Ryanair Holdings PLC Q3 FY2022 Earnings Call

Welcome to the Ryanair Q3 FY22 Results Conference Call. I will now turn it over to Michael O'Leary to begin the meeting.

Yeah, thank you. Good morning, ladies and gentlemen, you're all welcome to our Q3 results conference call. You'll see the comprehensive release this morning on the ryanair.com website of the Q3 numbers or the MD&A. We also released a video interview of myself and our CFO, Neil Sorahan, which should have dealt with most of the major issues. A couple of quick things. We've taken as read and everybody's seen the results. The strength of the numbers here with the recovery of traffic during the third quarter was up to 31.1 million passengers. That was a significantly faster recovery than any other airline in Europe, along with a dramatically higher load factor than any of the other so-called local airlines who still have load factors in the mid-70s; we delivered an 84% load factor. That would have been significantly higher, as would the yields, if we hadn't had the sudden emergence of the Omicron variant in the last week of November and the first week of December. I think we should be a little cautious going forward. We were heading for a very strong Christmas last year. As Omicron broke out and governments started imposing or re-imposing travel restrictions, we got hit and it probably cost us about 2 million passengers in December. That also impacted passenger volumes, as we fell to 9.5 million in December, critically affecting yield. We took out about a third of our January capacity again because bookings just collapsed. We managed to hold onto some of that Christmas return traffic in the first week of January, but other than that, the rest of January was a washout. Initially, we would have expected to carry about 10.5 million passengers for January; however, after taking out a third of the capacity, we reduced the target to between 6 million and 7 million. We've probably taken out about 15% of the February capacity as well. There's a misconception out there that these lockdowns just hit passenger volumes—they also hit passenger yields and revenues. Therefore, we think the impact of Omicron was quite damaging on the December numbers. In those Q3 numbers, despite still doing 31 million passengers and an 84% load factor, we anticipate that January will be somewhere between 6 million and 7 million passengers and February will be down about 10% to 15% on our normal expectations. We're expecting about 8 million to 8.5 million passengers in March, hoping to maintain a strong recovery potentially back to between 11 million and 12 million passengers. However, any more surprising variants or government reactions could significantly impact us, especially through the Easter period in mid-April. Presently, all indications suggest a strong recovery for Easter and into the summer of 2022. As a backdrop, the highlights of the third quarter are that we continue to invest heavily in our environmental strategy. Our Climate Disclosure Project rating moved from B minus to B, which is industry-leading. Traffic rebounded strongly despite the impact of Omicron on traffic in December, but closing bookings and yields in December and January were badly damaged by lockdown restrictions. We are being aggressive on pricing to recover traffic and load factors into February and March. Our balance sheet remains strong. We repaid the CCFF £600 million loan in October, five months earlier than scheduled. By the end of December, we've taken 41 Game Changer deliveries, expecting that to rise to 65 aircraft before the peak summer of 2022. To accommodate this additional capacity, we've announced 720 new routes and opened 15 new bases, all set to operate in the summer of 2022. We are very well hedged on fuel, which is something that separates us from many competitors, being strongly hedged at prices significantly lower than the current spot prices. Brent crude opened this morning over $91 a barrel. We are hedged 100% into Q4, 80% into H1 of FY23, and 70% into H2 of FY23. This is a mix of swaps and caps to avoid risks associated with buying into uncertain capacity, in case of further restrictions. For the remainder of this fiscal year and much of the next, we will benefit from significantly lower than spot price oil costs, granting us a substantial cost advantage over all our competitors in Europe. Our summer '22 capacity is now for sale, offering 114% of our pre-COVID capacity. We are committed to increasing our five-year growth target from 200 million passengers to 225 million, expecting a strong recovery post-COVID into summer 2022. Contrary to some analysts' reports, we do not believe that capacity will be flat in '22 compared to pre-COVID levels; it could be down by a double-digit percentage or at least a high single-digit percentage. Legacy airlines are desperately trying to hold onto slot waivers, reflecting their reluctance to operate a large proportion of their short-haul traffic—about 50% of their short-haul traffic connects to long-haul flights. We expect to see a meaningful reduction in short-haul capacity in Europe in summer 2022, while we will be the fastest growing airline based on absolute traffic numbers and capacity in that market. We are receiving numerous requests from airports and governments eager for us to allocate more aircraft to their markets, and we're offering attractive COVID recovery or post-COVID recovery traffic yields to those parties. With that, I will hand over to Neil to go through the MD&A highlights.

Yeah, I'll very quickly run through that. You've covered most of it already. We're equally well hedged on carbon for the next year. We're about 100% hedged for FY22 at €24 in EUA, 80% hedged into FY23 at €45 in EUA, compared to current prices of €90. The balance sheet remains in a very strong position with cash just under €3 billion at year-end in December after paying off the UK CCFF five months early. Net debt, despite €800 million of CapEx, now stands modestly at €2.1 billion at the end of the quarter. We will focus on getting that back to broadly net cash in the next couple of years. Lastly, I was pleased to note the unit cost ex-fuel development, where we saw unit costs drop back to €32 per passenger.

Okay, thanks, Neil. We'll open up to Q&A now. Please, everyone is limited to two questions. I'll address the first question, which everyone always asks: What will the yield be like for summer 2022? Currently, we don't know. Our focus, like most of our competitors, will be on recovering volumes quickly and restoring loads to aim for a 90% load factor. If there are no further Omicron or COVID restrictions, there should be a reasonably strong traffic recovery through late February into March and certainly into April. However, forward load factor or bookings are running significantly behind where they were for summer 2022 as of this day in advance of 2019. While bookings have rebounded strongly recently, they must continue uninterrupted for the next eight to ten weeks for April and the peak summer months to align with two years ago. We are, as usual, load factor active and yield passive. Our Q4 numbers showed an 84% load factor, whereas our competitors recently claimed to be load factor active and yield passive yet only managed 77% load factor in Q3. We see a strong traffic recovery if no negative COVID developments arise, though February is expected to suffer due to 50% capacity reduction. A solid load factor recovery is anticipated for March, and for the new year, we aim for 165 million passengers with hopes for a strong recovery in loading factor in the upcoming months. Unless there's another Omicron variant, Easter may also be affected, as it was in December.

Thank you. Our first question comes from Mark Simpson at Goodbody. Please go ahead, your line is open.

Good morning. I have two questions. First, you noted in the preamble about paying down debt over the next two years as stated on the website. Is there an update on CapEx behind that? Secondly, while not looking for specific overall guidance on summer, there's competition in two areas: domestic Italy and Vienna. Could you give us an update on your strategy for managing those markets, especially around a competitor's move in Italy?

Sure, thanks. Before Neil comments on CapEx, let me ask Eddie to provide news on domestic performance. It's crucial to emphasize that there's a false view that the worst of COVID is over. We are still fixing our load factors and bookings for the summer—this is a key concern for us to return to a net zero debt position, having gone into COVID at net zero. Hence, the next 18-24 months will primarily focus on debt reduction. Neil, regarding net debt and CapEx?

No change from our previous guidance. We expect about €1.2 billion CapEx in the current financial year and €2.3 billion next year as our peak year. Subsequently, it will decrease.

Okay, and Eddie, domestically in Vienna, are we noticing anything from competitors there?

I can comment on domestic performance in Italy. Over the past 12 months, we've heavily invested in Italy, increasing our base aircraft from 67 to 92 for the upcoming summer. We've added three additional bases with over 100 domestic routes. Comparatively, Wizz has under 30 routes, and we've gained a significant frequency advantage. While some competitors are struggling with load factors around 50-60%, we've grown by nearly 40% in Italy and expect to hold a dominant share. For Vienna, we're expecting to have close to 20 base aircraft this summer against a reduced Wizz presence.

Following up: Do you think your fuel hedging strategy offers a competitive advantage?

We don't hedge fuel to maximize returns; returns depend on recovery speed. Hedging is about delivering cost certainty to shareholders for the next 12-18 months. Competitors are unhedged and may face substantial losses alongside the high oil prices at $91 a barrel. We prefer not to commit to buying high percentages of our capacity because of the uncertainty. We believe we're in a good position for the coming year. Thanks, Mark. Next question please.

Our next question comes from Sathish Sivakumar of Citigroup. Please proceed.

Thank you, Michael. I have a couple of questions. Firstly, can you provide an update on the recent ICAO report regarding Belarus? Secondly, could you share some color on ancillary revenues, such as priority boarding and reserved seating—do you expect normalization in the coming quarters?

Sure, thanks, Sathish. We welcome the ICAO report on the diversion in May 2023. While we feel it could have gone further, it highlights that certain state actions engaged in modern-day piracy. We're backing ICAO to ensure no such future incidents occur and support actions against the four named Belarus officials. Air travel must be free from interruptions or dishonest diversions. Meanwhile, we continue to fly around Belarus and remain committed to air operations in places like Kyiv as far as economic flows allow. Regarding ancillary revenues, we've been doing dynamic pricing on priority boarding and expect that our strategy will continue to improve, with progress being made on duty-free sales.

On ancillary revenues, our focus has been on duty-free sales along with priority boarding and reserved seating. Our lab team has worked on dynamic pricing for areas like priority boarding. We're pleased with the trends observed and expect further clarity as volumes increase this summer.

Thanks, Sathish. Next question please.

Thank you. The next question comes from the line of Savanthi Syth at Raymond James. Please go ahead.

Hi, everyone. I have two questions. Firstly, regarding the non-fuel passenger performance, do you expect it to slip in fiscal Q4 given the capacity cuts in January and February? Additionally, any early thoughts on FY 2023's trends?

We'll have Tracey take non-fuel cost developments and then Eddie can speak on the opportunity in Germany.

We've seen a solid performance in non-fuel costs at €32 per passenger driven by increased load factors and aircraft utilization. However, we expect an increase due to Eurocontrol and ACC costs in FY23, albeit we strive to return to pre-COVID levels.

Eddie, could you discuss developments in Germany?

Germany faces structural airport cost issues, evidenced by recent events in Frankfurt. Secondary airports remain competitive, yet we have limited base aircraft compared to pre-COVID levels due to high fees. Currently, we are seeing growth in smaller airports; however, we are cautious regarding Frankfurt where prices are rising amidst a struggle for traffic.

What about Nuremberg and Hahn?

Secondary airports like Hahn and Nuremberg are managing costs effectively and allow us to regain some capacity. However, Hahn faces unique challenges as it's in administration. We see better growth opportunities with these smaller airports as they strive to cater to low-cost carriers.

We're determined to nurture the German market, therefore if they don't want to operate with us, there are 200 other airports in Europe open to us.

Could your fuel hedging strategy provide a competitive advantage in your pricing strategy?

Hedging is less about maximizing returns and more about ensuring certainty for our shareholders, particularly in the face of rising oil prices. With fuel costs high, you're seeing unhedged competitors in distress. Our strategy protects us, but overall yield depends on market conditions. Let's move to the next question.

Thank you. The next question comes from the line of Sathish Sivakumar at Citigroup. Please go ahead.

Thanks, Michael. I have a couple of questions. Firstly, can you provide an update on the recent ICAO report regarding the Belarus case? Secondly, could you share your perspective on ancillary revenues, including trends for priority boarding and reserved seating, and do you anticipate normalization in upcoming quarters?

Certainly, Sathish. We appreciate the ICAO's report on the May incident as it underscores the need for accountability. While it could have gone further, it emphasized that certain states engaged in piracy, an unacceptable act. We support ICAO's actions and we’re committed to safety in our operations and firmly stand by the measures taken for accountability. Regarding performance in ancillary revenues, we've implemented dynamic pricing strategies across various services, focusing on priority boarding and allocated seating; this approach shows promise.

On ancillary developments, we see good traction in dynamic pricing with respect to duty-free sales and priority boarding. As we resume more normal operations and volume levels this summer, we expect these revenues to grow.

Next question, please.

Thank you. The next question comes from the line of Savanthi Syth at Raymond James. Please go ahead.

Hey, everyone. Just two questions. Regarding non-fuel passenger performance, do you anticipate any negative effects from the capacity cuts? Also, any preliminary thoughts on opportunities in Germany compared to your ambitions pre-COVID?

We'll have Tracey handle the developments on non-fuel passenger cost, and then we can discuss the opportunities in Germany.

We are encouraged by our performance in the non-fuel costs which reduced to €32 per passenger, driven by higher load factors and operational efficiency. However, we anticipate inflationary pressures in some cost areas as we resume operations.

Eddie, any notes on developments in Germany, especially with Frankfurt's situation?

Germany poses structural challenges due to airport costs. While we've maintained good capacity in secondary airports, certain hubs like Frankfurt are hindering operations due to increasing costs and not stimulating growth. We're cautious planning for the German market, hoping to find more competitive rates in the future.

Thanks, everyone, for joining us today. We're looking forward to seeing you at our full-year results presentation at the end of May. Please feel free to reach out to Neil or Peter in Dublin with any follow-up questions. We're cautiously optimistic about the strong recovery we're seeing, but need to monitor developments closely. Thank you for your continued support.

Goodbye.

This concludes the conference. Thank you for attending.