Ryanair Holdings PLC Q1 FY2025 Earnings Call

Good morning, ladies and gentlemen. Welcome to the Ryanair Q1 Results Conference Call. You’ll have seen this morning, we released our Q1 results, together with an MD&A and a slide presentation on the ryanair.com website. I, therefore, won’t read the press release, but I’ll touch on a couple of key themes. We reported Q1 profit of EUR360 million, which is 46% down on last year’s Q1 EUR663 million. Despite strong traffic growth, traffic is up 10% in the quarter to 55.5 million customers, but this has been offset by weaker-than-expected airfares, some of which is impacted by the first half of Easter falling into the prior year Q4. Nevertheless, traffic growth is strong, up 10% to 55 million, but it’s only strong at a price, and we are having to repeatedly stimulate fares and bookings, and the closing fares and performance on close-in bookings has been disappointing and materially weaker than we’ve expected, particularly on the way into the peak months of July, August, and September. We have 156 Gamechangers in the fleet at the end of June, which is 20 aircraft less than we had originally budgeted. We are seeing record summer scheduled bookings but at lower prices. We are continuing to sign up multiple approved OTA partnerships, which would protect consumers and ensure that they get the lowest Ryanair airfares while we collect their correct e-mail and payment details. We continue to extend our fuel hedges at attractive prices. We’re now 75% hedged for FY ‘25 at about $79 a barrel, saving ourselves over EUR450 million in the current year. Additionally, we are now extending our fuel hedges for FY ‘26 to 45% of our needs at about $78 a barrel. As of Friday, we have completed just over half of the EUR700 million share buyback. Touching briefly on our commitment to the environment, during Q1, we took delivery of 10 Boeing game changer aircraft. These offer 4% more seats but burn 16% less fuel and have less CO2 emissions as well. The retrofitting wing retrofit program on the NGs continues. We’re on schedule to achieve our target of retrofitting the entire fleet of 409 NGs by 2026. These wings reduce fuel burn by 1.5% and noise by 6%. However, much of this excellent environmental work is being undermined by the deteriorating performance of European ATC. Europe controls all numbers this morning show that while flights in July or up to July are 4% higher year-on-year than they were in 2023, it’s still 3% less than 2019 levels. Year-to-date, the number of flights across Europe is 5% below 2019 levels. We are suffering, as are all other airlines, from inexplicable ATC capacity restrictions. These can only arise from material understaffing, mainly in the French, German, and Hungarian ATC areas. We are facing horrendous ATC delays, particularly during the morning wave of flight departures. They’re blaming adverse weather and other factors, but it comes down to understaffing. We are having our worst summer ever in terms of ATC delays and flight cancellations because, as these delays roll throughout the day, we’re having to cancel late evening flights at curfew airports. We are continuing to call on the EU Commission and the EU Parliament to deliver their long-delayed reform of Europe’s hopelessly inefficient ATC services. In terms of fleet and growth, we are operating our largest ever schedule with over 200 new routes in five new bases to deliver as much low fare growth as possible for passengers and our airport partners in FY ‘25. To that end, Lauda has extended operating leases on three of its A320s out to 2028. We have also agreed with Boeing to continue taking delivery of 737 Gamechangers through the peak months of August and September. All of these aircraft will arrive too late to be utilized for peak summer flights; we’ll use them as backups through the remainder of August and September. We expect European short-haul capacity to remain constrained for some time. Eurocontrol’s figures suggest that year-to-date, we are 5% behind where we were in 2019 in terms of intra-EU capacity. A320 operators are grounding aircraft for engine repairs, and manufacturers continue to struggle to meet delivery commitments, which is more pronounced with Boeing but also Airbus. Airline consolidation continues, with Lufthansa recently receiving EU approval for the takeover of ITA in Italy, and we believe that IAG’s takeover of Europa should also be accelerated. These capacity constraints, combined with our significant unit cost advantage and a strong balance sheet, will contribute to a decade of profitable growth of 300 million passengers by FY ‘34. Regarding shareholder returns, we’ve completed just over 50% of the buyback program. Once completed, Ryanair will have returned over EUR7.8 billion to shareholders. We also expect a final dividend of EUR200 million to be paid to shareholders in September, bringing total shareholder returns to just over EUR8 billion since 2008. Following a recent board review, the Board has approved a change in the ADS ratio so that one ADS will equal two ordinary shares compared to the current one to five ratio. We hope this change will make the ADSs more attractive to new investors and potentially increase ADS liquidity. Turning to the outlook, FY ‘25 traffic is expected to grow 8% to between 198 million and 200 million passengers. We think we are edging closer to 200 million than 198 million, provided there are no worsening Boeing delivery delays. Initially, we were supposed to take seven aircraft from Boeing in July; that has now reduced to five, with two slipping into August. Furthermore, we were supposed to receive ten aircraft in August, which is now down to eight, and probably heading towards seven. Consequently, we are still struggling to get our delayed Boeing deliveries on time. As previously guided, we expect unit costs to rise modestly this year, primarily due to increases in pay, productivity, higher landing and ATC fees, and the impact of multiple 737 delivery delays. However, these costs will be substantially offset by our attractive fuel hedge savings and rising net interest income. These gains will significantly widen Ryanair’s cost advantage over competitors and allow us to continue strong growth, albeit at lower fares than originally expected this summer. While Q2 demand is robust, pricing remains softer than anticipated, particularly for close-in airfares. Pricing is not increasing as it has in the past few summers, and we are seeing repeated price resistance for cheaper seats. We currently have only 34% of September already booked and expect this trend to continue. As a result, we now expect Q2 revenues to be materially lower than last summer, where we had initially expected them to be flat or mildly increasing. The final H1 outcome will depend entirely on close-in bookings and yields for August and September, and we believe the trend is downward, not upward. At this stage, we have zero visibility for Q3 and Q4, but we see no reason why pricing for these quarters would not also be weak. We will need to continue stimulating demand through the second half of the year. Q4 will not benefit from last year’s early Easter, making it too soon to provide meaningful full-year profit guidance. The final FY ‘25 outcome remains contingent upon avoiding adverse developments, especially considering the ongoing conflicts in Ukraine and the Middle East, continuing ATC issues, and further delays in Boeing deliveries. With that, I’ll turn it over to Neil for a brief overview of the MD&A or highlights on the MD&A.

Yes, no problem. Thanks, Michael. I’ll turn first to costs in the quarter. As previously guided, we saw costs modestly increase, as our fuel hedging offset much of the non-fuel inflation from annual productivity pay increases and, of course, the impact of the Boeing delivery delays. The balance sheet is in very good shape, ending the quarter with EUR4.5 billion in gross cash, after spending approximately EUR0.5 billion on the share buyback program, which started in May. Our net cash improved from EUR1.4 billion to EUR1.7 billion. As Michael mentioned, we are now over halfway through the buyback program, which is going very well and ahead of expectations. Now, back to you, Michael.

Before I open it up for questions, I’ll address the first question regarding what does 'material' mean. Although clearly, we think the minimum floor on price declines in Q2 will be above 5%. Could it reach double-digits? It is possible, but it doesn’t appear to be the case currently. The pricing on closing bookings has weakened as we moved through July, and there is no reason to believe that it will change in August or September. We are going on the offensive and will aggressively advertise low fare availability, maintaining our targeted load factors of 95% to 96%. We have a much lower cost base than any other airline. If fares are going to be materially lower this year, then that’s what it’s going to be. We consistently guide that our fare guidance, to the extent that we provide it, depends on close-in bookings. The reality during June and now into July and August is surprising given the capacity constraints close-in pricing has been materially weaker than last year. We are unsure of why that is. We see consumer spending under pressure all over Europe. There’s no specific market demonstrating material strength or weakness. We believe the consumer is under significant pressure due to higher interest rates and mortgage costs. Most consumer-facing operators are feeling the squeeze, which translates into air travel. People are traveling. We are growing strongly, although at a slower pace than originally budgeted due to delayed aircraft deliveries from Boeing, which has forced us to discount more to fill our flights. This is positive for passengers, even if it means short-term pain for shareholders. I share your concern, but given the current consumer pressure, we will lead the price discounting in July, August, and September. I will now open it up for questions.

Our first question today comes from Stephen Furlong from Davy.

Michael, you talked about ATC there firstly. I seem to remember that they were recruiting or investing in capacity, and I was just wondering if you heard anything from Eurocontrol that maybe by next summer, things will have normalized? Or would you not be optimistic about that? And then the second point I was wondering about cost inflation in the industry. Do you think it’s sticky? And if it is and the pricing isn’t, do you think the industry could have lower margins post-pandemic than pre-pandemic?

Thanks, Steve. Yes, Eurocontrol is indeed a mess. I think even they are in denial. The figures they’re producing show that European flights are 5% below 2019 levels, despite a 10-20% increase in capacity. We’re putting significant pressure on Eurocontrol and ANSPs. There is now an unexpected increase in thunderstorms over Europe this summer, which affects punctuality, but the delays mainly stem from a lack of staff for the summer schedules. Conversations with competitor airlines indicate they are experiencing even worse issues. If the first wave of flights is delayed, it’s solely due to inadequate staffing, and we are uncertain how future delays will impact passenger experiences. Over the weekend, ATC delayed more than one in three of every Ryanair flight. The increases in ATC fees over the past three years have also compounded our problems. In terms of cost inflation, we are indeed seeing material cost inflation among competitors. While labor costs are climbing, our pilots have established increases in prior years, which places us in a better stead compared to others. Airport monopolies in locations like Portugal are also increasing fees. We continue to negotiate growth incentives for discounts, particularly in Italy. I anticipate overall cost inflation within the airline industry but believe this will contribute to higher airfares, especially among high-fare competitors in Europe. However, the current summer reflects soft consumer spending, leading to lower average airfares compared to last summer.

No further comments beyond what you have mentioned. The demand exists; however, consumers are reacting to pricing. There is softness in the market, which is being felt across various regions throughout Europe. It is a question of trying to increase fares, but the consumers have reacted with resistance.

The next question comes from Jarrod Castle from UBS.

On fares, I don’t want to spend too much time on it, as there’s a lot to be said. While you say demand is present, you’re having to stimulate, which indicates that not all is well on the demand front. Have you been surprised by the speed of deterioration since June? Has there been a noticeable step change in this regard? On costs, given your status as the industry leader, when considering March '26, do you anticipate inflation to ease and extra costs to stabilize?

Thanks. Are we surprised at pricing? Yes, we saw a weaker Q1. Partly that was influenced by the timing of Easter. However, up to that point, we had a good portion of Q2 bookings in. Initially, we believed Q2 would perform well, but the situation has softened. Early in the year, we expected prices to rise by 5% to 10%. Reducing expectations to zero or 5% indicates the extent of pricing decline. While harsh, the closing bookings mean we must adapt. Notably, we carried an impressive volume of over 19 million scheduled passengers in June, which was unprecedented. Even so, total bookings remain weak nationwide. Despite our attempts, pricing resilience has faltered, and we must open up prices to meet target volumes. The consumer is demonstrating strong price sensitivity, impacting our forecasts.

Next question comes from Alex Irving from Bernstein.

Considering the shifts in demand, do you think this indicates a structural or cyclical change? Has this altered your outlook for net income per passenger in future financial years? Regarding ancillaries, I noticed they remained broadly flat per passenger this quarter. Could this be attributed to the Easter shift, or might we expect changes in ancillary trends moving forward?

Neil, I’ll ask you to comment on ancillaries. As for demand, I believe the pricing remains cyclical rather than structural. Consumer demand appears intact, yet the willingness to pay is weakened. Attempts to restrict cheaper seats yield significant booking declines. Maintaining strong growth this year toward 200 million passengers remains feasible. However, we anticipate price sensitivity to persist through 2024 unless significant changes in economic conditions occur. We must capitalize on our cost advantages and explore fleet growth opportunities, coupled with a focus on optimizing costs to remain competitive.

Regarding ancillary revenues, as we've seen, they were flat on a per-passenger basis. While certain products are outperforming past measures, early boarding has shown weaker performance. Moving into Q2, I expect us to experience relatively flat ancillary growth. Beyond that, marginal improvement is possible, but nothing concrete.

The next question comes from Harry Gowers from JPMorgan.

Michael, concerning the weakness in Q2 fares, is this trend consistent across your entire network, or are there particular regions or passenger types that are affecting performance? Secondly, regarding the buyback progress at 50%, do you envision a potential announcement or extension in the coming months?

Thanks, Harry. It’s a network-wide issue. Given our scale, any aggressive pricing tends to be uniform across our markets; there aren’t significant variations to note. Similarly, we’re not identifying unique markets pushing higher fares. The trend seems to span the entire system. Regarding the buybacks, as I mentioned, we anticipate completing the EUR700 million buyback by the end of September. It is well known that the Board is considering a potential top-up buyback, which will be discussed at the upcoming Board meeting during the AGM. If there's anything to announce, it will be done either at the AGM or the second quarter or half-year results in November.

The next question comes from Dudley Shanley from Goodbody.

Two questions for me, if I may. First, could you provide an update regarding Boeing? The last updates indicated slow improvements but given your statement earlier, I’m curious about your current stance. Secondly, if we step back and consider long-term implications as your order contracts conclude before the MAX 10's arrival, how should we view your network optimization strategies?

Regarding our situation with Boeing, we believe it has improved but glitches remain. Initially, we expected to receive seven aircraft in July, which has now changed to five, with two slipping to August, alongside receiving eight instead of ten in that month. We now find ourselves five aircraft short across these two critical months. Our concern lies with 2025 deliveries, which were originally scheduled for 29 between late February and late May but are now pushed to late March and late July, and we lack clarity on this matter. We suspect possible labor disruptions in Boeing come October, leading to concerns about having a repeat of summer 2025 as we are planning around delivery delays. Overall, if we are ten aircraft short by summer 2025, it's manageable, especially within a soft pricing environment. The current slowdown in consumer spending might not be the worst outcome. Our focus remains on maintaining profitability while capitalizing on further aircraft deliveries. In terms of optimization, we are continuously assessing our routes to ensure we allocate resources effectively.

Indeed, we have implemented considerable efforts over the past few seasons to enhance aircraft utilization. The focus now shifts to the quality and frequency of flights, with particular attention to regions like Morocco where domestic connectivity could be beneficial. Countries with high operational costs, such as Germany, will certainly be prime considerations for future planning and adjustments.

The next question comes from Jaime Rowbotham from Deutsche Bank.

Michael, two from me. First, you’ve commented on a constrained intra-European supply, but some might contend that returning to last year’s price point is oversupply. At what point, if any, would you consider moderating capacity growth for summer 2025 rather than having it occur naturally due to Boeing delays? Do you believe consumer demand could rebound significantly downward? Secondly, Neil, on non-fuel unit costs in Q1, I noted maintenance expenses came in lower than anticipated. You mentioned a supplier credit from Boeing. Do you have credits available to offset potentially higher maintenance costs in future quarters?

To respond to your question, if the pricing environment worsens, we will not reduce our capacity growth; we will accept lower margins and lower pricing while doubling down on our market share during challenging times. Historically, we excel during periods of consumer pressure. While there may be challenges ahead, we still believe growth remains necessary for Ryanair. Concerning Boeing's delivery timelines, we prefer to operate in a prepared manner rather than alter our growth strategy unnecessarily. Neil, please address the maintenance costs.

On CapEx, we maintain our previous guidance of EUR2.3 billion for this year, treating it as dependent on timely aircraft deliveries. For next year, we project between EUR1.1 billion and EUR1.2 billion in expenditures, although there may be delays in Boeing deliveries. The MAX 10's pre-delivery payments won't start until 2027, which should not impact our current financial footing significantly.

The next question comes from Gerald Khoo from Liberum.

You’ve discussed air traffic control delays in detail. Could you quantify the associated costs? Furthermore, you extended some leases on A320s. How much more can you extend, or have all available extensions been taken?

Quantifying ATC delays is challenging. We are currently in peak travel time. Over the past year, we dealt with 53 French ATC strikes, which we managed better than challenges borne from below-average punctuality. Currently, we are attempting to achieve a satisfactory percentage of on-time departures, barely reaching 66%. Due to airport policies, we anticipate modest increases in our EU261 costs this year but cannot determine the definitive increased amount. This situation highlights the pressing need for effective reform in Europe’s ATC infrastructure. As for A320 lease extensions, we have extended three leases to 2028 without a rate increase. But we are not inclined to approve additional extensions beyond this timeframe. We maintain a strategy of replacing older aircraft with upcoming MAX 10 deliveries in 2028. Should circumstances evolve, we will remain adaptable. However, lease rates have significantly increased recently and would create further inflation for our competitors.

The next question comes from Alex Paterson from Peel Hunt.

Could you elaborate on whether any regional variations exist regarding fare declines? Also, I noticed you mentioned that for August, you are running 0.5% behind plan. Is that plan aligned with previous years, given additional seats this year?

As I indicated earlier, the fare decline is uniformly felt across the network. Our strategy has been consistent, yet during the July period, we were 0.5% behind pre-established targets. The plan is flat compared to last year, with growth attributed to the addition of 9% or 10% more seats this year. We anticipated a stronger performance in pricing, but we’ve adjusted strategies, reflecting the current landscape.

Lastly, a question from Muneeba Kayani from Bank of America.

As Lufthansa is cleared for the acquisition, how do you view the Italian market in light of the proposed remedies, specifically regarding specific slots?

We are in favor of the ruling out of Europe regarding Lufthansa’s takeover of ITA. While we are disappointed about the slow approval process in consolidation efforts in the airline sector, we believe this acquisition is necessary to avoid relying on taxpayer bailouts for ITA. Although the remedies proposed, such as handing over slots, are not ideal for us, they may create opportunities for others. We recognize that high-fare carriers will likely consolidate, and we stand ready to continue expanding in Italy, providing our customers with more affordable service and maintaining our competitive edge. We expect to see growing demand in the Italian market, which can offset high fares and a recovering European landscape.

The next question comes from Johannes Braun from Stifel.

On free cash flow, it seems strong this quarter despite profits declining. I acknowledge the cash inflow concurs substantially with prepayments, so it raises the question on how this correlates with your warning concerning expected yield reduction for summer bookings. Might this solely reflect growth in volume or are there additional factors?

Yes, Johannes. We have noticed consistent traffic growth, with an uptick in pre-booked tickets. Increased gross cash has been attributed to our efforts to manage CapEx effectively and our ability to maintain a steady cash inflow despite profitability pressures. Overall, higher passenger volumes help cover the costs associated with pricing pressures.

Ladies and gentlemen, with no other questions, we’ll wrap it up. We are surprised by the pricing dynamics as we move into Q2, which is heavily driven by close-in bookings. However, we still anticipate strong traffic growth, solid cash flow generation, and a focus on returning surplus cash to shareholders. Our victory against booking.com last week represents a significant turning point for us. We will continue deploying capacity and remaining load factor active. We expect profitability will remain strong, albeit lower than initially anticipated. Should any follow-up questions arise, Peter Larkin, our Head of Investor Relations, is available in Dublin. Neil will also be in London and Frankfurt for investor meetings in the coming days. We look forward to seeing everyone at the AGM in September or at the half-year results roadshow in November. Thank you very much.