Ryanair Holdings PLC (RYAAY) 2019 Q2 法說會逐字稿

Hello, and welcome to the Ryanair H1 FY '19 Results Call.

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

Today, I'm pleased to present Michael O'Leary.

Please go ahead with your meeting.

Okay, thank you.

Good morning, ladies and gentlemen, you're very welcome to the Ryanair H1 Conference Call.

And as usual at these things, we've done a pre-record, which is available to you on the investor page of the ryanair.com website, setting out the H1 press release, the detailed MD&A, the shareholder slide presentation and also, there's a Q&A session with myself and Neil Sorahan.

So I would direct you all to the investor page of the ryanair.com website.

While you're there, please take -- feel free to book one of our 1 million seats at EUR 9.99 for travel in November, December, January and February.

One of the good news of having lower fares is that we can sell more and more cheap fares than anybody else and put further pressure on the competition over the coming months.

So this morning, we reported H1 profits down 7% to EUR 1.2 billion.

It's really a function of lower fares, higher oil and higher EU261 costs in the first half of the year, but we've left our full year guidance unchanged from the last changes we made on the 1st of October.

The full year range remains in a range of between EUR 1.1 billion and EUR 1.2 billion.

H1 highlights include traffic growth of 6% to 77 million passengers.

The load factor was unchanged at 96%.

Average fares are down 3%.

Ancillary revenues continue to grow strongly, up 27%, with 6% traffic growth.

Laudamotion investment increased to 75%.

And we have made very significant progress by signing up union agreements with our Irish pilots and cabin crew, U.K. pilots and cabin crew, the Italian pilots and cabin crew.

And last week, we've signed up the Portuguese pilots as well as the German cabin crew.

And I think there's been far too much noise in the background about unions and labor issues.

We've had 8 days of strikes this year, but really, they've been reasonably small.

We had 5 days of strikes by 25% of our Irish pilots, we canceled less than 20 flights out of 300 flights to and from Ireland; and 3 days of strikes by cabin crew across 5 countries in which we completed more than 90% of the scheduled flights in all of those cases.

That hasn't, however, and shouldn't take away from the fundamental strength of the continuing delivery of the Ryanair model.

We're still growing strongly.

This winter, we've cut or trimmed capacity by 1% with closures of the bases in Eindhoven and Bremen on the 5th of November next.

We've cut some flights from Niederrhein.

But already for summer 2019, we expect we will grow traffic.

We've announced 2 new bases in France in Bordeaux and Marseille, a new base in -- at London Southend and increased capacity in Luton.

That takes place against a backdrop with oil rising -- spot oil rising to $85 per barrel.

And already, we've seen the first wave of casualties across Europe.

Skyworks in Switzerland, VLM in Belgium, Small Planet and Azur Air in Germany, Cobalt in Greece last week and Primera Air in Scandinavia and in Stansted have all collapsed in the last 3 or 4 weeks.

We expect more failures this winter.

Mostly, we think 1 of the 2 Scandinavian airlines is likely to fail over the coming months, largely because they are unhedged on oil or essentially unhedged on oil.

And they couldn't make money when oil was at $40 a barrel.

They're certainly not going to make any money when oil is at $85 a barrel.

In our case, we've increased our investment in Laudamotion to 75% in the end of July.

We think that's going to be a very, over the medium term, a very successful investment.

In the first year, though, it would suffer exceptional losses of EUR 150 million, mainly because the aircraft it had -- expects to receive from Lufthansa arrived late.

They were late to put that fleet on sale this summer and, therefore, the yield suffered.

Already, we've restructured a lot of that business.

The Airbus fleet will grow from 9 to 18 aircraft for summer 2019.

And those seats already on sale, focusing on 3 big bases in Vienna, Stuttgart and Düsseldorf.

And we believe Laudamotion will come close to breakeven in its second year of operation, which would be our FY March 2020.

Ancillaries continue to grow strongly.

And the underlying message I want to impart today is our cost leadership continues.

In fact, if anything, our cost advantage over our competitor is getting wider.

As they add more expensive aircraft, they continue to grow at airports where they are unable to manage either the airport costs or the handling costs.

We have had some inflation in our pay, but so have they.

There's been a shortage of pilots in the last 12 months.

I think that shortage is ironing itself out, particularly as more and more airlines suffer casualties this winter.

And then we are about to enter into a period of new aircraft deliveries.

We take the first flight of the MAX 200 aircraft, the game-changers in March and April of next year.

And remember, these have 4% more seats, but 16% lower fuel consumption per seat, and these will drive very significant unit cost gains for us over the next 5 or 6 years.

Punctuality this summer has suffered meaningfully at the hands of European Air Traffic Control.

We're on target for the worst-ever year of air traffic control strikes and disruptions.

All airlines have suffered a very significant impact to their punctuality.

And in particular, we've suffered an impact to the increase in EU261 costs.

Because while we may not be responsible for ATC strikes or disruptions, EU261 obliged the airlines to pick up the right to care costs, reaccommodation and right to care.

And we are, by law, prohibited from recovering those costs from the ATC providers.

It has become a shamble.

Our punctuality in the half year has declined 11 percentage points from 86% to 75%.

We're still the most on-time airline in Europe, but 13 points of that 11 points is accounted for directly by air traffic control itself.

We have made very good progress in our union discussions.

We've now signed agreements in most of our bigger European markets.

I think what's been interesting about most of those issues, particularly the noise in the background, is that it's not about pay.

I think our people and the unions would accept that, in many cases, we pay better than the competition.

We're certainly the best-paid 737 low-cost pilots.

We pay better than Norwegian, Jet2.

And in the German market in particular, we pay significantly more than the union agreements with Eurowings, the German subsidiary.

Brexit remains.

We have more to do, but we would expect and hope that we will conclude agreements with most of our pilot and cabin crew unions over this winter period.

And I think the failures of a number of airlines in recent weeks has provided or certainly provided a stimulus to those negotiations and made both the unions and our people much more conscious of the fact that they enjoy excellent job security.

They don't want to threaten that.

Brexit remains a big challenge for us.

It hangs over us in April of next year.

The risks of a no deal or hard Brexit have risen materially.

Although on balance, we still expect that the U.K. will stumble into transition at the end of March.

That transition period will last at least 21 months out to December 2020 and probably be extended thereafter.

But the real challenge and the concern for us is that the U.K. government may fall.

You might stumble into a general election year, and there will be a degree of political uncertainty.

What is clear is that there is a hard Brexit in March of 2019 that will be or may be a disruption to flights.

We suspect that disruption will be for a very limited period of time because I think it's politically unacceptable to the U.K. population that they would not be able to access flights to holiday destinations in Spain, Portugal and Italy next year.

But it does, I think, expose a lot of the mythmaking undertaken by the Brexiteers is that either the German car manufacturers or the Spanish hoteliers would persuade Europe to give Britain a good deal.

It hasn't happened.

The talks have proceeded very much along the lines that we predicted at the time.

But we would hope to see a resolution and a resolution that allows for a very long transition period, which would not cause any disruption to flights or to our share of ownership based thereafter.

In terms of guidance, therefore, I think we're entering into what I described this morning as a grim winter.

It's characterized by declining airfares, which we thought on the 1st of October was a kind of a Ryanair phenomenon.

It was the lack of customer confidence because of a perceived threat to our reliability or union disruption.

In actual fact, I think we now believe it's a much wider industry phenomenon.

Short-haul capacity in Europe is up around 8% this winter.

Airfares across the piece seem to be our falling.

It's not related to Ryanair or unions.

It's related to excess capacity and certainly our willingness to continue to lower airfares into this winter.

If there's going to be a fare war, we want to lead it and win it.

And as a result of that, we have reduced our guidance as we did on the 1st of October.

We've taken it down slightly to a range of EUR 1.1 billion to EUR 1.2 billion.

We have a 3% reduction in average fares in the first half of the year.

We expect that will fall -- fares to fall by about 2% in the second half of the year.

We -- that is contingent upon there being no further adverse movements in oil.

We are now hedged out to -- 90% hedged out to September 2019 at about $68 a barrel, but we're unhedged for about 10% of our oil requirements.

That is a much stronger position than most of our competitor airlines.

For example, Norwegian is 85% unhedged for the next 12 months, and Wizz is about 60% unhedged.

And I, therefore, much prefer our hedging position to theirs given where oil is at the moment and where it's likely to go to.

We have not ruled out, and I think we should make it clear to investors, we have not ruled out that there may be further base closures or capacity reductions this winter if oil moves materially higher than $85 per barrel or if air fares fall further than the 2% we are guiding at the moment.

But there is -- we cannot rule out there might be some upside as well.

And if there was further failures or competitor failures this winter, then the winter trading might be positively impacted.

But on balance, we remain comfortable with the new guidance of EUR 1.1 billion to EUR 1.2 billion.

The fuel bill will be significantly higher.

Ancillary sales will be significantly higher.

But the guidance is driven by -- and the expectation in air fares will fall by 2% and that oil -- or unhedged oil won't rise more than $85 per barrel.

Our guidance for the full year of EUR 1.1 billion to EUR 1.2 billion excludes Laudamotion's results, and we expect it to lose approximately EUR 150 million in the first -- out to March of 2019.

As I said, in the second year, I expect it to go close to breakeven, a small loss or close to breakeven, but it's fundamentally dependent on how fares will operate during the summer of 2019.

Laudamotion already has its inventory on sale for summer '19, and forward bookings are strong and have material -- and have noticeably higher fares than they obtained in the summer of 2018.

With that, I think we'll just go straight now to Q&A.

Neil, is there anything that you would add?

I think we take the MD&A as written.

Any kind of points or themes you'd like to raise?

I think it's well covered, Michael, in the pre-record, as you mentioned, as well as the key thing is that while we're in a little bit of pain this year, on the cost front, we're in pretty good shape as we look forward with the MAXs coming in next year.

Equally, as you said, I'd highlight that fuel hedging, 90% hedged for the next 12 months at well below current spot prices.

And total revenue performed well with the help of ancillaries, although we did take the pain on the cost front from fuel, staff and EU261 this year.

But other than that, no, nothing else to add, Michael.

Okay.

So let's -- we'll open it up now for Q&A.

We're going to limit everybody to 2 questions, please.

I don't want 3- and 4-part questions, and we'll shoot through it as fast as we can.

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

If you could talk a little bit about how you see Ryanair's role in consolidation going forward.

And you mentioned on the webcast that the new org structure sort of helps you with consolidation.

Can you expand on that concept generally?

Yes.

I mean, I don't expect us to be a player in consolidation this winter.

If you take it, our expectation that Norwegian will probably go bust this winter.

IAG and Lufthansa have been kind of rumored or have admitted that they are -- have expressed some interest in Norwegian.

I can't imagine why they'd be interested in something that loses that much money, but that's a matter for them.

We don't expect to be or play a role in that consolidation process.

We have moved towards -- or are moving towards a group structure where we would have 3 main -- or at least 3 airlines or AOCs within the group or 4. We have Ryanair itself; Ryanair DAC, which currently has a fleet of about 440 aircraft; Laudamotion, which next year will have a fleet of 20 aircraft; and Ryanair Sun, which next year will have a fleet of about 20 aircraft.

And we would expect over the next number of years that much of our growth will take place through either the Ryanair Sun vehicle in Poland and/or Laudamotion in Austria and in Germany and -- because I think that's a more sensible way for us to grow is to have multiple AOCs, a number of different brands within the business.

But as for being a player, I mean, I think our contribution to consolidation this winter is we would expect to speed up the consolidation process by being very aggressive on pricing, driving down airfares in markets where, in particular, our competitors are not able to compete with us on price and are essentially unhedged on oil.

Fair enough, Michael.

And then just for my follow-up.

Given the outlook for fares and higher fuel, how do you think about the buyback going forward?

I think we've committed to continuing our buybacks, but I think it's appropriate.

We've just finished the EUR 750 million buyback, Duane.

I think it's appropriate given how close we are to Brexit, we should wait and get some certainty at the outcome next March.

As I said, I think it's likely that the U.K. will stumble into transition.

And therefore, the can will get kicked down the road for at least another 21 months.

Once we have some degree of certainty on that, I think we would then begin to probably look at another buyback in the spring of next year that would run through the summer.

The reason I'd be a little bit cautious is just on the -- in the off chance that there is a no-deal Brexit, we will be -- I mean, we've already agreed measures with the EU Commission, which is we would -- for a period of time, I suspect 6, 12 months, we would disenfranchise all non-EU shareholders from voting, and we would put restrictions on all non-EU shareholders, or at least the non-ADR, non-EU shareholders, that they could only dispose of their shares to EU citizens, residents, which would in very large -- or very quickly bring us -- if you trade the EU share, the U.K. shareholders as non-EUs, we'll probably move on the -- in a hard Brexit to 54% or 55% non-EU shareholding.

By restricting their voting rights and by requiring them only to sell to EU shareholders, we would write that from 54%, 55% back down to 49%, I think, in a number of months or pretty quickly.

The commission is happy that those are the appropriate steps for us to take to protect our EU ownership and control.

And once we have got it back down to 49%, we would then reallow the non-Europeans to vote, and we would remove the kind of share ownership restrictions once we've protected the EU licenses.

So I think we would, certainly for the 6-month period, not do more share buybacks until we have some more certainty on Brexit, and a share buyback might be one of the ways we respond to a no-deal or hard Brexit.

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

Firstly, 2 new French bases, I just want to get a bit more color if we could see more and also just about Scandinavia base opportunity.

And then just secondly, just on ex-fuel unit cost performance, obviously, quite a challenging year this year.

But thinking a little bit ahead to the next financial year, should we start to expect kind of a more normal kind of ex-fuel unit cost performance from Ryanair, i.e., flat to maybe even negative again?

Thanks, Jarrod.

Yes, I mean, we have a lot of opportunities in France and in Scandinavia.

David may give you some flavor.

We had very serious offers on the table.

I think about 7 offers from French mainly regional airports.

We have no particular desire to have a base in Paris.

But most of the other French -- large French regional airports, we selected Marseille and Bordeaux.

We certainly have good deals on the table for another 3 or 4. And I think Eddie Wilson, the Chief People Officer, is already in dialogue with the French pilots and the cabin crew unions.

So we can take it -- as we open those bases, we'll do so in compliance with the French labor law.

Scandinavia is also interesting.

I would be reluctant at the moment to do anything in Norway or in Sweden where they are adding travel taxes, but Copenhagen is certainly an airport where we've grown very strongly in recent years.

I think we're the #3 or #2.

-- I think we're the #3 airline in Copenhagen.

And we are -- we do have a plan to grow there pretty rapidly if anything untoward were to happen to either SAS or Norwegian.

But we have more, as is always the case, we have more growth opportunities that we can handle, and they don't require any further growth in France or in Scandinavia.

We have much more growth in Spain, in Portugal, in the U.K., Ireland, all over Europe.

Unit cost, yes, I would expect next year, particularly as we begin to spool up the volume of deliveries of the MAX 200 aircraft, we will have very modest airport and handling costs, unit costs that would be flat to slightly down.

Route charges could be up.

It depends what they do.

Aircraft ownership and maintenance costs will be meaningfully down.

Sales, marketing and other will depend on ATC disruptions.

And at the moment, the EU261 caused the disruptions.

But we will have a very kind of higher -- our P&L prior year comp from this year's ATC disruptions.

And I would expect staff unit costs have to be flattish going forward to the next year or 2; a, as we bed down the national agreements based on national law and local labor -- local law and local reg with the unions across Europe.

I think what has been interesting about the dialogue with unions this year is that very few have been seeking more money.

I think there's an exception that Ryanair does pay well, the pilots and the cabin crew.

So most of the issues have been around local pay, local labor and local tax, et cetera, et cetera.

And we have already signaled our willingness to remove the local tax, local regulation from the 1st of January.

So I would expect that from next year onwards, unit cost, particularly as we spool up the MAX 200, would continue then to be flat, maybe slightly down.

And in a marketplace where most of our competitors, their unit cost control will continue to be pretty poor as it is at the moment.

I mean, what's interesting about our unit cost increase this year is it will probably be still be less than most of the unit -- the ex-fuel unit cost increase of most of our competitor airlines.

David, do you want to comment on France and Scandinavia?

Yes.

In the case of France, I mean, I can see us more than doubling our activity in France in the next 18 months.

In the case of Scandinavia, I -- that's a market, I think, that will come to us rather than us rushing there.

There are no real barriers to entry.

It's far away from everywhere.

And there are a lot more opportunities closer to the center of Europe.

So we'll see what happens there, but there's no particular urgency.

And I think it's worth emphasizing again how within our existing big markets, there's still so much scope for growth.

Like this winter, 60% of our growth is in our top 4 markets; next summer, more than 50% in our top 3 markets.

So there's no particular urgency about Scandinavia.

France, we've made our decision, and we will certainly continue to grow there.

And Neil, do you want to add anything on unit cost?

I should be -- before I ask Neil on unit cost, also remember, our hedging position is very strong.

We're now 90% hedged on oil out to September 2019.

But almost equally as important, we are 100 -- we've hedged all of the CapEx, the dollar CapEx on the MAX 200s, which run out to 2024 at $1.25.

I mean, compared to I think current rates, they're about $1.10.

So we're in reasonably very good shape on the dollar -- on the OpEx and the CapEx hedging as well.

Neil, unit costs, anything you want to add?

Yes.

Just the only thing I'd add there, Mike, was that kind of from the back end of FY '20 onwards, we start handing back some of the older leases and then we'll also start disposing some of the older aircraft, which should be helpful on the maintenance line.

So we start to see the benefit of the MAXs really coming through as we're up to critical numbers, particularly into FY '21, but we'll see some of them to FY '20 as well.

Our next question comes from the line of Daniel Roeska, Bernstein Research.

More near term on the European consolidation.

Given that your fleet delivery pace is slowing down a bit in 2019 and 2020, how do you see the opportunity on capitalizing of that consolidation?

Is that more about pivoting out of less profitable routes today into that white space?

Or is it more about really additional growth and opening bases in Cyprus, for example?

And secondly, a little bit more strategically.

On your revenue management, once we get through the current sector phase of high capacity and high fuel, would you consider shifting some IT development capacity kind of within the Labs to improve your inventory revenue management system?

Would you see more opportunity here on being a little bit more yield active on the fares?

Or would you rather look at starting to revenue manage some of the ancillaries a bit more?

Thanks, Daniel.

Capitalizing on consolidation, I think we'd be opportunistic.

We do have a slowdown this year.

This winter, we only take 20 new aircraft.

But next winter, which is the winter of '19, '20, we'll be back up to 45 aircraft delivery.

So this is the one year, the one winter where we have a slowdown in capacity.

I would think we would be very happy to see some capacity -- or the capacity across Europe consolidate.

We think 8% short-haul capacity growth this winter is clearly too much.

I think that's why there is such a bearish pricing environment out there even as oil prices are rising.

I expect some of that will -- capacity will fail and come out of the market this winter.

I think I would be an optimist on summer '19.

I think the last 5 cycles, airfares tend to follow fuel with about a 12-months lag.

Fuel has been rising for more than 12 months now.

And I think into next summer, you will see the -- that the legacy airlines restore fuel surcharges, I think, certainly Lufthansa in the German market.

IAG and Air France will -- you'll see the reemergence of fuel surcharges.

We will be very happy to let our fares track up behind somebody else's fuel surcharge.

But I would rather see that capacity come out of the marketplace.

Would we move some capacity around?

Yes, we would if there was an appropriate opportunity.

And clearly, we think that opportunity is in Scandinavia.

But I wouldn't rush headlong into Scandinavia either.

I mean, the Norwegians are still talking about raising travel taxes, which is somewhat ironic for a country whose main export is oil.

Sweden has a similar attitude.

But if there was a major failure up there this winter, and I think there will be, certainly, we are already in negotiation with a number of the Scandinavian airports over moving some aircraft up there if they confirm and if there's an appropriate incentive for us to do so.

Going forward, on revenue management, no, we wouldn't be using Labs to somehow reengineer the revenue management system.

We operate in a load factor management system.

It's a very successful formula.

We maintain a 95% year-around load factor.

Actually, if I think of the next 12 months, we'll maintain that 95% load factor.

Certainly, if there's more capacity consolidation or if oil price remains 85%, there will be upward momentum in pricing certainly into the summer of 2019.

We will and we'll continue to use Labs, though, to exploit and identify other means of boosting ancillary revenues.

And I think if you look at the 27% jump in ancillary revenues in the first half of the year, you can see the kind of job that Labs are doing.

The next big step, and that will be on the 1st of November, when we move to restricting the nonpriority passengers to only one carry-on bag.

Admittedly, that carry-on bag is 40% increase in terms of size.

So we're seeing, I think, a material upstep in the uptake of priority boarding.

There will be some trading down of passengers with check-in bags, in the 20-kg check-in bags, in the 10-kg check-in bags.

But I think Labs has clearly demonstrated over the last 2, 3 years that it is the way forward.

We started a big program in Labs this winter that will take about 12 months.

I might ask John Hurley just to talk about Labs 3.0, where we begin to do much more -- develop much more personalization on the mobile app and on the website now so that when you come to the website in the summer of next year, in each case, it will identify the routes that you've flown on in the past.

It will identify the services you've taken in the past.

And if you haven't, for example, taken hotels in the past, it won't bother you with offering you with hotels.

So we will have a much more personalized product.

I think that's key to when we do big seat sales.

Instead of us sending you an e-mail going with 1 million seats on sale at EUR 9.99, it will be much more a, "Dear Daniel, we know you flew to Faro last year.

We have a EUR 9.99 seat sale on the Faro route in November, December.

Would you like to take up an opportunity with us?" So much better personalization.

I think that's where the future will be in Labs.

But in terms of revenue management and using it to boost somehow airfares at the expense of load factor is not in the plan, not in the plan for a very long time.

Kind of spooky that you picked Faro, though.

There we go.

Thanks, Daniel.

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

What's the -- I wonder if you could kind of discuss if there's any changes as a result of kind of going into local contracts on either the system side or operational side, does that create any complexities or anything like that?

And for my second question, just could you provide an update on, from an operational standpoint and then in a sort of revenue standpoint, kind of the result of the change in the bag policy recently?

Okay.

So I'm just writing the notes here.

On the local contracts, there'd be very few changes operationally or in terms of efficiency.

Remember, I mean, there's a kind of a miss put out there or a narrative by the unions that somehow we all have people on Irish contracts because Ireland is some kind of social dumping ground.

Ireland complies with exactly the same EU labor law as all of the other EU countries.

The one penalty of operating out of Ireland, actually, though is that personal tax rates are high in Ireland.

We have -- Ireland has an image as a tax haven for corporates, but personally, you're paying top-rated tax, which is 55% at about EUR 33,000.

So unusually for many of our people, both pilots and cabin crew, there will be an income tax saving by moving to local contracts and local taxation.

I mean, that's why we're trying to move them there by agreement with the unions as early as we can in 2019.

I mean, we're hoping for 1 January 2019 to agree with the unions.

There is very few restrictions.

There is certainly no operational restrictions that would cause us any issues.

And in almost all cases, both the pilots -- and the pilots are very keen to stay on our fixed 5 on 4 off rosters.

In terms of change to bag policy, no, I mean, there's nothing to share really at this point in time.

We see a significant uplift in priority boarding.

We see a diminution in baggage revenues because there'll be some trading down for people who are currently booking our 20-kg bag at EUR 25, and there will be some trading down of those guys to the 10-kg bag, which you can now buy for EUR 8. But I think the critical thing for us is we're happy for this to be a revenue-neutral change as long as it can eliminate gate bags or the gate bag problem, which has caused flight delays through the summer period.

And so that will help us to deliver improved punctuality and a better customer experience.

And what's been interesting despite some kind of regulatory pushback, actually, the feedback from customers has been overwhelmingly positive.

A lot of customers have seen and experienced kind of these flight delays this summer, the inconvenience of the gate bags and are certainly welcoming the move to clarifying that the priority customers can have the 2 gate bags and the nonpriority who choose to be nonpriority will travel with 1.

So have you seen that operational improvement, Michael, in the -- as you make the change?

No.

I mean, I wouldn't expect it yet.

I mean, I think we will see -- really won't see the operational improvement, Savi, until next summer.

I mean, we introduced this change in November as the winter schedule.

We don't tend not to have a lot of bad gate bags during the winter schedule.

We don't have a lot of leisure travel.

There will be some at Christmas, but it's essentially a way we have into the summer of next year, particularly a lot of European airports where you're doing remote stands or you're boarding passengers with buses.

The key there is to reduce the amount of bags being brought to the gate.

It speeds up the customer experience at airport security, and it speeds up the airport -- the aircraft boarding process.

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

Michael, can you just talk about Italy where -- how do you see that playing out with Alitalia?

It's an important market obviously for you.

And the second question, I just wanted -- maybe we could go through just a bit about the new handling provider at Stansted and what that's going to do or help you at least with the OTC.

That would be great.

Thanks, Stephen.

Yes, Italy continues to be a major market for us.

We're the #1 airline in Italy.

I think the key development in Italy is obviously the new government, which is a coalition of Five Star and the Northern League, looked to have moved I think decisively away from the sale of Alitalia to other more competent management, Lufthansa or somebody else.

I think they are now talking about possibly refinancing Alitalia or selling it to the Italian railway system.

I think anything that keeps Italia -- Alitalia in Italian ownership is good, both for Alitalia and for the Italian market generally, and it's certainly good for Ryanair's continued expansion in the Italian market.

So we are very happy with the Italian market.

We're continuing to grow in the Italian market.

And we see further opportunities for growth, particularly as some of the others, the easyJet, Lufthansa and others, continue to trim capacity in the Italian market.

The new handling provider in Stansted was a recognition that I think Swissport have mismanaged our handling this summer.

We have -- it has -- we have had some problems there, particularly with staffing and staffing at weekends.

And we have moved -- we put it out to tender again and for a reasonably similar cost.

There'd be no change in cost.

But we are much more now in control of the staffing levels per shift, the number of teams per crew.

And we are investing -- Ryanair itself is buying the ground handling equipment, now the steps, the togs, to make sure that we are -- I think one of the problems we had this summer was we think Swissport took on too much third-party business.

And so there was a surge in flights this summer and we found they had people who were supposed to be handling our flights were off handling charter airlines or something else during the peak period.

The critical element of the OmniServ contract next year is it's dedicated to Ryanair.

They will not be handling any other airlines.

They're not going off to handle somebody else's flights.

They're not going off to de-ice somebody else's aircraft.

We will have more staffing, more on the ramp and at front of house, and they would be dedicated solely to handling Ryanair's passengers and the front of house and Ryanair's aircraft on the ramp.

And we think that, that will probably add probably 3 or 4 points to our punctuality because Stansted is critical to the entire kind of punctuality operation because so much of our business is in and out of Stansted through the day.

And it's critical that we get Stansted right next summer.

I think particularly at weekends this year, they were understaffed, and the staff that were there were running off to handle somebody else's aircraft when we account for 90% of their business, and we're not willing to accept that again.

The next question comes from the line of James Hollins from Exane.

Just 2 from me.

Some guidance, actually, probably both for Neil.

On the Laudamotion, if we go into Q1, I think you were talking about a year [or 2] EUR 50 million loss.

You probably needed 40 to 50 aircraft to be making positive contribution.

You're now talking about breakeven up to EUR 30 million loss.

Does that sort of relate to some of the bullish comments on summer 2019?

Or is it something else?

And then the second one on guidance, [are we having] to put a number on ancillary unit revenue guidance.

You obviously done about 11% underlying in H1.

I think at the full year, you talked about plus 3% to 5%.

I was wondering if you could put a number on it again for us for the full year.

Okay.

Just looking at the Laudamotion guidance.

Since we've gone up steadily 5%, James, we're now helping out with our hedging, sort of included in our hedge program for next year.

We're looking at the airport deals.

We've managed to source, along with our team, relatively inexpensive leases for next summer.

So their costs are going to be transformed as we look into next year.

They also have managed to get their flights on sale significantly earlier than they would have done this year.

They were very late to market this year.

They've been now 8, 9 months in advance of the summer already selling their schedule.

So we, again, we would expect to see their revenues increase significantly.

They'll also get more access to ancillary products that they might otherwise have had in the current year.

So that's what's really driving the improved performance into FY '20.

That's why we're talking about possibly breakeven, more likely a small loss and then in the black fully in the third year of operations.

And the ancillary unit cost?

Yes.

We would expect ancillary unit costs to be in low double digits on the full year basis.

So you mean unit revenue, right?

This is on the revenue, yes, revenue per pax.

Okay.

Yes.

Just...

And one other thing I'd add to the Laudamotion guidance for next year is that Laudamotion, one of the brief problems -- challenges they faced this summer, they were unhedged on oil, so they've been paying full spot.

Whereas in our hedge program right out to September 2019, we have hedged Laudamotion's fuel at $68 a barrel next year.

So there's material aircraft savings, material fuel savings and a much better run into, I believe they'll be materially better.

I mean, the reason we're kind of so wide on the guidance, anything between north of EUR 30 million is really much of where the fares will finish up into the peak of next year.

But we think with a strong base in Vienna, Stuttgart, Düsseldorf and a very major -- a large program of flights to and from Palma de Mallorca where the Germans love to go in the summer, the yields will be materially better.

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

Two questions, if allowed.

First of all, can you just give us an update on what happened with the European competition complaint, in particular the expected earlier aspect of it about other companies crew being involved in union negotiations?

And secondly, can you just come back on the airports?

I hear what you're saying that the underlying cost per passenger was up just shy of 4% in Q2.

So could you give us a feel for what the constant currency level look like?

And in particular, what's changing there that will keep that constrained and even maybe slightly better than that into next year?

Okay.

I'll ask Juliusz just to address the competition complaint.

On the cost per passenger this year, much about was the impact of the sterling on the cost base of the U.K. airports.

And we do expect with the new deals that David has been doing at places like Bordeaux, Marseilles, some of the growth in centers we've put in place, we would expect that the airport cost per passenger would be flat, slightly down-ish for the next year or 2 once we get through this year.

And that again would be material growth in Stansted where we continue to have a significant incentive and some of the -- there has been a noticeable improvement in some of the growth deals being offered to us at airports in Scandinavia, in Italy and in some of the German airports where there's been failures in recent weeks.

Juliusz, so you would touch base on the competitor complaint?

So just briefly to remind everyone, our complaint, which is now about 3-weeks old, has 2 pillars supporting it.

And the first one is a thing which is called collective boycott.

It is a relatively unknown competition [laws term.] So it's quite challenging, but we firmly believe in this case.

The second pillar is the more immediate one, and that is competitor employees participation in union negotiations involving Ryanair.

And this is the one where we have asked the European Commission to issue an urgent decision confirming that it would be illegal, that it would be a breach of competition law for competitor employees to participate in our union negotiations.

We have been in touch with the European Commission on this matter several times since we have filed the case.

There has been a change of personnel in the unit in the commission which deals with this case.

And we are discussing this matter with the new person involved on Wednesday this week, so we will hopefully have an update in the coming days.

And some of the unions have been very helpful in, I think, in aiding that case in recent weeks.

I mean, you -- some of you may have seen, we have that old fake photograph of a cabin crew allegedly sleeping in a crew room in Malaga, which is entirely staged.

What's remarkable is that most of the commentary comes out of a guy called Fernando Gandra, who is an easyJet cabin crew in Portugal.

So our friend fake Fernando, who's widely quoted, is this is indeed what he started off.

I think this cabin crew sleeping on the floor, he's now moved his position that this was just a protest photograph, which I think is a euphemism for just a fake photograph by fake Fernando.

But here, you have an easyJet cabin crew making the running in Portugal on this issue.

In Spain, we have a Norwegian cabin crew doing the same thing.

And last, we had a somewhat silly press release issued by a guy, a Lufthansa captain, on behalf of the ECA calling for declarations of war on Ryanair.

I mean, what Lufthansa pilots and easyJet cabin crew or Norwegian cabin crew are doing in the middle of our negotiations with our pilots is somewhat unusual.

And the point we had made is that TAP wouldn't accept a Ryanair cabin crew negotiating with them, and Lufthansa certainly wouldn't accept having a Ryanair pilot negotiating their -- on behalf of the Lufthansa pilots with Lufthansa.

It is bizarre and it's unacceptable.

We are very happy to deal with the union.

I think what's unusual is that vast majority of our negotiations with the unions, the unions have had no difficulty in eliminating competitor employees.

The German pilots have taken Lufthansa out of the room.

The Portuguese pilots have taken out the TAP pilots.

It's just in Spain and Portugal we have to deal with these -- the Norwegian cabin crew has no interest even when we're in front of the mediator in Spain in coming out with a sensible agreement.

He just wants to cause as much disruption as possible.

So we have put up with it.

But we'd be making the point, this is fundamentally anticompetitive, much the same way that if Ryanair were in -- Ryanair people were employees when they're disrupting negotiations between easyJet and their people, easyJet would feel equally aggrieved.

So we would hope to have some ruling, not -- I mean, but that's not to constrain what the people at the unions can choose having their delegation, but you choose who you want.

But preferably, they should be Ryanair employees aided and assisted by full-time union officials.

They shouldn't be competitor employees who have a vested interest in disrupting Ryanair's services for the betterment of their employers.

Our next question comes from the line of Johannes Braun from MainFirst.

Just 2 technical financial questions, I guess, for Neil.

Firstly, your operating cash flow has been down 30% in H1.

In the cash flow statement, I can see a negative impact of EUR 94 million writeup of intangibles and also some EUR 80 million year-over-year negative impact from other current assets.

I guess this has to do with the Laudamotion acquisition.

So is it right to assume that excluding these writeups, the losses at Laudamotion would have been worse than the EUR 45 million loss you just reported in your P&L for H1?

And then secondly, there was this unusual lower tax rate in Q2, I think only 8% or so, driven by some EUR 30 million total tax credits.

I think some referred to Laudamotion and some to yourself.

But is this something that will reverse in H2?

Or will that impact full year profits and therefore is relevant for your net profit guidance?

Okay, Johannes, on the intangibles first, that's tied in with the slot valuations on the slots that we've acquired from Laudamotion.

We've only consolidated Laudamotion to our numbers from early August.

You'll recall that we treated any losses prior to that as associate losses where we took 25%.

So they've only been fully consolidated from early August into the numbers, which is what you're seeing, and the intangibles effectively are the slots that we've acquired.

On the tax rate, you are correct, there was a one-off adjustment related to Laudamotion there where we've booked a deferred tax asset on the losses that they have post consolidation.

On a full year basis, ex Lauda, we would expect our tax rate to be somewhere in the region about 9.5% to 10%, close to 9.5%, I would estimate.

So there are some timing differences in there as we take delivery of more aircraft over the course of the year.

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

Actually, on ancillary, it could be said that the second quarter ex IFRS 15 performance was a little bit disappointing, 9.3% underlying per pax rev against 11.5% in Q1.

I wonder if you could just tell us in the sense what might have driven that change.

And then with Lauda, I think you mentioned obviously expectation of ancillary to come through on that.

The presentation in the release shows 0 ancillary, don't know if that's just part of the presentation, or what you think you can do with Lauda passengers going forward in terms of achieving, I don't know, like-for-like ancillary per pax numbers?

Okay.

I wouldn't get into the quarterly breakdown of the ancillaries, but we're very happy with ancillary revenue growth of 27 -- up 27% in H1, with a lot of the lines moving favorably, our passenger penetration on reserve seating, priority boarding, even baggage rising a bit in the first half of the year.

The one that continues to underperform -- sort of underperform almost to plan is hotels, where we continue to give away the commission in order to build revenues.

So it has an impact on the revenue line, but we don't get a contribution from it.

We would expect that to continue over the next year or 2. We will expect ancillaries to continue to perform strongly at or ahead of schedule traffic growth certainly for the next year or 2. Now in Lauda, Lauda didn't have any ancillary income in the first half of the year.

One of the things we inherited was a contract with Laudamotion where they gave away the in-flight revenue to a third-party provider for no contribution.

We have now terminated that contract with effect from the end of January of next year.

Ryanair would be taking over the in-flight and the ancillary revenue management from Laudamotion.

We would expect in reasonably short order that Laudamotion will be generating a pretty -- an ancillary revenue not necessarily quite as high as Ryanair, but something in line with the general Ryanair numbers.

I mean, Laudamotion don't want to sell scratch cards, and that's fine.

We said that's your decision.

They also want to have slightly different -- some slightly different policies in relation to baggage.

We said, again, that's their decision.

They can copy our policies.

But if they choose to differ from our policies and it works for them, then that's fine.

We're happy to see that happen.

But in print, the key issue is that they subcontracted away all of their in-flight sales for the first 12 months, and that contract, we have now terminated with effect from January -- end of January.

And Ryanair solely will have a significant ancillary income stream building up over the second year of operation.

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

Two questions, please.

Firstly, just on the lease savings from Laudamotion where you've -- you're exiting the leases with Lufthansa and going elsewhere.

I wonder if you could give an approximate quantification of that.

And secondly, just on your reporting going forward, will you show Laudamotion separately, and this is for sort of passenger numbers, revenues, that sort of thing, or just provide a combined business as you go into FY '20, please?

Okay, thanks.

On the Laudamotion leases, obviously, we are constrained by the settlement agreement with Lufthansa from what we can say.

Laudamotion has agreed with Lufthansa to return the 9 aircraft.

I think it's safe to say, though, that the monthly lease rentals of the 18 aircraft that we have now negotiated for summer '19, the monthly lease rent of these is a fraction under EUR 200,000 per month, and that would be a material improvement on where we were.

I mean, the monthly outflows on the Lufthansa leases were more than double that EUR 200,000 per month.

So they were way significantly above market, but we can't obviously specify the detailed numbers because it's subject to a confidentiality agreement.

Going forward, I think what you'll see us do in the disclosure, but Neil, you are more expert at this than me, I think what we'll see into year 2 is we'll separately report Laudamotion on traffic, monthly traffic and customer staff, but it will be consolidated for the purposes of the quarterly and the annuals because at that stage, we will at some point in time over -- I expect over the next 12 or 24 months, we will move to take -- we'll buy out Niki Lauda's 25%, we'll move to 100%.

But because -- I think we were anxious to show it this year as exceptional because really, the year 1 losses are truly exceptional in Laudamotion because of the late start, the fewer aircraft numbers, the fact that we will have to lease them 10 aircraft so they can take up and use the slots this summer.

And next year, therefore, it will simply be incorporated into our numbers at the group line, and we won't show it separately as separate trading.

Is that fair, Neil?

That's correct, Mike.

The reason why we're splitting it out this year, Alex, as Michael just said, is that we want to make it easier for you guys to understand the business ex and the business including Laudamotion.

But the plan is, as we move into next year, we'll be guiding on a full Ryanair Group basis and we'll be consolidating on a full Ryanair Group basis on the numbers in the P&L and balance sheet.

The next question comes from the line of Penny Butcher from Morgan Stanley.

Just one question on my side.

Just to check in on the status of agreements in terms of, I guess, what we call JVs with Aer Lingus and other carriers in terms of transfer passengers and those types of deals.

Is there any update you can share on that front as to the progress?

I'm certain we can't.

Unfortunately, the Aer Lingus one is going nowhere.

And we're still waiting for them to get their IT (expletive) together, and we have no update from when they will write or rewrite the programs they need to do to be able to the -- but the delay in it, we can do.

We've done our IT work, but I think they're still running 6, 9, 12 months delay on Aer Lingus because I think they subcontract a lot of their IT, so it falls into some sort of a sequencing within -- for them.

David has done a deal with Air Malta.

So we're now -- are we connecting or feeding into Air Malta, David, is that correct?

No, we're simply selling them at the moment.

Connection is some time away.

Okay.

So connection there is some time away.

So really, I would say, we're some time away on the feeding of those airlines and other airlines for the moment.

Our next question comes from the line of Kathryn Leonard from Numis.

Two from me, please.

I'm just wondering if you could give us an update in the last 3 weeks whether you -- what you've seen in terms of progression on yield for the third quarter, and in particular for the October and Christmas key trading period.

I was just wondering whether it's deteriorated or better and how that 3Q contributes that minus 2% you're roughly guiding to?

And then a second question, just in terms of the ancillary penetration, I know we talked about the guidance for the full year, but I was just wondering where we are on the priority boarding penetration and reserve seats.

I know you previously spoken about a 50% threshold for those 2.

Yes, I'll come back at the ancillary penetration, I mean, obviously, the priority boarding is capped at 50% of seats because beyond 50% wouldn't be priority.

We are certainly moving close to 50%.

We would expect after November that we will be at or close to the 50% cap on most flights, but that the revenue boost there will be eaten up somewhat by some trading down or yield softness on the check-in bags where people would trade down from the current 20-kg, EUR 25 check-in bag to the EUR 8 check-in bag.

On yield progression, there hasn't been any significant movement.

I mean, we saw the yields getting soft into the third quarter, in the -- really at the last week of September, first week of October.

I think what's changed in the last 2, 3 weeks is, at that point in time, we thought it was a Ryanair-specific issue.

And as is always the case, as soon as we see something, we warn.

We thought it was a Ryanair-specific issue related to kind of customer conflicts on unions.

I think what we've seen in the last 3 weeks is it's not that issue.

It's much more a sectoral issue to do with overcapacity in the sector this winter.

We have seen a number of failures in the last couple of weeks.

We have seen very little -- I mean, our forward bookings are strong.

Certainly, we will maintain the load factor year-on-year.

Our forward bookings through up to November, December, January running about 1% ahead of where they were this time last year.

The fares are slightly lower than last year.

I think the 2% lower yield guidance is reasonable.

There is a risk it could get slightly worse than that over the winter, and I think we should be cautious.

We're certainly being aggressive on air fares.

We have a 1 million seat sale out there at EUR 9.99 for travel today in November, December, January and February.

We see other airlines -- what's unusual is we see other airlines pricing down below where they were pricing this time last year.

We see that in easyJet, Wizz, Norwegian, but also we see it materially in Aer Lingus, BA, Air France and Lufthansa short-haul, which is somewhat of a surprise given that Lufthansa now controls the German domestic market itself.

So the yield progression hasn't altered materially in the last 3 weeks.

We still think it is -- that the trend is downwards.

I wouldn't rule out that our yield guidance could move for the winter from minus 2% to minus 3%.

I don't think it will go to minus 4%.

But I think there's going to be more bad news before there is good news this winter.

And to that extent, therefore I would expect to see further failures.

But in many respects, if there's a large failure, then that will alter the kind of the pricing outlook for the remainder of the winter period.

So it's hard to tell, Kathryn, but there has been no material worsening in the last 3 weeks and there's been no material improvement, if that makes any sense or if that's helpful.

Guys, we've got about 5 more minutes, and then we got to go and do investor meetings.

So if you don't mind, but we'll try and take as many questions as we can over the next 5 minutes.

Our last question comes from the line of James Goodall from Redburn.

One, if you've only got 5 minutes, on the ex-fuel cost next year being flat to down, does that include Laudamotion because I see that's got a fairly dilutive impact?

And if it does, does the guidance still hold?

Yes, it includes Laudamotion.

But actually, you got cut off there.

You said, does the guidance still includes something.

Yes.

So does it include Laudamotion?

And if you would then exclude Laudamotion, what would the guidance be?

Would it be flat slightly down still or flat slightly up?

Which, the unit cost guidance?

Yes, ex-fuel cost.

No, I think flat is the reasonable assumption for FY -- ex-fuel, flat for FY '20 is a reasonable assumption.

We'll be trying to deliver slightly down, but I would start off at flattish.

We just had another question registered, and it is a follow-up question from the line of Alex Paterson from Investec.

Point, when you say let's call it flat for FY '20, including Laudamotion, would that be historically adjusting '19 numbers to include Laudamotion in the base?

Or is it off what you had reported '19 to what you would report in '20?

And then '20, you'd have Laudamotion; in '19, you would not be consolidating other than at the exceptional level?

Jeez, Alex, that's a granular question.

Neil, do you want to have a quick guess at that question because it's beyond my pay grade.

I would imagine...

As we were illustrating there, from a -- on a pure accounting basis, Alex, at year-end, while we'll give you a statement like we did today breaking it out.

We will ultimately have to consolidate Laudamotion into our GAAP numbers at year-end.

So we'll be talking on a like-for-like GAAP accounting basis as we guide into next year.

But I would still think that I would give a still flat to slightly, call it, flat unit costs.

What we will do if we fully consolidate Laudamotion is that the yield comparable will be -- I mean, the yield this year would be down, and the yield comparable -- prior year comparable will be easier for the fall of FY '20.

Most of the Laudamotion EUR 150 million loss this year has been on the yield and ancillary revenue side rather than on the cost side.

Their costs aren't bad apart from the aircraft leases.

Okay, I think that's all the questions done, and we have a roadshow on the road for most of this week.

If you haven't got a meeting and you'd like one, please route it -- talk to us through Citi or Davy who will be happy to facilitate the meeting; otherwise, our Shane O'toole, the Head of the IR.

Otherwise, I hope to see you sometime later during the week.

And I think remember that the key thing here is, there's a lot of background noise out there at the moment on oil, on unions and on kind of disruptions.

It's really noise.

There has been no change to the fundamental Ryanair story, which we have a very strong unit cost leadership, pricing leadership over every other airline in Europe.

We are phasing into a 5-year period where we start taking delivery of 200 MAX aircraft, which will give us 4% more seats and 16% lower fuel cost.

And we will roll out that incremental fleet on routes all over Europe where I expect there will be consolidation over the next 12 months on the back of higher oil prices.

And then moving into summer 2019, I expect to see some upward traction on pricing and airfares as pricing begins to -- or follow or trend up behind oil prices with a 12-month lag.

So I will be generally optimistic, there will be short-term pain this winter.

But thereafter, over the next 1 to 5 years, there will continue to be a restoration, a very strong delivery by Ryanair and a very strong performance, both on the top line passenger growth and bottom line profit growth.

So hold tight for the next 6 months.

Ignore all the background noise because all of this is background noise and then continue to focus on our monthly delivery of traffic and profitability.

Thanks very much, everybody.

We'll see you at some stage during the week.

Bye-bye.

This now concludes our conference call.

Thank you all for attending.

Participants, you may now disconnect your lines.