New trading guidance from Ryanair

Today we got a full year profit guidance update from Ryanair, along with their passenger number statistics for March.

As well us telling us the current state of trading at Europe’s biggest short-haul operator, perhaps we can also glean a few messages about the broader state of the airline market in Europe.

Full year losses

The company now expects full year net losses for their year ending March 2022 of between €350m and €400m. That suggests a final quarter loss of €207-257m, which sounds like a big loss, but would actually be in line with pre-pandemic Q4 losses. The last March quarter that wasn’t impacted by COVID was back in 2019, when they lost €200m.

So does that mean Ryanair will be back to pre-COVID profits for their 2023 financial year which has just started? The summer period will be the big test of that, since that is where they used to make all of their money. In 2019, they made €1.15 billion in the June - September period.

The March quarter was heavily impacted by the Omicron wave and related travel restrictions, with the company cutting capacity by a third in January in response. But things were already recovering well by the end of the quarter, as we can see from the March passenger numbers.

Passenger volumes finally back above pre-pandemic levels

March 2022 was the first month since the pandemic started that passenger volumes for Ryanair exceeded the equivalent month of 2019, with a 3% growth on 2019 to 11.2m passengers.

We also got March figures from WIzz today and they couldn’t manage the same feat, with volumes at only 91% of March 2019 levels.

Source: Company reports, GridPoint analysis

EasyJet are very slow at releasing their numbers - the last official figures we have from them are from December, but they are clearly lagging the other two. Here are the figures for the number of flights compared to 2019 for the most recent week.

Source: EuroControl

What is happening to load factors and yields?

Load factor for the month of March came in at 87%, also a record since the pandemic started and getting closer to the 95%+ figures Ryanair used to report.

Unfortunately, we won’t get any update on yields until the full results are reported on May 16th. In any case the quarterly figure may not tell us that much, as I suspect that yields in January and February were probably bad due to Omicron, with March picking up as demand came back.

Anecdotal reports from the industry all talk about strong booking levels since travel restrictions were lifted. That will be really important since firmer pricing will be vitally important for industry profitability as high fuel prices start to feed through.

Fuel prices and hedging

Ryanair is one of the most heavily hedged airlines in Europe, but it is still far from immune to the fuel cost pressures. We got an update in today’s press release on their fuel hedging programme going into the summer.

“Since our last market update on 31 Jan., Ryanair has increased FY23 (yr. ended 31 Mar. 2023) fuel hedging to 80% cover (c.65% jet swaps at $630 and 15% caps at $775 per metric tonne).”

I had a look back at the previous update, which said:

H1 FY23 is 80% hedged (60% jet swaps at $620 and 20% caps at $715) and H2 FY23 is 70% hedged at $640.

The company doesn’t make it very easy to compare exactly how the position has changed, but you can work out what they’ve done with a few assumptions and a little maths. The first assumption you need to make is the split of their fuel consumption between H1 and H2. I looked back at previous years and I think a weighting of 55% for H1 and 45% for H2 is reasonable. That tells us that at the end of January, they already had 65% of the full year covered with swaps and 11% with caps. Over the last couple of months, there has been no change in the level of cover provided by swaps. The only thing they have done is to take out an additional 4% cover using price caps. That additional cover has driven up the average price of the caps from $715 to $775, suggesting the new caps are priced at about $940. Whilst that’s a big increase on previous rates, it still looks like useful protection, given that spot prices are currently $1,250.

The implications of rising fuel costs for prices

Despite Ryanair’s enviable hedging position, the average price they are paying for fuel is climbing inexorably. If spot prices remain where they are, I think they’ll end up paying around $765/tonne this summer, up from something like $650 in the March quarter and $565 last summer. The situation is worsened in euro terms due to euro/dollar weakness. Taking this into account, I think Ryanair faces summer fuel costs measured in euros per seat about 20% higher than they paid in the March quarter. The increase compared to last summer is even greater, up something like 45%.

With fuel costs making up over a third of revenue for Ryanair, a big percentage increase in prices would be required to offset such an increase in costs. On the other hand, Ryanair’s revenue per seat is so low that this still only equates to something like a €5 increase in average fares.

As long as booking volumes remain robust, I would have thought that the price rises required to offset rising fuel prices this summer should be achievable for Ryanair, given its high hedging levels.

Winter capacity cuts?

It will be a while before Ryanair decides what capacity it operates for the seasonally weaker winter period. But if high fuel prices persist, and with their low price hedging beginning to run out, I’d expect the company to start wielding the capacity axe.

Special attention will of course be paid to airports that have incurred Michael O’Leary’s wrath by raising landing fees, or countries which have raised aviation taxes. We’ll probably start to hear him raising the volume soon on the need for airports and governments to share in some of the pain of absorbing higher fuel costs.