Ryanair Holdings PLC (RYAAY) 2018 Q2 法說會逐字稿

Hello, and welcome to the Ryanair H1 FY '18 results call.

(Operator Instructions) Just to remind you, this conference call is being recorded.

And today, I'm pleased to present Michael O'Leary.

Please, begin your meeting.

Okay.

Thank you.

Good morning, ladies and gentlemen.

Welcome to the Ryanair H1 conference call.

As you've seen this morning on the ryanair.com website, we published the H1 press release, the MD&A and the comprehensive Q&A section as well.

I invite you all to look at those.

So we can allocate more time for Q&A, I propose just to do opening remarks rather than reading you through the press release.

I think we've gone through another successful half year.

Average fares fell 5% but that delivered us an 11% growth in traffic and an 11% increase in profitability.

This is mainly due to a 5% fall in ex-fuel unit cost.

And it demonstrates here again the robust nature of the Ryanair model.

In the half year, we opened up 3 new bases and 80 new routes.

We took delivery of 35 new Boeing 737s.

Ancillary revenues grew by 14% as customer spend rose by 2%.

And the half 1 unit cost fell 5% including fuel.

Excluding fuel, it was flat but would have fallen 2% without the EU261 provision in September.

Balance sheet remains very strong.

We generated over 900 million of net cash in the half year.

We used that for net CapEx of EUR 675 million, share buybacks of EUR 640 million.

According net debt rose slightly to EUR 600 million at the half year.

And we plan to reduce that to 0 at the end of full year.

This is a biz that continues to execute.

We continue to roll out customer initiatives.

Ryanair.com has become the world's largest search engine.

We expect we're over 30 million members in My Ryanair in September.

We expect that to grow by 40 million by March.

Over half our customers now chose their preferred seat on board.

And the plus fares now account for 7% of all sectors sold.

The new flight connections project at Rome Fiumicino and Milan Bergamo are working well.

And our hotels inventory now exceeds 250,000 hotels worldwide with over 7.5 million rooms.

I think the key trend in the half year has been the accelerated progress towards consolidation in Europe.

Monarch Airlines had 5 million passengers in the U.K. at mainly U.K.P Airports, went bankrupt in September.

It was followed by Air Berlin with about 29 million passengers in Germany in October and Alitalia with 24 million passengers remains in bankruptcy.

There are other financially troubled EU airlines, so we will believe follow them, some as soon as this winter, others within next 12 to 18 months, particularly, as oil prices begins to tick back up towards the Brent bottom $60 a barrel.

These trends, particularly where they allow high-fare airlines like Lufthansa, BA and Air France to acquire local competitors, then constrained capacity and raised prices can only be good for Ryanair's traffic growth and our yield over the next few years as our fleet rises to 600 aircraft.

We remain concerned about the development in Brexit, or the lack of development in Brexit.

The deal between the U.K. or U.K.-EU bilateral is being held up while the divorce talks drag on, and we worry that time is running short for the U.K. to develop this bilateral solution.

We worry the U.K. government continues to underestimate the likelihood of such a flight -- our flight disruptions from April 2019, an outcome that was specifically highlighted by Air France's CEO in an interview with the Observer as recently as 2 weeks ago.

These results cover the 6-month period where we suffered a material rostering failure in September.

We are not short of crews, nor are we short of pilots.

We have more than sufficient pilots.

But due to the very bad planning, all -- and the excess of winter leave in September, October, November and December as we cut across the IAA 9 month transition period on pilot leave to get to a new calendar year from January through December 2018.

We created a shortage that impacted our punctuality in the first 2 weeks of September.

We took some very tough and very painful decisions.

We canceled 50 flights a day out of, or less than 2% of our flights for the 6 weeks of September and October, and then by grounding 25 aircraft for the remainder of the winter period, November 2 to March to correct that problem.

It has now corrected itself.

Punctuality has now been restored.

There have been no more cancellations since the end of September.

And our punctuality as recently as this weekend was over 90% on all 3 days of the busy bank holiday weekend.

However, we did disrupt a lot of passengers.

We did suffer reputational damage, and we are working hard both with our passengers through low-fare initiatives, offering those passengers who were disrupted travel vouchers which they can use in October.

And we have taken a EUR 25 million hit on EU261 costs: re-accommodating passengers, providing with compensation and meeting their reasonable disruption cost.

All of those charges have been taken in September.

This experience has also, I think, highlighted the need for us to improve pilot payment in Ryanair.

We're competitive with Jet2 and Norwegian, but we should be better than them.

And that's why we're rolling out significant pay increases of up to EUR 22,000 for captains, EUR 11,000 for first officers.

And that's being -- those deals are being considered on the base by base basis at the moment.

We have now have 15 of the bases, have accepted those increases.

A number of the bases, most notably Stansted, have turned down those increases, but we continue to engage with the ERCs at those airports.

It's important that they understand that there won't be another or better offer.

But if they, as is their right under the collective bargaining process within Ryanair, they're perfectly free to turn down the pay increase, but if they turn down the pay increase then they'll remain on their existing 5-year pay deal for the next number of years; in Stansted the deal runs out to 2020.

We have also addressed the management within the rostering and operations area, where there'll be new operations management.

Peter Bellew will shortly return from his stint as CEO of Malaysia Airlines.

He becomes a new Chief Operating Officer from the 1st of December.

Having said that, I also want to thank our people who have performed heroically in recent weeks.

Pilots offering to work their days off, as have cabin crew.

And our operations and engineering people have done a great job in keeping the operation going while we fixed the screw up we had within the rostering division.

There is undoubtedly -- this mistake has been used by competitor pilot unions as an opportunity to generate some negative PR for Ryanair.

It has happened in the past, it will happen again.

All it is, is PR.

We continue to be an excellent employer of pilots.

We pay more than the competition.

Our pilots enjoy the best rosters in the business with the most rapid promotions and the newest aircraft.

And that is demonstrated by the flood of applications we have had in recent months, both from Monarch pilots who were made redundant, Air Berlin pilots who are being made redundant and also pilots from Norwegian and Jet2 who want to share in the pay increases that our people are now enjoying.

But none of this can take away from the fact that, yes, we had to grow up in one area of the management in September.

We have addressed it.

We have fixed it.

But the underlying business continues to execute and continues to execute very well.

Having grown the hedge -- H1 traffic by 11%, the grounding of 25 aircraft in the H2 means growth was slowed to about 4%.

As a result, full year traffic will slow from 131 million passes to 129 million customers this year.

We are 2% better booked at this time than we were last year.

Our load factors are currently 97%.

But those bookings are at slightly lower fares.

However, we expect that the full year '18 air fares will fall by between 4% to 6%, which is slightly better than the previous guidance of minus 5% to minus 7%.

Ancillary spend for the full year should rise by 1% this year.

Ancillary unit costs will be adversely affected by the EUR 25 million in nonrecurring EU261 costs in September, and up to EUR 45 million of additional pilot costs, higher pay if it's accepted by our pilots, additional recruitments and training costs, exceptional recruitment costs taken in H2, that will rise as we take the September rostering failure.

Accordingly, we now expect full year unit cost to fall by about 2% this year, ex-fuel unit costs will rise 3%.

Based on the above and with the usual caveat on very limited H2 visibility, we saw no reason to alter our full year profit after tax guidance, which remains in a region of EUR 1.4 billion to EUR 1.45 billion.

I think that's a very credible performance.

We'll continue to deliver record profitability this year despite taking a EUR 75 million hit on EU261 costs and additional pilot costs in the second half of the year.

And with that, I'm going to ask Neil Sorahan to add couple of comments, and maybe a touch on the full year guidance.

Neil?

Yes, thank you, Michael.

It's like we already said, a very strong and robust first half of the year which had profit up 11%, average fares down 5% as previously guided.

There is in Q2, fare down 9% as we had indicated following a strong Q1 with (inaudible) customers up 11% (inaudible) in good shape despite the 2500 and one-off nonrecurring EU261 cost.

We saw costs down 5%, including fuel broadly flat on an ex-fuel basis and down 2% when we exclude the EUR 25 million.

Balance sheet finished the quarter in a net debt position of EUR 600 million.

This was after EUR 675 million of capital expenditure.

We believe we'll have about EUR 1.5 billion of capital expenditure on a full year basis this year.

We also finished our 600 million share buyback at the end of September, bringing distributions to EUR 639 million in the current financial year.

And our plan is now to manage down the net debt positions were broadly flat, net cash net debt position by year-end.

On the guidance itself, while we saw our costs increase by EUR 70 million on the back of the EU261 EUR 25 million cost compensation payments and the EUR 45 million additional investments in pilots, subject to all bases accepting the deal.

This was being offset by the improved ancillary performance.

With a 2% increase in ancillary spend per passenger in the first half of the year.

Based on that, we're now guiding ancillaries up approximately 1% on a full year basis, which is ahead of the broadly flat, how we guided before.

And based on the better visibility that we now have compared to last May, when we came out with full year numbers, we're guiding fares down minus 4% to minus 6% on a full year basis, which is broadly the same for the second half of the year.

And this is how we get to the -- how we get to retain the EUR 1.4 billion to EUR 1.45 billion in the guidance this year.

Fuel, we believe will deliver savings anywhere between EUR 70 million and EUR 80 million, pending on where stock goes over the next number of weeks, and indeed what the de-icing situation is going to be over winter.

Michael, back to you.

Okay.

Thanks, Neil.

We're going to open it up to Q&A.

Obviously, this is -- we're on an open line.

We are aware that there is a number of media and others who are on this call.

Therefore, we're going to limit what we say, particularly, in relation to the pilots and the union, or the pilots and the competitor unions because we think this is best managed quietly and internally and not feeding the kind of wild speculation or the inaccurate press reporting of this subject to date.

But within that context, then, let's open up for Q&A.

(Operator Instructions) And our first question comes from the line of Duane Pfennigwerth from Evercore ISI.

As we think about the slightly slower growth profile of the business into the back half of '18 and fiscal '19, how should we be thinking about the cost structure of the business, excluding any pilot changes?

It's too early to say yet.

I think if the -- when the pilot deals are accepted across all of the bases, they will add something of the order about EUR 80 million per year to the payroll.

We're allowing another EUR 20 million for growth and for other areas -- or for other areas within the company.

But I think it's helpful if you go back to the third or fourth slide -- page of the slide presentation, which is our comparable unit cost against over all other airlines.

On a per passenger basis, our staff costs are about EUR 5 per passenger.

We think that may rise to maybe EUR 6 over the next year or 2. But nothing that will close the already formidable and widening gap on per unit costs, so there's no real competitor.

And that's ultimately the point.

We have a huge cost leadership over everybody else.

Yes, we are -- have suffered a rostering failure.

In part, we're dealing with that by significantly stepping up pilot pay.

I believe the pilots will accept those increased pay terms over the coming weeks and months.

But those that don't, then that's fine.

They'll continue under existing pay.

Michael, I don't know if you have a value handy for what the asset position on your hedge positions stands now.

And how much of that is second half of this year versus 2019?

Yes.

On the fuel side, we're 90% hedged for the current financial year.

It's weighing at over USD 490 per metric ton.

With the euro/dollar hedge it's about 1.12.

And as we look into next year on the fuel, we're 50% hedged in first half at similar levels, about USD 490 per metric ton.

Euro/dollar hedged at 1.15.

And then you look at the asset size, the CapEx, we're now up to 85% of our CapEx hedged load options and firmer craft alike at about 1.24 on the euro/dollar.

I was just wondering what the value of that asset would be today if we marked that hedge book-to-market?

Look, I'm not going to go there, Duane.

No idea?

Yes.

Next question please.

Our next question comes from the line of Savi Syth of Raymond James.

Two questions from me.

First, I was a bit surprised that your fiscal year 2024 traffic targets have not changed.

And I was just wondering if you could provide a little bit more color on the lease returns over the next few years?

Or maybe even kind of the year end fleet count you expect for the next few years?

And second one was on the hedge book.

I'm a little surprised maybe not a higher hedge percentage in fiscal 1Q for next year.

Is there -- can any change in hedging charges here, maybe a little bit more cautious given the run-up?

And last one, on Norwegian, that was on the connecting traffic.

I know, you were talking to Norwegian and that didn't come to fruition.

Just wondering if that was kind of strategic business move on your part?

Or maybe it was Norwegian thinking it's a better fit with the easyJet where they are located in airports?

The 2024, there is no reason for us to change the traffic targets for 2024.

We will take all of the new Boeing MAX aircraft we have on order.

There is a slight slowdown in growth this winter and through the summer of 2018.

We're going to keep 10 backup aircraft for next summer.

But ultimately, the underlying growth model remains unchanged.

If you look at the underlying performance of this business through the fog or much of the noise over the last number of weeks, those factors 97%, forward book is at 2% ahead of where they were last year.

The business continues to chug along.

The hedge book, we're a little light on fuel at the moment.

Yes, we're only 50% hedged for the first half of next year.

We were hoping to see oil prices dip as we came out of the hurricane season.

There were oil prices pop around mid-50s.

It has risen now to kind of slightly towards $60 a barrel spot.

We are and we have resumed hedging in the last week or 2 at slightly higher prices, so then we will have a jump in fuel costs into next year if oil remains where it is at the moment.

Much depends on the upcoming OPEC meeting in November.

And Norwegian, we have an issue with Norwegian.

We are -- because partly, we weren't able to -- they couldn't get their IT team assembled to just meet with our IT team.

And we ran into -- we have concerns over Norwegian's financial viability and whether they are a partner we want to be working with at this time.

Yes Savi, on the leasings: 33 aircraft in the fleet are -- approximately 8% of the fleet are leased at this point in time.

You'll recall that we extended some of those leases into the summer of '18 and '19.

So we have about 16 leases coming out before the back end of FY '20 when we've got -- 7-odd are coming down in '21, and thereafter they taper off in '22.

Our next question comes from the line of Stephen Furlong from Davy.

There is a lot of deals obviously being done at the moment in terms of Air Berlin and Alitalia and perhaps Monarch.

What are the airports saying in Italy and Germany, perhaps also U.K. provincials in terms of providing growth for them.

Do you think that position actually is enhanced here that there is more market opportunity kind of going, continuing organically rather than buying these companies?

I think -- look, it's both.

But the underlying, I mean, without breaching the confidence of ongoing negotiations with those airports, there is an underlying concern certainly among the Germans, the UKP and the Italian airports that there will be less capacity flown by the incumbents post whatever the transactions are.

And that will -- is leading to slightly more advantageous growth proposals.

I think for David and the new routes team.

I wouldn't want to put it any stronger than that.

Germany is a market where we're growing strongly at a lot of airports who -- many of those airports are dependent on Lufthansa and Air Berlin for up to 80% of their traffic.

And here you have a transaction on which -- a remarkable deal.

You have to admire Lufthansa's ability to pull off a deal where they can acquire their way from 68% control of the German domestic market to 95% control of German domestic market, in breach of almost every known competition consideration.

And not alone did the German government waive it through, they actually lend them EUR 150 million so that it can be facilitated.

But it what it is.

I think it creates more opportunity for us in Germany and certainly creates more opportunity for us in the UKP airports and it's creating more opportunity for us in Italy as well.

David, you want to add to that?

No.

All of that is true.

And combine that with our relatively slower rate of growth, the competition between airports to secure their share of that growth is intensifying, though it's a reasonably positive environment.

Great, David.

Just one final one.

Slots at Gatwick, does that interest you?

No.

Besides, it's unclear anyway who owns the slots.

They could well be going back into the pool and have no value whatsoever.

Got it.

And the issue for us is the slots tend to be (inaudible) against putting together a kind of coherent schedule that was -- without leaving aircraft sitting on the ground for long periods of time.

Our next question comes from the line of Neil Glynn from Crédit Suisse.

If I can ask 3 quick ones, please.

The first one on Peter Bellew.

Just interested in terms of your thoughts as to what he brings.

I think there was some Irish media coverage about his strong relationships with staff, with labor at Malaysian, for example.

I'm just thinking ahead in terms of your pilot deals expiring in 2020, 2021.

I'm sure you're keen to head off any particular issue at that point in the interim?

And the second point, you mentioned you're better booked, of course.

But I'm sure website visits, presumably, took a little bit of a hit in September.

I'm just interested in any flavor you can provide us to whether we're back to normal levels now, albeit, with a bit of fare discounting as you touched on?

And then the final point, clearly negative publicity has been touched on, but just interested how useful has My Ryanair been in communicating to passengers as well as stimulating markets as you've touched on through this period?

Thanks, Neil.

Couple of quick answers.

Peter Bellew brings familiarity.

He was the Director of Operations up to 2 years ago.

He was actually responsible for a lot of the pilot recruitment, training and interaction with pilot bases.

He brings piloting, does give us somebody who the pilots are familiar with.

But that's not the solution to any perceived problems with the pilots.

The best solution for the problem with the pilot is, we pay them more money and we fix the things that we have clearly mismanaged this summer.

Like simple, stupid stuff.

People applying for annual leave couldn't get a reply.

People who wanted a day off wouldn't get an acknowledgment.

People who were being asked to work days off to cover holes in the roster that weren't apparent because we were being told the rosters were fully covered.

But I think he brings some experience.

He brings a face that the pilots and the operations will know.

But he doesn't walk on water, either, like we have underlying problems here that we have to face.

But we will -- Eddie Wilson and the team are -- fixed the rosters.

And we're well underway to fixing the communications issues with the pilots as well.

And we're 2% better booked.

Yes, we're 2% better booked.

Honestly, we didn't see that much of a dip even as we were announcing the cancellations.

There would be a couple of reasons to that: One, because we're 97 -- we have 97% load factors close-in.

We manage the business so that we are highly booked close-in.

And then the second wave of cancellations, which was the November 2 to March.

We announced those with more than 5 week’s notice, so that we handled that profit better.

We did so for an overreaction, but from -- down at the press and the media -- but we deserve that.

It's not one of our finest hours.

It was a screw up on our part, and it's something that we have to make sure it doesn't happen again.

But through all of the fog and the noise and some of the bull(expletive) that gets reported, particularly in the written media.

Our people are booking, they're flying.

The punctuality is excellent again.

We have fixed this.

And I think that will -- what we were famous for was low prices and reliability.

I think our reliability has taken a reputational hit, but we will restore that pretty quickly.

The negative PR.

My Ryanair has been very helpful in the negative PR in the same way it's been helpful as we continue to grow.

I think one of the most impressive things, not so much about just My Ryanair as the membership continues to build, but also the ryanair.com website itself.

This is now the world's largest travel website, or the world's largest airline travel website.

It has more customers than any other airline's website despite the fact that there are 3 other airlines in the U.S. that are bigger than we are.

And it has been key -- I think one of the key statistics that we're showing in this roadshow is that 95% of our customers come directly through that website.

They are not being referred by search engines or paid-for media or anything else.

We don't pay Google, Facebook or anybody a cent for references because frankly, if you're flying in Europe, A, you'll have heard of Ryanair; and B, you will already know that we've the lowest airfares.

And that will continue.

And I think this is one of these periods of time where you got to look at the underlying business model.

If the underlying business model continues to dilute yes, it is.

Is it continuing to execute?

Yes, it is.

Does it cope with the occasional (expletive) up?

Yes, it can.

And I think that's what we're today with these numbers and with what people we were willing to take very painful and difficult operational decisions if it's the right thing to do to protect the punctuality of the flight, of the other 98% of customers who were unaffected by this at all.

Very few customers were affected by these flight cancellations in terms of our overall size and scale.

That's not in any way to reduce or in any way minimize the inconvenience and the frustration we did cause to the people whose flights were disrupted.

But I'm pained to say that the overwhelming majority of those passengers were reaccomodated on other Ryanair flights.

Our next question comes from the line of Damian Brewer from RBC.

Three questions if I can quickly.

First of all, could you tell us a little bit more about, now we're a month into it, what Q3 pricing is looking like in terms of calendar -- sorry, your report in Q3?

And in particular, not just the ticket prices but also after the 3.9% lift per passenger and ancillaries, how that's trending?

Whether that's back down to the sort of 1% trend?

And then secondly, just want to explore a little bit more how you think about aircraft and balance sheet allocation?

In particular on aircraft allocations, the next summer you're thinking of following where there are gaps from Monarch and Air Berlin, already looking at where the GDP growth and demand is highest in places like Spain and Central and Eastern Europe?

And then with that in mind, how are you thinking about positioning your balance sheet into Brexit?

And also any opportunities that might arise should another major carrier, you guys seem to point to Norwegian's sale?

And how do you sort of preserve balance sheet capacity to do that?

I don't think, Damian, we gave any guidance on Q3 pricing.

I think we've already given sufficient guidance into the second half of the year.

We expect yield for H2 to be minus 4% of minus 6%, better than the minus 5% to minus 7%.

And not willing at this stage to spit that out between Q3 and Q4.

How will the aircraft be allocated?

As always in Ryanair, opportunistically.

David and the new-route team are running around the UKP, the German, the Italian airports, but also some airports in Central Europe and in Spain and Portugal as well, where we're seeing some capacity being shifted away from there back to places like Turkey and Egypt next year.

And so our -- the aircraft allocations will be opportunistic.

How do we gear the balance sheet for Brexit?

We don't.

We think Brexit is a potential large crisis.

The aviation sector will be first up because we'll be 6 months before almost every other sector.

And we will try our best to work our way through it as best we can around this time next year.

But I can't give you any better guidance at the moment other than we worry that the U.K. government is completely underestimating the difficulties or the extent to which the Europeans want to cause a disruption to flights because it may be the earliest way of putting pressure on the British economy.

And if there is another large -- when there is another large bankruptcy, we will again approach it opportunistically as we do all of these developments.

We've an underlying growth plan.

David and the team are kind of rolling that forward over a 12- and 18-month period.

But we will always be opportunistic, and if needs be and some opportunities arise, we'll flip aircraft around, and we'll move them around and that continues to be the case.

Our next question comes from the line of Anand Date from Deutsche Bank.

I've just got a couple of questions, please.

Could you walk through the reasoning behind pushing back, I think it's a EUR 6 second bag fee.

I guess, this just -- now is not a great time to put that in.

Just wanted to check if there is anything else.

Secondly, can you update on Internet onboard?

A lot of your competitors are planning to do it.

Given the ancillary ambitions are unchanged, is there a risk you're left behind if you don't start to move on that?

And then very lastly, some other airlines in Europe are talking about sharing revenues with airports.

I would have thought, actually, that's very applicable for you given the rate you can offer.

Are these in any of your discussions at all?

Okay.

We pushed price introduction of the second bag -- or the second bag being put in the hold for the nonpriority passengers to the middle of January.

We just felt from a kind of a PR and from a customer point of view the 1st of November was the wrong time to launch this, given the issues we're dealing with here.

I think it's important, after the rostering failure in September that we demonstrate through October and November that, that has been fixed.

There is still a worry or maybe a concern of it that there will more cancellations.

There won't be.

Internet onboard.

I'm not a great fan.

We are very happy with our Wi-Fi on board whenever we can put it onboard without a large fuel penalty.

But I don't see much demand for people to pay for Wi-Fi on board short-haul flights.

If you can provide them Wi-Fi free of charge, they will be happy to take it.

But until the technology to provide it them free of charge, I don't see it on Ryanair.

And are we looking to share revenue with airports?

I think we've been doing that for about 25 years sharing revenue with airports.

We think it is something that will continue, particularly with the Ryanair mobile app.

I think it's an opportunity we have of encouraging more of our customers to engage with the airport retail, where we get some kind of a fee or some kind of a share of commission back.

But we're at the foothills of those kind of developments at the moment.

I wouldn't be putting it into any model for the next 12 or 18 months.

Can I just ask, on the Internet stuff, more in terms of, say, My Ryanair for the -- you have more members than anyone else I would have thought in Europe.

But presumably, the data is still reasonably light.

You gotten this (inaudible)

I think it's very impressive.

But we haven't -- we're not monetizing it yet.

I think we've been focused more on continuing to build membership and continuing to deliver value to customers who are using My Ryanair.

It has certainly played a key role, though, in our ability particularly to convert people to mobile and to get them to take up things like airport parking, reserved seating, maybe even a priority boarding can now be bought 40 minutes prior to scheduled departure.

If you want to bring your second bag onboard from January onwards and you haven't bought priority boarding, you can do it on the mobile now at just 40 minutes.

So I think we wanted to kind of monetize our own services first.

But the data we have and are able to capture is pretty impressive.

Our next question comes from the line of James Hollins from Exane BNP Paribas.

One on cost and one on pilots.

Just on first one, unless my math has gone a bit awry, we're looking at H2 guidance on ex-fuel per unit cost up 7%.

I think that means incremental year-on-year growth of over EUR 100 million.

Now clearly EUR 45 million is given on the pilots.

I was just wondering else there was to watch at all -- or was it just ForEx given the weaker euro against dollar and sterling?

And so to linked to that, is that EUR 45 million, does that assume all payout, pay deals are accepted pretty much as of now?

And if they're accepted later, are they going to be backdated?

And then just checking a point of clarification, as far as I'm aware, Monarch and Alitalia don't really fly 737s.

I was wondering how that's helping your recruitment?

Okay.

I'll deal with the second one first and ask Neil to touch on the H2 fuel guidance.

First, yes.

The EUR 45 million assumes that all of the pilot pay deals are agreed from the 1st of November.

There is over 15 bases have now agreed those.

I think to the extent that those deals are put in place, we're still in negotiation in number of bases.

Those base that come over the line before we run, say for example, I might have did November payroll, which should be around toward the 3rd week of November, would probably be run from the 1st of November.

Those that don't won't be backdated.

They will run if they're agreed in December, they will run in December.

If they are agreed later on, they will run later on.

So the EUR 45 million might actually be reduced between now and the end of the year by some or other of those bases who don't yet agree or aren't willing to agree to those pay deals.

And it's important -- there has been quite a sea change in Stansted, for example, who this time last week were all full of fire and under or over -- mainly because they were misadvised by the unions that if you reject this 22% pay increase and Ryanair come back with more.

That's not the case.

You reject this pay increase, then you're not getting -- there won't be more.

You simply stay on the deal you're on.

And that's helpful.

I think one of the dynamics in Stansted is they are beginning to understand actually there isn't more money coming.

The only thing that is coming with 50 new pilots who are joining in Stansted in November who are on the higher pay.

Because the people who join us now, new joiners, new promoters, and base transfers are all getting the higher pay rates.

And I think that way be -- one of the issues that's facing pilots in Dublin, pilots in Stansted and some of the other base who have turned down the deal is new people are joining at your base on the higher pay.

But why don't you go back to BALPA and see what suggestion they have for remedying that?

I mean it's extraordinary the amount, the extent to which organizations like BALPA, which have recently presided over 500 -- 400 job losses in Monarch are now suggesting to our pilots that they -- who are already well-paid, they should turn down a EUR 22,000 pay deal.

There was a -- what was the other element about the pilots?

(inaudible)

Yes, Monarch has about 50 737 pilots.

Monarch were due to take 737 800s from Boeing in spring of '18.

They had contracted about 50 pilots to Norwegian and -- who were flying on Norwegian 737s to build up kind of a -- they had a core of 737 confidence.

Those guys have all -- guys and girls have applied directly to us.

I think that they, as of last weekend, we had already hired about 20 of them.

And I think there are job offers out to about another 20, and be -- but attraction, what we offer those people is that we have bases largely those UKP airports and we would be adding capacity at some of those UKP airports.

So they can simply walk across the road onto a Ryanair job as it now pays 20 grand-a-year more than Monarch were paying or that Jet2 or Norwegian are paying.

So there are -- Alitalia, yes.

Alitalia, those are flight 737s, and they are flights that mix and match you, but their clear concern down there as there is in Air Berlin, who are generally an Airbus operator.

People see their jobs disappearing.

I mean, remember in Air Berlin, Lufthansa is not just taking out Air Berlin, but it's imposing very stringent pay cuts on the Air Berlin pilot who want a transfer, who will be given a choice of transferring into Eurowings.

Eurowings now pays less than Ryanair does in the German market.

So we are seeing a significant uptick in applications from Air Berlin pilots, Monarch pilots, Alitalia pilots.

And again, it allays this nonsense that we have to keep hearing and particularly, in some of the more idiot sections of the media that there's a shortage of pilots.

I keep going back to the point.

We have 2,500 qualified pilots on a waiting list.

We're hiring about 40 a week at the moment.

And this year to date we have hired over 900 pilots.

There's another 2,500 waiting in the wings who want to join.

But every year, I think I've been in this business, some of the unions somewhere is produced a study that says there's a worldwide shortage of pilot.

If there is, it might affect maybe some regional or turboprop operators.

It's never going to affect a jet operator like Ryanair that pays captains EUR 150,000 a year and promotes people from joining -- 2 captains, say, typically within a 3- to 4-year period.

Neil, do you want to touch on the H2 fuel unit cost?

Yes, on the fuel guidance, James.

We think fuel will be down on a full year basis, maybe between EUR 70 million and EUR 80 million.

This depends on where a spot goes over the next few months.

But it also depends very much on the where our de-ice comes in over the winter months.

And just saying, I notice that some of the analysts seem to be a little bit light in their numbers in relation to de-icing and [inter] planes.

But that may be where you're having a bit of a difference, but we're very clear.

EUR 70 million savings on a good day.

And sorry, I was just kind of -- I was talking about the ex-fuel unit cost, to which I think we can -- looking at plus 7% in H2.

Now clearly, you've got the EUR 45 million pilot costs.

So just wondering, apart from Forex, what might mean it's up with over 7% year-on-year in H2?

Yes, Forex won't be a major impact as far as we expect sterling to be broadly flat on a year-on-year basis in there.

So we got the EUR 70 million coming through with a broadly shorter -- slightly shorter sector lengths than we had in first half the year, as we've taken some of the shorter domestic flights out, which has had an impact there.

We also have seen EU261 ran slightly ahead of expectations in first half the year.

But otherwise, we're continuing on as we had said.

We had originally guided that costs will be down about 1% on a full year basis.

The flip is mainly just the EUR 70 million, kind of, as I said, the slightly long -- shorter sector lengths.

Our next question comes from the line of Mark Simpson from Goodbody.

Just a couple questions.

So I just want to take up that last question up, actually, because I'm not sure you fully answered it.

You strip out the pilot costs, assume all EUR 45 million incurred in the second half, strip that out, there's still a 5% unit cost inflation ex-fuel.

And actually if we take your guidance line-by-line and plug that in, it looks like you have about EUR 50 million short of your full year profit guidance.

So I think that ex-fuel issue is -- just needs some further clarification because it doesn't quite sort of stack up at the moment.

But the other thing, just on ancillary, we obviously saw a significant improvement in the Q2.

I know you're guiding for plus 1% for the full year, but that suggests flat second half.

I'm just wondering if you can, having highlighted the fact of the advance seat on the -- the seat booking, why should that fall away in the second half?

Is there a third one?

I'm sorry.

I heard you had 3 questions.

Well, the third question is, I suppose, is just also checking the guidance of commentary.

You said EU261 cost you EUR 25 million in the first half.

I mean, if you strip that out to ex -- your cost base on a kind of clean base would have been down 1.2%.

You highlighted it was down 2%.

Just wondering if there's anything is in that over and above the EUR 25 million EU261 cost?

Okay.

I'll do the ancillaries.

We think ancillaries will be a little bit less buoyant in the second half of the year.

The befalling two of the -- the postponing the new introduction of the baggage into January will mean slightly less priority boarding income over the next 2 or 3 months.

Now I think on balance, it's more likely there -- we might do a little bit better than that.

But I think this is the time for cautious guidance.

We're generally guiding cautiously for the remainder of the year on ancillaries.

And the ex-fuel unit cost, do you want address it here or do you want to get Shane to get back to you on it?

We can get back to him on it, but again, I am happy to say, Mark, that the guidance where we effectively grow our ex-fuel costs where there was a drop of 3% on a full year basis is driven by sector lengths.

We had already indicated that cost will increase in the second half of the year, having had the same since Q1 and Q2 ex the 25 million.

And so there's nothing different or strange in these numbers other than what we had guide us previously with Q1 and the full year number.

Sterling, as I said, won't have an adverse impact on us until the winter.

And given that we had about 91 on the sterling over last year.

So there is nothing strange or different in these numbers other than we have the EUR 70 million in there (inaudible) in EU261 (inaudible)

(inaudible)

(inaudible) You're already getting the ex-fuel unit costs on the second half H2.

So 6% is what we're guiding.

Okay.

So it's kind of implied, as James said, it implies 7% on the guidance you gave us, but you're saying 6%.

Yes.

Which gets us to the 3%, which we have quoted in the guidance.

Yes, that's the number.

Okay.

And then I'd say, just in the EU261, EUR 25 million, but you're minus 2 on a clean like-to-like base which would suggest there's actually additional costs?

Just wondering if you can sort of close that gap.

No.

But with a EUR 25 million is the exception.

There are other EU261 costs, one cost in the first half the year as well.

Yes, which we're running up in last year, Mark.

Okay.

So that's over and above.

All right, Sorry, a final question.

Vouchers.

Are they being accounted for as a decline in yield?

Or will they be treated as a cost in the second half?

No.

Declining yield.

(Operator Instructions) Now next question comes from the line of Rishika Savjani from Barclays.

I just wanted to ask about the slowdown in the rate of capacity growth for summer next year.

Just asking if that decision was being a primarily driven to build a bit more slack into the business, but I wondered with the labor cost pressures that you talked about and the fuel headwinds, is any part of your decision designed to protect yields?

And then maybe secondly, just on the shareholder return policy and buybacks.

Can we assume from next financial year that your ordinary policy of being in positive free cash flow will likely mean a resumption in previous history around share buybacks?

Yes, I think on the share buybacks, we'll continue to keep it under review.

Policy will be to continue to spin back surplus cash to shareholders probably through a mix of buybacks and dividends.

It is unusual for us to be in a net debt situation of EUR 600 million, but at the half year it may be because of the CapEx and the accelerated share buyback in the first half of the year.

We want to make sure we're back at 0 net debt at the end of the year.

On Summer '18 capacity.

We've had a bad experience this summer, particularly with air traffic control delays.

I mean, enormous staffing problems within Germany.

UK ATC was better than it was in summer of '17, but still -- or in summer of '16 but still quite a significant amount of problems.

I mean our punctuality this year in the peak summer months was 2 or 3 percentage points below where it was this time last year.

We ran the fleet of 400 aircraft with essentially 7 backup aircraft in the middle of the week, but only about 3 backup aircraft at weekends.

I think we fear for next summer.

We want to see what the resilience of air traffic control staffing.

We'll be putting a lot of pressure on the Germans in particular, who have mismanaged their ATC capacity all summer long.

I suspect if the -- there is a better degree of resilience in next summer, we will fly some of those aircraft.

But we're definitely going to operate next summer with some more spare aircraft back up than we did in the last couple of years.

And so it's not for yield management purposes; it is for punctuality and reliability purpose that we're keeping an extra 10 aircraft spare at this point in time for summer '18.

The next question comes from the line of Alex Patterson from Investec.

I think you said that pilots who accepted pay increases at 15 bases, Stansted so far declined.

Could you just say if any other bases have declined?

And secondly, looking ahead to next financial year, it seems that for reasons of these bankruptcies, also higher fuel, it may be a more positive yield environment.

Could you say if you think whether yields will be up in '19 relative to '18, please?

Okay.

Firstly, I mean, we're not get into a which bases have accepted, which base have rejected, because that kind of lends itself to the union agenda.

There's over 15 bases have now accepted the pay increases.

Stansted has rejected.

There's a number of other bases that have also turned down the pay increase.

I think they have been surprised by the extent to which -- or certainly surprised by -- they are certainly disappointed that what they were promised by their local -- by the pilot unions that, that Ryanair will be back with an improved offer hasn't materialized.

And therefore they have to find a way of returning to the table by via their ERC to discuss the pay.

Now we continue to engage with Stansted pilots and their ERC.

The door remains open to them and to a number of the others.

But will there be some third party?

Are we going to sit down with some pilot unions or competitor pilot unions or this EERC, which is the latest construct of these competitor pilot unions?

No, we won't.

There won't be any discussions with them now or at any time in the future.

We have a -- what is it, an exhaustive collective bargaining process.

I think it's important to understand, the pilots have participated in this process, this bargaining process for over 30 years.

It's no secret that the pilots at Stansted are on a 5-year pay deal that runs to 2020, that they voted on a secret ballot and approved by an overwhelming majority.

Now we're offering to improve those pay terms again.

They are perfectly free using the ERC to reject that offer.

But that doesn't mean there will be an alternative offer.

But we will continue to engage with them.

And with any other bases that have turned down the deal and want to discuss it further.

But there won't be any more money on the table.

I think what they are misunderstanding, and certainly what some of the media have misunderstood, is we're now offering pay terms that are EUR 20,000 to EUR 25,000 more than any other -- the other 737 low-cost carriers.

We have a flood of people who want to join us, from bankrupt companies and from those other inferior pay airlines.

We're hiring 40 new pilots a week.

And we're adding those pilots at those bases in Stansted and at other bases who have turned down the deal at the higher pay rates.

So that is we it will lie.

We have seen all of the speculation about industrial action that -- none of it which is backed up any facts whatsoever.

But if they wish to take industrial action, they are free to take industrial action.

But the last people to take industrial action were the SAS unions in Copenhagen, to which we responded by closing the base in Copenhagen and moving the aircraft out of there.

While still growing over a 80-month period to become the third-largest airline in Copenhagen.

Now I hasten that, if there is industrial action, we will not close bases.

That will be too easy because that's what the competitor airline unions would want us to do.

But we will move some aircraft out of certain bases if there was industrial action, that there will be consequences.

And those consequences will not be to the advantage of those pilots.

But we're not at that stage.

The relationship with the pilots is very good, despite what you might read in the papers.

And it will continue to be good because we are paying them extraordinarily well.

We're providing excellent job security.

We're providing them with a roster that gives them a double bank holiday weekend at the end of every week of flying.

And we continue to welcome literally hundreds of pilots to Ryanair on an annualized basis.

We're flying brand new aircraft and building up their hours and getting rapid promotion to captaincy.

So I think the underlying, when you get -- cut through the fog and the noise of the PR -- and look.

There would be another 6 months of negative PR generated by pilot unions in whatever country it happens to be, and their friends in the local media, who generally tend to be somewhat left-wing and pro-union, that's just where we are.

But nobody buys those newspapers anymore anyway.

So frankly -- and our customers don't pay any attention to them.

Next year, it's too early to say.

Look, I mean if oil continues to trend upward towards $60 a barrel or higher, then I think there is likely to be upward pressure on fares and yields next year.

If other airlines go bankrupt, as I think whenever it will happen, it will happen sooner rather than later if oil remains up at $50 a barrel.

Remember, some of these airlines haven't been able to make money when oil was at $40 a barrel.

I continue to be generally bearish on pricing and yields.

Our business is set up so that we're continuing to add new, lower cost aircraft.

From April of 2018 onwards, we have the MAX 200, but you can remember you get 4% more seats but 16% lower fuel consumption per seat than our existing fleet.

Our operating costs will continue to be flat or fall slightly, although we're now going to add some EUR 100 million a year in terms of additional pay for our people.

And by the way, the best way of guaranteeing that there won't be industrial action is to pay your people more than the competition.

I would be surprised if we were to see industrial action from people who are on a EUR 150,000 -- paid EUR 150,000 a year and who have been offered a EUR 22,000 pay increase.

It would be a particularly difficult challenge for their unions to demonstrate why these people are disrupting thousands of members of the traveling public when they are clearly well paid and have a very attractive pay increase on the table at the moment.

Our next question comes from the line of Jarrod Castle from UBS.

Three as well, please.

Obviously, the fuel cost going up in 2019, you kind of alluded to kind of some of the building blocks in terms of yield versus ex-fuel unit cost.

But how would you look to offset those in 2019?

Secondly, just in terms of Catalonia, if you could kind of just give a bit of color in terms of what you're seeing there in terms of demand?

And then also, lastly, I mean, you kind of put all these slides saying, look, we're paying 20% more than in some certain competitor airlines.

I mean, one, why do you think it's necessary to be so competitive, Michael?

And two, I mean, do you think you're going to shortly see kind of competitors facing quite a big upward pressure in pilot cost?

Thanks, Jarrod.

Okay, fuel costs, we don't know where they get offset in 2019.

We are not sure whether oil will stay at $60 a barrel.

We're not in the forecasting business or predicting the future business.

We deal with the reality at the moment.

We were hoping as we came out of hurricane season that oil prices would trend back down.

Supply remains strong.

Stocks are at record highs.

But if oil prices rise into 2019, I think it's inevitable that the flags in Europe will put on more -- well, you will see the return to fuel surcharges, then there will be a more benign yield environment than there is currently.

And the troubles in Catalonia have undoubtedly affected yields.

We are having to price discount a little bit more than we would normally on our operations to and from Catalonia.

We operate 3 airports there: Barcelona, Girona and Reus.

But there is a political situation there.

I don't think ultimately it effects people flying there, as long as it doesn't break or spillover into safety concerns.

But it is undoubtedly a little bit weaker.

Our pricing there is weaker.

Load factors remain strong.

Why is it necessary to pay our pilots 20% more?

I think it's always been part of the Ryanair mission that we will pay our people more than the competition.

And we expect them to deliver us more productivity.

I think we have allowed the gap, or we have allowed the likes of Norwegian and Jet2 in the last 12 or 18 months that we don't see as serious long-term competitors anyway.

But nevertheless, they are paying up to where we are or close to where we are in terms of pilots' pay and remuneration.

And I think it's important to us, as we're going -- and we're going to grow from 400 to 600 aircraft in the next 8 years.

It is important that we reestablish that clear blue water between Ryanair pay and competitor alternatives.

Because we expect our guys and girls to deliver us more productivity.

I think it's also, though, there is niche symmetry between -- we're ensuring that we restore a significant pay premium to Ryanair pilots over our competitors.

It also makes it much more difficult for the unions of competitor airlines to whisper in our pilots' ears, "Don't accept this big pay increase because we will do something.

We'll get you, I don't know, redundancies like we got in Monarch or in Air Berlin." And we are determined, as has always been, we have been nonunion company for 30 years.

We will remain a nonunion company by paying our people more and by fixing the broken elements of communication with pilots that undoubtedly broke this summer.

Where we (expletive)ed up their rosters, we messed up their days off.

We didn't handle and we haven't handled well very reasonable requests for them for days off or leave or whatever it was.

That should be basic tenets in the operation of any company.

It has always been within Ryanair.

You may not like the answer we give you to a request, but at least you get the answer pretty quickly.

And even that fell down this summer.

And I think that is a management failure.

We have recognized there was a management failure.

And we are investing very heavily, not just in pay, we're not -- this thing is not going to be addressed by just paying them more.

Although certainly, paying them more is a good way to start off addressing it.

But paying them more and fixing the rosters, which has now being done and improving the way we communicate directly with pilots.

I mean to such an extent that in all this, a pilot could send in a request to us in rostering and wouldn't get an answer at all.

By the time we get to the end of November, they will sent in -- there will have -- there'll be an individual each pilot can communicate with and their requests will guaranteeing that all those and the request will be answered within 48 hours.

So we need to get lot more professional and better at the way we service our pilots and our cabin crew, and fix the very silly and unnecessary grief we have caused them, certainly over the last 6 months.

And why is it necessary to pay them 20% more?

It isn't.

But we want to pay our pilots more.

We think they do a great job in Ryanair.

I love Ryanair's pilots.

I despise competitor airline new pilot unions, but I love our pilots and I've long done so.

I have long since done so.

And our last question comes from the line of Savi Syth from Raymond James.

Two quick follow ups.

And the first is on the debt repayment, I was just wondering what you're expecting for fiscal '18 and maybe over the next couple of years?

And then the last question is on the contractor model.

And historically, I see that's been a benefit because of the seasonality in the model.

Is your kind of willingness to have more -- got a higher mix of employees a result of maybe flying out of more primary airports and less seasonality?

Just on the debts, we're really paying down about 450 on debt per annum, because we will be debt-free by the time we get to airport 24 at that point in time.

And there is a misunderstanding, again, by payments largely by competitor pilot unions about our contractor model.

I'll say in 2017, a majority of Ryanair pilots will be direct employees.

There is a minority of the captains who are contractors because they wish to be contractors.

They earn more money.

The contractors are paid more than the directly employed pilots.

There is a majority of the first officers are contractors, and that is a convenience because, as they move around and for the second officers, the first officers move around more as promotional opportunities arise.

It is easier to have them on contract so they are more mobile.

As they -- and it always been our policy; as they are promoted to captain and return to the base where ultimately they want to live or lay down roots, or as the Italians, say, finishing up in Italian bases.

We're very happy to have them permanently employed on Ryanair contract.

But this notion -- and two other things can I nail?

We do not have 0 hour contracts.

Our contract is a guarantee, the minimum number of flight hours.

There are no 0 hour contracts in Ryanair.

And secondly, we don't alter -- there's this notion out that somehow we're running some tax scam in Ireland by having people on Irish contract.

We're doing an Irish contract because we're required under Irish law, if you're flying an Irish aircraft managed in the state of Ireland, you have to pay your taxes in Ireland.

It's an Irish fiscal requirement.

We'd be very happy to move us to a local taxation around Europe because personal taxes in Ireland are very high and they tend to be lower elsewhere in Europe.

Ireland does have a bit of reputation of being a sort of tax haven from a corporate point of view.

But from a personal point of view, it's a penal tax environment.

And we would be very happy if that was moved -- paid -- people who are employed are paid in the country in which they live.

But there are mobile transport worker provisions in Europe that need to be addressed and resolved.

And we comply with European law.

We comply with the Irish law.

There won't be any changes to those Irish contracts arising out of the Mons court case or anything else.

So the contracting model doesn't provide us with any seasonality.

It doesn't provide us with anything other than we have some pilots who prefer to be contractors.

It is more tax efficient for them to be contractors.

It makes no difference for us, to Ryanair.

And we have first officers where -- who are moving around and need more flexibility.

Okay.

Thank you.

Ladies and gentlemen, thank you very much for participating in the call.

We have an extensive roadshow.

I think we have something like 12 teams on the road for the remainder of this week covering Ireland, the U.K., Europe and the U.S. for the East, Midwest and West Coast.

I hope if anybody who wants a meeting, we'll be very happy to facilitate it.

Just -- you can arrange it through Davies or Citi.

And again, apologies from me and the management team for the rostering (expletive) up in September.

We have fixed that screw up.

It won't happen again.

We will try to learn from this experience, and ensure going forward that we continue to execute in a way that you would expect us to execute while we grow the underlying business, grow the profitability and grow the shareholder returns.

Thank you very much, everybody.

Bye-bye.

Thank you.

This now concludes our conference call.

Thank you all for attending.

You may now disconnect your lines.