Earnings Call Transcript - RYAAY Q2 2021

Operator, Operator

Hello, and welcome to the Ryanair H1 FY '21 Results Conference Call. Today, I'm pleased to present Michael O'Leary, Group CEO. Please proceed with your meeting.

Michael O'Leary, Group CEO

Okay. Good morning, ladies and gentlemen. Welcome to the Ryanair Half Year Results conference call. You'd have seen this morning that we have released the half year results on the website. There is a comprehensive slide presentation and a Q&A on the website. So I would take it all that as read or seen. And then I'll just give you some comments on top of that. So as you've seen the results this morning, covered a 6-month period to the end of September. In the first quarter, we were essentially grounded, but successfully returned to service on the 1st of July. We've operated with about 60% of that capacity through the summer season, following all the ECDC and EASA health measures, which have been successfully implemented. Conscious of the need to prioritize the balance sheet and cash, in September, we raised €1.25 billion, a €400 million equity placing, which was led by the management team. We've also raised an €850 million eurobond, which means that at the half year, we have a closing cash position just over €4.5 billion. We will need that, as in the next 12 months, we have over €1.5 billion of debt repayments due. The U.K. government €600 million loan is due for repayment in March, and our first commercial bond issue, an €850 million issue from 2014, is due in June. Some of the key challenges over the last 6 months include the Ryanair customer service teams clearing an unprecedented backlog of customer flight changes and COVID-19 cancellation refunds and voucher issues. All of that backlog has now been eliminated. We have refunded vouchers worth €1.5 billion for bookings. We have no backlog in refunds now. If there are customers out there who still haven't received a refund, it's because they haven't requested it or they were one of that small number stuck, having made bookings through unlicensed screen scrapers, where we have fake customer contact details or fake payment details. We've set up a procedure where they can apply directly to us and bypass the overcharging scam artists to obtain their refund directly from us. The COVID-19 crisis has clearly caused the closure of a number of EU airlines, with huge long-term capacity reductions at many of Europe's legacy carriers, which are receiving significant state aid. For example, Air France, KLM, and Lufthansa have received over €10 billion each, and Alitalia has received over €3.5 billion. Similar sums or recurrent sums have been given to SAS state aid and others. We believe that this state aid will distort competition for years to come, allowing those failed flag carriers to engage in below-cost selling for many years. We've already initiated the first 2 legal cases in Europe against SAS state aid and the French refund of aviation taxes specifically for French airlines, and we expect to receive decisions on those cases before Christmas. However, it's important today not to get stuck in the details of the current situation with Europe moving into second lockdowns. There is a bright future ahead. We have taken advantage of the COVID-19 crisis to radically restructure our cost base. We've reached agreements with almost all of our pilots and cabin crew. This will involve painful pay cuts and productivity reductions through the winter period, but it's a much better alternative than job losses. We've minimized job losses, but we can't rule out further job losses in certain bases in Spain and Portugal, where - frankly, some unions are still insisting on not taking pay cuts. In those circumstances, it's inevitable we will have job losses at some of those smaller bases. We're also looking to negotiate with airports about growth incentives, focusing on where we can return traffic quickly. For example, we saw great success with the U.K. Canaries market when the U.K. added the Canaries to their green list 2 weeks ago, and our daily target of 2,000 bookings was exceeded by a factor of 14. We received 28,000 bookings on the first day and 25,000 on the second. This shows our view that there will be a very strong snapback in air travel, especially for short-haul European flights. On the long-haul recovery, we think it will take longer than short-haul. But the SNAPBACK for short-haul will be strong and immediate, and we are well-placed to cater to that demand. We also see opportunities with the MAX aircraft. We're confident that as are Boeing and the FAA, that the MAX 8 will return to service probably in late November or early December. This will allow our aircraft, the MAX 200, the game changer, to be certified, hopefully by early 2021. We are hoping to take our first delivery of those aircraft at the end of February, which will give us a capacity to take about 30 aircraft between February and early summer. Although that number could fall to about 25, depending on the timing of the first delivery. We currently have extensive MAX simulators and training programs for our pilots. We genuinely believe this is a great aircraft. All pilots who have flown this aircraft and flown the simulator think it's terrific. Operationally, they understand it well, it flies and handles very well, and from a financial perspective, it provides 4% more seats and a compelling 60% lower fuel consumption per seat, along with delivering 40% lower noise emissions. This game changer aircraft is key to significantly lowering our aircraft ownership cost base for the next number of years. In contrast, many of our competitors are engaging in sale and leasebacks of their fleets at distressed prices, resulting in higher financing costs, which will widen the cost gap between us and all other EU airlines for the coming 5 to 10 years. As we collide with the COVID-19 crisis, we'll emerge with a lower cost base, a compelling growth model, and significant incentives across various airports, particularly those looking to quickly recover lost traffic. In a marketplace structurally lacking capacity, we aim, particularly with the game changer aircraft, to fill gaps and restore traffic at many of Europe's airports. Regarding the risk of a no-deal Brexit, we hope that by the end of the transition period, the U.K. and Europe will agree on trade deals that cover air travel. They managed to establish a bilateral arrangement before the end of 2019 that has held since Brexit, and we believe a trade deal will emerge to allow free movement of people and a deregulated airline market in both the U.K. and Europe to continue. In terms of outlook, it's impossible in the current climate to give any kind of guidance for the remainder of this year. The recent weekend announcements of a second lockdown in the U.K. and Ireland entering a second lockdown 2 weeks ago highlight the unpredictability of the situation. It's important to note that lockdowns are completely ineffective. The WHO has stated that governments should avoid brutal lockdowns as they do not eliminate the virus. We have already seen how ineffective the first wave was, and we expect the same for the second wave. But I remain optimistic. I take my lead from Dr. Fauci in the U.S. who predicts one or more vaccines will be approved by health authorities before Christmas. The key issue will be when there will be widespread availability, especially for high-risk groups such as those over 70 and those working in healthcare. We hope this will be available by the end of Q1 or Q2 next year, allowing us to rescue most of the summer peak travel period and finally leave the COVID-19 crisis behind. However, as you know, our last guidance in October projected traffic of 38 million for the remainder of the year, which we believe will likely be lowered due to the current lockdowns. However, our severe surgery of November and early December flight schedules is likely to keep load factors from dropping significantly below 70%. We're looking at load factors dropping to around 60% and some minor capacity adjustments may be necessary. While FY '21 will continue to be hugely challenging, we expect to still carry between 38 million and 35 million passengers. That depends on booking strength for the Christmas period, which looks reasonable at the moment, but hinges on European countries emerging from lockdown. We need an end to these failed lockdowns and are calling on European governments to be more aggressive on testing and tracing. For instance, in Ireland, where we have a testing capacity of 100,000 people per week, we should be testing 1 million. Unfortunately, the Irish government has been poorly managed by health authorities rather than governmental leadership. Nevertheless, we will continue to navigate this situation. Our key objectives are to conserve cash, strengthen the balance sheet, and preserve as many jobs as possible, even if that includes painful pay cuts for management and frontline staff. It’s better they stay employed, allowing us all to respond and grow strongly once we emerge from the pandemic. The Ryanair Group will come out of this period with a lower cost base, a stronger balance sheet, and positioned to fund lower fares and new aircraft orders to capitalize on upcoming growth opportunities. Neil, would you like to add anything regarding MD&A?

Neil Sorahan, CFO

I don't have a lot to add, Michael, other than thank you for all the work you've done on cost-saving over the past number of months. This was evident in our half-year results, where we saw operating costs down 67%, although that was still not enough to offset a 38% reduction in revenue. However, we've worked very hard to maintain what was already the lowest cost base of any airline in Europe. The equity raise and the eurobond we completed last month have helped put us in a good position as we navigate the next 12 months. All refinancing risks have now been removed. I would flag that we experienced some ineffective hedging in the quarter, taking an after-tax charge of €214 million. This was primarily due to our capacity reduction from 50% to the prior year’s 40% capacity. Therefore, we moved what would have been a charge in Q4 or Q3 into the first half. We’re approaching the end of the hedging effect, particularly as we look into next year since we wouldn't anticipate any hedging effects next year. From a cash perspective, we've already settled about 70% of the adverse hedging from this year.

Michael O'Leary, Group CEO

Okay. Thanks, Neil. We'll open up for Q&A, please. We’re going to restrict everyone to two questions. The obvious first questions will be about yield and traffic for next year, which we do not know. Go ahead, Lee.

Operator, Operator

Our first question comes from Jarrod Castle from UBS.

Jarrod Castle, Analyst

Just a slight nuance on something you've already said on the Q&A on your website. You've had good cash control over the summer, but obviously, you will burn through cash as you normally do over the winter. Can you give us a range on what you think this will do to the balance sheet moving forward? I'm not asking for an exact number, just any color you can share, Neil, Michael? Secondly, concerning your willingness to achieve a 60% to 70% load factor given pent-up demand, would you be prepared to act aggressively on yields to achieve that load factor, or are you being conservative in the current environment where some people might not even be motivated to fly given the circumstances?

Michael O'Leary, Group CEO

Thanks, Jarrod. To respond briefly, it's impossible to provide guidance on cash flows this winter. Typically, in a normal year, we would see a surge of bookings and cash flowing in January, February, March as customers make their Easter and summer holiday bookings. However, this year, we have no idea how that will unfold. I think we anticipate strength, but with a potential third lockdown looming in January or February, it’s hard to say. There is no doubt that the current booking profile is very late, which is why we expect minimal impact from recent government announcements. November is already reasonably booked, but I think it’s a judgment issue. We’ve maintained a 70% load factor through the crisis. If we don't think we can achieve that, we cut capacity accordingly. We do not offer €1 airfares or free travel. We'll only do so where reasonable pricing exists. The goal is to operate our aircraft, pilots, and cabin crew while ensuring we stay as close to breakeven as possible in this climate. That said, we anticipate load factors may drop to about 60% in November due to weak bookings, so we will manage that carefully. We’ve already announced we will operate at 40% of our normal winter capacity while keeping those skeleton routes operating with a reasonable demand.

Operator, Operator

Our next question comes from Daniel Roeska from Bernstein.

Daniel Roeska, Analyst

You mentioned the opportunity for growth as other airlines retreat over the next few years. However, why haven't you announced any new bases or specific growth plans compared to others? Also, could you comment on how you're currently thinking about deploying that growth—whether it's better to strengthen existing bases or open new ones? If new bases, which geographic focus do you think would yield the best returns?

Michael O'Leary, Group CEO

Thanks, Daniel. We have announced one new base, which will be outside Paris, opening in late January, although it's only a 2 or 3 aircraft base. The reason we haven't announced more is that we haven't concluded negotiations with various airports yet. Extensive discussions are ongoing across Europe, but many airports remain unsure about their capacity losses. European airlines are allowed to hold onto their slots without losing them this winter, likely until summer 2021 as well. Looking at legacy airlines like Lufthansa, KLM, and Air France, who have retired a significant portion of their capacity, we believe a lot of that won’t be restored, presenting growth opportunities for us. How we will deploy growth will be opportunistic; we will deploy it to those airports offering us growth incentives and aiming for quick traffic restoration. Our recent experience with Canaries traffic shows the level of pent-up demand for air travel. People locked down for large periods truly desire to travel. Short-haul European air travel should rebound strongly next summer, provided vaccine distributions and rollout are timely.

Daniel Roeska, Analyst

Given your comments on hub-and-spoke carriers, which is more interesting for you—hubs or spokes?

Michael O'Leary, Group CEO

In principle, we are interested in the airports that offer us the lowest cost base. We operate at both hub and spoke airports and prioritize growth opportunities at any airport. If an airport reveals great incentives, that’s where we'll focus capacity. We expect rapid recovery in short-haul capacity, and our experience two weeks ago showed a remarkable spike in bookings. Whether we restore traffic rapidly at Stansted depends on negotiations and offers; we have a basis for flexible growth prospects moving forward.

Operator, Operator

Our next question comes from Savanthi Syth from Raymond James.

Savanthi Syth, Analyst

Assuming you get the 30 MAXes planned, what is your CapEx looking like for the second half of this year? More generally, what might the next couple of years look like in terms of CapEx? Additionally, with the near-term lower costs and assuming you receive the MAXes as expected, what level of operation do you need to return to in order to achieve the cost per passenger you had prior to the crisis?

Michael O'Leary, Group CEO

Allow me to defer the CapEx question to Neil. Regarding cost per passenger, I am not particularly concerned about hitting any absolute number right now. I believe that we will emerge from this with a significantly lower cost per passenger than before due to lower pay, fuel, and aircraft costs. Higher yields are also expected as we anticipate capacity constraints post-COVID, especially with the rollout of vaccines by Q1 or Q2 next year, with a very strong summer period anticipated. Our competitors will not quickly restore capacity. Neil, what's our CapEx outlook?

Neil Sorahan, CFO

There won't be a significant amount of CapEx this second half of the year. Most of it will be maintenance-related. It's too soon to give specific numbers on what the Boeing CapEx will look like because we haven't finalized the delivery schedules yet.

Operator, Operator

Our next question comes from Mark Simpson from Goodbody.

Mark Simpson, Analyst

You aren't giving firm guidance, but you've mentioned a potential range of 50% to 80% of summer '19 capacity for 2021. What factors influence that range? Is 80% the maximum we should assume? Also, regarding the MAX, are you considering the MAX 10 to further reduce unit cost in the future?

Michael O'Leary, Group CEO

Our guidance range is based on several factors, particularly the availability of effective vaccines and how it will affect government policies regarding lockdowns. The range covers 75 to 120 million passengers, and we suspect that achieving 80% will be challenging given the operational realities after the restart. If we were to see a vaccine by the end of Q1, we expect a return towards previous capacity, but we remain cautious about predicting exact numbers. As for the MAX 10, we are engaging with Boeing. Discussions are ongoing related to pricing for our current MAX order and additional orders. We will address the MAX 10 deployment once the aircraft returns to service. Boeing is currently unable to provide delivery timelines or discuss orders.

Neil Sorahan, CFO

We intend to pay back the government loan in March, but we will have to make that decision closer to that time. There's a possibility, should we want to, to roll it over for another year.

Operator, Operator

Our next question comes from Stephen Furlong from Davy.

Stephen Furlong, Analyst

How has Ryanair Labs been important during the crisis, particularly regarding revenue management? Also, could you share your thoughts on the competitive landscape for the coming year? Do you believe there will be a substantial amount of permanent capacity removed from the market?

Michael O'Leary, Group CEO

Eddie Wilson will address revenue management. Our outlook shows that we believe only 80% of capacity will return this coming summer. Alongside that, several legacy airlines have already announced capacity cuts, and as they struggle, we will be in a strong position to capitalize on those openings. We will likely lead on pricing in many markets, maintaining a lower cost base while providing superior service.

Edward Wilson, CEO of DAC

The Ryanair Labs team has been phenomenal throughout this crisis, particularly with customer service and business intelligence. They've adapted quickly to refund management and operational changes. The revenue side is different now, and we are working on how to adjust our strategies as bookings evolve. Most people are now hesitant to book flights far in advance due to travel uncertainties, so we are studying that closely as we prepare for the return of bookings.

Michael O'Leary, Group CEO

Ryanair Labs has done an outstanding job in eliminating a nearly €1.5 billion refund backlog. The only customers waiting are those who haven’t approached us directly. We anticipate continued strong returns, with demand rapidly ramping up as soon as travel guidelines improve. Our flexible cost base will allow for strategic adjustments as necessary.

Operator, Operator

Our next question comes from James Hollins from Exane BNP.

James Hollins, Analyst

Could you share more details about job redundancies? Your staff base was 18,000; what should we expect by the end of the fiscal year? For Neil, regarding Boeing compensation, should we think of CapEx next year as net zero?

Michael O'Leary, Group CEO

With respect to headcount, while there may be some job losses this winter at specific bases, especially in Spain, Portugal, and Belgium, most of our pilot bases have reached agreements where job losses are not anticipated. We prioritize conserving cash and keeping our team active, albeit on reduced hours. In terms of CapEx, we have no specific figures but aim for sustainability and to maintain liquidity. We’ll discuss more as things progress.

Operator, Operator

Our next question comes from Jaime Rowbotham from Deutsche Bank.

Jaime Rowbotham, Analyst

How are you managing your capacity given the U.K.'s recent national lockdown? Are there additional changes to operations or refunds due to that development? Also, what is the percentage of your current shareholder base that is U.K.-based?

Michael O'Leary, Group CEO

In terms of managing capacity for Q3, we will address changes on a day-to-day basis. The U.K. government's multiple lockdowns have caused a cascade of uncertainty for bookings, particularly close to key travel periods. Our refund liabilities are low; the majority of bookings are for essential travel purposes. We don’t have significant refund liabilities left; we've processed almost all refunds requested at this stage.

Operator, Operator

Our next question comes from Muneeba Kayani from Bank of America.

Muneeba Kayani, Analyst

Can you explain your hedging strategy? You mentioned being 40% hedged for FY '22, what assumptions underpin that? Regarding ticket refunds, did most of the €1.5 billion occur in Q2?

Michael O'Leary, Group CEO

Let me hand it to Neil to address the ticket refunds. On hedging, our strategy aims to keep us somewhat protected against price volatility when oil prices return. We're currently at about 40% hedged for next year, primarily because we want to maintain our liquidity and platform as the environment transitions. We also don't see significant hedge ineffectiveness moving forward.

Neil Sorahan, CFO

Most refunds were processed in Q2 and we ramped efforts from June as teams returned to the office and began processing the backlog that emerged earlier in the year. We have worked diligently to uphold our commitments to customer service.

Operator, Operator

Our next question comes from Ruxandra from Kepler Cheuvreux.

Ruxandra Haradau-Doser, Analyst

On the airports issue, will you focus on primary airports in the face of increased competition or would you revise towards smaller airports? Regarding your refund processes, it appears there's a delay among German customers applying for refunds. Could you share data to clarify the status?

Michael O'Leary, Group CEO

We're indifferent to whether our growth will be focused on primary or secondary airports. We have closed some bases temporarily for the winter but expect to return for summer if circumstances allow. On the German refund situation, I am unaware of any issues. We have processed all German customer refunds, and only a small segment may be waiting—those who have been misled by third-party owners. We encourage anyone experiencing issues to contact us directly so we can assist.

Operator, Operator

Our next question comes from Carolina das Dores from Morgan Stanley.

Carolina das Dores, Analyst

Should you significantly reduce flights, is your previous €60 million cash burn estimate still valid? How do you perceive your minimum liquidity thresholds? You hold €4.5 billion currently—when would you consider raising more funds? Would you follow an equity or debt option?

Michael O'Leary, Group CEO

Could you repeat the first question? I missed part of it.

Carolina das Dores, Analyst

About the €60 million cash burn you previously mentioned. Will that be accurate if your capacity declines?

Michael O'Leary, Group CEO

It's difficult to forecast increased cash flows through the winter period. We need to ensure at least €1 billion in cash reserve as we journey onward. Given the situation, we view approximately €4.5 billion in cash effectively as our minimum liquidity. If deprived of a necessary vaccine rollout or if COVID impacts continue massively, we may need to engage in more borrowing; but we remain hopeful for positive developments.

Operator, Operator

Our next question comes from Neil Glynn from Crédit Suisse.

Neil Glynn, Analyst

Just to clarify, given your lessors, are you expecting to have no operational leases left within the next 12 months? Also, given the uncertainty regarding demand, do you see structural change regarding leisure and city travel?

Michael O'Leary, Group CEO

It's unlikely to entirely eliminate operational leases. We have aircraft coming off lease soon, and we’ll decide based on negotiations with lessors regarding extending or terminating those leases. You’ve mentioned city travel; we expect strong resurgence in this segment due to urban commuting needs. It's vital for us to stay flexible during this transition, leveraging opportunities as new demands arise.

Operator, Operator

Our next question comes from Alex Paterson from Peel Hunt.

Alexander Paterson, Analyst

Can you provide insight into the impacts of later booking patterns? Is it having a negative effect, or given the pent-up demand and decreased capacity, does it not significantly affect your performance? Secondly, regarding the ineffectiveness charge of €214 million—it shows as €97 million on cash flows. Are you saying €53 million was paid out in the last quarter? When do you expect the remainder to be settled?

Michael O'Leary, Group CEO

With late bookings, we are cautious about proximity pricing targets, but we're still dynamically pricing to ensure close to optimal load factors at 70% and above. Our focus remains on leveraging cash flows to remain profitable at current levels; flexibility is essential at this time of uncertainty. Let's clarify the ineffectiveness with Neil.

Neil Sorahan, CFO

The charge reflects the front loading from Q4 and Q3 into the first half. Our mark-to-market hedges are settled as we progress. Over 70% has been paid out to date, and we're managing the remaining charges while focusing on our cash position.

Operator, Operator

Our next question comes from James Goodall from Redburn.

James Goodall, Analyst

On the employee renegotiations, how has your fixed versus variable pay composition shifted? Secondly, regarding MAX compensation, are you considering reinvesting all compensation received into lower-priced aircraft, or would you be open to taking cash?

Michael O'Leary, Group CEO

These negotiations focused on job security, and the outcome was a balance of pay reductions and stability for our workforce over the longer term. We established a solid foundation to manage our personnel through this transition. We're focusing primarily on pricing structures and engaging with Boeing regarding our existing MAX orders, while emphasizing growth strategies and ensuring our fleet remains optimally structured.

Operator, Operator

There appear to be no further questions. I will now hand it back to speakers for any final remarks.

Michael O'Leary, Group CEO

Thank you all for attending the call. This has been an extremely challenging six months for Ryanair and the airline industry. I’d like to conclude on a positive note. The coronavirus will come to an end; vaccines will be developed. I am hopeful for a reasonably strong summer of 2021. We've made painful decisions and strengthened our cost base. Our balance sheet remains strong, and our relationships with partners such as Boeing are robust. There are significant growth opportunities on the horizon. We are primed to meet that demand with the lowest cost base and new aircraft in the coming years. While the next couple of months may prove challenging, we will continue to adapt and manage the situation effectively. Thank you very much, everyone. We have an extensive roadshow taking place in the next few days for meetings. Please reach out if you'd like to schedule a meeting. Thank you again, and I hope to see you soon when we can all travel freely once again.

Operator, Operator

This now concludes our conference call. Thank you for attending, and you may now disconnect your lines.