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Ryanair on the 'pessimistic side of cautious' as it cuts profit guidance

Higher staff and fuel costs are expected to impact Ryanair's bottom line in fiscal year 2019

Ryanair
Ryanair's Irish union is threatening possible strikes

Ryanair Holdings PLC (LON:RYA) shares slipped on Monday as it reported a 10% increase in 2018 profits but cut its estimates for the year ahead, saying it is on the “pessimistic side of cautious”.

In early morning trading, the Irish budget airline's shares were 0.3% lower at €15.45.

The Dulin & London-listed firm, which has been negotiating a deal with unions over working practices, warned that it expects higher staff and fuel costs to impact its bottom line in fiscal year 2019.

READ: Ryanair fancied ahead of ‘make or break’ summer - UBS analyst

It now predicts profits will fall to range of €1.25bn to €1.35bn but said the guidance is “heavily dependent” on fares in the second half, a “normal” level of air traffic control disruptions, the absence of unforeseen security events, and no negative Brexit developments.

For the year to end of March 2018, profit after tax came to €1.45bn, up from €1.32bn a year ago.

Revenues rose 8% to €7.15bn from €6.65bn as the number of passengers carried rose 9% to 130mln from 120mln at a load factor of 95%. 

The net margin was flat at 20% even lower unit costs offset a 3% cut to air fares.

"We are pleased to report a 10% increase in profits, with an unchanged net margin of 20%, despite a 3% cut in air fares, during a year of overcapacity in Europe, leading to a weaker fare environment, rising fuel prices, and the recovery from our Sept. 2017 rostering management failure,” said chief executive Michael O’Leary.

Ryanair faces disruption from possible strikes

Ryanair recognised trade unions in December for the first time after pilots pressed for better conditions, exploiting problems with rostering that led the airline to cancel 20,000 flights last September.

The company has agreed five-year pay deals with most of its pilots and cabin crew in the UK and Italy but is still in talks with unions in other major centres including Ireland and Spain.

Ryanair’s Irish union has given the company until May 24 to agree to new working practices or it will ballot pilots for possible industrial action.

“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,” Ryanair said in its full year results statement.

The group expects staff costs to rise by nearly €200mln in the next year, reflecting higher pay for front line employees and an increase in headcount.

Ryanair added that it expects a shortage of experienced pilots in Europe to persist.

Higher fuel prices expected 

A recovery in oil prices will also push fuel costs up by €400mln. Ryanair said it is currently 90% hedged for 2019 at US$58 per barrel, well below the current spot prices of almost US$80 per barrel.  

“While US Shale production remains strong, world demand for oil is growing, and a number of short term political factors in Venezuela, Libya and Iran, suggests that prices will continue to be elevated for the coming year,” the group said.

The company therefore expects overall unit costs over the next year to rise 9%. Excluding-fuel, costs are projected to increase 6%.

In an effort to bring down expenses, the group is introducing a lower seat cost Boeing 737-MAX aircraft, has agreed a cheaper 10-year engine maintenance deal and is disposing of older aircraft.

Brexit concerns 

However, Ryanair remains concerned about the impact of a possible ‘hard’ Brexit and called the government to secure a proposed transition deal.

If the UK leaves the European Union without a deal, Ryanair and other airlines could lose licencing and flight rights.

On the upside, the firm predicts traffic will rise 7% to 139mln in the year ahead.  The load factor is expected to remain unchanged at 95%.

The carrier said it has “limited first half and zero second half fare visibility”. While forward bookings are “strong”, pricing remains soft due to tough competition between budget airlines. 

Given the earlier timing of Easter this year, it anticipates a 5% fare decline in the first quarter but a 4% rise in the second quarter. 

Take pessimistic outlook with a grain of salt, says analyst

"Ryanair has a habit of setting the bar rather low and then far exceeding it, so we must take this 'pessimistic side of cautious' outlook with a grain of salt," said Neil Wilson, chief market analyst at Markets.com.

"Nevertheless, we are starting to see how unionisation and higher pay will affect margins."

Liberum repeated a ‘buy’ rating on the stock, saying full year earnings were in line with consensus and at the top end of management’s guidance range.

The broker said “the long-term fundamentals remain intact and attractive, despite the short-term pressures from negotiating and implementing union agreements for the first time”.

 -- Adds share price, analyst comment--

Quick facts: Ryanair Holdings plc

Price: 11.9 EUR

LSE:RYA
Market: LSE
Market Cap: €12.96 billion
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