Earnings Call Transcript - RYAAY Q3 2023

Operator, Operator

Hello, and welcome to the Ryanair Q3 FY '23 Results Conference Call. Throughout the call, all participants will be in listen-only mode. And afterwards, there will be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present Michael O'Leary. Please begin your meeting.

Michael O'Leary, CEO

Okay. Good morning, ladies and gentlemen. You're all very welcome to the Q3 results conference call. I'm Michael O'Leary with the usual team here in Dublin. And Neil is joining us from London, where he's doing the media stuff this morning. I'm not going to deal with the press release. The slide show and the management MD&A are largely dealt with. I'll take those as read and point you to the Investor Relations page on the website. A couple of quick comments on the Q3 numbers and the kind of outlook going forward. So we reported a very strong Q3, a profit of EUR211 million, which contrasts markedly with the other low-fare carriers in Europe, all of whom reported a significant Q3 loss. Our traffic was up 24% to EUR38.4 million, that's up 7% on the pre-COVID figures of FY '20. We're still the only airline that has materially returned to strong growth over our pre-COVID traffic numbers. We saw a strong rise in Q3 fares, up 14% on the pre-COVID levels. That was mainly due to a very strong October school mid-term and the Christmas and New Year period. We saw very strong traffic at higher than expected airfares. That was why we went out on the 4th of January with the trading upgrade. Thankfully, for a change, the Christmas trading wasn't disrupted by any adverse news flow on COVID or Ukraine. We had a reasonably undisturbed but very strong Christmas and New Year period. We spent a lot of time, I agree with our union partners agreeing to the pay restoration. Not alone have we agreed to pay restoration with almost all of our pilots and cabin crews, the only people outstanding are some of the Belgians. But we've also put in place multiyear pay agreements, so that our crews can look forward to kind of guaranteed pay increases over the next four to five years. I think it's an example of how we continue to work well with our unions and our people, both to preserve jobs during COVID, but also to reward them as we emerge out of COVID when, hopefully, we continue to avoid any further significant events. Year-to-date unit cost, and I think this is a compelling story message, one of the two compelling messages this morning. There's been an extraordinary widening of the unit cost gap between us and every other airline in Europe. I would point you to Slide 4 of our industry presentation. Before COVID, we were already Europe's lowest cost airline with a total cost per passenger, excluding fuel, at EUR31. Over the past nine months, we've managed to maintain that, actually marginally going down to EUR30 per seat, excluding fuel. But every other competitor has seen very significant cost increases, whereas we calculate their unit cost actually up 18%, EasyJet 42%, and Southwest in the states up 25%. Even the legacy carriers, who were already high cost prior to COVID, we think Lufthansa has seen seat costs up 16% and IAG up 16%. I think there's such a widening of that cost gap between us and every other airline. It's one of the reasons why we're continuing to grow so strongly, but also why profitability has rebounded strongly this year. And I think that will be one of the themes of this morning's call. Thus far, we've taken delivery of 84 game changes up to the end of December. There are some uncertainties as to whether we'll get all 51 aircraft that Boeing are scheduled to deliver to us by the end of May. At the moment, we think we're somewhere around 44, 45 aircraft. It's a daily and weekly thing we worry about with Boeing because some of our growth into the summer of 2023 will be disrupted if we don't get those 51 aircraft out of Boeing. Nevertheless, we're seeing strong growth in all markets, with 223 new routes announced for FY '24. We're seeing very strong market share gains. One of the things that we decided to go after is market share gains in those markets where incumbents were withdrawing capacity. So we've seen very strong gains in Italy, where ITA or Alitalia has reduced capacity; in Portugal, where TAP has reduced capacity; in Poland, where Weeze appears to be taking capacity out; and also in Ireland and Spain, where the incumbents were very slow to recover their capacity as Europe emerged out of COVID. Another thing we'd point to this morning is that in H1, we've increased our fuel hedging now from 50% to 60% cover. We took advantage of some weaker pricing there over recent weeks, bringing down the fuel hedging cost from $92 a barrel to $90 a barrel, that's for H1 FY '24. We remain 50% hedged at $92 a barrel for the H2 of FY '24. We think we are in reasonably good shape. A couple of other themes I want to talk about looking forward into this summer, we still see seat capacity constrained in Europe. It is quite clear that some of the legacy carriers are not restoring their pre-COVID capacity. Obviously, in Italy and Portugal, TAP and Alitalia are capacity constrained. Alitalia's fleet has reduced by almost 50%, TAP by 40%. We're seeing Lufthansa in Germany being very slow to restore pre-COVID capacity. The German market is a very interesting one this year. Recent figures suggest that it's only operating at 70% of its pre-COVID capacity. We think that's a conscious decision by Lufthansa to constrain capacity, so they can drive up airfares. Airfares are seeing their highest increases in the German market. We have reduced some of our capacity in the German market or reallocated some of it where Frankfurt Main were increasing charges. We've increased capacity in Niederrhein and Nuremberg and some of the smaller bases there. The German market is going to be one where Lufthansa is doing what they generally do where they have a quasi-monopoly. They'll constrain capacity. They will increase pricing significantly, and we would be the beneficiary of that, even though Germany is one of our smaller markets. Another aspect to point to is Weeze seem to be taking more and more capacity out of markets where they compete with us, Austria, Central and Eastern Europe, and Italy. There seems to be a flight of capacity out of those markets where they compete with us. A lot of that capacity appears to be moving into the Middle East, which seems to be Weeze on a campaign to find a market where they don't have to compete with Ryanair, a good strategic move from their point of view. So there's going to be less available capacity, short-haul capacity in those markets as a result of Weeze pivoting some of their capacity away from intra-EU to the Middle East. Allied with that is we think there's going to be very strong transatlantic traffic, and there's a beginning recovery of Asian traffic. With the removal of pre-COVID restrictions, we believe that Asians will start returning to Europe this summer. They won’t reach their pre-COVID levels, but any recovery of the Asian traffic will fill up much of the short-haul connecting and transfer flights of the legacy carriers, the Lufthansa, IAG, and Air France KLM. The transatlantic traffic will also play a role in that. Therefore, we think that there will be less available capacity on European short-haul this summer. Europeans will continue to holiday at home due to the strength of the dollar, which will militate against them going transatlantic. Asia is still effectively closed and not very welcoming for long-haul passengers from Europe. Thus, the outlook is reasonably robust for summer 2023. We're already seeing that in our forward bookings. As we've reported in the last couple of weeks, we see very strong forward bookings, both in volumes and pricing into the February mid-term, into the Easter break, which is in Q1 of next year, and in summer 2023. Currently, our bookings are running at or above the pre-COVID levels for some of the peak months of summer. Fares are currently running above last summer's levels. Everything is set fair for a reasonably strong Easter and summer 2023. How strong will that be? We have no idea. 90% of the follow-on pricing, where I think yields will be this summer, I don't know. But it looks at this point in time that they will be stronger. It's reasonable at this stage to expect that there will be a mid- to high-single-digit increase over last summer, but it's too early to say. We haven't finalized the budgets and we don't have an outlook for next year yet. However, absent any adverse developments on COVID, Ukraine, or other unforeseen events, I think it is reasonable to suspect that we will have a second summer of rising fares. We will schedule a second summer of rising fares because we will have materially higher oil prices. We were very well hedged last year into summer 2022 and are reasonably well hedged at higher price levels in December 2023. The outlook on forward bookings, constrained capacity, strong recovery in transatlantic and Asian traffic to Europe, and the trend of Europeans holidaying at home for the second consecutive year means we will see significant market share gains from Ryanair in those major markets where we're allocating capacity: Portugal, Spain, Italy, Greece, and Central and Eastern Europe. We're also seeing strong growth in Ireland and the U.K. Flybe's failure over the weekend is not unhelpful. Even though they don't have a lot of capacity, the failure is occurring at airports where we tend to be going into; for example, Belfast and Birmingham, where we're the largest airline. While not large, it's reasonably helpful and will aid our expansion this year. We have very low costs going forward. The unit cost gap between us and other airlines has materially widened as a result of COVID and the effort we've exerted during COVID to extend airport deals and work closely with our people and union partners to restore pay, locking in agreed pay increases for the coming years. Thus, we are on track this year. We raised the guidance to a range of EUR1.325 billion to EUR1.425 billion. Absent any disruptions in February or March, we expect to achieve our target of 168 million traffic figure. Subject to getting reasonably close to 51 aircraft deliveries from Boeing, we expect to reach 185 million passengers in FY '24. We've not finalized our budgets; we're aware that fuel will be higher. A reasonable prospect exists that this summer, average fares will rise mid- to high-single digits and could be more. However, generally speaking, when things look optimistic in this industry, a curveball is often thrown to keep us grounded. The outlook appears robust, although challenges remain. Fuel will continue to be a challenge. I would caution against any irrational exuberance here. We expect to incur losses in the fourth quarter due to the absence of Easter. We're hiring and training more pilots and cabin crew, and we anticipate fewer disruptions at European airports this summer. We think the airports, handling agents, and other airlines will be sufficiently staffed for the summer schedule at the end of March. However, we do anticipate air traffic control issues, particularly during Q1. April, May, and June will be challenging due to frequent strikes in France, along with German ATC being a real pinch point. We’re working closely with EUROCONTROL to route flights around Germany as best we can. Overall, the industry must seek a solution where flights can be protected during national strikes. European Commission excuses have been insufficient. We will keep pushing for a resolution on that. That's all I have to add. Neil, would you like to take us through MD&A or touch on things you want to raise?

Neil Sorahan, CFO

Yeah, I will. You covered the unit cost advantage very well. We're still on schedule for our full year guidance. FY '23 is about EUR31 per passenger ex-fuel. We're pleased with the cost performance year-to-date. Regarding hedging, Michael pointed out that we've increased our hedging into the summer of FY '24, with about 60% hedging out to over $90 a barrel. Another big differentiator between us and everyone else is the strength of our balance sheet. We operate with a strong investment-grade rating, BBB positive outlook. We had EUR4.1 billion cash at the end of the quarter, which has increased to EUR4.4 billion today. Importantly, net debt has decreased to EUR960 million, down from EUR1.45 billion at the end of last year, despite EUR1.3 billion in CapEx. We have EUR700 million in CapEx commitments between now and the end of March and over the next 12 to 15 months, we will focus on paying off maturing bonds of EUR1.6 billion out of cash resources and financing EUR2.5 billion of CapEx next year, aiming to return to a broadly net cash position by the end of FY '24.

Michael O'Leary, CEO

Yeah. I think that's a key point we would want to emphasize. We might get to the Q&A. This year, we're going to use cash resources to pay down our EUR850 million bond due in March and EUR750 million bond due in August. We will not refinance those bonds, but rather pay them down using our cash resources. Some of our competitors, who entered COVID owning a significant portion of their fleet, have exited having done several sales leasebacks. Particularly, I think Weeze and EasyJet have retained large portions of their fleets on operating leases. Those lease costs will rise significantly through the remainder of this year as interest rates increase, while we will be paying off debt. We own about 98% of our fleet unencumbered. This will lead to a significant widening of the unit cost gap between us and others. We’re now entering a summer where our average fare is lower than any of our competitors' ex-fuel unit costs in Europe. This explains why many of them are retracting from markets they previously aimed to compete in or withdrawing capacity.

Edward Wilson, CRO

I want to focus on the operational aspects because we want to ensure we remain as resilient as we were last year. We've dedicated considerable attention to making sure we are fully resourced in our sales handling operations while also ensuring third-party handlers minimize delays. Our punctuality has improved over the last number of months as capacity has decreased. We aim to continue being the most on-time and reliable airline in Europe this summer. On the commercial side, we continue to finalize long-term airport deals, which are currently very favorable. Our operational resilience appears strong, and we don't foresee substantial weaknesses in any of our markets. We witnessed a short-term dip in the U.K. market due to perception issues with transit to and from airports, but that has now rebounded significantly.

Michael O'Leary, CEO

Good. Okay. Thanks, Eddie. Let's move on to the Q&A, please.

Operator, Operator

Thank you. Our first question comes from James Hollins at BNP Paribas. Please go ahead, your line is open.

James Hollins, Analyst

Hi. Good morning, everyone. Yes, two questions for me, please. First, regarding capacity, you've mentioned a potential 125% of pre-COVID levels. Is that based on the 124 MAX or the 114 you referenced in your video? And could it go higher or lower depending on Boeing? Second, you have highlighted U.S. and Asian traveler recovery. Can you tell us what your normal year passenger proportion would be based on filling your network capacity? Thanks.

Michael O'Leary, CEO

Thanks, James. Regarding summer capacity, that is based on our expectation of getting 124 MAXs from Boeing, which would be our maximum growth. At this point, we believe we will get 45 aircraft by the end of June. While Boeing is improving their delivery pace, we are not confident we will receive the last five or six aircraft. As for the U.S. and Asian traveler recovery, historically, approximately 50% of several legacy airlines’ short-haul traffic is connected via long-haul traffic. While we may not see substantial Asian traffic, transatlantic travel typically accounts for a high-single-digit percentage of our summer traffic. This does fill substantial amounts of legacy short-haul flights around Europe. As the legacy carriers are either unwilling or unable to restore their pre-COVID capacity, we anticipate stronger bookings and increased airfares in the short-haul segment. Notably, we believe capacity will see declines and demand for legacy short-haul travel will rise as they are occupied with accommodating transatlantic and Asian traffic.

James Hollins, Analyst

Thank you.

Michael O'Leary, CEO

Next question, please.

Jarrod Castle, Analyst

Hi. Good morning, everyone. Just two questions from me. First, any thoughts or comments on Flybe, Michael? And second, there have been some impressive results on the packaged holiday side from EasyJet. Would you consider revisiting that segment, or are you satisfied with simply selling hotel rooms and flights as you are currently?

Michael O'Leary, CEO

Thanks, Jarrod. On Flybe, while the situation is interesting, it demonstrates regulatory incompetence. They should never have been allowed back in the air as they were never adequately financed. However, they will be useful for our entry into Belfast and growth in Manchester and Birmingham, although overall, they are too small to make a considerable impact. We're not particularly focused on the packaged holiday side. While Jet2 is a well-run operation, I remain cautious about EasyJet's holiday operations, suspecting their profit figures are inflated. We do well without entering that market, and I believe the demand for packaged holidays is declining as people opt for point-to-point travel. We'll continue executing our plan to grow our fleet and traffic to 225 million passengers over the next four years while taking market share from competitors. The packaged holiday segment is a niche and not an area we intend to expand into.

Alex Irving, Analyst

Hi. Good morning, gentlemen. Two questions from me, please. First, on staff costs. You mentioned restoring pay reductions with four to five-year deals. Can you elaborate on what the average rate of increase is within those? Additionally, how should we expect unit staff costs to behave over the next four to five years? Second, regarding your recent reentry into the Amadeus GDS, is this primarily to target corporate travel? If so, how large do you think that opportunity is for you?

Michael O'Leary, CEO

Thanks, Alex. We've restored pay deals that average about 2-3% annual increases over the next four to five years. However, while labor costs might edge upwards, we believe the unit costs will rise in a managed manner without affecting our margins significantly. Now, regarding the GDS, Eddie can explain our strategy.

Edward Wilson, CRO

Sure. We were already with two GDSs—Travelport and Sabre. We've seen a significant increase in demand from corporate travelers who prefer the simplified expense management through these systems. Our entry into Amadeus primarily targets corporate customers looking to manage their business-related travel efficiently.

Michael O'Leary, CEO

Thanks, Eddie. Next question, please.

Savanthi Syth, Analyst

Good morning, everyone. I wanted to ask about fuel efficiency metrics. What are you seeing today, and what are your expectations for FY '24 and beyond, given the introduction of the MAX aircraft? Additionally, could you remind me about lease extensions on the Airbus and NG fleet and if there are any continuing negotiations?

Michael O'Leary, CEO

Thank you, Savi. Thomas Fowler, our Director of Sustainability, will provide insights into fuel efficiency, while Neil can update on lease negotiations.

Thomas Fowler, Director of Sustainability

On fuel efficiency, we've seen slightly better than our target of 16% fuel savings on longer sectors. We're retrofitting the 737 NGs with scimitar winglets, adding about 1.5% fuel savings as well. Most of that retrofit work will be done during maintenance over the winter. We anticipate seeing more significant savings going into next year.

Neil Sorahan, CFO

Regarding leases, we've extended 24 out of 29 A320 leases out to 2028 at attractive rental rates. We also added a 737 NG sister ship that became available. We’re not actively seeking secondhand aircraft since our deliveries from Boeing are stabilizing.

Michael O'Leary, CEO

Thanks, Savi and Neil. We’re not currently looking for additional lease aircraft, but if interesting offers arise, we will consider them. We expect our fleet to grow significantly with deliveries from Boeing, ensuring we maintain a low-cost position.

Jaime Rowbotham, Analyst

Hi, Michael. One question regarding staff—are competitors successfully hiring Ryanair pilots by offering higher pay, or is turnover higher than normal? How are you addressing this? My second question is about unit costs—given your current target of EUR31, can you achieve FY '19 levels below EUR30, or will labor cost increases make this difficult?

Michael O'Leary, CEO

We're not seeing any competitors successfully hiring our pilots. Most competitors operate Airbus aircraft while we operate 737s. We do portray some attrition to Gulf carriers looking to hire pilots, but the numbers are small. We currently have around 1,200 cadets in our training system, which exceeds our attrition rate. Regarding unit costs, we believe they will stay roughly at EUR31 for this year. The critical observation for analysts is how competitors' unit costs will evolve, both competing and climbing amidst high operational costs.

Duane Pfennigwerth, Analyst

Hey. Good morning. I won’t ask about unit costs again. On guidance from early January, you noted some weakening in U.K. point of sale and Ireland. Can you provide insight on that and if it has changed since the guidance update?

Michael O'Leary, CEO

Thank you, Duane. Yes, we noted temporary weakness in incoming bookings in the U.K. and Ireland due to media coverage of transport strikes. However, as of mid-January, we saw U.K. outbound demand picking up notably. We have had record booking weekends recently. Easter and summer bookings also appear strong across many markets.

Duane Pfennigwerth, Analyst

That’s great to know.

Michael O'Leary, CEO

Next question, please.

Stephen Furlong, Analyst

Hi, Michael. Can you share any insights on future aircraft deals regarding the optimal size of planes? Are you leaning towards the 197 MAX or the MAX 10's capacity? And regarding your average fleet age of eight years, is that considered optimal?

Michael O'Leary, CEO

Thanks, Stephen. Size of aircraft depends on pricing—I would prefer a bigger aircraft if priced competitively. We're in negotiation with Boeing, but not in serious talks. While the MAX 10 could be beneficial, pricing will dictate our decision.

Neil Sorahan, CFO

Regarding the fleet age, the average of eight years is relatively young for us. We’re managing the fleet effectively, and while aging does bring incremental maintenance costs, we don't expect issues for some time.

Muneeba Kayani, Analyst

Good morning. You mentioned a 40% market share in Italy. How do you think Lufthansa's potential stake in ITA will impact the Italian market? Also, should we expect a similar fare increase for the March quarter compared to December's 14%?

Michael O'Leary, CEO

Our market share is actually above 40% now. There has been significant withdrawal from the Italian market by competitors like Weeze. While Lufthansa's stake in ITA will likely lead to price increases without contributing additional route growth, we will see opportunities to expand further in Italy. Regarding fare increases, we forecast them to mirror the levels we observed previously, potentially seeing low double-digit increases based on current trends. Thank you all for your questions today. We are optimistic about what lies ahead. Overall, Ryanair's position in the market appears strong. We're taking advantage of our cost-leadership position to continue expanding and anticipate a productive year ahead. Look forward to keeping in touch.

Operator, Operator

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.