Ryanair Holdings PLC (RYAAY) 2008 Q4 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen.

Welcome to the Ryanair full year results conference call.

At this time, all participants are in a listen-only mode until we conduct a question and answer session, and instructions will follow at that time.

(OPERATOR INSTRUCTIONS).

I would now like to hand over to your chairperson, Michael O'Leary.

Please begin your meeting, and I'll be standing by.

Okay, thank you very much.

Good afternoon, ladies and gentlemen.

You're all very welcome to the Ryanair full year results press conference.

I would refer you to the results release and the investor slide presentation, as well as the Webcast, which is on our website at www.ryanair.com, for any of you who want to have a look at that later on today; it will give you a better background.

Briefly, you can also book Europe's lowest airfares with a guarantee of no fuel surcharges while you're on it as well.

I'm here with Howard Millar in London.

Michael Cawley's joining us from the U.S., and Sean Coyle and Neil Thorin are on the call as well.

A couple of brief opening remarks; a very good set of numbers this morning, although recovering for the last year.

Track record profits, up 20% to EUR481m.

Traffic growth up 20% to 50.9m passengers, as average fares, including baggage charges, fell 1% over the year.

Unit costs, despite a 6% increase in sector length, rose 2%, primarily due to higher staff and airport costs.

And we maintained our industry-leading after-tax profit margin of 18%.

A number of major highlights in the last year, obviously, our profit growth of 20% to EUR481m, traffic growth at 20% to 51m.

We added 30 new aircraft.

We opened three new bases in Bournemouth, Edinburgh and Belfast and 201 new routes.

We continue to improve our punctuality, reduced the number of lost bags and cancellations.

We increased the stake in Aer Lingus to 29.2%, completed a 300m share buyback and initiated a second 200m share buyback, of which we've done about 33m to date, whilst still retaining EUR2.2b in cash.

Looking forward for the current year, clearly, we've revised the guidance.

Many people thought we were somewhat over-pessimistic in the third quarter when we said, with oil at $85 a barrel, earnings might fall by 50%.

This morning, we're restating that.

Two factors obviously that determine guidance, and that is average fares and fuel.

We're now working off numbers for the current year that oil will remain high, at about $130 a barrel.

Although, thanks mainly to competitor fuel surcharges and fare increases, we're seeing less pressure -- less downward pressure on fares and yields at this time.

We have decent visibility on fares and yields out through the remainder of the summer and it looks like our average fares, including baggage charges, will be up maybe 4% or 5%.

And if that continues for the full year, a combination of 5% increase in average fares, [EUR130] a barrel on oil, we would expect now to break even for the full year; obviously, a very significant decline on current profitability but, still, a tremendous outcome in a year when we have had such an enormous jump in oil prices.

That gives us the confidence to continue our proposition in traveling public, our customers, which is we guarantee the lower fares in every route we fly and we guarantee no fuel surcharges; not today, not tomorrow, not ever.

A couple of other things we'd like to touch on; we warmly welcome the U.K.

Competition Commission's report on the BAA airport monopoly in -- here in London; well, London in particular but London and the Scottish airports as well.

We fully support their findings that the BA monopoly ownership of the Scottish airports has been bad for competition, the BA monopoly ownership of the London airports has been bad for competition, the way that BA monopoly has conducted its business has been bad for competition, and the wholly inadequate regulatory regime operated by the misguided CAA has been bad for competition as well.

We renew our call, and we're meeting with the Competition Commission, calling on the BAA airports to be broken up in their entirety.

Selling off Gatwick isn't going to resolve the competition problem in the London airports and the Scottish airports.

We need, if you're going to have improved airport facilities here in the Southeast in the U.K.

to break it up all together, spin the three London airports into separate competing airports.

Because we think competition will deliver better facilities, improved passenger services and lower costs.

And, let's face it, passenger service at the London airports couldn't be any worse.

We're also continuing to call for competition at the Dublin Airport monopoly where we're replicating the worst effect of a regulated monopoly airport model.

We believe there should be a competing second and, ideally, competing third terminal; we'd be happy to build it ourselves.

And we welcome the recent change in the Irish Government and hope that the new government will be more committed to delivering competition at Dublin Airport.

Clearly, the overriding concern for the airlines going forward this year is oil at $130 a barrel.

As I said, if average fares increase for the year by 5%, we would expect to break even with oil at $130 a barrel.

It's difficult to make any more accurate predications because, clearly, we do believe if oil remains at $130 a barrel, there will be some significant capacity reductions in Europe this winter, through a combination of the larger airlines reducing capacity, grounding aircraft through the winter, and some of the smaller airlines going bust, as we believe they will at those kinds of prices.

Nevertheless, we do believe that that is an outcome, therefore, in an environment where we think the Ryanair model can prosper.

Higher oil prices is undoubtedly enhancing the attraction of Ryanair's guaranteed lowest fares.

Presently, forward bookings are running about 2 percentage points ahead of where they were at the same time last year.

We're under less downward pressure on fares as well, and we attribute most of that to the fact that the competitors are whacking on the fuel surcharges and increasing fares.

We think that will continue for the year if oil prices remain high.

There will be a recession in the U.K.

and across Europe.

Passengers will become more price sensitive, which will drive them towards Ryanair.

Competitors will continue to increase fares and fuel surcharges and, undoubtedly, many of Europe's second tier or, so-called low fares airlines, will go bust, which will reduce capacity and may, in time over the winter, lead to a more benign yield environment, although clearly all of this is driven by oil prices.

We remain convinced that the airlines will prosper through a period of high oil prices or an economic recession, or those like Ryanair that has the lowest costs in the industry, the lowest fares in the industry, that operates a fleet of new, fuel-efficient aircraft and that can -- and have substantial cash balances to be able to trade through a cyclical downturn.

Nobody is better placed in Europe, in the European airline industry than Ryanair is, to prosper through that kind of a negative trading -- negative winter.

In many ways we look forward to it, because I think it's going to open up more opportunities for growth, certainly, more opportunities to expand at airports who, a couple of years ago, would barely talk to us.

And we look forward to continuing to expand sensibly in a low-cost manner, lowering costs as we go, confident in the knowledge that as oil prices soften, as I think they undoubtedly will at some point in time over the medium-term, as oil prices come back our earnings and our share price will rebound strongly.

Just in terms of the share buyback, the directive, we've already completed a EUR300m share buyback last year.

We've started another EUR200m share buyback.

To date, we've acquired 11.85m shares at a total spend of EUR33m.

And, I should say, all of the numbers for the purposes of today's conference are -- refer to our profits, or our numbers, excluding the exceptional items.

There's three principal exceptional items this year; a EUR10.6m net of tax gain from the disposal of five aircraft last year; second, accelerated depreciation, net of tax, of EUR9.3m on 15 aircraft which will be disposed over the coming two years, and a $92m write-off of our stake in Aer Lingus.

As you'll remember, we acquired a 29% stake in Aer Lingus; the average cost of our shares is about just over EUR2.50.

Aer Lingus is, today, trading, I think, something around EUR1.70, EUR1.80; significantly below their flotation price of EUR2.20 and way below our offer price of 18 months ago of EUR2.80.

And, accordingly, under the accounting rules we have to recognize that as an impairment value at our balance sheet date, being March 31.

Okay, with that, I'll hand you over to Howard.

I'll ask you to take us briefly through the MDNA and then we'll open it up for the questions and answers.

Howard?

Okay.

Thank you, Michael.

Well, obviously, taking into account all these numbers are, as Michael said, excluding the exceptional items which arose in the year.

Profit after tax increased by 20% to EUR480.9m, compared to EUR401.4m in the previous year ended March 31, 2007, reflecting a 20% increase in passenger numbers, a 1% decrease in average fares, which includes the checked-in baggage revenues, and strong growth in ancillary revenues.

The growth in revenues was offset by a combination of higher fuel, airport charges and staff costs.

Total operating revenues increased by 21% to EUR2.7b, after then the 20% growth in passenger volumes, our average fare decreased by 1% and ancillary revenues grew by 35% to EUR488.1m.

Total revenue per passenger, as a result, increased by 1%, while flow factor remained flat, at 82% during the year.

Total operating expenses increased by 23% to EUR2.166b, due to the increased level of activity and increased costs associated with the growth of the airline.

Fuel, which now represents 37% of total operating cost compared to 39% last year, increased by 14% to EUR791.3m due to an increase in number of hours flown, offset by a decrease in our U.S.

dollar cost per gallon and the positive movement in the U.S.

dollar exchange rate against the euro.

Staff costs rose by 26%, reflecting the growth in the airline, a share option charge of EUR10.9m and a one-off increase in cabin crewing ratios.

Excluding the charge of EUR10.9m for the share option grant, staff costs would have increased by 22%.

Airport and handling charges increased by 45% to EUR396.3m, arising from the doubling of airport charges at Stansted and higher charges at Dublin Airport.

Unit costs, as a result, rose by 2% and operating margins decreased by 1 point to 20%, whilst operating profit increased by 16% to EUR547.7m.

Net margins remained flat for the reasons as we've just outlined, and the earnings per share increased by 22% to EUR31.81 for the year, reflecting our increased profitability and the impact of a share buyback of 59.5m shares during the year.

On to the balance sheet.

Total cash decreased by EUR28.4m to EUR2.169b as the growth in profitability was offset by the funding of a EUR300m share buyback program, a EUR58.1m investment in Aer Lingus and EUR937.1m of capital expenditure.

Total debt, net of repayments, increased during the period by EUR404m.

Shareholders' equity at March 31 decreased by EUR37.6m to EUR2.502b compared to March 31, 2007, due to the EUR390.7m increase in profitability during the period, that's obviously after exceptional items, and EUR8.4m proceeds from the exercise of share options, offset by EUR436.7m due to the impact of the required IFRS accounting treatment for derivative financial instruments, pensions, available for sale financial assets, stock option grants and the share buyback.

With that, I'll hand you back to Michael for Q&A.

Okay, Kim, if you could open it up for the Q&A, please?

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from Stephen Furlong from Davy Research.

Please go ahead; your line is open.

Hi, Michael.

I was just wondering in terms of the bases at Birmingham and Edinburgh, were you surprised that you did deals there?

And maybe could you just give us some color on that?

Secondly, just to talk about the stage lengths, I know it's something you're trying to actively manage going forward because that seems to be a headwind for the call slides.

You might just talk about that more medium term.

And then, finally, just maybe talk about the 20 aircraft that are probably going to be grounded this winter.

Was there an art or a science to get to that number, or it was just where you intuitively feel that's the right number for the fleet, 10%?

Okay, thanks, Stephen.

Yes, I think that Birmingham and Edinburgh are very significant developments for a couple of reasons.

Firstly, they're airports that really wouldn't talk to us about discounted arrangements two years ago, because they were big BA bases or, in the case of Edinburgh, they had a big Easyjet base up there.

I think what some of those bigger regional airports have come to realize is two things; one, you can't rely on British Airways.

Either they're going to close some of those -- their regional bases or they're certainly going to cut back the capacity very significantly.

And, equally, there's only so much growth you'll get with Easyjet, so they have a relatively high fare operation but a kind of a flight profile that is, let's say, based around connecting you to some of the European capital cities and some of the charter stuff to Spain.

But if you want real and sustained traffic growth, you need Ryanair in there with much lower fares, and they're prepared to work with us to develop a secondary base.

I think it's a compelling thing, firstly, one that the airports want us to come in and grow rapidly at bases where an airline like BA is withdrawing capacity or closing bases all together

And two, airports want us to grow in some sense where Easyjet have stopped growing.

That's been replicated in airports like Liverpool, Bristol, Birmingham and Edinburgh.

And it has, to a certain extent, slowed down the development of bases on Continental Europe and Eastern Europe.

These are, in our view, unique opportunities to get in there with a low cost base and work with pretty substantial airports and develop very rapid traffic growth, and we're working with them to do that.

Stage length; it's not a conscious decision that the stage length would fall, although clearly we'd like to see stage length fall.

In the results we announced today unit costs were up 2% in the year when the stage length was up 6%, so I think we still demonstrate a lot of cost discipline in our growth.

What fundamentally drives the stage length growth, however, is the selection of bases and last year the bases were Bournemouth, Bristol, and Belfast.

I think this year we believe that the stage length growth will be somewhat smaller again than 6%.

I think it makes the unit cost growth a little bit easier if the stage length is shorter but it's fundamentally driven by base selection.

Is there an art or a science for grounding 20 aircraft this winter?

Neither.

It just it seems to us -- we think it worked well for us last year; we grounded seven aircraft at Stansted.

I think it's fundamental if you're going to be a low-cost airline that, at high-cost airports like Stansted and Dublin, where you have a failed regulatory regime rubber stamping unjustified and significant cost increases, is that you cut back capacity significantly during [the shorter and] the winter period.

It's nothing to do with the high price of oil.

It is to do with the high cost of those airports.

We will be writing to both airports in the next week or so looking for significant discount for the winter.

And, if we get significant discounts, then we cut back the capacity by less than 20 aircraft.

If we get what we got last year, which was "go to hell", an unresponsive monopoly response, then we will significantly cut back capacity at both Stansted and Dublin this winter.

That capacity will be restored in the following summer where the market seems more willing to pay slightly higher fares to cover these unjustified cost increases.

But, certainly, we're not going to do it during the winter.

I think it's interesting at a time when the Stansted monopoly last year doubled its charges when the Regulator stood by like an idiot and just rubber stamped it, that Stansted suffered its first traffic decline for some 20 years.

I think the Regulator six months ago was arguing that Stansted should be de-designated because they had no pricing power.

Now, in the recent weeks, he has issued a new report on the back of the statement to the Competition Commission calling for the breakup of the BAA monopoly because it's bad for competition.

All it does is illustrate that the Regulator in the U.K.

is a clown.

He has no idea what's going on in the marketplace and he shouldn't be allowed to regulate a rapacious monopoly like the BAA.

That's very good.

Thank you.

Our next question comes from the line of John Mattimoe from Merrion Capital.

Please go ahead; your line is open.

Hello.

John, hi.

I've just questions in three areas.

First is on yields, the second is on unit costs and the third one is just on fleet.

Just in relation on the 5% yield growth that you've been guiding during the day, can I just check in relation to the summer, which I presume you've reasonable visibility for at this stage, will there be any distortion between Q1 and Q2, particularly with Easter being absent from Q1 of this year?

Secondly, can I just check that the yield guidance takes into account the effect of sterling?

John, yes, in terms of Q1, clearly, the comparative is a difficult one, given that we had Easter in Q1 last year.

While I won't be specific on actual yields, I think that you can expect that we would expect that yields will be higher, our average fare will be higher than 5% over the summer period, and slightly below that over the winter period.

But we don't have enough bookings statistically to call that for an entire year.

What was the second part of that, John?

Sorry, just on that, Howard, is just really the difference between Q1 and Q2 rather than getting into the summer/winter difference.

Will Q2, will the growth be a bit stronger in Q1 relative to Q1, given that Easter --

I think the gap will be better.

But it's a very -- as I said, the gap will be narrower clearly in Q1 because we had Easter last year, and so the gap will be narrower and wider in Q2.

That's the best we can give you now at this stage, John.

Okay.

And the second part, Howard was just --

All guidance factors in sterling are current rates.

Okay.

So the local currency increase in average fare, then, will probably be closer to 10%.

Will that be right?

I don't know where you're getting that from, but our average of 5% takes into account the movement on sterling that we would expect over this year, which is based on current rates.

Okay, great.

Thanks, Howard.

The second one was just on unit costs, and I just wanted to know was I right in thinking in the webcast earlier, you were saying that that would be flat?

That's right, excluding fuel.

Exclude fuel.

And just in relation --

The 3% -- more or less the 3% sector length we should absorb most of that with reductions in the other unit costs.

Okay, so the sector length is the main driver boosting it up, yes?

Yes.

And if you look, it's almost half the rate of where we were last year.

Average sector length growth over 6% last year and this year -- obviously, we don't have the final route selections done in terms of what's going to happen in the winter, but at the moment it looks like it'll be about 3%.

And could I just ask in relation to those non-fuel costs, how much of those are being based on sterling?

We don't have the split of those available, John.

Okay.

And then, lastly, just two questions on the fleet.

Firstly, in relation to the five aircraft that were referenced as being sold to a Russian buyer earlier, are those five out of the 11 that remain to be sold as of year end, or is there still 11 that remain to be sold?

Still 11.

We had 20 sold, John, if you remember in February.

We've sold another five since then, and that would then leave 11 to get us to the 36, with the balance of the additional 10 being operating leases being returned to the lessor.

Okay.

And then there's -- the last question is just in relation to the current environment, if a downturn is on the way in the industry, do you think that will give an opportunity maybe to do a renewed deal with Boeing to get you beyond, say, the 2012 deliveries that you have at the moment?

Firstly, I don't think a downturn's on the way; the downturn is here in the industry.

We started the initiating talks with Boeing and Airbus before Christmas on aircraft -- or deliveries beyond 2012.

Both of them at that stage were telling us how big the order book was between now and 2012, with thousands of aircraft orders into India, in North American re-fleeting programs, all that kind of nonsense.

They weren't yet at any kind of -- they weren't yet where we would want them to be to discuss serious numbers of our aircraft post 2012.

So the discussions continue but, really, unless there's going to be some significant painful retrenchment in the industry over this winter, which we expect there will be with oil at $130 a barrel, I don't think the talks are going anywhere at the moment.

So we're in talks, but we're not really going anywhere yet on price.

Okay.

And any chance of a long-haul dimension being in the next order?

I don't know.

The long-haul project is something that's entirely separate from Ryanair.

We wouldn't want to contaminate our Ryanair aircraft order with something else on long haul.

Long haul has nothing to do with Ryanair although, clearly, if it's a matter of downturn in the industry and aircraft parked up in the desert, the possibility of a long-haul, low-cost, low-fares carrier will get closer.

I'd like to keep that separate from a Ryanair conference call, if you like.

Yes, fair enough.

Thanks, Michael.

Once again, ladies and gentlemen, if you would like to register a question at this time, please press number one on your telephone keypad.

Our next question comes from Dwayne Penningworth from Raymond James.

Please go ahead; your line is open.

Michael, good morning, it's Jim, Jim Parker with Raymond James.

I want to ask Howard a question about the currency hedges, what your currency hedges in U.S.

dollars are for 2009 -- fiscal '09 year versus fiscal '08.

Hi, Jim.

Yes, we have -- obviously we have a long-term hedging horizon on the dollar.

At the moment, we have 18 months pretty much almost 100% hedged out.

Within this fiscal year the average exchange rate between the dollar and the euro would be about EUR1.42 versus EUR1.30 last year.

We've also, at the same time, taken advantage of the present weakness of the dollar and extended our capital hedging program, and we're actually out to 2011 on that.

And a lot of that is done now at about EUR1.50 out to 2011.

Okay.

Second question, Michael, what do you do with the pilots when you park 20 aircraft?

Let's say that you do, do you have to compensate pilots, or are you using independent contractors, or how do you handle the labor situation when you park those aircraft?

Generally speaking, we do a combination of three things, Jim.

Firstly, we have contractors who actually are looking to take three and four months off during the winter and they fly more during the summer, so they get up to their annual 900 hour limit during the summer.

We also take out significant amounts of holidays for the crews across that winter period and [sort of] put them out on holidays and get the holidays out of the system.

And the third is we've just slightly delayed our recruitment of new pilots for the new aircraft launches which will be -- or the new bases and the routes, which will be launched in April '09.

So we don't have any excess labor bills, we don't have pilots sitting around the place doing nothing; we're able to manage it.

We ground 20 aircraft; it's still less than -- well, it's about 10% of the fleet so it's easily managed within the confines.

And when we say we ground them for the winter, we're really talking November, December, January, February.

We're flying through most of October and then we're flying through about the second half of March anyway.

But we're just not going to fly them during those really four bad months of the winter, particularly at those high-cost airports, the regulated monopoly airports like Stansted and Dublin.

Okay, great.

Thanks.

Thanks, Jim.

Our next question comes from Travis Anderson from Gilder, Gagnon and Howe.

Please go ahead; your line is open.

Hi, Michael.

I was wondering if, despite your hopes of $130 or, shall we say, lower fuel prices, that once again fuel confounds you and we end up averaging $150 or so for the next six to nine months.

What contingency plans do you have for that, if any?

None, to put a finer point on it.

I think if oil goes to $150 a barrel, the only kind of compensating thing is I think you will speed up the rate of capacity, withdrawals and bankruptcies, certainly, here in Europe.

I think there might -- I would expect there to be some awkward pressure on underlying fares as capacity gets taken out of the system through the winter, more by bankruptcies than anything else in Europe.

But I think if oil goes $150 a barrel for the winter, we'll lose money in the next 12 months.

I don't think you will see a compensatory rise in yields in the short term, partly because there'll be such an economic downturn in the short term.

But I think an awful lot more people if you take -- the [flying] carriers who are surcharging will be increasing their fuel surcharges even more at that stage and I think driving more traffic in our direction.

There's no doubt we're seeing an underlying trend at the moment of stronger advance sales, less downward pressure on yields compared to what we originally budgeted, but I don't think that's going to compensate if oil goes to $150 a barrel.

If oil goes to $150 a barrel, we'll lose money in the next 12 months.

Thanks.

Once again, ladies and gentlemen, if you would like to register a question at this time please press number one on your telephone keypad.

There will now be a short silence whilst any final questions are registered.

Okay, folks, I'd just say thank you very much to everybody who joined in the calls today.

Again, if you haven't seen the webcast, it's on -- the website is ryanair.com, as is the results presentation, the investor presentation.

The normal annual road show has kicked off today.

Michael Cawley is in the U.S.

Howard is here in London and Europe.

I'm going to New York and Boston for the next couple of days.

So I hope that one or other of our investor teams will see you each over the coming week.

As I say, I think these are very interesting times, much more interesting than they've been in recent years and we are -- as a Company, are looking forward to a period or a winter of very high oil prices where we will continue to take out costs, continue to exploit efficiencies and opportunities, and maybe move in where some of our competitors go bust, or withdraw capacity from the marketplace, as they have been doing over the last six to 12 months.

Thank you very much.

I look forward to seeing you all later on in the week.

Goodbye.

Ladies and gentlemen, thank you for your participation.

That concludes today's conference and you may now disconnect your lines.

Thank you.