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Edited Transcript of RY4C.I earnings conference call or presentation 3-Feb-20 10:59am GMT

Q3 2020 Ryanair Holdings PLC Earnings Pre-Recorded Presentation

Dublin Feb 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Ryanair Holdings PLC earnings conference call or presentation Monday, February 3, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michael O'Leary

Ryanair Holdings plc - Group CEO & Executive Director

* Neil Sorahan

Ryanair Holdings plc - Group CFO

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Presentation

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [1]

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Okay. Good morning, ladies and gentlemen, and you're welcome to the Ryanair Q3 Results presentation. I'm Michael O'Leary, I'm the Group CEO, and I'm joined this morning by Neil Sorahan, our Group CFO.

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Neil Sorahan, Ryanair Holdings plc - Group CFO [2]

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Good morning.

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [3]

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You will have seen the strong Q3 numbers we published this morning on the ryanair.com website. We reported a Q3 net profit of EUR 88 million, up from a Q3 loss in the prior year. We'll take that as way, and we're going to run straight through the slide presentation, which we'll move to now.

So as you'll see, Ryanair remains Europe's favorite airline group. We have the lowest costs. We have the lowest fares of any airline operating across Europe. We're #1 for traffic, 154 million guests, up 8%, #1 for coverage. Lower growth is driving slightly higher fares, both this winter, and we think that trend will continue into the summer of 2020. EU airline failures and sales reorganizations are accelerating, and we've seen that trend over the winter period. Ryanair's proud to be Europe's greenest, cleanest airline, and we're about to invest upwards of EUR 20 billion in the fleet of new Boeing aircraft, which will significantly increase the amount of passengers we carry per flight by reducing fuel consumption. Ryanair is and remains the lowest cost operator in Europe, and we will be the structural winner.

This slide is familiar to everybody. It sets out our 82 bases, 241 airports. And I would draw your attention that in summer of 2020, we have new routes in Katowice in Poland; Zadar, Croatia; a new country in Armenia. And in total, we'll have opened 111 new routes this summer. We continue and we commit ourselves to offering Europe's lowest airfares, which is why other airlines, our competitors, can't compete with Ryanair's prices, nor can they compete with our costs. Other airlines claim to have lower costs on some RASM or CASM basis. It's simply not true. If you look and compare us on a unit cost basis, per passenger, excluding fuel, we beat everybody. We're significantly cheaper, for example, an easyJet, on airports and handling costs, about 1/3 of their costs. And in aircraft ownership, we're significantly cheaper than Wizz.

In total, however, our unit costs, ex fuel, are more than 34% lower than our nearest competitor, which enables Ryanair to continue to grow, offering lower fares than any other airline and sustaining those low fares.

Neil, the results.

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Neil Sorahan, Ryanair Holdings plc - Group CFO [4]

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Yes. Q3 showed a strong performance. Guests were up 6% to 36 million customers. Revenue per passenger performed strong, a 13% improvement, thanks to strong close-in bookings on Christmas and the New Year. We saw a 9% increase in average fare. Our priority boarding and reserved seating continue to drive a strong performance in our ancillary revenues, which were up 21%.

Unit costs, despite the fact that we haven't had any MAX in our fleet, were only up 1% in the quarter. And as Michael already said, we recorded a profit of EUR 88 million in the quarter, which compares to a loss of EUR 66 million in the prior year. Interestingly, our earnings per share was tracking ahead of that, thanks to the buybacks that we've been doing over the past year.

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [5]

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In terms of current development so clearly, the MAX 200s are delayed, and Boeing, themselves, are saying that the return to service -- they expect the grounded MAX to return to service in June. The certification -- the MAX 200s is going to need 2 months beyond that. So frankly, we're too busy in July and August. So we've now reduced -- cut back our summer of 2020 schedule, taking out the 10 MAX aircraft we had hoped to receive. And therefore, our growth next year will be slightly lower, but that should help the underlying airfare proposition this summer.

Our cost leadership is being maintained, as Neil has said, despite the fact that we don't have 55 MAX aircraft in this winter's fleet. We're still seeing tremendous unit cost discipline, up only 1%. We believe the slower capacity growth by Ryanair and our competitors and higher fuel will continue to drive consolidation. We've seen that this winter with the failure of Thomas Cook, among -- and Adria, among others.

There will be slightly higher loan losses due to the price war with Lufthansa subsidiaries in both the German and the Austrian market. We believe they are engaged in below cost selling, but we are the lowest cost operator, so we'll continue to meet and beat them on price.

We're continuing to make significant environmental progress, and we're pleased to announce today we've appointed our first Director of Sustainability, who will be the focus of our delivery of these ambitious environmental targets. Of the EUR 700 million share buyback, we have about EUR 440 million now completed. There's about EUR 260 million to go. We expect to run that program out slightly longer now, will complete it by about the end of July. And as you would have seen in early January, we raised our full year guidance from an old range of EUR 800 million to EUR 900 million. The new range is now EUR 950 million to EUR 1.050 billion.

The MAX update. So we have 210 aircrafts on orders. They will be delayed now until the winter of 2020, and that means slower FY '21 growth. We're reducing it from 162 million to probably about 160 million -- [56] million over the next 12 months. Most of that growth will be delivered by the additional A320s in Lauda. It has led, regrettably, to some base closures this winter because we've had a constrained capacity with fewer aircrafts. So we closed bases in Arrecife in the Canary Islands, Belfast, Hamburg, Las Palmas, Nuremberg, Stockholm Skavsta and Tenerife South. We've frozen our PDP payments to Boeing. We do want to restart those PDP payments, but only once we have certainty on our MAX delivery program.

We continue to look through the current noise, and we believe this is a great aircraft. It does carry 4% more passengers per flight and 16% lower fuel consumption. Our senior pilots, our training pilots have been in the MAX simulators. They've been in the NG simulators we recreate, and they are very confident this is a great aircraft. It handles brilliantly and that our customers are going to really like it when we start taking it on board.

But the result of this delayed delivery means we're now moving of -- our target of 200 million guests will be delayed from currently FY '24. It will now be to FY '25 or FY '26 depending on when we can take the deliveries of all 210 of these aircraft.

Consolidations continue. In recent months, we've seen the failure of Ernest Airlines in Italy, Adria in Slovenia, Thomas Cook, charter airline was a big failure last autumn. TAP is currently for sale as well as Croatia Air. Air Europa and Condor have been sold. Alitalia, FlyBe and Tarom are now in receipt of state aid. And even in Vienna, where Laudamotion is losing money, we've seen Eurowings significantly cut back their program. In fact, they're closing their Vienna base. Level has cut back its program, and easyJet has failed to grow.

The Lauda losses have increased marginally from EUR 80 million to EUR 90 million this winter. Average fare -- its entire average issue -- fares have been lower than expected and significantly lower than budget. That's because it's engaged in a price war with Lufthansa subsidiaries in both Germany and Austria who are engaged in below cost selling, and both Eurowings and Austrian airways are losing money themselves. This year, in Lauda, we carried about 6.5 million guests. We expect that to grow in the next 12 months to about 10 million guests. This summer, the fleet will rise from 23 to 36 aircraft, with most of that growth taking place in Vienna, the base in Vienna. We will also open a fifth base in Zadar this summer. And as a result of those investments for the longer-term, losses will grow from EUR 80 million to above EUR 90 million this year. The management team now are engaged in a line-by-line detail cost review and are continuing to roll out cost reduction measures through this winter and, we believe, into next summer.

In terms of our environmental proposition, we are the first EU airline to publish our monthly CO2 emissions. We've now appointed Thomas Fowler as the Director of Sustainability. He will be charged with delivering the very ambitious targets that we've set out in our environmental statement. We are already one of Europe's greenest airlines. Passengers switching to Ryanair from high fare legacy European airlines can reduce their emissions by up to 50%. We're not content with that. We have a plan to cut our emissions further by another 10% over the next decade. And much of that will be delivered by the Boeing MAX aircraft deliveries.

We've committed ourselves to being plastic free in 5 years' time. We're ahead of target. Now we're up to 60% plastic free, both in head office and on board. We're raising the voluntary carbon offset this summer from April, it will rise from EUR 1 to EUR 2 per flight. It doesn't offset all of our carbon emissions, but it is an indication for those customers who want to offset or make a contribution towards carbon offset in their flights, can do so.

And critically, we're on the dawn of taking delivery of 210 new Boeing 737 aircraft, which will cut our fuel consumption while carry -- and cut our noise emissions while carrying 4% more passengers.

Neil, do you want to save the dates?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [6]

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I will, Michael. Thank you. So as guided to the market on the 10th of January, we expect approximately a new range of EUR 0.95 billion to EUR 1.05 billion. The moving parts in there, we'll see our guests -- our traffic increase by 8% to 154 million. Revenue per passenger, thanks to the strong performance on ancillaries and slightly better than expected average fares will be approximately somewhere between 3% and 4%. Unit costs, ex fuel, will be up just 2%. And that's with no MAXs in the fleet this year.

Our fuel bill at current spot prices will be somewhere in the range of about EUR 440 million higher than last year. So a good performance for the year. This, of course, as is always the case, is very much dependent on close-in bookings for rest of the quarter in the absence of security events. Before anybody asks, we won't be giving any guidance this morning; we will be around the full year in May.

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [7]

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Okay. Now we'll open for questions and answers.

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Questions and Answers

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Unidentified Participant, [1]

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Revenue per passenger was up 13% in Q3, right?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [2]

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We had stronger close-in bookings over the Christmas and New Year holiday period at higher-than-expected airfares. Average fares in the third quarter were up 9%. That was supplemented by a very strong performance on ancillary revenues, which were up 21%, largely as a result of the success of our priority boarding and assigned seating services.

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Unidentified Participant, [3]

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Will the ancillary performance continue in Q4?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [4]

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We expect to continue to perform well, but they won't be growing as fast as they were in prior quarters. We would now annualize the bag policy that we brought in November '18 that annualized in November. But we would anticipate that we will continue to grow ahead of traffic growth. We're working now hard in our labs on the personalization, increasing conversion and revenue.

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Unidentified Participant, [5]

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How have fares performed in Q4?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [6]

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Bookings, at the moment, are running about 1% ahead of where they were at the same day last year at modestly better-than-expected airfares. However, we would caution, last year's Q4 was in particular -- the comps were particularly soft. It was a particularly weak period, so we would continue to be cautious. And we don't have any presence of Easter at the back end of March.

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Unidentified Participant, [7]

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Is the yield improvement of Ryanair specific or an improving environment?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [8]

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It's a combination of the 2. Clearly, the capacity coming out of the market has been helpful. We've seen a number of consolidations and failures. And of course, the MAX deliveries haven't made their way into Europe over the course of the last year into our fleets. We've taken a number of steps ourselves to reduce underperforming bases and routes over the winter. And we're also seeing the benefit of the new 10 kg bag product, the checked 10 kg bag that we introduced last year in the scheduled revenue numbers.

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Unidentified Participant, [9]

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Are there any new developments from Labs?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [10]

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Labs successfully rolled out the new digital platform in November. We've seen that continue to deliver a superior conversion on some of the optional customer services like priority boarding and reserved seating. Labs are now focused on increasing personalization, and particularly the ancillary offers to guests. And car rental became our new car hire partner in late 2019, and we believe they will help to grow revenues strongly in the car hire sector or segment over the next 3 years.

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Unidentified Participant, [11]

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How did the cost perform in Q3?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [12]

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Relatively well. We saw a 1% increase in unit costs, ex fuel. And the reasons for the increase are staff costs, where pilot pay increase are continuing to annualize. We've also seen a slowdown in resignations and an increase in crewing ratios due to the non-delivery of the MAX aircraft. The MAX is also having an adverse impact on our maintenance costs, as we were flying over the aircraft for longer, having to shift -- shop visit them more frequently. On the plus side, all the hard work that our ops and engineering team have done over the past year to improve on-time performance, which is now running at over 90%, excluding ATC. That led to a great improvement in our EU261 compensation, and that's thankfully down to the new handling arrangements in Stansted, in Poland and in Spain.

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Unidentified Participant, [13]

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Any update on your fuel hedging?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [14]

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Yes. As you know, we're 90% hedged in the current year till the end of March 2020 at about $71 per barrel. We took advantage of the recent dip in prices. So we've now preannounced that we're 90% hedged for FY '21 and a fraction over $60 per barrel.

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Unidentified Participant, [15]

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Are you seeing any customer reaction for the environmental focus recently?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [16]

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Yes. Flights are fully booked. 96% load factor, it's more about 1% better booked than we were at this time last year. I think a big element of this is people realizing that they can half their CO2 emissions by switching from the legacy carriers to Ryanair. We have the lowest CO2 per passenger kilometer of any airline in Europe. And indeed, more of our customers, over 3% of them now are now opting for the voluntary carbon offset with a particularly high percentage of our Germany customers doing so.

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Unidentified Participant, [17]

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You appointed a Director of Sustainability in December. What will he do?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [18]

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Yes. His primary task or immediate task is going to be improving fuel efficiency and to develop -- lead our project to develop sustainable aviation fuel supplies into the future. He's also charged, on a monthly basis, with reporting on our ambitious emissions and green initiatives that we set out in our 2019 environmental policy document, which has the full support of the Board of Ryanair Holdings plc.

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Unidentified Participant, [19]

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Is there any update on the environmental taxes?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [20]

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Well, the French tax has already come in, in January. The German with APD, which is an 80% increase, comes in, in April of this year. I think an opportunity is being missed here to reflect and reward high-performing airlines like ourselves, with high load factors and young fleets, relatively low fuel burn and instead exempting -- connecting traffic for legacy carriers which tends to burn more fuel.

I think a lot of people miss the fact that Ryanair customers are paying over 11% of their ticket price in aviation taxes already, which is about EUR 630 million on an annualized basis. So there's a big opportunity here. Aviation accounts for 2% of CO2 in Europe, which compares to about 6% on shipping, but there's a big opportunity here to encourage airlines like ourselves to invest in new technology, like the MAX, which is of 16% lower fuel burn, rather than exempting connecting traffic and effectively giving subsidies to legacy carriers.

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Unidentified Participant, [21]

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How are the new airlines developing?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [22]

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They're developing strongly. This summer, in the summer of 2020, for example, Lauda will grow to 36 aircraft in the fleet. It will open a new base in Zadar. Buzz in Poland will have grown its fleet to over 50 aircraft, 7 of which will be in the Polish charter market. The balance would be flying -- operating subservices for Ryanair at most of our Central and Eastern European bases. And Air Malta is growing strongly. It's taking over most of the Ryanair bases in Italy, Germany and France, and will rise to a fleet of almost 100 aircraft by the summer of 2020.

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Unidentified Participant, [23]

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Would you consider M&A?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [24]

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It wouldn't be the first thing on our list. We plan to grow organically over the next few years with 210 aircraft coming into the fleet, and that's what we do well. That said, I think there will be opportunities where there's competition overlap, as more airlines either go out of business or consolidate over the next number of months and years. We already have a process in Italy where Alitalia are up for sale, TAP in Portugal. And recently, we've seen the likes of Ernest Airlines in Italy go out of business. So there will be opportunities, but we will primarily grow organically.

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Unidentified Participant, [25]

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Michael, any (inaudible) you are the airline CEO (inaudible) what's your day-to-day focus?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [26]

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Principally, my focus is 4 key areas: one, management development, getting the new airline management teams in place and working well; two, driving cost efficiencies and really charging up the group with delivering on cost-cutting initiatives; the timing and delivery of the MAX aircraft and the Boeing relationship recently backs from Chicago where we met a new team in Boeing; and on -- and fourthly, capital allocation going forward. Where should the aircraft and the capital best be invested, who can deliver us at the lowest cost lift at the most efficient prices.

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Unidentified Participant, [27]

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Is there any update on the MAX aircraft?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [28]

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Well, it looks now as if it will be the middle of the year before the MAX returns to service, which for us sadly means we won't see any MAXs in our fleet this summer. We're looking at, at least September or October before we take delivery of the first aircraft, which means we're looking at a 2% increase in traffic this year, which will be delivered primarily from our Airbus fleet.

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Unidentified Participant, [29]

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Boeing closed the 737 MAX production line. Will this impact your long-term growth?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [30]

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We can delay it. I -- there's 2 issues here. Firstly, when will the -- we're now running 12 months behind the original delivery schedule. We have hoped to have 55 aircraft in the fleet for the summer of 2020. We'll have none. I think what's likely is that, that will push out that delivery profile with Boeing by at least 12 months. So we would hope to get 55 aircraft in time -- in for the summer of '21 schedule, '22, '23 and '24. At best, that means we will have to kind of roll forward our plan to reach 200 million passengers per year, was probably going to be delayed at least 12 months, possibly 24. So we'll now move out to either FY '25 or FY '26.

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Unidentified Participant, [31]

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You've closed some bases this year as you saw MAX delays. Is there a risk of more closures?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [32]

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Look, it can never be ruled out.

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Unidentified Participant, [33]

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How quickly can you take MAX deliveries when the aircraft is all ready?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [34]

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Well, we can take them reasonably quickly because we're one the few airlines that has its own Boeing MAX simulators. But the challenge for us, we've never taken more than 8 aircraft in a month before. That's really as many aircraft as we would want to take. And so I think our cap will be taking 8 deliveries a month and no more than 50 aircraft in time for the next summer peaks. So I think it's reasonable. We're working on a plan now, 50 aircraft for summer '21, 50 for summer '22 and thereafter.

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Unidentified Participant, [35]

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How are the talks with Boeing going?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [36]

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They're going well. As said, we've been to Chicago to meet the new management team. Our focus and theirs is to get the Boeing MAX back into service as quickly as possible, hopefully, by the end of June of this year; then, to certify the MAX-200s, which are the stretched versions that we take delivery of. And we would hope to take the first deliveries of those in September, October of this year. That is more than sufficient time for us to take 50 aircraft for the summer of 2021. We are having discussions with Boeing both on the pricing of those aircraft and also on Boeing reimbursing Ryanair our constant losses for these delayed deliveries. And those discussions continue. But they can't really be finalized until we have a revised delivery schedule that's real and credible because of the aircraft (inaudible).

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Unidentified Participant, [37]

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Neil, what is the impact of IFRS 16 lease accounting standard on your balance sheet in Q3?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [38]

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It was very modest for Ryanair. Only 6% of our fleet is leased at this point in time. So the impact at the end of the quarter was EUR 230 million increase for net debt (inaudible) our net debt, having to take the impact of IFRS 16 and EUR 370 million of share buybacks, was just EUR 700 million at the end of the quarter.

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Unidentified Participant, [39]

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What is your CapEx guidance for FY '20, FY '21?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [40]

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It's very difficult to be certain on the CapEx guidance at the moment until we have a certain or some degree or some confidence or certainty over the MAX delivery program. Clearly, we have postponed all PDP payments because of the delays. Clearly, those PDP will restart once we have a schedule of deliveries, which we hope will start as early as September, October this year. And then we'll update the market with a -- at that point in time with an up-to-date view or outlook on our capital -- or our CapEx for the next number of years.

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Neil Sorahan, Ryanair Holdings plc - Group CFO [41]

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Yes. I think that's fair. We're probably going to be into -- peak CapEx over the next 12 to 18 months. So we'll give you more color on that in May.

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Unidentified Participant, [42]

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How is the buyback program?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [43]

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It's going well. We got EUR 440 million through the buyback at this point in time. However, as we wait for firm delivery schedules on the MAX, as we start to focus on repayment of debt, particularly our first bonds in 2021, we think we'll slow down the buyback program. So this one will run out till the end of July. And then we'll start to focus on debt. We have an opportunity over the next 18 months to pay down about EUR 1.3 billion of debt, which will strengthen up the balance sheet and take some of the more expensive interest off the P&L, about 2% interest rate. So that, again, will be positive for the numbers coming through.

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Unidentified Participant, [44]

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Can you update on FY '20 guidance?

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Neil Sorahan, Ryanair Holdings plc - Group CFO [45]

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Yes. We guided on the 10th of January. So we expect our profit after tax to be in a new range now of EUR 0.95 billion to EUR 1.05 billion. Based on current trading, we're probably somewhere close to the middle of that range. Traffic will grow by about 8% to 154 million guests. Our fuel build will be up about EUR 440 million on a full year basis. Unit costs, ex fuel, will be up just 2% despite the fact that we haven't taken delivery of any MAXs yet. So depending on where close-in bookings end up, we think revenue, driven by the strong ancillaries, will be up somewhere between plus 3% and plus 4% on a full year basis. And this, as always, is predicated on no unforeseen events in the market.

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Unidentified Participant, [46]

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Can you provide any guidance for FY '21?

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Michael O'Leary, Ryanair Holdings plc - Group CEO & Executive Director [47]

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No. It's far too early still to be looking at guidance for FY '21. We're still working on finalizing the budget. We hope to have that done maybe in next month or 2, but it's very -- I mean, it's very -- it's a moveable piece based on the outcome of the MAX delivery discussions. And I think we would hope to be in a position to update the market on the -- at the time of the full year results in May. But again, it will be heavily driven by the date on when we take delivery of the MAX aircraft and how many MAX aircraft we can take over the next financial year to March 2021.

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Neil Sorahan, Ryanair Holdings plc - Group CFO [48]

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Yes.