30-Jul-2013 9:00 PM

Ryanair’s 1QFY2014 net profit falls, but 2Q will be key to the full year

Analysis

As flagged by Ryanair in May, its 1QFY2014 net profit fell as a result of higher fuel costs and lower average fares (-4%), the first year-on-year fall in average fares in 14 quarters. With 90% of its FY2014 fuel bill hedged at USD980 per tonne, the key unknown variable for the full year is the development of average fares.

Ryanair says yields on close-in summer bookings have been weak recently, but it expects them to increase in 2Q. Moreover, ancillary revenue growth was strong (+25%) and this should also continue into 2Q. As is usual at this stage of the fiscal year, it made no change to its FY2014 net profit target, which is lower than market consensus forecasts.

Summary

Ryanair's 1QFY2014 net profit fell by 21% due to higher fuel costs and lower average fares.
The airline expects average fares to increase in 2QFY2014, but yields on close-in summer bookings have been weak recently.
Ancillary revenue growth was strong (+25%) and is expected to continue into 2Q.
Ryanair's net profit guidance for FY2014 remains unchanged at EUR570 million to EUR600 million, lower than market consensus forecasts.
Operating costs grew faster than revenues, with fuel costs accounting for almost half of the total.
Ryanair's fleet is expected to grow to 410 aircraft by FY2019, with an increase in passenger numbers from 100 million to 110 million.

1QFY2014 net profit down 21%, but FY guidance unchanged

Ryanair's net profit fell by 21% to EUR99 million in 1QFY2014 (Apr-2013 to Jun-2013). The operating margin fell from 10.3% a year earlier to 7.7%. Passenger numbers were up 3% and revenues grew by 5%. Although average fares fell by 4% to EUR42, total revenue per passenger increased by 1% to EUR58. Ryanair had expected its 1Q net profit to fall as a result of lower average fares and higher fuel costs.

Ryanair's net profit guidance for FY2014 remains unchanged at between EUR570 million and EUR600 million, but this looks cautious compared with a consensus forecast among analysts of EUR646 million (source: Bloomberg, 29-Jul-2013).

Ryanair 1QFY2014 financial highlights

	1QFY2013	1QFY2014	Change
Passengers million	22.5	23.2	3%
Load Factor	82%	82%	0%
Avg. Fare (incl. bag) EUR	44	42	-4%
Rev. Per Pax. EUR	57	58	1%
Revenues EUR million	1,284	1,342	5%
Operating profit EUR million	132	103	-22%
Operating margin %	10.3	7.7	-2.6
Profit after Tax EUR million	99	78	-21%

Ancillary revenues were up 25%

Revenue growth of 5%, faster than passenger growth in the quarter, was due to ancillaries. Scheduled ticket revenues fell by 1%, with average fares down 1%, partly as a result of the change in the timing of Easter from April last year into March this year, thereby removing its beneficial impact out of 1Q. Average fares were also affected by the weakening of the GBP against the EUR and by the Jun-2013 French ATC strike.

Ryanair expects average fares to rise in 2QFY2014, by around 5%, although it says that yields on close-in summer bookings have been weak in recent weeks (likely due to the recent hot weather in North Europe).

Ancillary revenues grew by 25% to account for 27% of total revenues, their highest ever proportion. The strong growth in ancillaries reflected an improved product mix, the introduction of reserved seating across the network, higher admin/credit card fees and internet-related revenues. According to CEO Michael O'Leary on the conference call to discuss the 1Q results, there is little cost attached to reserved seating and the margins derived from ancillary revenues are also increasing.

Reserved seating, which cover eight rows of the aircraft, is helping to attract business-type passengers, particularly on routes where Ryanair has three or more daily frequencies. That said, Ryanair will not use travel agents or GDS to increase its appeal to business passengers.

Ryanair revenues: 1QFY2014

EUR million	1QFY2013	1QFY2014	Change	% of total in 1QFY2014
Scheduled revenues	998.0	985.7	-1%	73%
Ancillary revenues	285.9	356.5	25%	27%
Total	1283.9	1342.2	5%	100%

Operating costs grow faster than revenues

Growth in operating costs of 8% was faster than revenue growth. Fuel costs accounted for almost half (47%) of the total and increased by 6% year-on-year. This was faster than the growth in passenger numbers due to increased average sector lengths and an increase in EUR-denominated fuel prices.

Airport, handling and route charges also grew faster than passenger numbers as a result of higher tariffs, particularly higher airport charges in Spain and ATC charges in Italy. Ryanair also says that these costs were affected by the mix of new routes and bases launched. This suggests that it may be having difficulty in finding such good airport deals as it has in the past, although it may just refer to longer sector length routes. Mr O'Leary sounded relaxed about this on the conference call, saying that Ryanair has a "myriad" of airport deals on offer as it is "the only show in town" for airports seeking growth.

Staff costs accounted for 11% of total costs in the quarter, a much lower proportion than for most airlines, for whom this is typically one of the top two expense categories. The 13% increase in staff costs was due to a 9% increase in flight hours and a 2% pay rise. The increase in flight hours was the result of an increased number of sectors and longer sector lengths, but also of some decrease in average flight speeds in an effort to save fuel. A small increase in crew flight hours and crew costs is worthwhile to save on fuel costs.

Ryanair operating costs: 1QFY2014

EUR million	1QFY2013	1QFY2014	Change	% of total in 1QFY2014
Fuel and oil	543.8	576.6	6%	47%
Airport & handling charges	166.3	176.3	6%	14%
Route charges	137.5	155.2	13%	13%
Staff costs	115.9	130.4	13%	11%
Depreciation	84.8	90.5	7%	7%
Marketing, distribution & other	51.6	53.7	4%	4%
Maintenance, material and repairs	27.7	29.8	8%	2%
Aircraft rentals	24.3	26.4	9%	2%
Total	1151.9	1238.9	8%	100%

Very competitive pricing, but not the only ultra-LCC in Europe

Key to its success, Ryanair has very low average fares by comparison with other European airlines. According to its 1QFY2014 presentation, its average fare of EUR42 compares with other LCCs such as easyJet on EUR80 and Norwegian on EUR83.

Ryanair also compares its average fares with those of FSCs with long-haul networks (see chart reproduced below).

Average fares for Ryanair and other European airlines

Ryanair's comparison does not take account of ancillary revenues or average sector length. In addition, it is limited to a relatively small selection of carriers and to the most recent quarter. The chart below takes a wider view, comparing total revenue per passenger and average sector length for a larger selection of European airlines, based on annual figures for 2012.

This shows that Ryanair has the second lowest level of revenue per passenger among European airlines, with EUR62, 8% above that of Turkish LCC Pegasus on EUR57. With an average sector length almost 30% longer, this confirms Ryanair's price competitiveness.

Nevertheless, our chart suggests that Ryanair may not be justified in claiming to be Europe's "only ultra-low cost carrier".

A chart of cost per passenger versus average sector length reveals a similar positioning and suggests that Pegasus and Wizz Air also have a valid claim to be included in such a group. However, it still has the best margins in Europe.

See related reports

Revenue per passenger (EUR) versus average sector length (km) for European airlines: 2012

Ryanair's fleet to rise to 410 aircraft in FY2019

Ryanair's aircraft delivery schedule and fleet plan are shown in the table below. Under a new order with Boeing, announced in Mar-2013, it will take delivery of 175 737-800 aircraft between Sep-2014 and Dec-2018, growing its fleet from 305 at the end of FY2013 to 410 in FY2019 (net of 70 aircraft exiting the fleet). When the order was originally announced in Mar-2013, Ryanair envisaged that 105 aircraft would exit the fleet during this period and that the total would reach 375 in FY2019.

Ryanair increased its planned fleet numbers in late Jun-2013 as a result of increased demand and lower costs from both existing and new airport partners across Europe. As a result, its FY2019 passenger numbers target was increased from 100 million to 110 million. Over the current financial year (to Mar-2014), Ryanair's fleet will fall by 15 aircraft due mainly to lease returns.

Nevertheless, it still expects 3% passenger growth in FY2014 as, in recent years, its fleet has included spare capacity in the winter months, when aircraft have been grounded.

Ryanair aircraft delivery schedule and passenger growth to FY2019

Year to Mar	Deliveries under new order	Lease Returns / Disposals	YE Fleet	Pax (m)	Pax growth
FY2013			305	79	5%
FY2014	0	-15	290	82	3%
FY2015	11	-3	298	84	3%
FY2016	35	-5	328	89	6%
FY2017	50	-24	354	96	7%
FY2018	50	-18	386	103	7%
FY2019	29	-5	410	110	7%
Total	175	-70	-	-	-

Ryanair expected total aircraft numbers at year end: FY2013 to FY2019

Ryanair expected passenger numbers at year end: FY2013 to FY2019

Ryanair continues to discuss a possible 737MAX order with Boeing, with a view to reaching agreement around the end of calendar 2013, subject to favourable terms including prices and delivery dates.

Earnings seasonality means 2Q will be all-important

As CAPA has commented previously (6-Feb-2013), one of Ryanair's weaknesses is that its earnings are highly seasonal.

This is also the case for the airline industry in general: indeed, Ryanair's winter losses are typically less significant than those of its competitors. Nevertheless, Ryanair's pattern of seasonality has become more pronounced since FY2009, although that year's results were distorted by Ryanair's failure to hedge its fuel bill just as oil prices hit their all-time high.

Ryanair's cost structure is such that it is almost entirely a variable cost business, with fixed costs kept to a minimum. This has facilitated it in reaching decisions to ground some of its fleet in recent winters and this has at least had the effect of containing the losses suffered in the fiscal fourth quarter (Jan-Mar).

Over the past four full financial years, the first two quarters have been the key profit-making quarters. The first quarter (Apr-Jun) has accounted for a declining share of the year's operating profit, while the second quarter has gained in importance. In FY2013, 1Q was 18% of the annual operating profit and 2Q was 81%.

The fall in profit in 1QFY2014 versus 1QFY2013 suggests that this seasonality pattern may become even more dependent on the second quarter. The next quarter will be decisive in whether or not Ryanair increases its guidance for full year profits, or whether market consensus forecasts will need to be reduced toward Ryanair's guidance. Ryanair's track record suggests that the former is the more likely outcome.

Ryanair quarterly operating profit as % of annual operating profit by quarter FY2001 to FY2014*