Ryanair Holdings plc (NASDAQ:RYAAY) Q3 2023 Earnings Call Transcript

Ryanair Holdings plc (NASDAQ:RYAAY) Q3 2023 Earnings Call Transcript January 30, 2023

Operator: Hello, and welcome to the Ryanair Q3 FY ’23 Results Conference Call. Throughout the call all participants will be in listen-only mode. And afterwards, there will be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present Michael O’Leary. Please begin your meeting.

Michael O’Leary: Okay. Good morning, ladies and gentlemen. You’re all very welcome to the Q3 results conference call. I’m Michael O’Leary with the usual team here in Dublin. And Neil is joining us from London, where he’s doing the media stuff this morning. I take the — I’m not going to deal with the press release. The slide show and the management MD&A is largely dealt with. I’ll take those as read and point you to the Investor Relations page on the website. A couple of quick comments on the Q3 numbers and the kind of outlook going forward. So we reported a very strong Q3, a profit of EUR211 million, which contrasts markedly with the other alleged low fare carriers in Europe, all of whom reported a significant Q3 loss. Our traffic was up 24% to EUR38.4 million, that’s up 7% on the pre-COVID figures of FY ’20.

We’re still the only airline that has materially returned to strong growth over our pre-COVID traffic numbers. We saw a strong rise in Q3 fares, up 14% of the pre-COVID levels. That was mainly due to a very strong October school mid-term and the Christmas and New Year kind of period. We saw very strong traffic at higher than expected airfares. That was why we had went out on the 4th of January with the trading upgrade. And thankfully, for a change, the Christmas trading wasn’t disrupted by any adverse news flow on COVID or Ukraine. So we had a reasonably undisturbed but very strong Christmas and New Year period. We spent a lot of time, I agree with our union partners agreeing the pay restoration. Not alone have we agreed to pay restoration with almost all of our pilots and cabin crews.

The only people outstanding are some of the Belgian. But we’ve also put in place a multiyear pay agreements, we take multiyear pay agreements onto the back of those deals so that our crews can look forward to kind of guaranteed pay increases over the next four years — four or five years, depending on which agreements they’ve done. I think, it’s an example of how we continue to work well with our unions and with our people, both to preserve jobs during COVID, but also to reward them as we emerge out of COVID when, hopefully, we’ll continue to avoid any further black swan events. Year-to-date unit cost, and I think this is the compelling store message, one of the two compelling messages this morning. There’s been an extraordinary widening of the unit cost gap between us and every other airline in Europe.

I would point you to Slide 4 of our industry presentation. Before COVID, we were already Europe’s lowest cost airline on — with a total cost per passenger, excluding fuel, assess seat cost per passenger of EUR31. Over the past nine months, that has — we’ve managed to maintain that. Actually, it’s gone down very marginally to EUR30 per seat, excluding fuel. But every other competitor has seen very significant cost increases, whereas we calculate their unit cost actually up 18%, East (ph) 42%, Southwest in the states up 25%. And even the legacy carriers, who were already ridiculously high cost prior to COVID, we think Lufthansa have seen seat costs up 16% and IAG up 16%. And I think there’s such a widening of that cost gap between us and every other airline.

It’s one of the reasons why we are continuing to grow so strongly, but also while profitability has rebounded strongly this year. And we are — and I think that will be one of the themes of this morning’s call. Thus far, we’ve taken delivery of 84 game changes up to the end of December. There are still some uncertainties as to whether we’ll get all 51 aircraft that Boeing are scheduled to deliver to us by the end of May. At the moment, we think we’re somewhere around 44, 45 aircraft. But it’s a kind of a daily and weekly thing we worry about with Boeing because obviously, some of our growth into the summer of 2023 will be disrupted if we don’t get those 51 aircraft out of Boeing. Nevertheless, we’re seeing strong growth in all markets with 223 new routes announced for FY ’24.

We’re seeing very strong market share gains. I think one of the things that we constantly decided to do with to go after market share, grab market share gains in those markets where incumbents were withdrawing capacity. So we’ve seen very strong gains in Italy, where ITA or Alitalia has reduced capacity in Portugal, where TAP has reduced capacity; in Poland, where Weeze appear to be taking capacity out; and also in Ireland and Spain, where the incumbents were very slow to recover their capacity as Europe emerge out of COVID. And I think the other thing we’d point to you this morning is that in H1, we’ve increased our fuel hedging now from 50% to 60% cover. We were able to take advantage of some weaker pricing there over recent weeks. We brought down the fuel hedging cost from $92 a barrel to $90 a barrel, that’s for H1 FY ’24.

We remain 50% hedged at $92 a barrel for the H2 of FY ’24. So we think we are in reasonably good shape. A couple of other themes then. I just want to talk to you about looking forward into this summer, we still see seat capacity constrained in Europe. It is quite clear that some of the legacy carriers are not restoring their pre-COVID capacity. Obviously, in Italy and Portugal, TAP and Alitalia are capacity constrained. Alitalia’s fleet has reduced by almost 50%, TAP by 40%. We’re seeing Lufthansa in Germany being very slow to restore pre-COVID capacity. The German market is a very interesting one this year. Recent figures suggest that it’s only operating at 70% of its pre-COVID capacity. And we think that’s a conscious decision by Lufthansa to constrain capacity so they can drive up airfares, and airfares are seeing their highest increases in the German market.

We have reduced some of our capacity in the German market or reallocated some of it where Frankfurt Main were increasing charges. We reallocate deployed capacity to Frankfurt Main (ph). We’ve increased capacity in Niederrhein (ph) in Nuremberg and some of the smaller bases there. But I think the German market is going to be one where Lufthansa will, being the national champion, will do what they generally do where they have a quasi-monopoly. They’ll constrain capacity. They will increase pricing quite significantly. And we would be the beneficiary of that, even though Germany is one of our smaller markets. The other thing we point to is Weeze seem to be taking more and more capacity out of markets where they compete with us, Austria, Central and Eastern Europe and Italy regional and Italy domestic.

There seem to be, I would have said, a flight of capacity out of those markets where they compete with us. And a lot of that capacity appears to be moving into the Middle East, which it would appear to us to be with on a kind of campaign to find a market where they don’t have to compete with Ryanair, which is a good sense of the strategy from their point of view. So I think there’s going to be meaningly less capacity, short-haul capacity in those markets as a result of Weeze pivoting some of their capacity away from intra-EU and after the Middle East. Allied with that is, it is somewhere that we think there’s going to be very strong transatlantic traffic, and there’s the beginning of a recovery of Asian traffic. Now with the risk movement in the pre-COVID restrictions, the Asians will start returning to Europe this summer.

They won’t reach their pre-COVID levels. But any recovery of the Asian traffic will, we believe, fill up a lot of the short-haul connecting and transfer flights of the legacy carriers, the Lufthansa, IAG and Air France KLM. The transatlantic traffic will also play a role in that. And therefore, we think and believe that there will be meaningfully less available capacity on European short-haul this summer. Europeans will continue to holiday at home. I think the strength of the dollar will militate against them going transatlantic. Asia is still effectively closed and not very welcoming for long-haul majorities from Europe. And so the outlook, I think, is reasonably robust for summer 2023. We’re already seeing that in our forward bookings. As we’ve reported in the last couple of weeks, we see very strong forward bookings, both volumes and pricing into the February mid-term, into the Easter, which is in Q1 of next year, which is in the middle of April, and in summer 2023.

At the moment, our bookings are running at or above where they were pre-COVID for the — some of the peak months of the summer doesn’t run right through the summer. And fares at the moment are running above where they were last summer. Now I think, therefore, everything is set fair for a reasonably strong Easter and a reasonably strong summer 2023. How strong will that be? We have no idea. And I can answer that 90% of the follow-on pricing, which would be, where do I think yields will be this summer? I don’t know. But it looks at this point in time that they will be stronger. I think it is reasonable at this stage to expect that there will be a kind of mid- to high-single digit up on where they were in summer of 2022, but it’s too early to say.

We haven’t yet finalized the budgets and we don’t have an outlook for next year yet. But absent there being any adverse news flow on COVID, any adverse news flow on Ukraine or any other unforeseen black swan event. I think it is very reasonable at this point in time to suspect that we will have a second summer of rising fares. We will lead a second summer of rising fares because we will have materially higher oil prices. We were very well hedged last year into summer 2022. We’re reasonably well hedged, but at higher price levels in December 2023. But the outlook on forward bookings, constrained capacity, strong return of transatlantic and Asian traffic to Europe and European holiday at home for the second year in a row means I think we will continue to see significant market share gains from Ryanair in those major markets where we’re allocating capacity, Portugal, Spain, Italy, Greece and Central and Eastern Europe.

We’re also seeing strong growth in Ireland and the U.K. Fly Bs failure over the weekend is not unhelpful. Even though they don’t have a lot of capacity, the failure is taking place at airports where we tend to be the — we’re going into Belfast, Birmingham, we’re the largest airline. They’re not big, but it’s reasonably helpful and it will help our expansion this year. So we have very low cost going forward. The unit cost gap between us and all other airlines has materially widened as a result of COVID. And the work we’ve done during COVID, extending airport deals and working closely with our people and our union partners to restore, pay, lock and agree pay increases for the next coming years and that work continues. So we are on track this year.

As I said, we raised the guidance to a range of EUR1.325 billion to EUR1.425 billion. We think, again, absent any disruptions in February or March, we will get to our 168 million traffic figure. And again, subject to getting reasonably close to 51 aircraft deliveries from Boeing, we think we are on track to get to 185 million passengers in FY ’24. But we haven’t yet finalized our budgets, we know that fuel will be higher. And I think there’s a reasonable prospect that this summer, average fares will be up mid to high-single digits. It could be more. But generally speaking, when things look optimistic in this industry, some curveball is sent to keep all to keep our feet on the ground. So outlook is reasonably robust. There are challenges. Fuel will continue to be a challenge.

I would caution the any irrational exuberance here. We are going to lose money in the fourth quarter. We don’t have Easter in the fourth quarter. We are hiring a lot more and training a lot more pilots and cabin crew. We expect a lot less disruption at European airports this summer. We think the airports themselves, the handling agents and the other airlines will be appropriately staffed when we get to the summer schedule at the end of March. We do think ATC will be a shamble, particularly through Q1. So April, May, June will be very difficult. The French will be engaging in their kind of recreational striking. There will be frequent ATC strikes in France, where there will be HDC staff shortage on Saturday mornings, where the French will not turn up to work.

German ATC will also be a real pinch point. A lot more flights are being rooted over German HTC because of the NATO exercise in Southern Poland because Russia being close. And German ATC is not staffed up or geared up to handle these kind of volumes. We’re working closely with EUROCONTROL, the flow managers to try to route flights around Germany as best we can. But we think, certainly, in the first quarter and through the first half of the summer, ATC would be a major challenge will cause a lot of the flight delays and disruptions, and we’re pushing very hard together with our other fellow members in A4E. There is a simple solution to a lot of this, and that is to separate the upper air space for the EUROCONTROL to take control of the overflights because if you could protect overflights during periods of national strikes.

As they already do in Italy and in Greece, that would be a solution that would solve a lot of these problems. And yet we continue to hear the European Commission come up with all sorts of excuses why this can’t be done. And it is another example where the European Commission is absolutely useless. They’ve had 24 years of abject failure on the single European sky. And when you give them a simple solution like protect the overflights during strikes, they won’t take it. So we’ll keep pushing for some solution on that. Well, that’s all I have to add. Neil, do you want to take us through MD&A or highlight some things you want to raise?

Neil Sorahan: Yeah, I will. You deal with the unit cost advantage very well. We’re still on track for our full year guidance. FY ’23 is about EUR31 per passenger ex-fuel. So very pleased with the cost performance year-to-date. Hedging, again, Michael pointed out that we’ve increased our hedging into the summer of FY ’24, about 60% hedging out to over $90 a barrel. But the other big differentiator between ourselves and everybody else is the strength of our balance sheet. Our balance sheet, strong investment grade, BBB positive outlook. We had EUR4.1 billion cash at the end of the quarter. That has actually increased to EUR4.4 billion today. And importantly, net debt, which is EUR960 million, down from EUR1.45 billion at the end of last year.

And that’s despite EUR1.3 billion in CapEx. So we’ve got another EUR700 million in CapEx between now at the back end of March. And then over the next 12 months to 15 months, we’ll be very busy paying off maturing bonds of EUR1.6 billion out of cash resources and financing another EUR2.5 billion of CapEx next year and hopefully get the balance sheet back to a broadly net cash, net debt position by the back end of FY ’24. I have nothing for it to add, Michael.

Michael O’Leary: Yeah. I think that’s a little point we would want to emphasize. We might get to the Q&A. We are planning is this year, we’re going to use those cash resources we have to pay down. We have an EUR850 million bond to pay off in March. There’s a EUR750 million bond to pay off in August. We will not refinance those bonds. We will pay them down. Where we try to refinance them, even with our investment-grade balance sheet, we’d be looking at financing cost of between 4.5% or 5% currently. We have the cash resource to pay down that debt, and we intend to use the cash to pay down that debt and to fund CapEx. And I think many of our competitors, though, who entered COVID owning a considerable proportion of their fleet have exited COVID, having done lots to sales leaseback.

Particularly, I think Weeze and EasyJet. But now most of the fleet is on operating leases. And the cost of those leases will be rising meaningfully through the remainder of this year as interest rates and cost of funds rise, whereas we’ll be paying off debt. We own all of our fleet, about 98% or 95%, 98% of it will be unencumbered. And that will be another very significant point of widening between us and the unit cost between us and everybody else. In reality, I think we are now entering a summer where our average fare is lower than any of our competitors’ ex-fuel unit costs in Europe. And that is probably explains why many of them are either so anxious to get out of our way or not or withdrawing capacity from markets where they previously claimed to wish to compete with us or in the case of EasyJet, they don’t grow at all and have retreated to kind of fortress airports where because of slot restrictions, they are reasonably isolated from competition with Ryanair.

The reality is, we are — have a much lower cost base than any other airline in Europe. We intend to continue to use that cost base to pass on low fares to our customers. By doing so, we’ll take more market share from all of the higher cost incumbents, and we have a flow of low cost aircraft deliveries from Boeing for the next three years that will enable us to maintain this reasonably strong rate of growth. And in a market, which we hope will be reasonably profitable as certainly in summer ’23, rising airfares will help us to pay for higher oil prices in a marketplace where our competitors are currently still losing money and therefore, under much more pressure to get airfares up. Constrained capacity get airfares up to cover their higher cost.

All right. Eddie, I might ask you just before we open up to Q&A, any themes you want to raise here from a kind of commercial point of view or market growth in Europe.

Edward Wilson: But I think I’ll probably start off just on the operational side because we want to make sure that we are as resilient as we were. Last year, we’ve had a particular focus over the last number of months, not only with our — ensuring that we are fully resourced on our sales handling operations, but also have kind of a keen attention on third-party handlers so we can minimize as many of the delays as possible. Our punctuality has picked up so that we can — over the last number of weeks and months, when there has been less capacity. But obviously, we can only control what we can control. So we want to ensure that we have, we are still going to be the most on-time and reliable airline in Europe this summer and that we continue to focus on.

On the commercial side, we continue to close out long term deals with airports, and they’re in very good shape at the moment, as we obviously try to drive down airport costs, where environmental taxes are still a challenge, which again are outside of our control. On the commercial side, we are, as you’ve alluded to already, I mean, we can’t really see into what’s going to happen next summer. But we’re happy by what we see in terms of we don’t see any particular weakness or any — in any of the markets that we’re in. We had that as we thought was a — it turns out it’s been a short-term blip in the U.K. market, which has now more than recovered. It looks like that was down to short-term perception issues with getting to and from airports, et cetera.

So continued operational resilience. We look in a good shape airport cost-wise. And on the commercial side, while it’s too early to say about the summer, we’re happy with bookings on the booking curve.

Michael O’Leary: Good. Okay. Thanks, Eddie. Okay. Folks, we’ll open it up to Q&A, please.

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Q&A Session

Operator: Thank you. And our first question comes from the line of James Hollins at BNP Paribas. Please go ahead. Your line is open.

James Hollins: Hi. Good morning, everyone. Yes, two for me, please. First of all, just on the — for bare for me to annoy you by talking about some of yields. So let’s talk about some capacity. You’ve talked about 125% of pre-COVID. Just for clarity, is that based on 124 max by then or is it the 114 you talked about on your video? i.e., could it go higher or lower depending on what Boeing do and maybe just your views on what going are up to at the moment? And the second one, you flagged quite a few times the U.S. and Asian traveler recovery. Just wondering if you could just maybe let us know what your normal year passenger proportion would be a base or is it really just about those sort of filling the capacity of the networks? Thanks.

Michael O’Leary: Thanks, James. Yeah. To our summer capacity, we’re talking — that’s based on us getting all 124 MAXs out of Boeing, that would be the max growth we deliver. I think at this point in time, but it’s a weekly call where it’s a daily and a weekly management issue with Boeing. We are due to get 51 aircraft. We think and we’re reasonably sure at this point in time that we’ll get 45 aircraft by the end of June. I’m not sure we’ll get the last five or six aircraft. But to be fair to Boeing, deliveries have clipped up in January. They are doing better on the deliveries that per day. We were struggling production, was taking about 10 weeks. That looks like it’s come down to nine and may come a little bit better may improve to 8.5. But we don’t think we’re going to get all 51 aircraft.

Now the challenge for us is, if we don’t get those aircraft by the end of June. We’re not reasonably constant. We can’t put them on sales. So we said to Boeing, we’re not taking any aircraft. If you don’t deliver aircraft by the end of June, we’re not taking deliveries. We’re too busy, take deliveries in July and August. That will not materially — if we get 45 in by the end of June, we will hit, I think, 185 million passengers. We may move slightly some of the growth out of Q2 and into Q3. We’ll take a couple of extra aircraft to temper, we might do a little bit of a winter growth as well. But if we get to 45 aircraft, we’re close enough that I think we’ll stick to 185. If we get all 51 aircraft, we could go a little bit over 185, not meaning there may be 186, 186.5 or something.

But I think that 45 aircraft and no major ATC screw-up strikes. And those strikes are damaging to passenger numbers. The French we’ve taken two now, French had a of 90, with the cancel about 40 flights. Berlin had some handling strike we cancel other 50 flights. Each of those cost us about 18,000 or 20,000 passengers on each of those days. So — but it’s based on those numbers. What are Boeing up to? Boeing are improving. They are — they seem to have reducing the manufacturing time. Their target is about eight weeks. They’re not at eight weeks yet. But we do think they’ll remove or eliminate all of those backlogs during this summer peak period, June, July, August, and the situation will get better. We will be much more hopeful than if we are left short a couple of aircraft this summer.

We’ll pick it up in the winter. And we will have all of the — that plus the 50 new aircraft well in time for summer of 2024. The reason I think the U.S. and Asian traffic is important is that in pre-COVID times, most of the legacy airlines would — and I know certainly Lufthansa has said this publicly. 50% of their short-haul traffic in Europe in the summer is long-haul traffic transatlantic and Asians connecting across Europe. And therefore, while we have a reasonably — I mean, we would not see much Asian traffic. We do see — I think the transatlantic traffic is a high-single digit percentage of our traffic in the summer. But it does fill up an awful lot of the legacy short-haul traffic around Europe and in a market where the legacies are either unwilling as in the case of Lufthansa, or unable as in the case of Alitalia, Air France, KLM to restore pre-COVID capacity.

If they’re filling up what is a smaller capacity during the summer with a significant growth of transatlantic and a return of Asian traffic. It generally kind of — it adds to that kind of slightly net-net capacity down. Now, I know we’ll come out of this and some analysts will do brilliant work researching all the slot filings for this year, say, no, no, capacity won’t be down this year. It will be. The legacy guys are still filing for all the slots. But, Lufthansa, TAP are running around and canceling slot within kind of two-week scanning this last system so that they’re able to block competition from us, particularly where we would go in and take up on new slots. But we’re not able to go and take up those new slots more than two weeks’ notice.

We’ve complained to the European Commission about this, particularly in the case of TAP, who are doing it on a kind of structural weekly basis. But so capacity will be down pre-COVID. Demand, I think, for legacy short haul will be up and constrained because of the recovery of transatlantic in Asia. And that will generally mean I think stronger bookings and higher airfares for the short-haul point-to-point carriers, and Ryanair dominate that marketplace. And all goes well, I think, for this summer’s traffic and pricing in a market where we will be the only air in operating at 25% more than our pre-COVID.

James Hollins: yes.

Michael O’Leary: Yeah. No. There’s always some issues out there that comes up. No, we’ve done a study in the capacity is open on pre-COVID. It won’t be. There is no appetite among the legacy guys to restore capacity. They seem to be very comfortable with constraining capacity, particularly in Lufthansa in the German market where the Germans are being screwed for very high fares in a marketplace where they’re a great national champion is just screwing them all for much higher airfares and not restoring capacity. But Lufthansa can’t help themselves. Next question, please.

Operator: Thank you. The next question is from Jarrod Castle at UBS. Please go ahead. Your line is open.

Jarrod Castle: Hi. Good morning, everyone. Just your — any thoughts, comments on Fly BE, Michael, would be interesting. Is there anything for you? Don’t really see it, but yes, just some comments. And then secondly, there’s been some really good results being printed on the packaged holiday side. We’ve had EasyJet holidays too. Would it be something you would revisit or are you just happy selling hotel rooms, flights as you’re currently doing? Thanks.