ATW Daily News
Irish LCC Ryanair's net profit for 2017-18 has risen 10% to EUR 1.45 billion ($1.71 billion), delivering a 20% net margin, even after thousands of flight cancellations in fall 2017, but rising labor and fuel costs mean a weaker result is expected for 2018-19.
Ryanair CEO Michael O'Leary said the profit increase had been achieved despite overcapacity in Europe, weaker fares, rising fuel prices and the impact of the fall 2017 crew-scheduling crisis.
During the 12-month period, Ryanair carried 130.3 million passengers at a 95% load factor. Passenger numbers were 9% up on the prior year, even though 25 aircraft were grounded over the winter months because of the crewing problems.
Average fares fell 3% to EUR 39.40, but revenue still rose 8% to 7.2 billion. "Ancillaries now deliver 28% of revenue and we are well on track to achieve our five-year goal of 30%. More guests are switching to our great value 'plus' fares, reserved seating, priority boarding, and car hire. Ryanair Rooms penetration is rising steadily, albeit from a low base," O'Leary said.
Fuel hedges drove a 1% decline in unit costs, but excluding the impact of fuel, unit costs were up 3%. This was driven by compensation payments for the 2017 cancelations and higher second-half labor costs, when Ryanair was forced to agree to "substantial pay increases." Ryanair has now agreed new five-year pay deals with most of its pilots and cabin crew.
After the crew-scheduling crisis, O'Leary was forced to recognize unions, a move which he had historically resisted. Ryanair has since signed recognition agreements with pilots' unions in the UK and Italy. O'Leary said the airline is also making "considerable progress" on cabin crew negotiations in the UK and Spain.
"We will continue to deal openly and fairly with our people and their unions, but we will not make concessions on pay or productivity which threatens either our low-cost model or our cost leadership in Europe," O'Leary said.
Despite these headwinds, he insisted Ryanair has a "significant cost advantage" over its rivals. "We expect this leadership to continue," he added. However, fuel will be "a major cost headwind" for the next 24 months. Ryanair is 90% hedged for 2018-19 at around $58 per barrel, compared with the current spot price of almost $80.
"Air fares tend to follow oil prices (as they have downwards over the last three years), but with a lag of up to 12 months before higher oil prices feed through to higher air fares," O'Leary said. Higher staff and fuel costs will drive a 9% unit cost increase in 2018-19, narrowing to 6% ex-fuel.
Over the year, Ryanair took delivery of 50 Boeing 737s, taking its fleet to 430 aircraft. The Irish LCC also increased its 737 MAX-200 order to 135 aircraft, with a further 75 on option. O'Leary said these 737 MAXs, as well as a lower-cost 10-year engine maintenance agreement, will help deliver "flat or slightly declining non-fuel unit costs."
Ryanair fell short of its 90% on-time performance target, with punctuality slipping by two points to 86%. "We are working hard to increase staffing at our larger bases, re-designing boarding procedures, and providing additional spare aircraft in summer 2018 to improve our punctuality to our 90% target, which is a key Always Getting Better [improvement program] target for the coming year," O'Leary said.
During the period, Ryanair established a Polish charter airline, Ryanair Sun, which started flying in April. O'Leary said this start-up and "looks set to trade profitably in its first 12 months of operation."
Ryanair also recently announced it is acquiring 24.9% of Austrian carrier LaudaMotion, with plans to increase this to 75% subject to regulatory approval. O'Leary said LaudaMotion will fly from Austria and Germany to holiday destinations, primarily in Spain.
"LaudaMotion is an attractive opportunity, as it is an Airbus operator, and we are looking for opportunities to grow its Airbus fleet to 30-50 aircraft over the next five years. LaudaMotion has a valuable portfolio of slots at many congested airports in Germany, Vienna, and Palma de Mallorca. We believe that by investing in these separate airlines, we can build a substantial and profitable group of EU airlines under the Ryanair Holdings banner over the next three years, when it is likely that further merger and acquisition opportunities will arise," O'Leary said.
If the 75% buy-in is agreed, Ryanair estimates that LaudaMotion will incur almost EUR 100 million in start-up costs and operating losses over the next two years, partly because of "expensive aircraft leases from Lufthansa." He said that LaudaMotion will be "modestly profitable and self-sustaining" once those leases expire.
LaudaMotion's impact is excluded from Ryanair's 2018-19 guidance for a EUR 1.25-1.35 billion net profit, down from EUR 1.45 billion in 2017-18. O'Leary described this outlook as being "on the pessimistic side of cautious."
"We expect to grow traffic by 7% to 139 million, at flat load factors of 95%. Unit costs this year will rise 9%, due to higher staff and oil prices which will, when adjusted for volume growth, add more than EUR 400 million to our fuel bill. Ex-fuel unit cost will rise by up to 6% as we annualize pilot and cabin crew pay increases, and invest in our business and our systems," he said.
O'Leary is expecting above-average European capacity growth to continue, depressing fares, followed by some upward pressure because of higher oil prices. "Ryanair will continue to pursue our load factor active/yield passive strategy. No other EU airline can compete with Ryanair's prices," he said.
Forward bookings are strong, but pricing remains soft. Ryanair is anticipating fares will drop by 5% in the first quarter, before improving 4% in the second quarter.
"While still too early to accurately forecast close-in summer bookings or second-half fares, we are cautiously guiding broadly flat average fares for the 2019 financial year. Ancillary revenues will grow as penetration of customer services continues to rise. We do not expect ancillary revenue growth to fully offset higher costs and lower fares, and so we expect full-year 2019 profits will fall to a range of EUR 1.25-1.35 billion," O'Leary said.
By 2024, Ryanair is aiming to carry 200 million passengers per year, supported by a fleet of 600 aircraft.