Ryanair Holdings PLC (RYAAY) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to your Ryanair conference call. (Operator Instructions). I would now like to turn hand over to the Chairperson, Michael O'Leary. Please go ahead with your conference, and I will be standing by.

Good afternoon, ladies and gentlemen. Welcome to the Ryanair full year results conference. I'm joined here in London by Howard Millar. Michael Cawley will be dialing in; he's in New York. Also on the line, we have Sean Coyle, Ray Hernan among others.

Slight different format today since we did the webcast of the results this morning. So, we won't bore you with the MD&A, the press release, or the investor site presentation. All that is available on the website at Ryanair.com on the Investor Relations page, where you can also see a replay of this morning's webcast. So, what we'll do is confine myself to a few opening remarks, and then we'll open it up for questions as you wish.

We're very pleased with this morning's results. I think what's important is we came -- in profits are up 12%, ahead of market expectation, to a new record of EUR302 million after tax. That was driven essentially by unit costs being down 6% excluding fuel. Fuel costs increased by 74% over the year. Including fuel, unit costs rose by 5%.

Traffic was up 26% over the year, much of that driven by our refusal -- steadfast refusal to impose surcharges, whereas the surcharging by most of our competitors is driving traffic in our direction. Another feature of these results is the absence of Easter from the fourth quarter, which obviously has a significant impact on the profit reduction in quarter 4. That would be reflected -- you will see that -- we'll note that in much stronger earnings in quarter 1, which we reported in the first week of August.

The new bases are performing well in Liverpool, Nottingham East Midlands and in Shannon. We briefly announced our 16th new base in Marseille in the south of France, which will start at the end of November. We plan over the next couple of months to announce one maybe, probably two additional bases that we'll launch -- one immediately after Christmas towards the end of January and one probably sometime towards the end of February, early March. Both of those will be -- at this stage -- we estimate in Continental Europe. But, we're still finalizing negotiations. There's about seven airports in the running to select two. There's no more we can say about that at the moment.

Further cost reduction initiatives continue. Web-based checking is working very well. We're already seeing certain flights, where more than 50% of passengers are availing at the Web check-in service to avoid all of the Web check -- avoid queuing at the airports' check-in. You can only avail of that if you're carrying hand luggage. Correspondingly, we're seeing the beginnings of a slight decline in passengers traveling with checked-in luggage.

On charging for bags, that initiative is encouraging more and more passengers to travel with hand luggage only. It's also had a slightly better effect on our overall yields. As you know, when we first launched it in March, we expected it to be revenue neutral. In the first couple of months, it looks like it's actually going to be slightly revenue positive. We've seen an income of about EUR1 per passenger from us in the initial month. We expect that will grow to EUR2 per passenger before the year end. Although, we're going to continue to try to encourage more and more passengers to move away from checked-in luggage and avail at the Web check-in service. We'd hope to have 50% of passengers across the board using the Web check-in service between now and the end of the year.

Winglet modification is being rolled out across the fleet. We're seeing a dramatic reduction in fuel consumption. Thus far with about half the fleet modified, we've seen this 2% reduction in fleet fuel consumption. We would expect that to rise to somewhere about 3% for the year end, as the winglet modification has rolled out across the entire fleet.

Negotiations on pilot pay were successfully concluded recently at 14 of our 15 bases. The Dublin pilots continue to absent themselves in direct negotiations with the Company, as is their right. It just means that they lose out on pay increases, and we save some more money. On the other 14 bases, 13 of them have elected and voted for a one-year deal with a 1.8% basic pay increase at the Luton base. The pilots there voted for a four-year option with improved rosters and a 5% pay increase on year one. We're bringing in a lot of the new pilots, who are joining us now, are being recruited on the new and improved five-on, four-off rosters. That in turn, over the next 12 months, will lead to a slightly higher rate of -- or a higher rate of crewing on the aircraft, partly by virtue of the fact that we're now opening up Continental bases and have slightly longer sectors.

No difficultly recruiting pilots at the moment. In fact, we [actually] need about 320 pilots for the full 12 months. Already we have 290 of those pilots already recruited. So, it's likely we are continued to be supportive of the Ferrovial bid for the BAA airport monopoly. We believe that the takeover of the BAA has highlighted many of the points we've been making to the regulator here in the UK for many years, mainly that the BAA was overcharging, was over specifying its facilities and was making far more money than it was telling either the regulator or indeed its customers.

In fact, we believe there's a great contradiction between the BAA Stansted position of just three months ago, where they said they couldn't build a second runway at Stansted without doubling passenger charges for the next 10 years. And yet, in the face of a hostile bid from Ferrovial last week, they were able to generate a 1 billion pound sterling payback to shareholders by way of a bonus dividend and an increased annual dividend later on this year. We believe this highlights the fact that the BAA has been featherbedding its accounts for the last number of years with higher than necessary charges. It highlights again the failure of the regulatory regime here in the UK and we believe adds further fuel to the campaign by Ryanair and other airlines to call for the breakup of the British airports monopoly, the separation of the three main London airports -- Heathrow, Gatwick, and Stansted -- allowing them the commercial freedom to compete against each other and to develop the facilities they actually need rather than the facilities imposed on them by the central overhead of the BAA, whose primary interest seem to be in inflating the regularly Stansted base, so they could inflate its income stream for coming years.

Over the next 12 months, Ryanair's fleet will increase by 30 aircraft, most of those deliveries coming between September '06 and April '07. We will be launching a large number of new routes and bases at what's clearly the worst time of the year. We expect that the winter trading at the end of this year will be negatively affected by a combination of our significant capacity increase; higher oil prices, particularly compared to the hedged oil prices we had last winter when we had hedged most of our requirements at $49 a barrel; and further price dumping by loss-making competitors who will be desperately trying to stay in business next winter.

Accordingly, we remain cautious about the profit guidance for the coming year. The good news is that we're guiding for increased profits despite the much higher oil prices. We're confident the traffic will grow by 20% to about 42 million passengers over the next 12 months. We expect the profit growth will be more modest, somewhere in the 5 to 10% increase range if oil prices remain at $70 a barrel. And, that's clearly the big determinant on this.

We've eliminated any risk in the -- for the first half of the year. We've now hedged 90% of our fuel requirements to the end of October at $70 a barrel. We can't yet hedge the winter at those kind of prices, but we continue to look for opportunities to do so. Winter will also be -- profitability in the winter will also be affected by the impact -- sorry, will also be affected by the -- sorry, there will be a much bigger skewing of profits this year into the first two quarters in excess of 85% of the annual profits, compared to 80% last year, will be made in the first two quarters. Much of that will be as the result of the movement of Easter into quarter 1, which will be very strong, the increasing presence of sun routes in our overall operation and also the continued impact of competitor fuel surcharges. We there expect a corresponding reduction in profitability in quarters 3 and 4 for the reasons that -- the reverse reasons -- a, where the oil prices will be significantly higher than they were against our hedged prices of last year; b, we think that competitors, whilst they'll continue to try to keep the fuel surcharges, will be much more aggressive in discounting prices; and c, we'll have a large capacity expansion ourselves at that time of the year as we open up a new base and new routes.

So, in all, we believe our continuing commitment to cost reduction. One of the highlights of the last 12 months has been that unit costs were reduced by 6% over the entire 12 months excluding fuel. Our commitment to cost reduction will mean we'll continue to have the lowest unit costs in Europe. Our refusal to impose fuel surcharges means the fair differential between us and most of our competitors is getting wider. That's driving the traffic growth in our direction with we expect 20% growth in passenger numbers this year in a more benign yield environment currently than we have experienced before. If you remember, the model of Ryanair's business is we expect to grow traffic 20% a year. Unit costs decline 5% a year. Average fares decline 5% a year. Presently, we're seeing yields that are stable, flat. In fact, last year, they rose by 1%. We expect to see a similar pattern established over the coming 12 months. Therefore, we are somewhat hopeful that there would be an increased profitability on the back of increased traffic for the fiscal year end, March 2007.

Those are the end of my remarks. We'll now open this up, Sarah, if you don't mind to questions and answers.

(Operator Instructions). John Mattimoe.

John Mattimoe from Merrion Stockbrokers in Dublin. Just in relation to the ancillary revenues, could you give us a sense as to first of all the timing of when the gambling and the in-flight telephony will come on-stream? And then for the year ahead, could you give us a sense on how big an increase on a per unit basis will ancillary revenues be able to be a quantum similar to last year? Or will it be diluted by the fact that certain issues like insurance and so on are beginning to get into tougher year-on-year comparisons?

Secondly then just in relation to the seasonality in the business in the year ahead, could you give us some type of a sense of what the quantum of difference will be between the half-one yield trends and the second-half declines?

Howard, you want to take that?

Yes. In terms of the gambling, we'd expect to have that up and running for Q2 of this year. We will go for a -- what we would describe as soft gambling, which will focus on the things that we know that works very well with passengers, which is lotto cards or lotto on the Web, Bingo and other soft gambling. It will have of course available poker and the other casino games.

In terms of the telephony, we'd expect that to be operational in mid 2007. And, again, it will work on the basis of a revenue share, whereby we would earn a portion of whatever spends in terms of telephone calls or indeed on text messages.

In terms of ancillaries, you are quite correct. We would expect ancillaries to continue to grow. But, obviously, we've got a more difficult comparative, as we had a big pickup arising from travel insurance last year. But, we would still expect that ancillary revenues will continue to outpace the growth in past year numbers on a year-on-year basis.

Talking then about in terms of yields, we would (multiple speakers) --

Sorry, Howard, just before you go on to the yields, just on the ancillaries, why do you say they are growing faster than the passenger numbers? Will it be of a similar pace to last year?

It won't be at the same difference. If you look at last year, it was -- I think it was 36% vis-à-vis 26%. We don't think we will see that same accelerated growth. It will be still ahead of the growth in passenger volumes but not to that same extent. What exactly it is at this stage -- difficult to call. But, certainly, we would think ahead of passenger growth but not to the same extent as last year.

Okay, thanks.

In terms of then seasonality in terms of yields, we think that yields over the summer period will probably be something like 5 to 7% ahead of last year. For the back half of the year, we think that yields could be down something similar to what we originally guided for last year, somewhere in the region of 5 to 10%. Although, we've no visibility in terms of the second half of the year. Obviously, we have reasonable or some visibility in terms of Q1 but limited visibility in terms of Q2.

Jim Parker.

Great show in a difficult environment with those numbers. Just regarding the flag carriers and they're perhaps focusing more, renewing focus on short-haul traffic. It appears they are doing very well in their long-haul markets, and they might be using the revenue there to subsidize short-haul. Are you seeing any of that? When would it show up? What's the impact do you think?

No evidence of it, Jim. I mean, what we're seeing at the moment is a number of marketing initiatives, BA talking about relaunching a range of low fares. They've done this every year for the last five or six years, spending a lot of money advertising price -- the short-haul European routes on the back of price. We believe it's doing Ryanair's advertising for us. In terms of BA's traffic numbers, if you look consistently at their monthly traffic staff for the last 12 months, you will see the short-haul traffic in decline and obviously our short-haul traffic growing very rapidly.

I think there is an inexorable trend there, and it really doesn't matter what BA do. Their average -- even their average short-haul fare must be a multiple of three or four times Ryanair's average fare. That game is over. They do seem to be doing better on the long-haul side. I assume their business model will continue to focus on cost reduction as well as maximizing yields and fuel surcharges on the long-haul traffic and on the short-haul connecting traffic. But, as for the short-haul point-to-point traffic here in the UK or in Europe, we see no impact at all of any price competitiveness or aggressive pricing from BA or any of the other flags.

Michael, I believe that you are suggesting that your unit costs will be down this year or maybe along the line of 3%. Would you discuss the sources of the unit cost improvement in fiscal '07?

Sure. We think a lot of it will come from similar sources as before. The main areas will continue to be aircraft, the new maintenance contract, the routes charges which this year we're going to see some reductions in some of the bigger costs where there have been cost increases in recent years -- the German market for example. There will be a continuing significant decline in advertising and marketing expenditure, primarily because we now feel we are now kind of present in most of the big European countries. Our arrival or the opening up of new routes and bases makes enough an impact in its own right. We simply don't need to be doing as much advertising and marketing as we have heretofore. That's been reflected in today's numbers, where you see a significant decline in marketing expenditure over the last 12 months, some of which is paid for by airports or local governments. We think that trend will continue. There'll be --

Okay, thanks very much.

Just so that I warn you, there will be -- as I tried to highlight in the opening remarks -- there will be a slight jump this year in staff costs. That will be because of increased crewing ratios on the aircraft at some of the European bases, where we have longer flight sectors and we're running up against the 900-hour limit slightly earlier than 12 months, not being untoward there to be a one-off adjustment. Thereafter, we expect unit operating costs to continue to decline and seeing a far more benign yield environment than we have been operating in before.

Okay, that's good. Thank you.

Joe Gill.

I think that's me; is it? Joe Gill in Goodbody in Dublin. Just got four questions. The first in relation to Dublin and the webcast this morning, you mentioned that you might deploy four to five more aircrafts to Dublin next winter, depending on discussions with the DAA. You've moved from I think 9 130-seaters last year to about 15 or 16 189-seaters now. So, it's quite a material step change in terms of a base in a very short period of time. Could you just talk a little bit about the rationale behind that and also how demand is responding to that sort of fairly aggressive push?

Second, in relation to Marseille, you mentioned in the release that early bookings are very strong. Could you just give us a bit more flavor around that? And also, the deal in Marseille, are there other offers like that coming through from other French airports? Is France going to become more material in terms of the network or in the short to medium-term?

Thirdly, in relation to aircraft options, given the aircraft market, presumably these options have an awful lot of inherent value. And, some people are arguing you could flip them and make short-term money. But, I understand they are all there to infill capacity in the latter part of the decade and maintain a fairly strong growth clip. Is that where you are at the moment, or are you seriously considering trading some of those options?

The last question relates to rostering just the five-on, four-off structure at Luton. I can see where the pilots gain from that. What is it that you get out of that? Why are you moving that way? Thanks.

Thanks. I will try and take the first one and let Howard do the aircraft options. Dublin expansion, at the moment, we are being encouraged by Dublin Airport to continue to expand. There is a tightness of -- there's lack of availability of slots, mainly driven by capacity limit -- by terminal capacity constraints rather than any runway blockage. There isn't any runway blockage.

The Slot Conference going on this week, our initial kind of feedback is that we're going to get an extra five early morning slots. Our view is if we don't take up those slots, they will be lost and you simply won't get it back until maybe there's a second runway being built at Dublin. Now, it's subject to two things. There is ongoing discussions with Dublin DAA on cost, and there's also ongoing discussion with DAA on facilities, specifically the kind of development of Pier D in Terminal 2.

Subject to fruitful or an agreement of mind with the DAA on those issues, we could well be looking to announce say another five aircraft in Dublin this winter. That's not set in stone though. It is movable depending on how the base discussions at other bases progress. You know, one of the things that again would be evident from the Slot Conference this week, we have applied for a number of -- a large number of slots at the Madrid Airport, where there's a significant capacity increase this summer and next winter.

So, it'll be a kind of a juggling decision at the end of the day. Once we have their acceptable cost base in the right facilities in Dublin, Dublin could take another five aircraft but it's not set in stone yet. Demand of the present routes out of Dublin has gone very well, largely outbound where passengers are kind of turning away from the Aer Lingus high-fare European services to Ryanair's low-fare services. Quite a degree of inbound traffic as well, where we are using Ryanair's large presence and marketing mostly overseas to drive people back into Dublin.

But we suspect that the Dublin market will be fairly seasonal. I think it would be a very good market during the summer but weak enough during the winter, something along the lines of Shannon although maybe a little bit stronger. So, I wouldn't want to get too -- I wouldn't want to be overly positive on Dublin yet -- going well but let's see what winter looks like and certainly has the potential for further expansion, where we could link Dublin to a lot of our other European bases.

Marseille, we've a number of other airports, not just in France but around Europe, who are following the Marseille model, which is developing a specifically low-cost terminal which has a lot less thrills than the normal terminal building, offering that to all airports on a lower-cost basis than at the main terminal building and inviting airlines to tender for them. We're talking to a number of other French and other European airports about using a similar model. Demand on the Marseille routes has been good. But, again I caution, we started in November. Normally, I would be surprised if anybody is booking now for November. But, certainly in Marseille, we've seen some stronger than we would have expected bookings already.

Now on the aircraft options, we're not in the business of trading aircraft options. When we regard the firm orders and the options as being for our own growth, we will however -- our stocking probably will continue for as long as the strong market continues or persists. We'll look at maybe trading out our older 737-800 series aircraft, the first five of which were delivered in 1999. We're looking at selling those out of the fleet in 2006 as they enter and come out of their first D-Check. The pricing we're looking at at the moment is not far off what we originally paid for those aircraft new back in 1999 and significantly ahead of book value.

So, we will be -- there will be an opportunity to trade out some of those older positions but only while the market remains kind of gaga as it is at the moment. We do not see ourselves being traders or speculators in options. Our view is we would either confirm the options used in Marseille or roll them forward into later years, where we think we can use them for our own internal growth. And, there is some degree of sense in that because clearly the cost deal with Boeing is so good, it would be very difficult to replicate that again if we don't take those options.

Rostering five-on, four-off, actually it's a reflection of the fact -- if you look at our numbers, the last number of years, the sector length has been creeping upwards. I think we're up at one hour (multiple speakers) 1 hour 25 minutes now is our average sector length. It's a reflection of the fact in actual that the pilots are simply running out of hours, not so much over a year but on a weekly basis. If they've flown kind of to four sectors a day over a five-day period, they run out -- they are likely to run over their weekly hours limit. So, we need to be a little bit more generous on the rostering side to reflect the fact that we have longer segment lengths.

The effect that would give us is we would have slightly more pilots, but we would also have -- across -- if you take a two, three or four aircraft base, we have simply more hour -- more pilots hours to be able to fly to slightly longer flying hours that we're now accomplishing on those aircraft compared to the relatively short flying hours per year at the older bases like Dublin and Stansted.

Thanks for that and just one point. Did you mention Madrid as an airport that there was slots available that you are interested in?

I did. I said it would come out of the Slot Conference going on this week at the moment, and we are in for a lot of slots at Madrid. It's all up in the air as to whether we would get any or not. And again, even if we secure slots, it does not mean we're necessarily going to launch Madrid. But, it will leak out this week anyway. So, you have it first, but don't tell anyone.

Chris Reid.

It's Chris Reid here from Deutsche Bank in London. It was just two actually -- just can you sort of confirm your net debt figure at the end of the year? And also just quickly talk us through if there's anything in there on derivative liabilities or anything like that if that's okay? The final one, you touched on it with the ancillaries. If you could give us a quick word on which ones did particularly well this year, that would be great. I think you mentioned insurance as one of the big positives you had this year. Thanks very much.

Closing year with a net cash position of EUR294 million.

If you go to the balance sheet.

Yes.

-- where we're saying total debt, if you go to page 8 of the slideshow, you will see that debt is at both short and long 1.67 billion.

Okay, right, yes. I see.

Derivative financial instruments, if you go to the actual balance sheet, you'll see that we now have to account for derivative financial instruments all over the place. This is this new IFRS accounting. But basically what we are having to do is to put the relative gains and losses on whatever derivatives we have in place and record them on the balance sheet as to how they fall either in short-term liabilities, long-term liabilities or whether they are assets. With a balancing adjustment, you'll see in other reserves at the bottom of the page on the balance sheet. So, it's really accounting for derivatives, which has come in over the last year or so with IFRS.

But I may just say, we have no open derivative positions referenced in our balance sheet and in our accounts derivatives is to the forward hedges on fuel and currency, all of which fully worked their way through the accounts.

There will be cost currency interest rate swaps as well from some of the earlier deliveries. So, we have, if you like, what's called a perfect hedge. In other words, we only use derivatives for hedging actual non-liabilities, which means we have the benefit of hedge accounting. And this is the way we account through the balance sheet.

Okay, great. But there's no sort of open derivatives. As you say, this is all just updated?

No, no, they are all purely -- they are specifically matched and hedged against (multiple speakers) --

They work their way through the system over a period of time.

Okay, that's great. Thanks, guys. The other one just on ancillaries I think?

Yes, the big ancillaries are the counter hire, hotel -- or at the counter hire, travel insurance, hotel, in-flight sales, lottery and bus tickets --

Rail tickets.

Pardon me?

Rail tickets.

Well lottery, yes, they're bus and rail tickets onboard sales. We would expect again, as Howard said, that the rate of ancillary revenue growth will for the next couple of years outdistance our -- run at a slightly faster rate than the rate of scheduled traffic growth.

Yes, one of the things I should have mentioned when John was earlier on is also the impact of the bag charge in excess baggage. As you know, we increased our allowance from 15 kilos to 20 kilos, which meant that excess baggage won't be rising at the same rate as the growth in passenger volumes. So, that will be a slight negative in the period. But, obviously, we picked up more than that obviously on the checked-in bag charge.

John Sheehan.

John?

He's actually dropped his line. (Operator Instructions). John Mattimoe.

John Mattimoe again from Merrion in Dublin. Just a follow-up call, guys. In relation to the pace of capacity growth during the year, you've talked about 20% for the year. Is that relatively smoothed over the quarters or is there any large differences?

Other than Q4 and obviously we got our delivery program at the back half of the year, so you expect to see it slightly faster towards the back end of the year, which in particular, the fourth quarter would be faster than the other three.

Okay, and will Q1 this year be helped by the spillover -- the delays from the Boeing deliveries at the (multiple speakers) --

Yes, four aircraft came into April. So, obviously, that would mean that Q1 growth will be good. Obviously, load factors have been -- you saw April and May. So, load factors were good in April and good in May.

Okay, so Q1 might be a bit higher than Q2 and 3 and Q4 being the strongest?

Correct.

Yes.

Okay, thanks again.

We appear to have no further questions at this time. So, I will hand the conference back to you for any closing comments.

Okay, ladies and gentlemen, thank you very much again for participating in the conference call. As I said, we have roadshows on the road all week. There will be one in an area near you. If anybody has any follow-up questions, please feel free to route them back through [Jimmy Dempsey] either at the office or you'll get all of us back in the office next Monday. I hope we will see you all during the week. Thank you very much, everybody. Cheerio. Bye-bye.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines. Thank you.