Ryanair Holdings PLC (RYAAY) 2014 Q2 法說會逐字稿

Good day and welcome to the Ryanair half-year results 2013/2014 conference call. Today's conference is being recorded. And at this time I would like to turn the conference over to Mr. Michael O'Leary. Please go ahead sir.

Okay, good afternoon, ladies and gentlemen. You're all very welcome to the half one results conference call. You'll have seen the press release and the MD&A which was released on the website, the ryanair.com website this morning.

I'm joined today, Lesley Kane our Head of Sales is with me here in London, Howard Millar is joining us from a different office in London and Jimmy Dempsey is joining us from Davy's office in Dublin. Michael Cawley and Neil Sorahan send their apologies but they are traveling at the initial part of the road show.

And according to a -- I'll give you some brief introductory remarks then we'll open up to questions and answers. So you'll have seen this morning that the half-one profits rose by 1% to EUR602m as our traffic grew 2% to 49m passengers. Average fares fell by 2% during the half year and have continued to fall this winter which will lead to a reduction in our full year profit guidance from EUR570m to approximately EUR510m.

Highlights at the half year have included the growth in profit, the traffic continuing to rise 2% to 49m, seven new bases and 116 new routes opened, the 175 aircraft order placed -- agreed with Boeing back in March, which -- the delivery start in September 2014. The new 10 year-growth deal at London Stansted and Warsaw Modlin airports which I think would be significantly important for our future growth.

The new Irish travel tax or the Irish travel tax the government announced it will be scrapped from April 2014. And we are responding to that welcome announcement with a series of traffic growth announcements so far in Knock and Shannon airports. We are still in dialogue with Dublin airport to try to finalize those -- to finalize the growth at Dublin next year. We hope to make an announcement on that shortly.

And we completed a share buyback prior to the end of September of EUR177m. We did a further EUR75m in October, bringing to about EUR148m -- [EUR152m] the total share buybacks year to date.

The 2% fall in fares in the half year was impacted by a series of one-off events. We've responded to that by -- since the announcement in early September with an aggressive pricing, rolling out more low fare availability. While fares are falling, ancillary revenues continue to grow strongly, and we expect that to continue into the second half.

Unit costs in the first half rose 3% mainly due to a 7% increase in fuel costs. However, excluding fuel, sector-length-adjusted unit costs fell by 2%.

In terms of growth we've been very pleased with the performance of the new bases and new routes this summer albeit they are doing so at weaker yields. And the weaker fare environment seems to be spread across the entire market.

We are responding this winter with a whole series of new announcements in terms of digital marketing and customer service. Two weeks ago we announced a series of customer service initiatives in response to customer feedback. We've scrapped the RECAPTCHA security feature for individual bookings. We'll allow a small second carryon bag from December 1, have quiet flights prior to 8 am in the morning and after 9 pm in the evening will start from November 1. There is a 24-hour grace period for people that want to change bookings, reduced boarding card reissue and standard gate fees. There has been a very good response from customers to those developments.

We've also last week announced a significant upgrade to the website and digital platforms. Before the end of November we'll have a much cleaner, simpler website home page and improved booking path which will reduce from 17 to 5 the number of clicks required to make a booking. A new My Ryanair member service where people can enter their details, name, address, credit care, securely on the website, it will remember them in future making it easier for people to interact with us both at the time of original booking and when they come back in to check-in online.

Next year we'll roll out a number of further features including mobile boarding passes, a shared fare option, a fare finder feature which I think will be particularly important and will enable customers to immediately click on a low fare and see what flights and what routes that fare is available, thereby leading to them spending less time on the website but -- and hopefully making it easier for them to book our seats.

We've taken that customer service program further today with the announcement that from February 1 next year we move to fully allocated seating on all Ryanair flights. This is building on the dramatic growth and success of the reserved seating product thus far. From February 1 all passengers flying with Ryanair will be able to either continue to buy paid-for reserve seating if they want to sit in the front five rows or in the over-wing exit. But they'll also now be able to buy their own allocated seating for EUR5 as long as they are doing -- checking in on line more than 24 hours prior to the date of departure. If they are checking -- if they don't want to pay for that service then they can check-in on the day prior to the date of departure and they'll be allocated a seat entirely free of charge.

Underneath the pricing, the weaker pricing development of recent weeks and months, however Ryanair continues to take out significant costs. As I said, the Stansted and the Modlin airport costs deals are reflective of the kind of deals we are doing now at more major airports where those airports have recognized that their incumbent carriers are not going to grow and are returning to us offering us lower fairs in order -- and offering us lower cost in order to secure Ryanair's growth. So we are continuing to take out cost.

On fuel we are 90% hedged for the remainder this year at $98 approximately per barrel. We've currently hedged out 60% of FY15 at about $94 a barrel, although I have to -- at a weaker dollar, which means if we can continue to hedge out the remainder of FY15 at those rates it will reduce our fuel bill by about 4% for FY15 and could save us up to EUR100m.

The balance sheet remains one of the strongest in the industry. At the half year despite having completed another EUR177m in share buybacks the gross cash was over EUR3.5b. We plan to continue to execute at least another EUR150m of share buybacks prior to the end of the current fiscal year in March 2014. And in addition we see no reason to change and/or alter our commitment to return up to EUR600m to shareholders in FY15 through a combination of share buybacks and/or special dividends during that year.

In terms of trading update and guidance again it continues to be characterized by weak pricing, and we've seen that validated by a number of competitor airlines in recent weeks. When September 4 when we announced the perceptible dip in forward fares in yields in Q3 was due to increased price competition, softer economic conditions in Europe, weaker euro/sterling exchange rates.

We are responding to that by being aggressive out there, aggressively driving prices. That strategy has been vindicated by strong current bookings and strong advance bookings. You'll have seen on Friday last that we announced our October traffic had risen by 6% with a 1% increase in load factors albeit on the back of lower prices.

Market pricing remains weak, so we will continue to promote low fare seat sales throughout the remainder of both Q3 and Q4. Forward bookings are running slightly ahead of last year, but we still expect that Q3 fares will fall by approximately 9% and Q4, albeit with no visibility at this stage, to fall by up to 10% although without the benefit of Easter which was in the comparable Q4 last year.

Our cost discipline will continue to see sector-length-adjusted cost per passenger fall by 7% in H2 on the back of a 2% fall in H1. However, the continuing fare and yield softness means that the full-year profits will be lower than previously guided between the range of EUR570m to EUR600m. We now expect the full-year outturn to be between EUR500m to EUR520m due entirely to this lower fare environment.

And I'm not doing to ask Howard to read the MD&A this time, so I simply expect that everybody has it so that we can allow more time for Q&A. And with that, Paula, I'll now ask you to open it up for Q&A.

Thank you Mr. O'Leary. (Operator Instructions) Donal O'Neill, Goodbody

Hi guys, good afternoon. Just two quick questions from me or really one question really I guess, just in terms of the market opportunity you see in the next couple of years. Could you talk a bit about how Spain might feature in that? And I guess I'm thinking in the context of suggestion recently that they might pull back airport charges.

And also in France obviously it's a much bigger market for easyJet, let's say, than for yourselves but still quite under-penetrated from a low cost point of view. Do you see any big opportunities for you to grow in France over the next couple of years? Thanks.

Thanks, Donal. And I think where we see the opportunity over the next couple of years is a combination of two things. There will be more joining up the dots or connecting some of our existing airports to other of our existing airports, particularly as the bases expand.

But one of the features of our development in the last six months has been the extent to which primary airports are now coming to us offering us what are really exceptional cost deals in order to return them to growth. Stansted obviously being a case in point, although clearly the base there the issue at Stansted had gone back further than that.

I think we see airports where either the incumbents are in trouble and are cutting capacity, and the most obvious case of that is Germany with Air Berlin, in Spain with Iberia, in Italy in particular with Alitalia, particularly on the Italian domestics, up in Scandinavia where SAS is cutting capacity. And in regional UK where easyJet is increasingly taking capacity away from airports like Liverpool and Stansted and moving them to places like Gatwick -- or Manchester and Southend. I think you will see further opportunities for us to grow at more mainline airports but on the back of a lower cost base.

France, I think we'll continue to strongly but at regional French airports. The fact that the European Commission has now issued guidelines on airports, airports guidelines which takes the guidelines much more back into line with the original market and investor economy principal in Europe it has been a welcome move.

It effectively allows for more airport growth deals like say the Charleroi deal which has been so successful in transforming Charleroi Airport in Brussels and making it profitable. And it brings the EU guidance now back in much more into line with the court ruling in the Charleroi case, which ruled that Ryanair's discount scheme was not a subsidy but was a long-term growth incentive scheme engaged in by the Walloon region in Charleroi acting as a market or as a private investor normally would.

Spain is a bit trickier. Aena have announced a kind of a bit, deep discount scheme but in actual fact it's almost unachievable. It's a discount scheme where not alone must an individual airline deliver growth but also the growth must make up for any declines in other airlines taking traffic out of the Spanish airports. And given that most of the Spanish airports have seen a huge decline in traffic this year because of easyJet's closure of the base in Madrid, because Iberia is cutting back capacity quite steeply because we've taken some capacity out in response to the doubling of airport fees last year, it's almost unachievable.

So it's much more a bit of a PR stunt by Aena in Spain. We don't think it will result in significant lowering of airport costs. And I don't think it will be successful, but then it's being introduced by an airport operator that's seen a 7% decline in its traffic this year having nearly doubled its charges at some of the major airports.

I think if you were asking, I think the big opportunity in the next 12 months will continue to be in Italy where the future of Alitalia even on the back of the Post Office investment continues to be -- I think there will be a significant cut in Alitalia's capacity.

We are looking in Central Europe where Poland and Wizz Air are reducing capacities, in LOT because they can't compete at all snd Wizz Air because they seem to be taking more and more capacity away to further East into places like Belorussia, Ukraine and more recently India. And Scandinavia where I think you have a combination of SAS cutting their capacities and Norwegian operating at very high prices will continue to be focus areas for us.

But I think we'll continue to be opportunistic and move or adapt quickly and flexibly as we have for example in the case of Ireland where last week the government abolished the travel tax from April next year, and we are responding straight away by reallocating 1m seats which -- 1m passenger growth which otherwise would not have gone to Ireland next year will now be allocated to Ireland next year to respond positively to the government initiative.

Can I ask you just one follow on question, Michael, if that's okay? Just in terms of the digital marketing drive your putting out at the moment and the more consumer-friendly face of the business can you give us a sense of what ultimately your trying to achieve there. Is it a higher revenue line by attractive more business passengers? Is it simply a volume gain? What's the end game in that I guess?

I think the end game is, look there is a lot of trap trap out there at the moment that we need to become more customer friendlier. We couldn't be any customer friendly we have 81m people who think we are wonderfully more customer friendly than any other airline that's why they fly with us.

But there are areas [in doubt] there and we need to -- we are consciously going to eliminate those [areas]. The website doesn't function properly and it's much too complicated to navigate your way through it, we are going to change that before the end of November.

The recognition as part of the deal with Stansted that we'd allow a second small carry-on bag to facilitate airport shopping, we roll that out from December 1 across the network.

I think I've been surprised personally by the extent to which on the tell MOL page on the website we've got feedback, about 60% of our passengers calling for allocated seating. So fine if that's what you want we give you the allocated seating from February 1 next year. So I think we are trying to respond to our customers where we get that kind of feedback, where there seems to be a demand for a certain service.

Some of the digital stuff is there just to eliminate, I think we have an inferior digital platform at the moment we will close that gap with easyJet and the other competitors within three months. I think we'll overtake them within six to 12 months, because we are not going to stop at where -- just eliminating these deficiencies we intent to be very aggressively develop the digital platform and the way we interact digitally and using social media with our customers over the next six months.

But I don't think it's going to alter the current pricing environment. The pricing environment is weak. That's been validated by other low fare airlines such as Air Berlin, Norwegian and Air Lingus and also by Lufthansa last week. But I think we are determined, using a new -- the website platform next year to target much more business traffic, families traveling as their on -- families traveling on holidays and groups business.

Great, thank you very much.

Thanks, Donal.

Robin Byde, Cantor Fitzgerald.

Good afternoon, guys. Just two from me please, just firstly on unit costs and potential savings what are the main areas that you've identified to make savings?

And then secondly, just on share buybacks versus special dividends, and obviously you've been using buybacks recently and you're about to buyback more and looking at today's share price that looks like a good value option. But what's your thinking on a special dividend? And if you go down that route would that have to be beyond the AGM at the back end of next year? Thanks.

Thanks. I think on the unit costs we are continuing to target, apart from the obvious one which is fuel at the moment we are continuing to target lower cost airports. We are still taking out handling costs. We still have very, while the staff have had a pay increase this year, it's relatively modest. And maintenance and marketing continue to -- we continue to reduce unit costs.

The one that we slightly have been unable to control has been the euro controlled route charges where you have the public authority in Europe with no great cost control over them raising fees like the Italians, quadrupled the Italia ATC fees in the middle of -- from July with no notice to anybody.

But I think on balance you'll continue to see very impressive cost discipline. I think the real takeaway from today's numbers is not that fares are soft, I think that will be a temporary phenomenon, but it's that our unit costs, sector-length-adjusted unit costs are down 2% for the first half, 7% in the second half. We'll be the only airline reducing unit costs this year and widening the gap between us and every other competitor in Europe even further, which gives us a platform to enter into some of their markets over from September of 2014 onwards with a much lower unit cost base with the new aircraft deliveries and begin to grow again off a much lower cost base.

The share buyback deals we signaled a plan at the time when we signed up in March the new aircraft order. We are able to set out the CapEx plan for the next five years. The cash flows, even though the profitability will be slightly down this year entirely on the back of lower fares which is good for our customers, the cash flows will still be very strong.

We see no reason not to go ahead and continue to execute our plan to deliver something EUR400m plus in share buybacks this year. We are not under any short-term pressure to do so, but by the end of March next year we expect to have completed 400m plus of share buybacks.

And then there will be at least -- there will be a special dividend plus or minus some other share buybacks next year. The dividend will be towards the back end of the year, possibly into the first quarter of calendar 2015. But it will be after the AGM, so it could be some time in September 2014.

I don't think we need to change that, although that's not to rule -- if there was some catastrophic change in the pricing yield environment that had some catastrophic effect on cash flows we may have revisit it, but I think at the moment on the base of everything we've seen thus far I think it's unlikely. Profitability is down slightly this year, something of the order of 10% on last year's record numbers. But the cash flows will continue to be very strong.

Thanks very much. And just a quick follow up, I did just hear you say that you thought that the yield weakness would be a relatively temporary thing and that you will see recovery. How confident are you on that please?

I think the yield weakness will be through -- continue through the remainder of this winter. I expect yields in sales to rebound as we move into the summer of next year. But I caution, this comes from somebody who in the first week of September told you we expect average fares to fall by 4% in this half year and two months later they are falling by 9%.

I keep trying to take everybody back to the model in Ryanair is we are load factor active, yield passive. We will take whatever fares we get as long as we maintain our very high load factors and that's why we drive -- how we drive the business.

It is a fact of life that for the last five years as our capacity has been slowing down, capacity growth has slowed down we've seen very high single-digit yield growth for five years in a row. This year it's going to be flat, slightly down or actually down for the full year. And if it's going to be down into next year then we'll take that because it means there will be even further pressure on competitors.

We will take whatever price we get to fill to 82% or 83% year round and that will -- because that continues to drive both the cost reduction on the airport side, the unit cost efficiency on the employee and aircraft side and the very strong performance in our ancillary revenues.

Thanks very much, very clear thank you.

Thanks, Robin.

Jim Parker, Raymond James.

Jim, hi.

Michael, good afternoon.

How are you?

Good, good. I've got a couple of questions.

Yes.

One is are you able to quantify the year-to-year change in competing seats in your city pairs to say December quarter and March quarters? Are you able to say percent change?

Secondly, I've seen the commentary recently where you suggested that Ryanair or a Ryanair joint venture might have interest in the 787 aircraft, which is a bit different from what you've said in the past in that your interest in wide-bodied aircraft would be there if there were a major decline in the values but yet you may seem to be bringing that to the front burner.

Okay, anything else?

No, just those two.

Sorry, yes, great. We can quantify the year-to-year change in seats on a city pair basis, we have that analysis on all the city pairs we fly but I'm not sure it's all that helpful. I think the market overall is characterized by flat capacity this summer both from us and across the system. We've had a small capacity addition this summer, easyJet and Norwegian have added some capacity but Iberia and Alitalia and SAS have taken out capacity, so overall it's flat.

We do not see, and I know somebody is going to ask me for more color on yields, we do not see any markets where it's particularly good or particularly bad it just seems to be soft generally across the marketplace. And so I think a kind of year-to-year change across the piece in Europe is that capacity is generally flat slightly down, certainly slightly down in the winter. And we don't think this pricing softness is driven by some usual capacity growth and nor is this isolated or confined to one geographical area at the expense of others. It seems to be generally across the piece.

The 787 thing got a little bit over-reported. It's no more than I have repeatedly said in the past. We do have a plan to have a -- to -- we have a business plan there for a transatlantic low fares long-haul carrier. I was expressing a view that I thought the 787 would be an ideal aircraft for that type of operation. But there is no indication at the moment that there is any real low-price long-haul aircraft availability because of the historic peak in Gulf airline orders and the general backlog in Airbus and Boeing deliveries on long-haul aircraft. So, yes, no nothing has really changed. I don't expect to see any changes for a three or four-year period on that front, Jim.

Okay, thank you.

Okay, thanks very much.

Suzanne Todd, Morgan Stanley.

Hi, Michael. I just had a question for FY15, I know you haven't given formal ex-fuel unit cost guidance yet; however, can you give us just some more color as to what you see as being the profiling of the cost going forward?

And clearly you have the minus 7% in the second half of this year it's very punchy indeed. I presume we are going to see more read across from airport charges going into 2015. Is there any more color you can give us on what kind of profiling you could expect to be seeing given that it is a cost that you are targeting?

Honestly, I really don't want to get into FY15 at this stage. When we can't give you any kind of visibility on yields in Q4 for the current year, it's wrong to get into 2015.

All I will say is we'll continue to -- if you look at the deals we are doing on airports, aircraft, fuel is certainly going to kick some in, labor will continue to be stable, advertising and marketing will continue to be stable. I would be generally optimistic on unit costs into -- for 2015 but I'm not going to get in -- I'm not going to get into any further speculation on FY15 yet until we get a lot close -- further down FY14.

Okay, that's fair enough. Is it possible to help us out with sector length growth just at the moment you might be expecting to see in FY15?

Again it's -- until we finalize -- now we should finalize the summer of 2015, the summer of 2014 schedule in the next couple of weeks. There are still some airport negotiations to be concluded. Again, having taken out a number of the UK domestic, Spanish domestic routes where they got more badly affected by the Spanish airport cost increases I would expect the sector length into 2015 to be slightly less than the 7% in 2014.

But that could be heavily affected if there is some kind of -- and there is the potential for some dramatic change on Italian domestics, if Alitalia as part of reorganization makes some kind of significant cutback on the domestics. So we have at this stage to continue to be opportunistic but it's just too early to call.

No, that's wonderful.

But I think another year at 7% is highly unlikely.

Thank you very much.

Thanks.

As there are no further questions I'd like to hand the call back to Mr. O'Leary for any additional or closing remarks.

Okay. Howard, is there anything -- any final anything comments you'd like to make?

No, Michael, I don't think so, I think we've pretty much covered most of it this morning.

Yes. The analyst presentation is up on the website as well for those of you who want to see it. If there's no other questions I think I'd caution everybody, look, there is a weak pricing environment out there, we can't really explain why it's weak but we are responding to it aggressively by delivering lower fares.

Our forward bookings are up, our load factors will be up for this winter and our traffic I think will continue to grow strongly with the exception of March and I heavily caution that because Easter has moved out of March this year but it's in the March comparable, traffic will be down in -- significantly in March, and the yields will be down as well in the Q4. That might artificially improve Q1 next year but we'll worry about that when we get there.

Having said that, we are continuing to deliver very significant unit cost reductions which will widen the unit -- the cost advantage we have over all other airlines. And you're seeing some very significant cultural changes in our customer service proposition, the second carry-on bag, the removal of RECAPTCHA, the allocated seating from the February 1 next year.

And we are going to see a revolution in our website and digital platform. As early as the end of November you'll see a much better cleaned-up website where it's going to be much easier to book tickets. And we'll be developing that aggressively over the next six months to eliminate any competitive advantage that our competitors may have by having a slightly better website at higher fares.

So we are going to mow down the website advantages. And that will take us into some very interesting marketing things in the first quarter of next year, business type propositions, family fares, group fares where we'll be aggressively going after those markets and bringing them back to booking directly on a much more functional and usable Ryanair.com website.

That's all I have to add today. We will be on a full investor road show for the entire week. We are covering the West Coast, East Coast of the US, London, the UK and Europe. If you haven't and you would like an investor meeting please give a call to Citibank or Davy's and we'll be happy to fit you in. And if you want to come and visit us in Dublin we'll be in the old head office until Christmas and then God help us we move into a shiny new one which we'll be running around dirtying as best we can some time after Christmas.

Thanks, everybody, look forward to meeting you over the current week. And if anybody wants to call me or talk to me directly please call me at any time. Bye, bye. Thank you.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.