02-Nov-2010 7:10 PM

Ryanair raises full year result outlook as profits increase and yields improve

Analysis

Ryanair has raised its full year profit outlook with the carrier now expecting to exceed the upper end of its previous forecast range of EUR350 million to EUR375 million, to report a profit of EUR380-400 million subject to 4Q yields. Based on forward bookings in the current quarter, traditionally the weakest for European carriers, Ryanair anticipates that winter (H2) yields will exceed its previous forecast, with full year yields now anticipated to be at the upper end of the +5% to +10% range which was previously indicated - ie close to 10%.

European majors profitable, raising forecasts

Ryanair's result continues a trend of the major European airlines announcing higher earnings and upgrading forecasts although this has not always to the benefit of their share prices (Ryanair's share price for example tumbled 5.3% upon the release of the financial results as the results fell below analyst expectations). British Airways last week posted its first profit in two years - its share price also declined 3.6% upon the release - while Air France and Lufthansa have both raised their forecasts. Specifically, Air France-KLM raised its operating result forecast to positive after previously stated in Jul-2010 it expected to break even at the operating level for the year while Lufthansa, which reported an operating profit of EUR783 million in the three months ended Sep-2010, upwardly revised its operating result to exceed the EUR800 million market with a full year profit projected for its Austrian Airlines unit.

Ryanair benefits from the recession - double-digit profit, margin, revenue and yield growth

Ryanair, Europe's largest LCC, reported a 32% increase in second quarter net profitability to EUR330 million, with a net profit of EUR424 million in the six months to Sep-2010 and year-on-year growth of 13.5%, for a net profit margin of over 20%. (See end of article for key financial figures for both the three months and six months ended Sep-2010).

Ryanair operating profit margin and net profit margin: FY06 to 1HFY2011

CEO Michael O'Leary stated the carrier has benefited from the recession, commenting: "The old analysis is that in a recession people stop flying, or fly less. In fact it's not true. They just become much more price sensitive and switch off the high-fare carriers and on to Ryanair." The carrier added that it expects to continue to gain market share across Europe from the 'Big Three' network carries - Air France-KLM, British Airways and Lufthansa.

Passenger numbers advanced, +10% in the six-month period, with fares increasing 12% to EUR45 and revenue per passenger growing by the same degree to EUR54. Revenues strengthened 23% to EUR2.2 billion with ancillary revenues also up by a similar rate to EUR424 million faster than the 10% increase in passenger volumes - due to a combination of higher onboard spend (which was helped by longer sector lengths), improved product mix and higher Internet related revenues. Ancillary revenue per passenger rose 11% to over EUR10 per passenger.

Ryanair revenue growth and pax numbers growth: FY2005 to 1HFY2011

Ryanair passenger numbers and passenger load factor: FY2005 to 1HFY2011

Unit costs increase but airport unit cost falls; fuel costs up 44%

Unit costs increased by 13%, primarily due to the 12% growth in sector length and higher fuel costs. The carrier's fuel bill rose by 44% to EUR660 million on the back of an increased level of activity and higher prices. Unit costs excluding fuel rose by 4%, and sector length adjusted, they decreased 8% as Ryanair lowered aircraft ownership, airport and handling costs.

The carrier stated it continues to "welcome vigorous competition between airports for Ryanair's traffic growth". This resulted in airport unit costs falling by 3% during the half year as the carrier withdraws from 'high-cost' and problematic airports - such as Frankfurt Hahn, Marseille, Shannon and Belfast - and increases capacity in markets such as Italy, Spain and Portugal.

Ryanair operating expense breakdown

Currency: EUR (mill)		% Change	Explanation
Total operating expenses	1,636.2	+25%	Due to the 44% increase in fuel costs, and a 4% increase in unit costs (excluding fuel) and the higher level of activity associated with the growth of the airline.
Staff costs	190.7	+13%	Due to a 13% increase in average headcount to 8,007
Depreciation and amortisation	130.9	+18%	Due to an additional 46 lower cost "owned" aircraft in the fleet this period compared to the half year ended Sep-2009.
Fuel costs	660.2	+44%	Primarily due to the rise in fuel prices and the higher number of hours flown
Maintenance costs	43.9	+9%	Primarily due to an 8% increase in the total number of leased aircraft from 51 to 55.
Aircraft rental costs	49.7	+10%	Reflecting the 8% increase in the total number of leased aircraft from 51 to 55.
Route charges	221.7	+28%	Due to increases in the number of sectors flown, the longer sector length and the higher average unit rates charged by Eurocontrol.
Airport and handling charges	268.5	+7%	Reflecting the 10% increase in passenger volumes, offset somewhat by lower charges at new airports and bases launched.
Marketing, distribution and other expenses	75.1	+9%	Reflecting the increased level of activity and higher onboard product costs due to the growth in sales.
Icelandic volcanic ash related costs	14.1	n/a

Considering opening routes to major airports

As previously reported, Mr O'Leary recently stated the carrier is considering opening routes to all major European airports, with the exception of the top three - London Heathrow, Paris Charles de Gaulle and Frankfurt am Main - as slowing growth prompts it to modify its strategy of operating only to less-costly terminals and secondary airports. See related article: easyJet to slow growth, Ryanair to target major airports

Pax and fleet growth slowing but off a large base

Ryanair expects to report passenger growth of 11% this year, to 73.5 million before growth slows to the single-digits. However, Ryanir will continue its growth trajectory, adding 6.5 million passengers in FY2012 and 5 million passengers in FY2013.

Ryanair fleet and passenger growth

FY to Mar	Total fleet	Disposals	Pax traffic	Pax growth
2010E	232	-3	66.5m	+14%
2011F	272	-10*	73.5m	+11%
2012F	294	-3*	80.0m	+9%
2013F	299	-10*	85.0m	+6%

Key facts

The carrier also provided updates on its fleet plans, the impact of the Icelandic volcanic ash cloud, its dividend strategy, its position on Aer Lingus and its hedging strategy:

Shareholder dividend	Ryanair paid a one-time dividend of EUR500 million on 01-Oct-2010, equating to EUR 33.57 cents per ordinary share and marking the first-ever payment to shareholders. The dividend was paid after the carrier opted to limit fleet growth as the discount market matures. Mr O'Learly however stated it is "a long way away" from considering a further dividend of that magnitude.
Fleet	As at 30-Sep-2010 it had an operating fleet of 254 B737-800 aircraft (up from 193 at 31-Mar-2010). It also had firm orders for an additional 68 B737-800's. The delivery of these firm order aircraft will increase the fleet size (net of planned disposals) to 299 aircraft by 31-Mar-2013. Mr O'Leary said the company has kept open a dialogue with both Boeing and Airbus about acquiring more aircraft but added that there are no formal negotiations.
Icelandic volcanic ash	The closure of European airspace in Apr-2010 and May 2010 due to the Icelandic volcanic ash disruption, resulted in the cancellation of 9,400 Ryanair flights. The impact on the Group's operating results totalled EUR31.7m for the six months ended Sep-2010, comprising EUR15.9m of operating expenses and EUR1.7m of finance expenses attributable to the period of flight disruption, together with estimated passenger compensation costs of EUR14m.
Aer Lingus	Ryanair CFO confirmed the LCC has no plans to make a third offer for Aer Lingus unless the government voluntarily offers to sell Ryanair its stake Ryanair owns 29.8% of Aer Lingus and the Irish Government has a 25% stake. While the government has stated it plans to cut its budget deficit by selling state-owned assets, its intentions with Aer Lingus have not been made clear.
Hedging	Ryanair is 90% hedged for FY11 at USD730 per tonne and 60% hedged for FY12 at USD760 per tonne. The carrier extended its dollar cover and are 60% hedged for FY12 at EUR/USD 1.35 versus EUR/USD 1.40 for FY11.
Network	Operates 44 bases with services to 160 airports in 27 countries with 1,200+ routes and 1,500+ daily departures

Ryanair financial highlights for six month and three month periods to Sep-2010

Ryanair financial highlights for six months ended Sep-2010

Currency: EUR		% Change
Revenue (mill)	2182	+23%
Ancillary (mill)	423.8	+22.4%
Operating expenses	1666	+26.8%
Fuel	660.5	+43.7%
Airport and handling charges	268.5	+7.6%
Route charges	221.8	+27.5%
Labour	195.0	+15.7%
Operating profit (mill)	515.4	+13.9%
Operating margin	25%	-1 ppts
Adjusted profit after tax	451.9	+17%
Net profit (mill)	424.0	+13.5%
Revenue per passenger (EUR)	54	+12%
Average air fare (EUR)	44	+12%
Unit costs excluding fuel	n/a	+4%
Unit costs including fuel	n/a	+13%
Traffic pax (mill)	40.1	+10%
Load factor (%)	85%	stable
Sector length (km)	n/a	+12%
Total assets (mill)^	8140	+7.6%
Cash and cash equivalents (mill)^	1936	+#1.0%
Total liabilities (mill)^	4851	+2.9%

Ryanair financial highlights for three months ended Sep-2010

Currency: EUR		% Change
Revenue (mill)	1285	+30%
Ancillary (mill)	219.9	+21%
Operating expenses	890.5	+28.3%
Fuel	373.6	+52%
Airport and handling charges		+14%
Route charges	122.1	+32%
Labour	101.9	+18%
Operating profit (mill)	394.3	+32.4%
Adjusted profit after tax (mill)	313.4	+25%
Net profit (mill)	330.0	+31.9%
Average fares	n/a	+17%
Revenue per passenger	n/a	+15%
Unit cost excluding fuel	n/a	+6%
Unit cost including fuel	n/a	+17%
Passenger numbers	22.1	+12%
Load factor	88%	Stable