one over another. Yes, but we won’t accept any contracts of state aid to maintain the level of competition. Ultimately, it isn’t right for a country to keep deriving benefits unless it provides competitive advantages and actually meets the requirements for successful commerce. For example, German state funding will give Lufthansa an unnecessary edge over others when we, as private enterprises, must engage competitively on equal footing. So overall our priority will lie in upholding fairness across the industry.