10-Nov-2011 2:01 PM

Ryanair raises full-year profit target by 10% following strong 1H profit and yield result

Analysis

Ryanair, the world's largest airline by international passenger numbers, raised its full-year profit target by 10% to EUR440 million, as higher yields are expected to offset stubbornly high fuel prices. The carrier reported a 20% increase in adjusted profit after tax in 1HFY2012 (six months ended Sep-2011), bucking the industry trend, and amid strong performance in passenger, yields and top line revenue (including ancillary) growth.

Ryanair CEO Michael O'Leary stated the carrier expects 2HFY2012 yields to increase by 14%, more than the previously forecast 12% growth. Supporting the anticipated yield improvement, capacity will be reduced by 4% in the second half to safeguard profitability over the low season amid stubbornly high fuel costs. The decision is expected to result in a 10% reduction in passenger numbers, equating to a reduction of 500,0000 passengers in Nov-2011, as up to 80 aircraft are grounded. "Grounding 80 aircraft means we can hang on to higher fares," Mr O'Leary said.

Ryanair passenger and fare growth (%): FY2008 to FY2012F

Mr O'Leary expects the carrier will report a loss in 2H2012 in the region of EUR100 million, compared with a loss of EUR30 million in the previous corresponding period, and grounding aircraft will mitigate potentially higher losses. Mr O'Leary stated a deepening of the economic slowdown is unlikely to have a major impact on the carrier. "We are well booked for the coming months, fractionally ahead of where we were last year. So far we have not seen any impact from recession," CFO Howard Millar added.

Ryanair financial highlights for the six months ended Sep-2011:

Operating revenue: EUR2712.4 million, +24.3% year-on-year;
- Ancillary: EUR486.5 million, +14.8%;
Operating costs: EUR2061.9 million, +23.7%;
- Labour: EUR222.5 million, +14.1%;
- Fuel: EUR907 million, +37.3%;
Operating profit: EUR650.5 million, +26.2%;
Net profit: EUR543.5 million, +28.2%;
Passenger numbers: 44.7 million, +12%;
Load factor: 85%, -1.0 ppts;
Revenue per passenger: EUR61, +11%;
Average fare (inc baggage): EUR50, +13%;
Passenger numbers forecast:
- FY2012: 75 million, +4%;
- FY2013: 79 million, +5%.

Strong profitability growth in first half; operating profit margin of 24%

Ryanair reported a 28% increase in half-year net profit to EUR544 million, a 20% increase in adjusted profit after tax to EUR543.5 million and a 19% increase in operating profit to EUR651 million, all outpacing the 12% rise in passenger numbers. The carrier's operating profit margin decreased by 1 ppt to 24% in the period, with the adjusted net margin also weakening by 1 ppt to 20%.

Ryanair operating profit margin and net profit margin: FY2006 to 1HFY2012

Revenues increase 24% with 15% increase in ancillary revenue and 11% growth in revenue per passenger

Revenues increased by 24% to EUR2.7 billion with a revenue per passengers increase of 11% to EUR61 in the period, primarily driven by 13% increase in average fares (including baggage fees). The carrier noted this increase is due to slower growth, a better mix of new routes and bases, as well as rising competitor fares/fuel surcharges.

Ancillary revenues increased 14.8% to EUR486.5 million in the six-month period, outpacing revenue growth and contributing 18% of total revenues for the carrier. Ryanair attributed the improved ancillary performance to "an improved product mix and higher internet related revenues".

The LCC's major move in the ancillary area has been recent trials of reserved seating for 21 extra-legroom seats on selected routes for a fee of EUR10/GBP10 per seat. The trial, which extended its reserved seating trial from 40 to 80 routes, was launched on its Dublin-Gatwick and Dublin-Malaga service in Apr-2011. The carrier has not ruled out the possibility of rolling it out on all of its 1500 routes.

Mr O'Leary previously said that reserve seating would be included in Ryanair's strategy "as long as it doesn't compromise or completely destroy priority boarding.… There's a balance to be struck there between reserved seating for those who want to pay more for reserved seating … but not if it's just the priority borders switching directly across to reserved seating". Ryanair expects reserved seating to be more popular on longer sectors and family travel. "I don't think, for example, we'll roll out reserved seating across every route, domestic routes within Spain or within Italy," he said. "We're not sure if it would have any appeal at all."

Priority boarding is EUR5/GBP5 and requires less IT infrastructure and costs than seat reservation. Some studies suggest not assigning seats speeds up boarding.

During the Sep-2011 quarter, the carrier also launched the Ryanair "Cash Passport" Mastercard prepaid card in the UK and Italy, with the intention to roll out the product across the network over the coming months.

Revenue growth (just) exceeds costs growth with fuel costs continuing to bite

While revenue growth gained strongly in the six-month period, operating costs were also up heavily. Operating costs increased 23.7% year-on-year in the first half to EUR2062 million driven by a 37.3% year-on-year increase in fuel costs to EUR907 million.

Ryanair cost breakdown: 1HFY2011 vs 1HFY2012

Unit costs rose at the same pace as average fares, by 13%, due mainly to longer sectors and a 37% increase in fuel costs. Excluding fuel, sector length adjusted unit costs were flat, as the carrier continued its rigorous cost control focus.

Cost rises at Ryanair, which place upward pressure on airfares and thus threaten to dampen revenue and traffic growth, are an ongoing challenge. Significant unit cost increases were across all cost items, and with Ryanair generally slowing its rate of growth, it would not be unreasonable to expect unit costs to creep up. The LCC has previously stated it expects the EU Emissions Trading Scheme (EU ETS) to cost EUR15 million p/a from next year, when the aviation industry is included in the scheme.

Meanwhile, the carrier continues to focus on controlling its fuel bill through hedging. The carrier is 90% hedged for FY2012 at USD820 per tonne (approximately USD82 pbl), up 12% on last year but significantly below current prices. The carrier also recently extended its FY2013 fuel cover and are 90% hedged for 1H at USD990 per tonne (USD99pbl) and 50% for 2H at USD980 per tonne (USD98pbl). Mr O'Leary has commented fuel remains the largest factor slowing the carrier's growth. He said: "We can handle it, but that's one of the reasons we're slowing down the growth rate this winter, sitting 80 aircraft on the ground. We don't want to fly a lot of extra flights losing money paying USD100 dollars a barrel for oil."

Ryanair fuel hedging outline

	Fuel cost/tonne FY2012	Fuel cost/tonne FY2013	% year-on-year change
1Q	USD795 (Act)	USD995 (90%)	+25%
2Q	USD 800 (Act)	USD985 (90%)	+23%
3Q	USD 805 (90%)	USD1000 (50%)	+24%
4Q	USD 970 (90%)	USD970 (50%)	0%
FY	90% hedged at an average of USD820pmt (+EUR350 million)	73% hedged at an average of USD990pmt (+ EUR250 million or EUR3 per pax)

While expressing continued concern about escalating fuel costs, the carrier has continued to assert that sustained high oil prices are "forcing competitors to further increase their fuel surcharges and fares which make Ryanair's low fares even more attractive". Ryanair does not place a fuel surcharge on any fares. Ryanair says it benefits from recessions, when consumers are looking for cheaper deals. Deputy CEO Howard Millar has previously said the LCC's continuing ability to attract passengers reflected "the recession in people's minds" as much as anything else.

75 million passengers expected in FY2012; Ryanair set to expand despite short-term cutbacks

Ryanair handled 44.7 million passengers in the first half, a 12% year-on-year increase, with growth expected to slow to 4% in the full year to 75 million passengers. Growth of 5% is anticipated in FY2013 to 79 million passengers, reflecting a slowing growth trend for the well-established LCC.

Ryanair passenger number and pax growth: FY2005 to FY2013F

Meanwhile, Mr O'Leary stated Ryanair was talking to 30 new airports to which it currently does not operate. Mr O'Leary said that, in some cases, large airports have offered Ryanair bargain landing fees because airline mergers and takeovers had seen carriers abandon their slots. "What has changed in the last two years is that more and more airports that did not want to deal with us do want to deal with us because of the consolidation," he said. Mr O'Leary has previously stated the carrier plans to almost double the number of passengers and stretch its reach across Europe.

In an interview with the Financial Times earlier this month, Mr O'Leary stated he wanted to increase passenger numbers to between 120 million and 130 million over the next decade, which would make Ryanair one of the largest airlines in the world.

Mr O'Leary added Ryanair could increase its share of the European market as the tough economic environment boosts demand for low-cost travel. He added that the airline could deploy 50 new aircraft to serve Scandinavia and a further 100 to service the Baltic states, Poland, Hungary and the Czech Republic.

Meanwhile, the carrier stated its new routes and bases continue to perform well. The carrier opened its 45th base in Manchester last week, with its 46th (Wroclaw, Poland) and 47th (Baden Baden, Germany) to be launched in Mar-2012. The carrier added that it plans to open its 48th base at Warsaw (Modlin) as soon as current negotiations with the airport have been concluded. Ryanair's network covers 160 airports in 27 countries with over 1300 routes and 1500 daily departures at present.

Ryanair base network: Nov-2011

BMI takeover good news for Ryanair: O'Leary

Mr O'Leary has claimed it will handle an extra 10 million passengers p/a by summer 2012 to 80 million passengers, thanks in part to the acquisition of bmi by British Airways parent IAG.

"The IAG merger with BMI will see more and more loss-making short-haul routes closed as slots are used for medium- and long-haul destinations. Those short-haul passengers will switch into our services. A lot of bmi's short-haul routes from Heathrow will be closed or cut back, leading to more growth opportunities for Ryanair from Stansted, Luton and Gatwick," Mr O'Leary said. He continued: "Europe continues to migrate in the same direction as the US. There's no business-class across the US on domestic flights and everybody is flying low-cost. What's driving it is the implosion of flag carriers in short-haul markets."

The carrier added the move would create opportunities for expansion on short-haul routes as BMI slots are utilised for long-haul routes, accelerating the exit of mainline carriers from services within Europe. Mr O'Leary added bmibaby will "probably get sold, closed down, or go bust. It creates more demand for our routes".

He also stated the LCC has had success in attracting passengers from network carriers, such as British Airways and Lufthansa. Ryanair expects to double its Greek traffic from 1 million passengers to 2 million, a level Mr O'Leary believes will rise in the event of Greece replacing the euro with the drachma. "If Greece leaves the euro there will be a massive devaluation of the drachma and the one industry that will boom is tourism. You'd get masses of people heading there for their holidays. We're ideally positioned to benefit from that."

Ryanair continues to make noise on aircraft purchasing

Mr O'Leary stated the carrier would need "another 200 aircraft over the next five to 10 years", with the LCC looking at manufacturers other than Boeing.

Mr O'Leary talked up the Commercial Aircraft Corp of China (COMAC), a competitor to Boeing, while also talking down Boeing in a move to make him seem uninterested in purchasing Boeing aircraft. His reckoning is that will attract him a larger discount from Boeing.

Mr O'Leary said COMAC will change the face of the aerospace industry if it succeeds in delivering its 174-seat C919 aircraft by 2016, stating: "The Boeing and Airbus duopoly is ending." He continued: "The Chinese tell us they can stretch their aircraft to make a 199-seat plane. If they do, we'll buy it. If they [COMAC] deliver a 199 or a 200 seat aircraft then it does not matter what Boeing do. We would be all over them like a rash. If the C919 gets delivered by 2016 it totally changes the dynamic for aircraft manufacturers. The Chinese will take a huge amount of orders away from Airbus and Boeing overnight which will create significant turmoil in the marketplace."

Mr O'Leary stated Ryanair is meeting regularly with COMAC executives and that COMAC is talking about delivery of a 200-seat aircraft by around 2018. But this leaves a gap in Ryanair's short/medium-term fleet planning that only 737s fan fulfill.

In addition to COMAC, Ryanair is also in talks with Boeing, with the CEO meeting both manufacturers later this month. Mr O'Leary made his skepticism of the B737MAX clear, saying: "They have not yet designed the aircraft. They cannot tell us what the operating costs will be because it is not designed, they do not know where they are going to build it yet, they do not know when it is going to fly either. But they do assure us that they will be able to answer those questions by the end of November."

Ryanair has previously expressed its disappointment at Boeing's decision to scrap plans for an all-new B737, instead upgrading its 737 with new engines. "Our preference would have been for a redevelopment," said deputy CEO Howard Millar. "The key driver will be pricing and how much fuel it would save. Its very early days, but clearly it's something we have to look at." Meanwhile, Mr Millar stated the A320neo is a less likely option for the carrier, if for no other reason than Airbus will not give Ryanair time, knowing the carrier is famous for price negotiations. Mr Millar added the carrier is not considering the SuperJet.

Mr Miller also described the environment for aircraft financing as the worst he has ever seen, as a number of European banks, including Societe Generale (SocGen), BNP Parabis, DVB Bank, BNP Parabis and Natixis, scale down their aircraft financing businesses. SocGen, BNP Paribas, Natixis and Credit Agricole arrange around 30% of aircraft agreements that include arranging financing from other lenders. Most aircraft are financed in US dollars and Mr Millar added that financing will increasingly worsen as manufacturers ramp up production, with more airlines competing for bank loans. At the start of the summer, Ryanair closed Export-Import Bank of the United States' first euro-denominated bond, and more recently issued a US dollar bond.

In the short term, the carrier, which operates an all-Boeing fleet, plans to increase its fleet from 272 new aircraft as at FY2011, to 294 aircraft in FY2012 and 305 aircraft in FY2013. The carrier has 44 B737 deliveries outstanding at present.

Ryanair fleet and traffic plans: FY2010 through FY2013

	Fleet (net)	Fleet disposal	Passengers (mill)	Traffic growth
FY2010	232	-3	66.5	+14%
FY2011	272	-10	73.5	+11%
FY2012	294	-3^	75.0	+4%
FY2013	305	-4^	79.0	+5%

Balance sheet one of the strongest in the industry

Ryanair stated its balance sheet "remains one of the strongest in the industry", with EUR3.1 billion in cash despite returning EUR931 million to shareholders over the past three years. The carrier is expected to announce another dividend of around EUR500 million this time in 2012, according to Mr O'Leary, with COO Michael Cawley stating the carrier "will have a substantial dividend next year".

A share buyback is also a possibility in the coming 18 months should the stock price weaken further, he said. The carrier significantly reduced net debt during 1H2011 from EUR709 million to EUR372 million despite another EUR85 million share buyback. The carrier added it has taken advantage of lower interest rates to fix almost 60% of its existing debt for the next seven years at "all in" rates of just over 3.7%. The carrier added its long-term dollar hedging programme will ensure its 35 Boeing deliveries in 2011 and 2012 are funded at Euro to US dollar exchange rates of 1.43, which is "significantly better than current rates".

Ryanair gripes - Dubin Airport, BAA, Aer Lingus

Ryanair continues to explain about airport charges at its bases, with the carrier particularly focused on slamming the charges at Dublin Airport. Mr O'Leary warned that Ryanair expects Dublin Airport's traffic to fall in calendar 2011, which would be its fourth consecutive annual fall, amid an over 40% increase in airport charges. Mr O'Leary noted that rival Aer Lingus has described the higher charges as "insane", with Etihad labelling the charges "too excessive".

The carrier also stated it "regrets" the decision of the Ferrovial/BAA monopoly to further delay the sale of Stansted (instead bringing forward the sale of Edinburgh), to comply with the UK Competition Commission's 2009 breakup recommendation. The carrier commented: "While the Competition Appeals Tribunal considers this pointless judicial review, these delays allow BAA Stansted to continue to charge excessive fees and generate monopoly profits, even as Stansted's traffic declines from 24m passengers in 2007 to less than 18m in 2011".

EUROCONTROL charge increases were also criticsed, with the carrier also unsurprisingly taking aim at Aer Lingus, which it has labelled as a destroyer of shareholder value.

Ryanair won't rule out sale of its Aer Lingus stake to Etihad

Mr Millar stated the sale of the carrier's 29% stake in Aer Lingus will likely be off the agenda in the coming months. He further added Ryanair has not spoken to anyone about a possible sale and is waiting for the Irish Government to find a buyer for its stake before selling.

Meanwhile, deputy CEO Michael Cawley stated the carrier would not rule out selling part of its stake in Aer Lingus to Etihad if an approach is made. Etihad CEO James Hogan indicated last month the airline might be interested in acquiring the Government's stake. However, Etihad is unable to acquire more than a 49.9% interest in Aer Lingus as the airline is based outside the European Union.

Meanwhile, an effort by Ryanair to call an EGM at Aer Lingus in its continuing attempt to force the release of a report into a controversial leave and return report could be headed for the High Court. Mr Cawley said the airline had just replied to a letter received last week from Aer Lingus chairman Colm Barrington telling Ryanair that its recent request for the EGM was legally invalid. Mr Cawley said that Ryanair has subsequently replied to Mr Barrington informing him that it believes its request is valid.

Ryanair has been pushing for the public release of the report, which was prepared by Deloitte and McCann Fitzgerald. Aer Lingus had to come to a EUR29.5 million settlement with the Revenue Commissioners earlier this year after the 2008 leave and return scheme was deemed to have generated additional tax liabilities.

Solid result and profit upgrade despite turbulent operating environment

The proven Ryanair business model delivered a strong performance in a turbulent operating environment, highlighting that the LCC's competitive, strategic and financial position remains very strong and its model is suited to a recessionary environment. Meanwhile, double-digit fare increases and the turbulent economic environment in the Euro area have not dissuaded passengers from flying with Ryanair, with Mr O'Leary noting: "Whatever the crisis, it is not going to stop people from flying. People are becoming much more price sensitive". He added that Ryanair remains comparatively cheaper than its closest rivals in the European short-haul market, despite the increases. According to Ryanair, easyJet's average fare is EUR71 while Aer Lingus charges EUR96, both considerably higher than Ryanair's average fare of EUR45.