Earnings Call Transcript - RYAAY Q2 2022

Michael O'Leary, CEO

Good morning, everyone. Welcome to the Ryanair H1 Results Presentation. I'm Michael O'Leary, the Group CEO, and with me is Neil Sorahan, our Group CFO. As reported this morning on our website, we've recorded a H1 loss of €48 million, a significant improvement from the previous year's loss of €411 million. In the first half of this year, we've experienced a strong rebound in traffic, increasing by 128% from 17.1 million last year to 39.1 million this half year. We have received the first of our 737 Gamechanger aircraft and ended the half year with a robust cash balance of €4.24 billion, up from €3.15 billion in March, reflecting the strong recovery in bookings and cash flows. Our net debt has decreased from €2.28 billion at the end of March to €1.5 billion at the end of September. We have launched over 560 new routes and announced 14 new bases for this and next summer as we aim for a strong recovery from the pandemic. Our recent AGM outlined an ambitious five-year growth strategy that targets increased traffic from 200 million to 225 million by the financial year ending March 2026. A central part of this strategy is our commitment to the environment. Each passenger flying with Ryanair instead of legacy airlines can reduce their CO2 emissions by up to 50% per flight. We're also expanding our fleet with the new Boeing 737 Gamechanger aircraft, which offer 4% more seats while reducing fuel consumption by 16% and cutting noise emissions by 40%. Our efforts to maximize the use of sustainable aviation fuel continue, and we're actively advocating for the reform of the single European Sky to reduce air traffic control delays, which would lower fuel consumption and CO2 emissions for all airlines in Europe. Our goal is to improve our climate rating from a B- to an A over the next two years. We're collaborating with Trinity College in Dublin to establish a Sustainable Aviation Research Center, aiming for a 30% increase in sustainable aviation fuel production and availability, with a target of using about 12.5% of sustainable aviation fuels. This forms part of our goal to decrease CO2 per passenger to just 60 grams per passenger kilometer by 2030. Regarding COVID-19, while it significantly affected our operations in the first quarter, we have seen a strong recovery in the second quarter, aided by the EU digital travel certificates introduced on July 1. We carried 5 million passengers in June, and that number more than doubled to over 10 million in August. H1 bookings have largely been constrained and required ongoing price stimulation. Recently, however, we have seen a surge in bookings and better yields for the October school break and the upcoming Christmas period, with expectations that this demand will continue into Easter and summer 2022. We remain focused on increasing load factors while being passive on yield. We have already achieved load factors above 80% for the past few months and anticipate exceeding 90% during summer 2022. However, during off-peak periods in November and early February, yields may be challenging, prompting us to engage in price discounting to encourage travel and rebuild confidence in intra-EU air travel. Ryanair was among the few airlines to take advantage of the COVID-19 crisis by placing a significant aircraft order in December 2020, increasing our order of Gamechanger aircraft from 135 to 210. Over the past 18 months, we've expanded our airport partnerships to secure lower operating costs, allowing us to offer lower fares to customers post-COVID. We're leading the recovery of air traffic in Europe and plan to significantly grow both passenger numbers and jobs in the next five years. This would not be possible without our robust balance sheet, which is industry-leading. We maintain a BBB credit rating from both Standard & Poor's and Fitch. As of the end of the half year, we had €4.2 billion in cash, and nearly 90% of our fleet is unencumbered. In May, we issued a new €1.25 billion five-year unsecured bond at a record low coupon of just under 0.9%. In June, we repaid an €850 million maturing bond, and last week we repaid our UK CCF loan of £600 million five months early since we don't need the funds and bookings and cash flows have significantly recovered. The strength of Ryanair’s balance sheet positions us well to seize growth opportunities as the market rebounds from the pandemic. However, we anticipate incurring losses this year, expecting a small loss for the year ending March 31, 2022, while leading a strong recovery in short-haul European air travel in summer 2022. On the outlook for winter pricing and yields for FY '22, we expect challenges, as the booking trend remains close in, and traffic recovery will necessitate ongoing price stimulation. Coupled with rising costs for a small portion of our unhedged fuel, visibility for earnings throughout the remainder of FY '22 is limited. We cannot provide meaningful guidance at this stage, but we believe traffic will improve to just above our current estimate of 90 million to 100 million passengers. If we continue to recover at our current pace and there are no adverse COVID developments this winter, we might exceed 100 million passengers. However, we expect a full-year loss between €100 million and €200 million, depending on winter fares and the continued rollout of vaccines across Europe without setbacks related to COVID-19. On our overall strategy, assuming no adverse COVID developments this winter, we expect to take delivery of 65 Gamechangers from Boeing before peak summer 2022, allowing us to accelerate our growth post-COVID-19. These aircraft are designed for the lowest costs, reduced emissions, and exceptional fuel efficiency, enabling us to capitalize on growth opportunities at both primary and secondary airports across Europe. As highlighted in our recent AGM, we are pursuing a much more aggressive growth trajectory for the next five years, aiming to increase from 149 million passengers pre-COVID to 225 million by FY '26, representing a remarkable 50% growth for Europe's largest airline during that period. We sincerely hope that you, as shareholders, will join us on this journey over the next five years, as we anticipate not only a recovery in traffic but also improvements in profitability and our share price. Thank you.

Neil Sorahan, CFO

Thank you, Michael. I'll just quickly run through the presentation and hand over to you for current developments. So Ryanair has the lowest fares and lowest costs of any airline in Europe. We're number one for traffic, as Michael just said, hopefully, somewhere just above 100 million this year, and number one for customer service and on-time performance. When it comes to the climate, we've got an industry-leading B- rating from CDP, and our balance sheet has a strong investment-grade rating of BBB. So this financial strength and our lowest costs make us the long-term winner. We're starting to put down the platform for growth for the next five years. We've got 89 bases, 14 of which were announced this year, and we'll roll into next summer as well. We've launched over 560 new routes. So, I think we're well-placed with the new Gamechanger aircraft to achieve 225 million guests by FY '26. We commenced the COVID with the lowest cost per passenger ex-fuel of any airline. And by the time we've taken delivery of our aircraft, we will be significantly ahead of everybody else in the sector. On the half itself, we saw a significant recovery, particularly in Q2 on traffic following the release of the EU digital COVID certificates in July, so traffic up 128% to 39 million guests at a load factor of 79%. Revenue jumped 83% to just under €2.2 billion. However, costs remain in good shape, up 60% to €2.2 billion. So as a result, we saw a very good improvement in the year from the same half last year where we recorded a loss of €48 million, down from €411 million last year. Our balance sheet remains extremely strong, as I said, BBB rated by both Fitch and S&P, very strong cash balances of €4.24 billion at the end of the half. 90% of the fleet unencumbered and net debt at €1.5 billion, so this enabled us, thanks to the strong cash flows in the business, as Michael said, to repay £600 million to the UK CCFF last week, five months ahead of target. Michael, I might ask you to run through current developments, please.

Michael O'Leary, CEO

Thank you, Neil. As I mentioned earlier, we've experienced a robust recovery heading into the winter of 2021, significantly outperforming other European scheduled airlines. Last week, we had excellent bookings for the October school midterm break, and we anticipate similar results during Christmas. We are proud to maintain our top environmental and social governance standards, and it’s encouraging that customers switching to us have reduced their CO2 emissions by 50% compared to Europe's flag carrier airlines. Regarding our traffic outlook, we're projecting over 100 million passengers for the full year. Our cost leadership has improved due to lower financing, airport, and aircraft costs, and management and staff have agreed to salary cuts for the next year, which will be restored in the following years. We are 80% hedged for fuel in the fourth quarter of FY '22, and we have also mitigated fuel risks for 80% in the first half of 2023, with a mix of swaps and caps. We're expecting 65 new Gamechangers for summer 2022 from our total order of 210, allowing us to accelerate our growth targets to 225 million guests by FY '26. Focusing briefly on traffic recovery, we are maintaining an active load factor with yields being passive. Our load factor has exceeded 80% in recent months, with expectations to reach nearly 84% for October, with further figures to be released later today. With most of our UK and EU population vaccinated, we believe this will significantly reduce the risk of disruptions during winter. Throughout COVID, we've worked diligently to keep our aircraft, pilots, and cabin crew current, enabling a swift recovery in our schedules and route network. Our October and Christmas bookings are strong, and we are raising our FY '22 traffic target beyond our previous range of 90 to 100 million. To give perspective on Ryanair's swift recovery, Eurocontrol's published figures for September show our flight volumes down only 9% compared to September 2019, while most other European airlines are down about 40%. Alitalia, for instance, reported a 67% decline in September, contributing to our growth in the Italian market. We have capitalized on the pandemic to strengthen our cost leadership against other EU airlines, negotiating agreed salary reductions with our piloting and cabin crew teams that will begin to be restored over the next few years. We're still in negotiations for recovery incentives with European airports and working with our partners to enhance our efficiency and cost savings. While route charges might rise in the next couple of years due to price gouging by European ANSPs, the new orders of Gamechanger aircraft will greatly reduce our aircraft costs for the coming decade, offering 4% more seats and 16% lower fuel consumption. We're benefiting from better lease and maintenance agreements and a BBB rating that allows us access to cheaper finance, having recently replaced an older bond with one at a lower interest rate. Additionally, we're reducing marketing expenses and integrating technology in-house for efficiency, which will further lower costs. The Gamechangers will significantly cut down our fuel burn over the next 5 to 10 years. Our only recent challenge concerning aircraft was Boeing's price increase for a MAX 10 order, which led us to step away from negotiations. Other airlines in Europe, such as Jet2 and IAG, have also turned to Airbus. While we have sufficient aircraft for the next four years, we'll wait for more competitive pricing from Boeing before making additional orders. Growth will ramp up to 225 million guests, particularly due to the considerable shrinkage or failure of competitors. We've seen the closures of several airlines including Thomas Cook and Alitalia, which has reduced their fleet size significantly. Norwegian reduced their fleet from 120 to around 25 or 30 aircraft. This opens substantial growth opportunities for us to fill the gaps left by these airlines, with airports acknowledging Ryanair as a key player for fast recovery. We have recently announced 14 new bases for 2021 and over 560 new post-COVID routes, focusing more on growth at existing bases than new ones. For example, we’re placing new aircraft in Vienna, Stansted, and across Italy to ensure competitive pricing continues in those markets. We're optimistic about Ukraine joining the EU Open Skies next year, further expanding our opportunities. Despite the exciting prospects, we still project a modest loss for the full year, between €100 million and €200 million, contingent on COVID developments and yield performance. However, we are confident in a strong recovery while maintaining low fares, especially leading into Christmas and Easter, setting the stage for an increase to 225 million guests by FY 2026. We are utilizing our solid financial position to invest in fleet and market share growth. On the topic of fuel hedging, while prices have risen recently, we remain cautious, choosing not to hedge excessively due to potential adverse COVID developments. Our strategy includes a combination of fuel swaps and caps, ensuring we secure our fuel needs without overcommitting. We're currently 50% hedged for the second half of FY '22 at approximately $58 a barrel and have similar hedging in place for the first half of FY '23. This strategy allows us to take prudent steps while avoiding the pitfalls we've encountered in the past. Now, Neil and I are ready to take your questions.