Ryanair Holdings plc (NASDAQ:RYAAY) Q3 2024 Earnings Call Transcript

Ryanair Holdings plc (NASDAQ:RYAAY) Q3 2024 Earnings Call Transcript January 29, 2024

Ryanair Holdings plc misses on earnings expectations. Reported EPS is $0.07 EPS, expectations were $0.35. RYAAY isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Michael O’Leary: Okay. Good morning, ladies and gentlemen. You’re all very welcome to the Q3 results call. As you see earlier this morning on our ryanair.com website, we published our Q3 results together with an MD&A and a Q&A section with myself and CFO, Neil Sorahan. A couple of quick themes. As you see, we reported a Q3 profit after tax of €15 million. Traffic and fares were ahead of the prior year, but closing Christmas and New Year loads and yields were softer than previously expected, as we had to lower prices somewhat in response to the very sudden, but surprising but very welcome removal of flights from most of the major OTA pirate websites in early December. Profit after tax, however, for the 9 months ended 31 December was up 39% at €2.19 billion.

Prior year, it was €1.58 billion. Just to touch on some brief Q3 highlights. The traffic grew 7% to 41 million. Revenue per passenger was up 9%. Average fares were up 13%, mainly due to a very strong Christmas and the October bank holiday weekend and ancillary revenues up 2%. MSCI raised their ESG rating on Ryanair from a BBB to an A in December. Our fuel bill rose €320 million in the quarter, up 35% to €1.2 billion. At the quarter end, we had 136 B737 Gamechangers in the total fleet that was significantly behind the original deliveries due to Boeing delays. More importantly, going forward, our fuel hedging, we’ve extended fuel hedging. We have 65% of our FY ‘25 fuel now hedged at $79 per barrel. This year, we are hedged at $89 per barrel.

So we have already banked a saving of €450 million into FY ‘25. And as you will all be aware, we have ended the first interim dividend of €0.175 per share is payable on the February 28. I think just to touch on growth in fleet. At the end of Q3, we’ve taken delivery of 136 737 Gamechangers. We now expect to have up to 174 of these aircraft in our fleet by the end of June in time for peak summer 2024, that’s up 50 aircraft from summer 2023. That would still be 7 aircraft short of our contracted deliveries due to Boeing delivery delays. However, those new aircraft means we have a bumper summer 2024 schedule now on sale. It includes 169 new routes, our first 11 domestic routes in Morocco and our first summer with 23 routes in Albania, are in to and from Tirana, the capital city of Albania.

While travel demand remains high, we expect summer ‘24 EU short-haul capacity to be behind where it was in summer ‘23 as a considerable number of our competitors ground the A320 aircraft in Europe due to the Pratt & Whitney engine issues and Boeing delivery delays constrain our growth from 57 to 50 aircraft. We are continuing to work closely with Boeing to minimize delivery delays and we have invested in additional engineering over – Ryanair engineering oversight to improve the quality control in both Wichita and Seattle. The recent MAX 9 grounding was a disappointing setback, but we welcome the ungrounding of the MAX 9 last week. Ryanair do not operate any MAX 9 variant. There are no MAX 9 aircraft in Europe, and therefore, it is largely a U.S. issue.

However, Neil visited in Seattle in January, met with Boeing’s senior management and we urge them and they have agreed to increase their quality assurance resources on the ground in Wichita and Seattle. We are putting more engineers into Wichita and Seattle to run extra checks on our deliveries, but also on our recent 737 deliveries, we’ve noted improvements in the quality with fewer delivery defects on the 12 aircraft we got in the fourth quarter before Christmas. However, we do believe Boeing have more work to do to improve quality and reduce delivery delays. But – and I want to stress this, we are fully supportive of the initiatives that David Calhoun and Brian West are taking to improve Boeing’s performance and production. It is critical, we believe, to Boeing’s continued performance that we support Calhoun and West.

I think they are a good team. I have concerns about the management in Seattle, but I have a lot of confidence in Calhoun and Brian West. I think they are on the right track. The MAX 9 grounding was an unfortunate event, and it does indicate that quality does need to be improved in Boeing, but we are very supportive and a lot of confidence in what Calhoun is doing under his leadership. We welcome – on the OTAs, this is a significant event in December. The timing of the OTA taking, as I said, was a bit unfortunate, because it was the first week in December. With Christmas coming, you can’t just go in and open up and dump seats to counteract that. We think historically, these OTA pirates generally account for between 10% and 15% of our volume.

So a sudden removal of that meant, we saw a sudden – or a very short-term dip in our bookings. We would normally respond to that by opening up price promotions, but we didn’t want to do that in the run into Christmas. We therefore think we’ll take a hit of 1% or 2% on load factor in December and January. We will take it into hit on yields during December and January, but we think it will be short-lived and we are happy with the forward bookings, particularly out into February and March, although March is slightly – is artificially enhanced by having the first half of Easter in that. Much more important for Ryanair and our passengers is to convert these OTA pirates into what we now would call kind of approved OTA partners. The partnership agreement we signed last week with loveholidays who were our fourth largest OTA and Kiwi.com this morning, who are our largest – where our largest OTA pirates, are critical, we think to protecting customers from OTA overcharges and scams.

As part of this agreement, we now give these two approved OTA direct feed of inventory from the ryanair.com website and they agree as part of the deal, no overcharging of passengers for either airfares or for any of our ancillaries. The bookings are made directly in the ryanair.com website with the customer’s actual and real e-mail address and real payment details, so that if we need to send a customer an e-mail or some flight information, it goes directly to the customer, it doesn’t get lost in some OTA pirate fake e-mail address. And whenever we have to refund to passengers, we can now make the bookings directly to the passengers. We think this is the way forward and we will continue to campaign to outlaw the illegal screen scraping and the customer overcharging and scamming being undertaken by so many others of these OTA pirates and converted them to the same system or the same mechanism that we now agree with loveholidays and Kiwi.

Looking forward to the summer 2024, we expect airlines will continue to consolidate. We expect capacity will be constrained by both the consolidation by the lack of aircraft deliveries post-COVID across Europe. And I think the A320 fleet grounding this summer, we expect about 10% of Europe’s A320 fleet to be grounded for the – while they address the Pratt & Whitney engine issues and that this will mean tight supply for summer 2024. And while we still have 50 additional aircraft into that marketplace, we don’t have the original 57 we had hoped for. So we think there is going to be a reasonably strong summer pricing. Already today, our bookings are running about 5% ahead of where they were, forward bookings into the summer about 5% ahead of where they were this time last year.

Pricing is up by a low single-digit percentage. Again, some of that, I think, is a factor of the fact that the first half of Easter has moved into March. So, Q4 is strong. But therefore, there is less of an impact of Easter pricing in April. But much work remains to be done, but we are very pleased with where we are for summer 2024. In terms of outlook, we are targeting 183.5 million passengers in the current year. That will still be a monumental achievement. The original budget was 185 million. But if you take the ATC – it’s been over 60 days of ATC strikes, that’s cost us over 1 million seats. The Tel Aviv cancellations, which have been running since the end of – since the end of November, that’s cost us about another 600,000 seats and the Boeing delivery delays have meant we’ve had to truncate both the summer 2024 – summer ‘23 schedule and our winter ‘24 schedule.

So, it will still be a very strong performance. However, as a result of these lower load factors, particularly in Q3 and the kicking in of some higher productivity pay agreements with pilot unions across Belgium, Italy and in the UK, these are productivity enhancements that we intend to rollout to most of the other by agreement with the other pilot unions and groups between now and summer 2024, which will significantly improve our operational resilience and reduce pilot attrition. We now expect full year ‘24 ex-fuel unit cost to rise by about €2.50. That would still leave a dramatically wider cost gap between Ryanair and our main European competitor airlines, two of whom reported last week. Q4, which is traditionally the weakest quarter will also be impacted by the partial unwind of free ETS carbon credits in the January 1, but we will benefit from a strong first half of Easter traffic falling into late March, although this is unlikely to offset the weaker than previously expected load factors and yields in late Q3 and early Q4.

We are therefore this morning narrowing our full year FY ‘24 profit after tax guidance to a range of between €1.85 billion to €1.95 billion. It was previously €1.85 billion to €2.05 billion. So we think the number will come in just under €2 billion for the full year. However, this guidance and the full year results still remains heavily dependent upon avoiding unforeseen adverse events in Q4, such as the Ukraine war, the Israel Hamas conflict and any further Boeing delivery delays, which might damage us in the run into Easter. We have also given you a full update or we have attached to the release, a full update on the OTA pirate situation. I think this has been one of the most dramatic victories for Ryanair in recent years. And I would always be happy to take a short-term pain if it’s getting rid of OTA pirate scamming and overcharging our customers and moving those into a more cooperative working with us.

It also, I think the new agreement this morning with loveholidays and with Kiwi exposes the falsehood of some of these OTA claims that Ryanair is just trying to eliminate OTA. We are not – we have, for many years, worked with OTAs like Google Flight who just – who are an honest price transparency website, but who send passengers directly to Ryanair to make the booking. The reason we have a problem with the OTA pirates is the illegal screen scraping of our digital – of our data and then using that to scam customers for excessive airfares, inflated ancillary services, and in some cases, charging them for non-existing services such as refund insurance and/or change fees, while it’s a non-changeable ticket. But I think it’s been a very good month or 2 months work and is long-term very much in Ryanair’s interest and in the interest of our consumers that they can get access to our low fares, our low cost ancillary services without being scammed by some intermediaries.

Neil, I am finished. Do you want to – anything you want to highlight in terms of the finances, the balance sheet and/or the dividend.

Neil Sorahan: Yes. I suppose just on the balance sheet, ended the quarter very strongly with just over €2.9 billion in gross cash and importantly, net cash balance €150 million. We continue to be the most highly rated airline in the world with a BBB+ rating from Fitch and S&P. And a big advantage that we have in these markets is unencumbered Boeing 747 fleet, 546 unencumbered aircraft. And so we are generating net interest income in the business at a time when our competitors are refinancing or taking on expensive leases. So that’s a big competitive advantage that we have. You touched on the hedging, but I think we shouldn’t underestimate the benefit of the certainty that we have now in our hedging out to the end of March 2025, €450 million worth of savings being locked in and one are very volatile markets at this point in time.

And then, of course, we have got our first interim dividend at the end of next month, €0.175 per share and we’ll have something similar again after AGM approval in September. And that’s pretty much all I wanted to add, Michael.

Michael O’Leary: Okay. Alright. [indiscernible], then we’ll open it up to Q&A, please.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today comes from Harry Gowers from JPMorgan. Please go ahead, Harry. Your line is now open.

Harry Gowers: Good morning, gents. Hi. Two questions, if I can. First one is just on the ex-fuel unit costs, maybe you could talk through the increase in the group productivity part and what impact we might see into 2025 and so any latest force directionally on ex-fuel cost per pack for March 25? And then second one, we saw some comments from United, I think last week or so and they were making plans, that doesn’t include the MAX 10 going forward potentially. I guess if other airlines start to cancel order – fair orders, would you happily take on some of those slots over the next few years or are you quite content with your current plans? Thanks a lot.

Michael O’Leary: Okay. Neil, I’ll ask you give the ex-fuel unit costs. It’s a bit early yet for FY ‘25. We haven’t yet finalized the budget, but I’ll ask Neil to give more detail. United, I thought this comment out of United last week was stupid. If they want to hand over or they want to cancel some of their MAX 10 deliveries, frankly, Ryanair will take them. We would be very happy to take aircraft early. The MAX 10 is a very good aircraft. We can’t wait to get it. It offers us 20% more seats. It burns 20% less fuel. The MAX aircraft has now in Ryanair alone, we completed over 1 million flights last year, more than 20% of those on MAX aircraft, great operational reliability. This is a great aircraft. The MAX 9, the plug was an unfortunate incident.

It does highlight the need for improved quality control in Boeing, but they are still making great aircraft. As by the way, our Airbus, who are making great aircraft despite the fact that they have a – the Pratt & Whitney engine is a major issue for Airbus – air operators going forward. So – but I think we have two large manufacturers they are both making great aircraft. The stupidity of the United comments last week is that their order books are full out to 2030. So if United isn’t going to take the MAX aircraft, they are not going to replace them or substitute them with Airbus aircraft. But if they want to delay or cancel any of those MAX 10 aircraft, Ryanair will be the first people into Seattle to talk to Boeing about taking those aircraft, although I suspect there will be a queue of customers waiting to take those aircraft, given how tight the OEM supply is between now and 2030.

So I thought the United comments were unhelpful, stupid, but if they want to do something stupid like cancels of the MAX 10 orders, Ryanair will be very happy to take them. Neil, do you want to talk…

Neil Sorahan: Yes. Sure. Harry thanks for the question. In the quarter, it’s sales and for this year, as you’ve seen from the commentary this morning, we are looking at about another €0.50 on unit cost ex-fuel, so €2.50 ahead of prior year. Some of that’s down to the lower load factor in Q3 in early January. The balance is kind of down to the productivity pay improvements that we are putting through for our people. Those pay improvements will obviously have to then annualize into next year. So you – we will see a little bit of cost increase as a result of that next year. But our fuel savings are going to more than offset any unit cost ex-fuel increases that we have coming through on a year-on-year basis.

Michael O’Leary: And I think the people will over assess you on a quarterly basis, Harry, on unit costs. Actually, the key issue here is still Slide 4 in the presentation. While we are not in any way kind of relaxed about unit cost or cost control, the gap between us and other competitors with easyJet in Europe, and in particular, the other airlines in the U.S. is widening dramatically as we – but we do have to keep our pay competitive. We have fixed – we have pay agreements in place that cover basic pay and productivity pay with pilots and cabin crew that run for the next 3, 4 years. But if we are – our earnings are rising dramatically and there is some pressure on competitive pay, particularly for pilots. It’s up to us to do – to work with our unions and our pilots and keep their pay competitive, which is what we will do.

Harry Gowers: Okay. Thanks, Michael.

Michael O’Leary: Thanks, Harry. Next question, please.

Operator: Next question that comes from Stephen Furlong from Davy. Please go ahead. Your line is now open.

Stephen Furlong: Hi, Michael. Yes, two questions. I noticed maybe one for Neil, just maybe talk about the headwinds or tailwinds and cost into the next year or two. I saw there the EU were talking about ETS reform and the rebasing of current airline allowances, for example, maybe that’s a minor thing, but you might just talk about that and anything else on just big positives or headwinds for costs. And then on pricing, Michael, I know on the pre-record, you said pricing is strong demand, very, very strong. Anything in terms of markets where it’s – I mean, I guess it’s a function of capacity where is better than other places, that would be great? Thank you.