Ryanair Holdings PLC (RYAAY) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to today's Ryanair conference call.

I will now hand you over to the chairperson, Mr. Michael O'Leary.

Please go ahead.

I'll be standing by for questions.

Welcome to the conference call.

We are a little bit tight for time because we are catching flights so I will run through this pretty quickly.

Ryanair, Europe's number one low fare airline, today announced record traffic and profit growth for Q3.

As the traffic for the quarter grew by 46% to 3.9m passengers and the average load factor jumped from 79% to 86% primarily due to a further 8% reduction in fares as predicted during the quarter.

This reduction in yields reflects the 1m free seat promotion last October, the launch of 4 new routes to Frankfurt-Hahn in December and Ryanair's continuing policy of offering the lowest fares in all markets.

Total revenues for the quarter rose by 37%, however operating costs rose at a slower rate by 28%.

As a result, Ryanair after tax margins during the worst quarter in the year increased from 21% to 23%, a net profit increase by 50% to 43.2m Euros.

These are a good set of numbers which result from the disciplined way we are rolling out our low fares all over Europe.

They again highlight the difference between Ryanair and other so-called low fare imitators in Europe.

We continue to earn increasing profits even during the winter period when others have confirmed that they will suffer losses.

Ryanair's reducing cost base enables us to continue to drive down airfares.

Lower fares means higher load factors and higher load factors on our new larger aircraft, whose lower operating costs in turn result in increased profits.

This is a virtuous cycle of lower costs, lower fares, faster growth and increasing profits.

No other airline in Europe can match Ryanair's low fares and the gap between Ryanair's prices and the rest continues to widen.

We continue to be surrounded by opportunities.

The average load factor on our four new routes from Frankfurt-Hahn in December was up over 80%.

Advanced bookings at our new Milan Bergamo base, which starts in two day' time on the 6th of February, suggest that load factors for the first month in Milan will also be in the very high 70% if not 80% as well, and the initial customer response to our ninth European base at Stockholm Skavsta, which we announced last Tuesday, which we start operating in April, has been very encouraging.

Based on our estimates for the final quarter we are now raising our guidance for the full year to 235m Euros net profit after tax.

We continue to limit any risks associated with our capacity growth by spreading it across our network, launching new bases, new routes of existing bases and increasing frequency on existing routes.

Last week we announced our ninth European base of Stockholm Skavsta, but also five new routes from London Stansted to France, Holland, Norway and Germany, and significantly increased frequency this summer to some of our existing destinations from Stansted including Frankfurt, six daily flights, Rome, five a day, Stockholm, five a day, Barcelona three a day, among others.

All this growth justifies our 100 new aircraft order which was announced last Friday.

With worldwide aircraft orders now significantly down, there has never been a better time to buy more new aircraft.

We are proud to extend our partnership with Boeing, the maker of the most popular and world's best aircraft, the Boeing 737.

By ordering a total of 125 firm and 125 option aircraft we can begin the replacement of 737-200 series over the next three years and maintain further organic growth across Europe as we transform Ryanair into the airline with the youngest fleet in Europe, in addition to being the most punctual, which we already are, and the lowest cost, which we already are.

The purchase of Buzz which was announced on Friday morning for a relatively insignificant net cash sum of under 5m Euros was an opportunity too good to miss.

We will be eliminating a number of Buzz' loss making routes in order to allocate some of the aircraft to increase frequency on existing Buzz routes from London Stansted.

The combination of Ryanair's low fares and more efficient airports as well as the conversion of Buzz into an all 737 operator over the next 12 months will result in the Buzz operation becoming profitable for the first time as we double its traffic from under 2m to over 4m passengers per annum.

We are aware that some commentators fear that we are biting off more than we can chew.

We are conscious of this but one cannot always control the timing of opportunities that present themselves.

However, the purchase price made this deal in our view a very attractive proposition.

Fortune favors the brave and, as Warren Buffet has proved many times, the time to buy is when everyone else is selling and the prices are low.

I believe this is one of those times and one of those transactions.

With the addition of the Buzz traffic and Ryanair's own organic growth which is continuing we expect to carry up to 24m passengers in the coming fiscal year, a figure that would see Ryanair challenge Air France for the position of Europe's third largest international scheduled airline.

We have the low fares formula, the people and the unrelenting determination to achieve these targets by delivering disciplined, profitable low fare growth to millions and millions of European consumers.

Finally, a word on the recently announced EU investigation of Ryanair's cost base at Brussels Charleroi Airport.

This investigation will be the test case for the cause of competition, choice and low fare air travel in the European Union for the next 25 years.

Many of our competitors, including high cost airports and high cost airlines, will seek to use this case to block Ryanair's rapid growth at secondary and regional airports.

They do this in the hope of imposing higher costs and higher fares upon consumers and to block competition and choice.

They want to return to the bad old days of high fares for the rich few.

This is wrong.

The sole purple of these incumbent complainers is to prevent the spread of choice and lower fares and to limit the impact of the growth of low fare air travel in Europe.

The success of low fare airlines in the U.S. over the past 30 years and of Ryanair in Europe over the past ten years depends upon encouraging and incentivizing underused secondary and regional airports to compete with dominant hub airport by providing lower costs and efficient facilities to those airlines who are willing to offer lower fares to attract consumers to these airports.

This is the very essence of free market competition and is already generating enormous savings for European consumers.

I have every confidence that the commissioner for transport, Loyola de Palacio, will rule in favor of Brussels Charleroi and the Belgian government, who are the subject of the investigation, as the evidence is overwhelming that, one, there was no element of State aid in our cost base and, two, secondary and regional airports offering lower costs and more efficient facilities, allied to low fare airline services provided by Ryanair and others, is in the best interests of competition and the EU consumers.

European integration and harmonization depends upon the ease of movement of people around the European community.

For years in Europe air travel was confined to the rich few.

Ryanair has changed all of that over the past ten years and we are confident of the continuing support of Commissioner Loyola de Palacio and the EU commission as we extend and expand the range of choice, routes, services, and lower fares that we offer European consumers.

I will now turn the call over to Howard Millar who will take you through the summary and D&A of the quarter's results.

Thank you. [inaudible] Profits after taxes increased by 50% to 43.2m Euros compared to 28.8m euros in the previous quarter, driven principally by the strong growth in passenger volume and continued cost control.

Operating revenues rose by 37% to 185.9m Euros while scheduled revenues grew by 34% to 157.4m due to a combination of a 46% growth in passenger volume offset by an 8% decline in average fares.

The combination of low fares and the successful launch of new routes resulted in the passenger load factor increasing from 79% to 86% at the expensive of yields during the period.

[Inaudible] revenues increased 55% to 28.5m and have continued to grow at a faster rate than the increase in passenger volumes during the period.

Total operating expenses increased by 28% to 137.2m due to the increased level of activity and the increased costs, primarily depreciation, route charges and airport and handling costs associated with the growth of the airline.

All major costs increased at a lower rate than the growth in passenger volume due to a combination of increased staff productivity, improved operation efficiencies, and our policy of hedging fuel on foreign currency requirements.

Marketing distribution costs increased by 1.8m euros to 2.9m euros reflecting a higher level of advertising spending due to the launch of the new base and routes during the period.

Operation margin has increased by five points to 26% compared to the last quarter while operating profit has increased by 73% to 48.7m. [Inaudible] after tax increased by 50% [inaudible] to strong trading performance as a result of the impact in the decline of the headline corporation tax rate in Ireland.

For the reasons outlined net margin has increased in 21% to 23% in the quarter.

Earnings per share has risen by 44% to 5.7 Euros per share, [growth] and profit due to an increased number of shares in issue posted share offerings in February 2002.

On to the balance sheet.

Cash and liquid resources has increased from 899.3m euros at March 31, 2002, to 1.04b euros in December 31, 2002, reflecting increased cash flows from the profitable trading performance during the period.

Additional eight aircraft were delivered, five in the last quarter which in addition to aircraft deposits accounted for the bulk of the 270.9m Euros incurred in capital expenditure.

This is [inaudible] by drawdown of long term debt which increased net of repayments by 161.7m during the period.

Shareholder bonds as of December 31, 2002, have increased to 1.196b euros compared to 1.002b euros at March 31, 2002.

I will now give the call back for questions.

We'd now like to open up the call to questions.

Operator, if you would arrange that.

Thank you.

Thank you, sir.

If you'd like to ask a question please press the number one on your telephone key pads and to cancel your call press your pound key.

First question comes from Mr. Jim Parker.

Please go ahead, announcing your company name.

I'd like to ask you regarding a worse case scenario at Charleroi, if you had to refund the promotional fees, ground handling and so forth that you might say are subsidies, how much would that be?

Even if they say they were subsidies it doesn't involve the ground handling fees or the airport fees.

It may be some of the introductory marketing monies that may be at issue.

The figure would immaterial in the context of our either monthly or quarterly or annual results.

It would be tiny.

If they were to go all that way in terms of the impact on the ongoing business, Jim, we would have two alternatives, A., either raise prices out of Charleroi, charge higher fares, one could argue we could make even more money at that base, or more likely we may simply move the aircraft away from that base to another lower cost base because clearly Charleroi would be an uneconomic base compared to other competitor bases we have available to us.

That is one of the two guiding principles in the State aid.

Receiving a discount or having lower charges is not of itself State aid.

If those charges are made available to others who wish to operate there and there’s clear evidence at the airport that similar or low type cost bases are offered to other airlines including Sabina and Virgin Express and EasyJet, and also that the airport was simply operating at the private [inaudible]the market would be and we would have numerous cases where the cost base in Charleroi is similar, in fact less expensive than deals that were offered to us at the time at private airports.

Michael, how many of the markets that you serve, airports that you serve have some sort of government ownership and if this were in Charleroi, if for some reason you found they were subsidies, what if this goes throughout the system, what percentage of your passenger volume would be to these government subsidized airports?

We don't have any government subsidized airports.

We don't have any government subsidies.

I'm sorry, I didn't word that properly.

Where EU is suggesting that there might be some sort of subsidies.

THE EU isn't suggesting, competitors are suggesting there is some kind of subsidy.

I would expect that as the investigation progresses, everyone has a month to put in submissions, there will be many more submissions from many of our high fare competitors and other high cost airports around Europe suggesting that some of our arrangements, even at private airport represents state aid.

This is nothing more than the last desperate role from a dying corpse of the high fares airlines, high cost airports.

They can't beat us and they can't match the fares so call in the lawyers.

I agree wholeheartedly.

Whether established policy and air transport are promoting deregulation, promoting competition, encouraging the development of regional and secondary airports, and we have every faith and every confidence in this case that what's clearly good for those secondary airports and what's good for EU consumers will come top of the list when they investigate.

Okay.

That's great.

Thanks a lot.

Thank you, Jim.

Thank you next question comes from Andrew Levin (ph).

Please go ahead, sir.

At ABN.

Just a quick question.

The 24m euros that's spent on Buzz, what does buy in terms of assets?

I know it's a big wad of cash, but is it ultimately all being accounted for as goodwill?

Yes, it will all be accounted for as goodwill.

The balance sheet will have about 19m euros in cash and an equivalent 19m euros in creditors which will be largely forward tickets sales and some other prepayments and things like that.

It will be clean.

It will be --it's being transferred out of U.K. into a new cost structure.

We are buying a clean new company and it will be a goodwill adjustment but of a very small magnitude obviously.

And over what time are you going to amortize that goodwill?

I think we are obliged to do it over 20 years.

I would rather take it in a month and get it the hell out of the way, but I believe it's 20 years so we'll be writing out goodwill of just over 1m Euros a year for the next 20 years.

Thank you very much.

I would stress just as kind of advisory to everybody on the call, obviously because for some reason acquisitions tends to be more sexier and everyone wants to talk about acquisitions, this is not a change in our fundamental policy, it is a very small [brought on] to what we presently do at Stansted and all over Europe.

We've gone ahead with it because the price is low, it's based here in Stansted and we believe there are a couple of real structural problems at Buzz such as aircraft, airport and people numbers that can be restructured by the 1st of April.

To put in context, [Buzz] last year carried less than 2m passengers.

That's about the same number of passengers we expect to carry in our first 12 months of this year at either of our new bases, being Milan, Bergamo and Stockholm.

In the context of the business going forward, our organic growth is considerably more than Buzz and Buzz is a relatively small deal.

Next question.

Thank you.

Our next question comes from Travis Anderson.

Please go ahead and state your company name.

I have several quick questions.

One relates to just the delivery schedule on the new orders announced the other day.

And then most of the rest of my questions relate to Buzz also.

Delivery schedule on the new orders, there is 22 firm aircraft being delivered in the winter of '04, '05 and '05, '06.

They are in essence additional orders so we can replace the existing 200 fleet over that period and maintain kind of a 25% to 30% rate of organic growth.

Okay.

You are saying that Buzz will carry, you hope, 4m passengers next year?

It will.

Excuse me?

It will.

Yes.

And that's included in the 24m number you are giving out as a total?

Right.

So that implies that Ryanair, without Buzz, is only planning to carry 20m passengers up 25% this year despite all the additional aircraft?

Correct.

Okay.

And we may exceed that targeted 20m, Travis, but for the moment we are targeted at 20m.

Okay.

Would you make it clear, I take it the Buzz name is going to disappear rather quickly?

The 1st of April.

Okay.

I am not going to spend a lot of money repainting planes or anything like that.

It's simply we will take over the marketing of it.

Buzz will continue as a separate company with its own UKAOC, it's own aircraft, pilots and cabin crew, and they will be flying some services on behalf of Ryanair.

Ryanair will take over the marketing of, say, for example a route out of London to Bordeaux.

It will be sold on the Ryanair website, if you go on the Buzz website, you get shot through to the Ryanair website, you would pay Ryanair but when you show up at the airport it will probably be you will fly on a yellow aircraft that has Buzz scoffed out and Ryanair painted over it.

Both pilots and both cabin crew are operating to the Ryanair model of efficiency, quick turn-around and low cost airports and much more aggressive in-flight sales and ancillary revenue product.

It will be kept separate at least until the 300 leases expire?

I don't know, I think that's a reasonable assumption at the moment, Travis.

There is a possibility, just a possibility it may over the longer term be worthwhile hanging on to something that has a U.K.

AOC so that we would be free to fly our routes directly from the UK to points outside of the EU, but I wouldn't hold my breath.

The intention would be that as soon as it operates a complete fleet of 737s our over time gets out of the 300s and has a complete fleet of 737-800s, then we will be maybe looking at running it all at one.

Buzz has a good management team over here.

We believe it has good pilots, good people.

They just, their hands are tied behind their back because they have a shitty aircraft, they go to the wrong airports, and for the size of it is significantly overstaffed.

Thanks.

Thanks, Travis.

Thank you.

Once again if you'd like to ask a question please press the number one on your telephone key pad.

Our next question comes from Robert Maxwell.

Please go ahead and announce your company name.

Robert Maxwell from [Rabb] Capital here.

Just a couple questions on the Buzz deal.

Looking at the 23 routes that they have and knowing your own delight in getting aircraft taking off and landing as frequently as you can, can we assume that the longer sectors will go and then, secondly, looking at the map of France how many of those destinations could you as it were lift with so few existing run air flights?

I don't think there's that much that we can't lift them all at the moment but we don't have enough aircraft for it.

One of the problems with the Buzz model, Robert, is that they have a tendency to fly to one French destination three or four times a week and another French destination three or four times a week, and we believe that would be better by consolidating the two into one and flying at least daily or at least double daily.

We would envision -- one thing I can tell you straight away, we are not flying out of the [Bournmouth base] [inaudible] [inaudible] yesterday.

We would not be flying the two French domestic services.

They are just gone without even talking to the airport.

I cannot envision even if they gave it to us for free and offered to have my firstborn child that we would fly to either Charles DeGaulle or [inaudible] or Frankfurt main because simply even if it's cheap we can't get out of those airports quickly or efficiently.

Other than that I think the other seventeen or eighteen airports, it's up for grabs.

We are meeting with most of them over this week and the early couple days of next week with the simple proposition, either you are losing your route altogether on the first of April or you have the chance of doubling up the frequency on the routes and doubling up the traffic, but we want a lower cost and more cost efficient facility than Buzz had negotiated if you want this rapid traffic growth.

We are pretty confident that we will be able to restructure a significant number of those airports within the next week or ten days.

But if we don't we still have many more of our own new airport deals out of Stansted, anyway, and we are also going to use some of the Buzz capacity to fly additional frequencies in some of our existing routes such as Rome and Barcelona where the demands this summer is like nothing we've ever seen before.

So would it be fair to sort of expect one to sort of, once you've sort of, once Buzz is operated by you and so on, those routes, 23 routes will probably come down 15, 17, something like that and your yield to be considerably higher on them?

No, no.

I would say that it comes down to about ten routes.

They would be twice the capacity as the existing but with average fares to be about 40 to 50% lower than the fares currently with Buzz.

We are taking [maybe Harrah's] and we are making [testicles] out of it.

This is shoot the doorman, buy it high, sell it cheap, increase the volume but know that we are going to take out a lot of the operating costs.

Grand.

Our profit is to turn it around.

Immediately we are going with the airport, the people numbers and then over the next 12 months the more [46s] disappear to be replaced by 737s.

Okay.

Thank you very much.

Thanks, Robert.

Thank you.

Our next question comes from John Armitise (ph).

Please go ahead and announce your company name.

Hi, Michael.

Congratulations on a fantastic set of figures and on the Buzz deal.

I just wanted to know, you've now ordered I think up to 200 planes from Boeing of which a substantial part are obviously options.

And I'm sure that you have done a fantastic financial deal.

But could you nevertheless set the scale of the purchase in the context of your operations in the sense that, it's obviously quite a large financial commitment.

I think it's not that large a commitment, John, as it initially appeared.

To put it in context we now have 125 firm orders of which we've taken delivery, we've taken delivery of the first three.

We had previously 25 of the aircraft from the previous order.

But it means you have to take 125 aircraft over the next six, seven years.

Of the 56 we already have, 21 of those are replacements.

So if you like we are presently operating a fleet of nearly 60 aircraft and we are committed to a net incremental addition of about 100 aircraft over the next six, seven years.

That requires us to treble in size over the next six or seven years, and unless we do something really self-inflicted and dumb, there is absolutely nothing to stop us from growing from 16m passengers last year to 30m, 35m passengers in three years' time and then well over 50m passengers in another three years after that.

Southwest has proven it can be done.

They've done it in the States.

We are growing at exactly the same rate as they were over an equivalent period.

And, again, with the new aircraft coming in we are lowering the cost on a per passenger basis and having the ability to offer lower fares and the lower fares almost underwrite the growth.

How would you mitigate the risk if the business plan didn't come in, if operations didn't come in as you expected?

We'd mitigate the risk, we wouldn't exercise the options and the options only come up every -- on an ongoing basis every two years, we give Boeing two years' notice if we want to exercise the option.

We can also defer the option out into the future or bring some forward as the case may be.

So we have a significant flexibility built into that.

We clearly don't have as much flexibility built into the firm orders but based on the existing model at the moment, I can't foresee why we won't want over the next four, five years 100 aircraft and, given the growth we have at the moment and the demands that exists for the services, operating as we do in the market in Europe when most, all of our competitors including some other so-called low fare airline are trying to cut back capacity and increase prices.

And as recently as last month EasyJet announced significant reductions of the London/Glasgow market.

Had we the planes this summer, we would and we will be increasing capacity and we will at some point in time increase capacity.

We are not in the business of closing capacity so we can manage our yields.

We want to go the opposite way.

Can I just on another issue, I know that you've done these tests to race Lufthansa from the center of Frankfurt to the center of London via Frankfurt-Hahn and Frankfurt-Hahn main respectively and you won.

It wasn't us.

It was actually German TV, the margin of victory was 20 minutes or something.

Yes, to an hour and a half.

At the same time, could you comment generally, is there anything you can do to improve transport links to your main hubs, particularly now that you have such a big share of Stansted?

I don't think, to be perfectly honest, there is anything we could do or want to do to improve the transport links.

The transport links as evidenced by our continuing growth are no impediment whatsoever to our continuing rapid growth.

It happens over time.

When we were starting this back in '92, '93, everybody laughed at Stansted.

It was up in the back hand of Essex and this wasn't really a London airport, there was only Heathrow and Glasgow.

After a couple million passengers a year and it becomes real and credible, nobody asks the question any more.

This transport link to places like Charleroi and Frankfurt-Hahn are in many respects every bit as good as they are from London Liverpool or to London [Newton] which doesn't have the rail connections but has frequent coach connections and everyone can drive there.

Again, if you look at the American model Southwest has repeatedly demonstrated, there's no requirement to have rail links at airports.

If you have low cost and you have cheap car parking people will drive there, people will get taxis there and people will use it.

Thanks a lot.

I wouldn't want to underestimate that we won't continue to run into certain difficulties or that we will be surprised in new markets.

We are very conscious of the fact that somewhere somebody is going to throw a curve ball in the next year or two.

It may well be the Buzz acquisition this time around.

There's a big job of work to be done in the next two or three months but at least not trying to integrate it into 34 restructuring we believe we can get that done over time.

If there's a war in Iraq that has consciously now driven up the advanced bookings.

We are running about 94% of the seats of the budgeted seats for the next month are already sold.

We've constantly locked away all the fuel hedging and we constantly have over 1 billion Euros on the balance sheet.

It gives us the capacity to weather, we believe, most curve balls that can be thrown at us as long as we stick to the kind of [inaudible] and don't [lose control] of ourselves the next couple of years.

That sounds great.

Thanks a lot.

Thanks John.

Thank you.

Our next question comes from Mallory Kennedy (ph).

Please go ahead and announce your company name.

[inaudible] National.

I want wondered what the state was on the EU proposals to compensate passengers for delays.

It was voted on by the Parliament and is now due to go back to the EU commission.

The are now studying it again because would you believe it, the high airfare airlines who originally supported the proposal have now worked out that they have many more delays than the low fare airlines and is going to cost them a lot more money.

And we are still fairly confident that this proposal is going to be significantly restructured before if ever it becomes law within the EU.

However, again, even if it is imposed, its impact on us will be immaterial.

We have the best on-time record.

We are publishing the numbers on an ongoing basis.

And very close to 100% of our delays would be due to factors outside of our control such as weather and European ATC, and they have already been accepted from the draft legislation in terms of, if you don't provide compensation, if delays or cancellations are clearly outside the airlines' control.

It would have no impact on us whatsoever.

Thanks.

Just one more thing, how are bookings looking at the established bases versus last year?

Very good.

I mean, the bookings look very good.

Were stuffed to the gills at the moment but that's partly because of our campaign over the last third and the fourth quarters is that we are driving down the fares, if you like, we are dumping prices, we are using that kind of declining cost base to keep the advanced bookings high.

So you could take it on new routes and existing routes, you can characterize it at the moment by slightly increased load factors, better advanced bookings and slightly lower yields.

And we would, again, the warning we gave at the end of the half year that you are going to see for quarters three and four faster traffic growth but much lower yields, we would expect that to continue into the fourth quarter as well.

In fact we are determined to make it continue into the fourth quarter.

Now is the time for putting the foot down on everyone, all of the competition over Europe, not for easing off the throttle.

Thank you.

You're welcome.

Sean Matthews.

Please go ahead and announce your company name.

Mr. Matthews, your line is open.

Sorry.

I didn't have a question.

Apologies.

Our next question comes from Daniel LaPatti (ph).

Please go ahead and announce your company name.

I don't have a question.

Hello?

I didn't press the button.

Fine.

It sounded like greyhounds copulating in the background for a moment.

Once again, if you have a question please press the number one on your telephone key pad.

Okay.

I think we've exhausted all the questions.

We did have an analyst presentation here this morning and I do want to repeat the message for those analysts who are on the line, we are up to our goodies in workload for the next couple of months so please forgive us if we decline all offers of one-on-one with investors and all the rest of it.

We do need to restructure Buzz, we have already announced, we are launching the Milan base on Thursday, we are starting the Stockholm base on the first week of April.

So we are going to be cutting back in the next couple of months on the investor briefs and the rest of it.

We will be doing the full set of results in June and we will be doing the [inaudible] road show and we will have very good news for you at that stage on the restructuring of Buzz and the continuing very strong organic growth of Ryanair.

With that I think we will draw the conference call to a close.

Thank you very much for participating in it and for your continuing support.

Cheerio everybody.

Ladies and gentlemen that concludes today's conference.

You may now disconnect your lines.

Thank you.