March quarter results from Ryanair and EasyJet
Strong full year results from Ryanair
This morning Ryanair released their results for their financial year ending March 2023.
The March quarter is seasonally the worst for all northern hemisphere airlines, and especially so for leisure-oriented carriers. So the quarter itself was loss-making for Ryanair, with losses of €226.8m at an operating profit level. However, the year as a whole was nicely profitable thanks to very strong results last summer. For the full year, Ryanair recorded pre-exceptional operating profits of €1,573.1m, representing an impressive margin of 14.6%.
There was an exceptional loss of €130.5m from marking to market the company’s fuel hedges. In the prior year, Ryanair treated €130.5 of fuel hedging gains as exceptional and now the fuel price has dropped and those gains have disappeared, they therefore had to treat the reversal as exceptional too.
Ryanair has very little debt (it ended the year with €559m of net cash) and so finance costs were small at €34.4m. In fact even those costs were virtually offset by a €34.3m foreign exchange gain, so pre-tax profits were virtually identical to the operating result.
Not so strong figures from EasyJet
We also got results for the March quarter from EasyJet. For them, March is the half way point of its financial year, so to get comparable figures, you need to add the second half of the prior year. If you do that, you get a 12 month operating profit of just £97m (€112m) and a pre-tax loss of £44m (€51m). Profit margins were 13 points lower than Ryanair at an operating level and 15 points after finance costs. As best as I can judge it, the average fuel cost paid in the year seemed almost identical between the carriers, so the difference in performance wasn’t down to fuel cost differences.
EasyJet doesn’t seem to be narrowing the gap either. In the March quarter, EasyJet lost £278m at a pre-tax level, which is a margin of -22.9%. That compares to Ryanair’s -10.6%, so a 12 point gap, quite similar to the difference for the full year.
Can EasyJet start to close the gap in the next 12 months? Let’s compare what they each had to say about the outlook.
Guidance for the next 6-12 months
I’ve put a summary of the guidance each company gave in the table below. Since their financial years line up neither with the calendar year nor with each other, I should explain what I've done in the table when referring to quarters. Whenever I refer to a quarter, I mean the calendar quarter. So Q2 is Ryanair’s fiscal Q1 and EasyJet’s fiscal Q3. When referring to the half years (H1 or H2) in the EasyJet guidance, I’ve used their definition. For Ryanair, they gave guidance for the next fiscal year, meaning April 2023 to March 2024.
| Item | Ryanair | EasyJet |
|---|---|---|
| Growth | Traffic + 10% next year | Seats + 9% in H2 (Q2&Q3) |
| Unit revenues | Q2 fares significantly higher VLY Peak S23 fares ahead of S22 |
Q2 revenue per seat +20% VLY |
| Unit costs excluding fuel | Modest increase for next year | Flat VLY for H2 (Q2&Q3) |
| Fuel (next year) | 85% hedged at $890 =>$866 at current spot price |
Est. 65% hedged at $879 => $827 at current spot price |
| Carbon permits | 48% hedged at €78 for next year* | 96% hedged at €41 for CY23 |
| * guidance not updated since Q3 |
The outlook for growth is similar, although Ryanair cautioned that Boeing delivery delays were likely to mean they would miss their target for growth, so that’s probably marginally in EasyJet’s favour.
On unit revenues, it is hard to know what to make of Ryanair’s rather vague guidance for fares. Is “significant” more or less than 20%? It is hard to know but it doesn’t sound that confident.
There is more of a clear difference on costs, with Ryanair guiding for a “modest increase” in non-fuel costs and EasyJet guiding for them to be flat.
EasyJet also look to be in a better position on fuel costs. I’ve taken EasyJet’s guidance on its hedging position for H2 (75% hedged at $885) and H1’24 (52% hedged at $868) and worked out what that should mean for the twelve month period ending March 2024, so that we can better compare it with Ryanair’s. The price at which EasyJet is hedged is only marginally better, but the level of hedging is a lot lower and that should pay dividends given that the current fuel prices of around $730 are 18% lower than the hedged prices. I think it should give them a 5% overall advantage in fuel if fuel prices stay where they are.
They also have a much better position on the cost of carbon credits. EasyJet said they were 96% covered for the 2023 calendar year. Ryanair didn’t provide an update on their position, but last quarter they said they were 48% hedged at €78 per tonne for 2023/24 financial year. With spot prices having ranged between €85 and €100 since then, any additional hedging they have take out since will have been at a higher price.
Carbon credits are becoming a very significant cost for airlines flying within Europe, especially fast growing ones where a much bigger proportion of emissions need to be paid for. I reckon Ryanair will pay for about 72% of its emissions next year. If they end up paying €85 per tonne, with a conversion rate of 3.15, that is equivalent to a tax of $208 per tonne of fuel. At slower growing EasyJet, it will be more like 62% of emissions and if they are only paying €41 per tonne, that works out an a more affordable $86 per tonne of fuel.
Taken together, Ryanair’s unit fuel and emissions costs might be 18% higher than at EasyJet. With the company estimating the cost of fuel and emissions at over €4.9 billion next year, that’s quite a chunk of change.
So it does look like EasyJet will manage to narrow the margin gap with Ryanair next year.
Putting the results into a broader European context
We won’t have results for Wizz until the 8th June, but I think it is worth putting the Ryanair and EasyJet results into a broader European airline context. Together with the big three network airline groups, these five airlines account for the majority of the Western European industry these days.
Looking at the twelve months to March 2023 gives us the first relatively “clean” post COVID set of annual results. We’ve been able to compare quarterly figures before, but there are big differences in seasonality between the airlines so that can be misleading.
I’ll start with showing the annual revenues for these five airline companies. Still number one in revenue terms is Lufthansa Group, thanks to its outsized cargo and maintenance businesses. The three network airline groups are much more similar when it comes to passenger revenue.
Source: Company reports, GridPoint Analysis
Of course, when it comes to passenger numbers, the short-haul focused low cost carriers feature much more prominently. The size of Ryanair on this measure is quite striking.
Source: Company reports, GridPoint Analysis
In terms of profitability, Ryanair won all the awards for this period and EasyJet trailed in in last place. Based on performance in the first nine months, I expect Wizz to emphatically claim EasyJet’s crown when they report in a couple of weeks.
Source: Company reports, GridPoint Analysis
The other big metric of financial health is the state of the balance sheet. All three of the big network airline groups have a lot of debt, whereas the low-cost players have cash reserves almost as big as their debts. As we saw earlier, Ryanair actually had net cash. In the chart below, the percentage figures show the net debt as a percentage of the revenue. Not the best measure of financial gearing, but it gives you an idea of how big the debts are relative to the size of the company. IAG comes out looking the most financially stretched on this measure, but its higher profit margins relative to the other two network groups certainly help it look better when looking at leverage metrics like net debt to EBITDA.
Source: Company reports, GridPoint Analysis
In summary
Ryanair styles itself as “Europe’s Favourite Airline”, a title which it lays claim to courtesy of being the largest measured by passenger numbers. That is a position which seems pretty unassailable. In today’s results, it set out a goal to grow to 300m passengers by 2024 thanks to its recent 300 aircraft order from Boeing.
However, it is not actually Europe’s largest airline group by revenue. It is only fourth on that metric and is less than a third the size of Lufthansa Group. But today’s results confirm Ryanair’s position as king of the European airline hill on pretty much every other measure. Despite being less than a third of LHG’s size in revenue terms, its pre-tax profits were 30% higher.
EasyJet was by some margin the weakest performer over the last twelve months (at least until Wizz report). However, it has a strong balance sheet and seems to be set up for a much improved performance over the next twelve months, narrowing the gap to its bigger rival.
