Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ryanair Holdings plc (NASDAQ:RYAAY)

Q3 2012 Earnings Call

January 30, 2012 9:30 am ET

Executives

Michael O'Leary - Chief Executive Officer, Executive Director, Member of Nomination Committee, Member of Executive Committee, Chief Executive Officer of Ryanair Limited and Director of Ryanair Limited

Howard Millar - Chief Financial Officer and Deputy Chief Executive

Jimmy Dempsey -

Analysts

Neil Glynn - Crédit Suisse AG, Research Division

Joe Gill - Bloxham Stockbrokers, Research Division

Jarrod Castle - UBS Investment Bank, Research Division

Mark Manduca - BofA Merrill Lynch, Research Division

Stephen Furlong - Davy, Research Division

James D. Parker - Raymond James & Associates, Inc., Research Division

Gorm Inge Thomassen - AKO Capital LLP

Andrew Light - Citigroup Inc, Research Division

Peter Hyde - Liberum Capital Limited, Research Division

Eamonn Hughes - Goodbody Stockbrokers, Research Division

Brian Devine - NCB Group Limited, Research Division

Jonathan Wober - Societe Generale Cross Asset Research

Gerard Moore - Merrion Stockbrokers Ltd., Research Division

Operator

Good day, and welcome to the Ryanair Q3 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael O'Leary, CEO. Please go ahead, sir.

Michael O'Leary

Okay. Good afternoon, everybody, you're very welcome to the Q3 conference call. I'm joined here in Dublin by Neil Sorahan, Jimmy Dempsey, Dave Broderick. Howard is joining us on the call from London. Apologies, Michael Cawley can't make it, he's down in Barcelona in active discussions with the El Prat airport and the Generalitat about how we can rescue the poor stranded Spanair passengers.

And talk to you on our Q3 results, you will see in the press release. This morning, we announced a Q3 profit of EUR 15 million compared to a EUR 10 million loss last year. Revenues increased 13% to EUR 844 million. While traffic fell 2% but average fares rose 17%. Unit cost rose 11%, due to a 7% increase in sector length and an 18% increase in fuel costs.

And we're are very pleased to report this Q3 profit of EUR 15 million. It's slightly ahead of our expectations but largely due to the benign weather conditions experienced in December 2011 compared to the widespread snow closure de-icing comps we suffered in December 2010, and also a better yield performance as we grounded up to 80 aircraft and cut our traffic in Q3 by 2%. The 17% rise in average fares, which does include our optional baggage fees is due to reduced seat capacities, longer sectors and significantly higher competitor airfares and fuel surcharges. Ancillary revenues also grew 6% to EUR 177 million and rose by 8% in the per passenger basis.

We've rolled out our successful reserved seating service from 80 to all routes in the network will effect on January 10 slots. Our new routes and bases have performed well this winter. We open 5 new bases in the coming months, Baden in Germany, Billund in Denmark, Palma de Mallorca in Spain, Pafos in Cyprus and Wroclaw in Poland. We expect to launch at least one more base for summer 2012 shortly, but hope to have it announced before the end of February.

As you can see, the EU recession, higher oil prices, unfolding failure of the package tour operator model, significant competitor fare increases and capacity costs have created an enormous growth opportunities for Ryanair as large and smaller airports across Europe compete aggressively to win our growth.

Our unit cost rose 11%, mainly due to an 18% increase in fuel costs, excluding fuel, sector length adjusted unit cost fell 1%, as we continue to control costs despite a 2% basic pay increase, higher Eurocontrol fees and significantly higher Dublin Airport charges. In FY '13, we are 90% hedged for half 1 at above $99 per barrel, 70% hedged for the second half at approximately $100 a barrel. We do expect to hedge out the balance of our H2 FY 2013 needs over the coming months. But at these prices, our fuel bill for FY 2013 will rise by approximately EUR 350 million, which poses a significant cost challenge as we move into FY '13.

The BAA has recently announced that will pay dividends of GBP 240 million this year to Ferrovial and its other shareholders is further evidence that it's generating monopoly profits under the CAA's inadequate regulatory regime. Over the past 5 years, while Stansted charges has doubled, traffic has declined by 26% from over 24 million in 2007 to just 18 million last year. The BAA's monopoly shareholders are being unfairly enriched at the expense of Stansted airport users, who continue to suffer high charges and inadequate service. We again call on the U.K. government and the CAA to bring forward the sale of Stansted to enable the competition between London airport to deliver lower airport charges and improved customer service, where the BAA airport's monopoly and the CAA's inadequate regulatory regime has repeatedly failed.

We'd also like the U.K. government to scrap its dismal APD tourist tax, which is damaging U.K.'s tourism and jobs. A similar visitor tax in Holland was scrapped after just one year, when it was proven that it detrimentally impacts on those tourism and the economy with far greater than the revenue it generated. The U.K. APD was doubled in 2007 to GBP 10 and further increased this year to GBP 12 and has caused the U.K. to have the highest aviation taxes in the world to the detriment of U.K.'s tourism industry, which was one of the UK's most important revenue earners before its visitor number declined by some 20% over the past 4 years.

In Ireland, the government-owned DAA airport monopoly recently published its 2012 traffic figures, which highlighted a 26% decline in traffic over the past 5 years -- or 4 years from 30 million passengers in 2007 to just 22 million in 2011. While most of the U.K. and European airports delivered growth in 2011 by reducing charges, the government-owned DAA monopoly, protected by the useless Department of Transport, raised its fees by 40% and delivered another year of underlying traffic decline.

Sadly, the new Irish government after one year has failed to deliver any change or reform in either airport or tourism policy and has also failed to scrap its EUR 3 tourist tax. Ireland needs the competition between Dublin, Cork and Shannon Airports in order to reduce the DAA's high airport charges and return our tourism industry to growth, which is the only way we can create thousands of badly needed entry-level jobs in the Irish economy. We continue to campaign for this change and reform since the Department of Transport's current policy of protecting the DAA monopoly and increasing access cost to an island on the periphery of Europe clearly isn't working.

Our Q3 net profit of EUR 15 million was slightly ahead of guidance due to a combination of benign weather, which caused fewer flight cancellations and significant de-icing savings and a better performance on yields, reflecting our planned winter capacity cost, longer sectors and higher competitor fares and fuel surcharges. Should these positive Q3 trends continue into Q4, we now expect our full year profit will exceed the previous guidance of EUR 440 million and rise to approximately EUR 480 million after tax.

Just a note, for [indiscernible] in terms of an EGM. As you would be aware of, September 2011 EGM authorized the board to buy back ordinary shares representing up to 5% of our issued share capital. However, EU ownership rules requires at least 50% of the company be owned by EU nationals. Currently, that figure is about 51%. In order to facilitate further share buybacks, the board Intends to hold an EGM in March 2012 to seek shareholder approval to include ADRs, as well as ordinary shares in future buyback programs for up to 5% of our issued share capital and to ensure that we stay within the 50.1% EU ownership. A detailed letter to shareholders explaining these matters will be issued in due course, and the board believes that shareholders will support this proposal, which would be subject to stock exchange and regulatory approvals in due course.

Howard, can you take us to the MD&A for the quarter, please?

Howard Millar

All right. Thank you, Michael. Profit after tax was EUR 14.9 million compared to a loss after tax in the quarter ended December 31, 2010, of EUR 10.3 million, primarily due to a 17% increase in average fares and strong ancillary revenues, offset by significantly higher fuel costs. Total operating revenues increased by 13% to EUR 844.4 million, primarily due to a 17% increase in average fares, offset by a 2% decrease in passenger numbers. Fuel, which now represents 41% of total operating costs compared to 38% in the prior year, increased by 18% to EUR 333.6 million, due to a higher price per gallon paid and a 3% increase in the number of hours flown. Unit costs excluding fuel rose by 6%, when adjusted for its sales length, unit cost fell by 1%. Including fuel, unit cost rose by 11%.

Operating margin as a result of the above rose to 3%, while its operating profit was EUR 29.4 million compared to an operating loss of EUR 0.3 million in the quarter ended December 31, 2010.

Turning then to the balance sheet. Gross cash increased by EUR 39.5 million to EUR 2.98 billion, and the group generated cash from operating activities of EUR 401.7 million, which funded net capital expenditure of EUR 106 million, debt repayments of EUR 239.3 million and an EUR 85.1 million buyback program. Gross debt increased by EUR 155.9 million to EUR 3.493 billion. Net debt has fallen from EUR 708.8 million at March 31, 2011, to EUR 513.4 million at the period end.

Shareholders’ equity increased by EUR 301.9 million in the period to EUR 3.255 billion, due to the net profit after tax of EUR 558.4 million in the first 9 months and the issue of new shares associated with the employee share option program of EUR 5.2 million. These were offset by the EUR 85.1 million share buyback and the impact of IFRS accounting treatment for derivatives and available-for-sale financial assets and stock option grants.

I'll hand it back to Michael for the Q&A.

Michael O'Leary

Thanks, Howard. Okay, ladies and gentlemen, I think we'd open it up for questions now. If I can though, just to temper some of the irrational euphoria. I think the overriding view of these numbers are they're heavily distorted by very benign weather conditions in Q3 last year compared to horrendous weather conditions in the prior year Q3, a significant decline in cancellation, flight disruption, significant savings [indiscernible], a disruption in de-icing costs, et cetera. And lest anybody lose the run of themselves, I'd like to highlight again that we do face very significant fuel cost headwinds over the next 12 months. We expect our fuel bills to rise by up to EUR 350 million, given our continuing expansion. But then, of course, on the other hand, fuel will be rising very significantly for all of our competitor airlines, many of whom won't be as well -- aren't as well hedged as we are and certainly, don't have the margin to pay for the entire cost.

So I think the underlying theme, which is the continuing switch of passengers across Europe from high fare airlines like Aer Lingus, British Airways, Lufthansa, Air France to Ryanair, as they become more price-sensitive continues. We're certainly having to discount less fares to fill our flights. And while we are grounding up to 80 aircraft this winter, with 5 new bases already announced for the summer, a 6th one on the way. All of the fleets will be up and flying by April, May time this year. So I think our traffic growth will be strong, significant fuel cost headwinds and a fair challenge to try to ensure that through cost management and selective price increases, we can cover that higher oil bill this year.

With that, Liane, if you could open up to questions, I'd appreciate it.

Question-and-Answer Session

Operator

[Operator Instructions] And we take our first question from Neil Glynn with Credit Suisse.

Neil Glynn - Crédit Suisse AG, Research Division

Two for me, please. The first one on the revenue environment. Your own and easyJet fares have surprised repeatedly, positively over recent quarters. I'm wondering, does this suggest any particular strength in late bookings or would you see fare strength is more uniform along the forward booking curve? And then second of all, if we could revisit your exposure to euro weakness relative to the pound, can you confirm what the current or in the next year's net long sterling position is?

Michael O'Leary

I'd take the first half, Howard, and if you do the second one. I think -- I mean our focus -- I don't think there's any particular strength in closed-in late bookings or closed-in bookings. I think what we've seen through last summer and continuing to the winter, though is slightly stronger, we're discounting less to fill our flights. I think that's a combination of a couple of things. One there's undoubtedly competitor fares and fuel surcharges driving passengers in our direction. I think the continuing collapse of the tour operator model, these vertically integrated tour operator holiday companies, particularly in the big holiday markets in Spain and Italy, passengers are no longer willing to shell out GBP 800, GBP 900 or GBP 1,200 for a high-priced airline and hidden -- for a high-priced airline fees hidden in a tour, in a package. And more and more passengers now coming to the ryanair.com website, booking the air travel cheaply with Ryanair to Spain, Italy, Canaries, all the holiday destinations. And then sorting out the accommodation themselves. I think you see that reflected in the various profit warnings emanating from the Thomas Cooks, the TUIs and those -- as far as -- I think it's over for them in those short-haul holiday markets, where Ryanair is now the #1 airline in Spain, #1 airline in Italy. They don't come close. And then I think -- so if you remember, the kind of curve we have on the build-up, I think the strength of our fares, average fares over the last 12, 18 months has been, we're doing less free seat sales, less EUR 2.99 seat sales. But people are still stalking to us and snapping up the EUR 9.99 and the EUR 12.99 seats. And if you go in, close in, the kind of fares being charged within a week or 2 weeks by Aer Lingus, Lufthansa, Air France, BA are outrageous. In many cases, the fuel surcharge of some of those airlines is more than half Ryanair's underlying airfare. And that's driving the traffic in our direction. That could only be augmented, I think, over the coming months by, obviously, the Spanair collapse last Friday, Air Berlin's significant capacity cutbacks, which is certainly attracting us to grow more in Germany and in Palma, which is one of their big bases. So the underlying themes we've seen over the last couple of years of capacity cutbacks by the high-fare guys, passengers coming in our direction and the continuing implosion of the package tour operator market in Europe, I think it's driving a -- it's certainly means, we are having to do less very aggressive price promotion to fill our seats. Howard, where you are on the exchange?

Howard Millar

Generally, we'd be much more favorable on -- we prefer the sterling to be stronger against the euro. Approximately 28% of our revenues are in sterling and about 25% of our costs are in sterling. So we're net long on sterling, and so we've kind of looked forward to a strong sterling against the euro. But as to what the net surplus will be, obviously depends on yields over the summer and winter of next year. But overall, net long, about 28% in revenues, 25% on costs.

Operator

The next question comes from Joe Gill with Bloxham.

Joe Gill - Bloxham Stockbrokers, Research Division

I just got 2 or 3 questions. One, in relation to aircraft net capital expansion now for fiscal '12 and fiscal '13, could you have just the updated numbers on those 2? And secondly, in relation to the whole aircraft debate, what's your latest thoughts are out there and in particular, what your views are in relation to the new generation Boeing and Airbus aircraft on offer in the markets? And thirdly, in relation to capital -- or sorry, capacity increases for fiscal '13, any sense of how that will be structured between the summer quarters and winter quarters? Do you plan next winter, for example, to be flat to down again or much you increase next winter and so on in relation to summer? And the final question, just a technical one, what was the average sector length in the third quarter?

Michael O'Leary

Okay. Just writing down those notes. Okay. Gross CapEx for 2012 is what? EUR 500 million?

Howard Millar

EUR 500 million and hopefully next year, we'll be dropping down. Aircraft capital expenditure about EUR 400 million for fiscal '13.

Michael O'Leary

Okay. On the aircraft debate, the new-generation aircraft. I think like most people we've been impressed with the Airbus NEO and the fuel savings it can deliver. I think equally like most people, we've been singularly unimpressed by the MAX. We don't -- certainly, there seems to be an inferior fuel saving. The 737 is challenged in terms of the engine size. But there's a significant weight penalty on the aircraft for an inferior fuel saving. We don't frankly see that there's going to be much in the MAX that isn't going to be absorbed with ever-increasing Eurocontrol weight charges, some landing charges at European airports. As I said, we continue to be very impressed with the Chinese, the COMAC offering. But at 174 seats, it's a bit small for us. But we're encouraging COMAC as much as we can to at least deliver that aircraft into the commercial service by 2016 which will at least create, I think, a much more competitive environment for airlines to have 3 manufacturers competing against each other instead of 2. I think at the moment, anybody ordering aircraft currently is nuts. The price of new aircraft is, I'd say, close to an all-time high. And you really want to be smoking something to be ordering aircraft now for delivery in 3 or 4 years time, given the high prices and escalation. And I wouldn't be overly impressed with anybody announcing significant aircraft orders. I wouldn't be surprised if we are -- we see an order from BA and Aer Lingus, given that they usually manage to time their aircraft orders at the very peak of the cycle. There must surely be an order coming from one or other within the coming weeks and months. Where we're concerned, we take delivery of another 25 aircraft through calendar '12. We have no aircraft deliveries after that. I think that's quite -- I mean by almost by accident a good position to be in. We're very happy with our growth. We continue to deliver some small headline growth by increasing or reducing the amount of aircraft we ground over the next couple of winters. But I don't foresee any requirements for us to grow the top line or grow the fleet until maybe the summer of '16 or summer of '17, and we're very happy to wait and see what happens to the aircraft cycle between now and then. The one great disconnect that I struggle to -- well, don't struggle, I think it's easy to understand but I struggle to understand new aircraft pricing at the moment, is that the secondhand market is completely dead. We've always been a seller of good young secondhand aircraft. We haven't got a sniff from anybody for about 2 years on secondhand aircraft. And the secondhand aircraft market is weak and it seems to be very weak. Aircraft financing market is completely blown out of the water. We fail to understand why people are rushing out there at the moment to order lots of new aircraft for deliveries in 3 or 4 years time, when many of them won't be able to -- aren't capable of growing their business and they're certainly not capable of funding new aircraft order at expensive prices. Capacity in fiscal '13, again, we haven't yet finalized the budgets for fiscal '13 and therefore, for the purpose of today's call, I'd rather stay off it. We will give some further color later on, other than we -- there will be, I think, small, modest single-digit capacity growth during the peak summer. But we're still a long way away yet from deciding what we'll do next winter with aircraft and with sector. And it's a very fluid situation at the moment. I mean, we're still dealing with some German airports, who are very concerned about further cutbacks in Air Berlin. Clearly, we're down in Barcelona today talking to El Prat or Aena and the Generalitat. I'm off to Alicante and Palma to announce some more aircraft and routes tomorrow. We had -- all I can tell you is we're still dealing with far more base and route offers than we can handle at the moment. And I have forget -- can't read my notes on the last...

Howard Millar

750 miles, Michael, average sector is 750 miles.

Michael O'Leary

750 miles. Sorry, average sector length.

Operator

[Operator Instructions] And we take our next question from Jarrod Castle with UBS.

Jarrod Castle - UBS Investment Bank, Research Division

I'm just trying to understand a little bit more about your potential changes in your share buyback program. Will you still have the flexibility under this to decide whether to buy the ordinary line or the ADR line? Or there have to be some proportion of buyback? And then, does it make sense to be paying a premium for the ADR line, I guess, as well? Secondly, can you just clarify where you are in terms of dollar hedging for calendar 2013, please? And then lastly, I mean, I guess it's too early to say, to give much color, but can you say anything about -- any of the bookings kind of April, May, June time, how that's looking?

Michael O'Leary

Thanks, Jared. The share buyback program, yes, we have complete flexibility up to, obviously, the limit of 50.1% has to remain in European ownership. I think, obviously, from our perspective, we will continue to buy the ordinaries wherever we can. The ordinaries are, the ADRs do trade at a premium. But wherever there's the danger that we're likely to trip over the 50.1% -- under the 50.1%, we need to have that flexibility to be able to buy ADR. And also, when we're -- our experience in doing past share buyback is it becomes difficult sometimes to get sufficient volume of ordinary. And on a day-to-day basis that it may be easier to get some volume of ADRs, but we need the flexibility to be able to do both primarily, so that we can stay below the 50.1%. But obviously, I think, our focus would be able to continue to try to purchase the ordinaries by way -- under the share buyback program. So the restriction at the moment is that we can only pay a 5% premium on the ordinaries. The ADRs tend to trade at about 15% premium to the ordinary, which it puts them out of our price bracket. And we want -- we need EGM approval, therefore to buy the ordinary that's up to a 5% premium and buy the ADR that's up to a 5% premium, wherever we need to. But we will have complete flexibility in terms of how we operate the program. Howard, do you want to take the fuel hedging for calendar 2013, and then I'll do the April, May bookings.

Howard Millar

Okay. In terms of currency hedging, Jarrod, our CapEx is hedged at $1.40 and for this year, for FY '12, euro-dollar average exchange rate will be $1.36 and for FY '13, it will be slightly better at $1.38. At the moment, we have 90% of our requirements hedged for the first 3 quarters of FY '13 and 50% of Q4, which is an average of about 80% for the full year. We'd expect to close out the balance of the remaining 40% of Q4 over the coming months.

Michael O'Leary

Thanks, Howard. In terms of -- again, it's a little bit early yet, Jarrod, on April, May bookings. We have some decent visibility up to March. All I can say, if you take our April and May bookings at this stage, now remember Easter falls bang in the middle of April this year. Last year, it's been on the early side. So at this point in time, we're running a little bit ahead of the forward bookings into April and May, but off a very small of that -- it's a very small percentage of advance seats sold. Quite significant strength, though particularly of things like the school holidays, midterm breaks, U.K. market into Spain, into Italy. I think there's been a big switch of people switching away from the tour operators. And obviously, there's been an enormous surge even over the weekend of bookings in places like Barcelona with the Spanair. We launched a rescue fare of EUR 49 one way and sold over 5,000 of them on Saturday and Sunday alone. So I would expect of -- the forward bookings are 1% or 2% ahead of where we would've been this time last year, and without us having been as aggressive on pricing. But we'll continue to try to keep the forward booking profile building into the same profile as last year. We'll try to do it at slightly higher fares given that we have a much bigger oil bill to pay for next year.

Operator

And we take our next question from Mark Manduca with Merrill Lynch.

Mark Manduca - BofA Merrill Lynch, Research Division

The majority of my questions have been answered. Just a quick question on yields. Just following on from that point you just made. If I take the guidance, I guess, this is a bit of a mundane question. But if I take the guidance that you've given in terms of net profit and the weaker comp on yield in Q4 versus Q3 in 2011, is it fair to say there is an element of conservatism in the Q4 yield trend that you're putting in, i.e., essentially implying 12% growth in yields in Q4? And I guess sort of the attachment question to that is, given what you said about pricing, particularly around April and May, is there any sense that I would be wrong in assuming that you could keep a double-digit yield trend going into Q1 into Q2 of next year?

Michael O'Leary

If I work [indiscernible] answer questions back. I mean, I think I have the answer to that, could we keep a double-digit trend going into Q1 and Q2? I think we'll be hopeful. A lot depends on what happens, A, with fuel surcharges amongst the competition and with capacity. Everything we see looking out into this summer suggests that the Lufthansas, the Air Frances, the BAs are under very significant cost pressure. And there's a likelihood that there would be an upward trend on pricing, we see no significant capacity growth across Europe this summer. That should be helpful. But this is always a business where you're always, expect the unexpected, it's never going to be blue skies. So we remain -- significant concerns about the euro. There's always a concern about maybe terrorism or some kind of naughty stuff breaking out, out there. But absent anything untoward, if the current trend we see continue into Q1 or Q2, I would be hopeful -- I'd be sort of more, I think, I'd be confident that there would be yield increases into Q1 or to Q2. I'm not sure whether I want to be predicting double digit. We have it -- the business has become more seasonal but we appear to be working in that direction. We need -- with the pace of the higher oil, we need to have an average fare increase this year, something on the order of EUR 354, so we've got to get close to a double digit just to pay for the higher oil. Q4 yield, yes -- no, I mean, I think our guidance today is pretty current. Remember that in Q4 this year, you had a little bit -- the first half of Easter was in comparable Q4 last year, Easter fell early in April. I don't know, I've forgotten maybe...

Howard Millar

It's at the end, Michael.

Michael O'Leary

[indiscernible]

Howard Millar

It's at the end.

Michael O'Leary

Okay. Our guidance is fairly, I think, it's fairly accurate. We still don't have -- we're weak visibility still into March. We still need a good outturn through the end of February and March. But we also have cost penalties coming through in Q4, significantly on the oil, where there's a big step-up in our oil, our hedged oil position from Q3, where we're at kind of $83 a barrel into Q4, we're up at $100 a barrel. So...

Mark Manduca - BofA Merrill Lynch, Research Division

But even if I assume EUR 1.6 billion for the full year in terms of fuel cost, I still find it hard to get to a position whereby I'm assuming that Q4 is negative year-on-year on a euro basis, on a net profit line, versus Q3, which was up year-on-year. It's fine. I understand, obviously, there's a weather effect. But I'm just saying there is an element of conservatism attached to the net profit forecast that you've given.

Howard Millar

Yes. You're looking at, Mark, it's obviously, Q4 we have the full quarter of the ownership costs of the grounding of the aircraft whereas in Q3, that was only in play for 2 months. So you might just want to have a look at that as well. Because obviously, with an extra month with 80 aircraft grounded, that will have an impact on the bottom line.

Operator

We take our next question from Stephen Furlong with Davy Research.

Stephen Furlong - Davy, Research Division

Could you just remind us in terms of Barcelona, currently, what aircraft you have based there in Girona and Reyes. And how does -- when something, an event like this happens, how do you think in terms of allocating capacity? I know you said, Michael, it's a very fluid situation. But I mean, are you prepared to allocate even further capacity? Or it really depends on competing deals all over Europe? And then just a general question then about airport cost. I mean, I saw there was a stack open in terms of Dublin Airport, but what was your view beyond the deflationary or inflationary pressures in airport cost going forward? And do you think that more medium term, there's a big opportunity for growth at Stansted?

Michael O'Leary

Barcelona, I think, clearly, the Spanair demise on Friday will be very good for us. But we have, I think, at the last count, we had 11 -- no, 8 aircraft, I think, based in Barcelona, in El Prat. We had cut back Girona from 8 to 4, but we've now reached agreement with the Generalitat on cost. So if Girona is going back up to 8 this summer, we plan to increase main Barcelona or El Prat, I think, is going from 8 to 10 this summer. Reyes, as we closed it during the winter and just goes to 1 aircraft. So in total, this summer, we would expect about 20 aircraft based at the Barcelona airport. Now of those, there's a significant crossover between us and Spanair in Barcelona, particularly on the Spanish domestic routes. We're largely operating 2 and 3 times a day. There are, however, a number of routes where Clickair with Vueling, the Iberia subsidiary would have a monopoly in Spanair's absence. And we're meeting with Aena this afternoon in fact, and with the Generalitat. We could allocate another 2 or 3 -- yes, we could allocate another 2 or 3 aircraft. Two at this summer, but the problem is we've only got about 3 or 4 aircraft left to allocate. So it would be difficult for us to give them all to Barcelona, even if we've got a good deal from Aena. But I think the point we're making in Barcelona generally today is, the Spanair problem is still very much a byproduct of Aena's high cost. If you remember, one of the more lunatic proposals down in Spain in recent months is that the Spanish government would privatize Aena, but with a built-in 5% price increase every year for something like the next 10 years, some kind of crazy stuff. But -- so I would expect, I'd be disappointed, if we're not -- sometime within the next week or 2, announcing 1 or 2 more aircraft based in El Prat this summer. At the moment there, we have 11-somewhere aircraft in El Prat, and that might rise to 12 or 13, which will give us the capacity to add flights on maybe 6 or 8 new routes that we presently don't operate at. But we also have to keep an eye of the fact that if Girona up the road, were already increase -- the summer fleet this year is already increasing from, we had 3 in the winter going up to 9 in the summer. Last summer we had only 6. In terms of airport costs, generally, with a notable exception of Dublin, airport cost generally across Europe are coming down. That's how the way most of the airports across Europe have returned to growth in recent years. We see that most pronounced at the moment in Germany, where there's a number of the airports are very concerned about Air Berlin, where I think it's going to be very significant capacity cutbacks. And they're offering us very attractive deals. Spain, there continues to be opportunities. Obviously, the demise of Spanair will speed that up, but probably comes to the rescue of some of the other so-called low-fare but loss-making Spanish airlines. There'll probably be a temporary risk right there. But the big driver for us will still be taking out handling costs, driving down the amount of check-in baggage, simplifying the procedures. So we get people away from checking this, checking stuff, baggage handling people. And that's where the big comp savings will continue to come from. And in terms of Stansted, I mean, I think there'd been no change at Stansted for the last 2 years. Costs haven't risen. But I think, certainly, our ongoing dialogue with the CAA would indicate that there's a new team in place there. They are certainly more active than the old team, but I think anybody with a post would have been more active than the old team in the CAA. I think they see themselves under significant pressure, given the Competition Commission's ruling that the CAA's regulatory regime was inadequate. And there's definitely an in-depth analysis going on about how, comparing Stansted, where over the last 5 years traffic has declined but operated by 25% -- their operating costs have grown by some 30%. And how that can be lined up compared to other similar airports in the U.K. which are no longer regulated like Manchester, like Birmingham, like Bristol, where they too have suffered either flat or declining traffic over the last 5 years. But their operating costs have declined -- have been flat on a passenger base but declined overall. So there's a glaring kind of still unexplained cost issue in the Stansted numbers. The BAA are bulls******* on about how it was, increased staffing and increased security and all the rest of that. They also seem to transfer the bundle of electricity cost and other cost from Heathrow, shoveled it into Stansted because the regulators were asleep. The mid-Q5 review will be completed by the CAA sometime by the end of April. We're moving into a Q6 review. And I think the fact that Stansted now hasn't grown its traffic for the last 5 years, the CapEx, the original and crazy decision on the second runway, the second terminal, is clearly, gets being postponed [ph]. It's going to be much harder for Stansted to pull the wool over the regulators' eyes this time around. So I would certainly be very hopeful that there'll be significant charges, reductions at Stansted going forward. And let's face it, there needs to be, if you're going to get Stansted -- put Stansted back on a growth path. Obviously, around the edges, the U.K. government policy in this area is a shamble. You have the likes of Boris Johnson running around, ravaging on about an airport in the middle of nowhere, out in the Romney Marshes or something that has no transport link, no motorways, no train, no infrastructure. When the obvious solution to it is additional runways at Stansted, Heathrow and Gatwick. But the Tories are unable to stand up and come up with an aviation policy that does anything other than pander to a couple of environmental headbangers. But I think ultimately, it will come when they realize that the U.K. aviation tourism is being overtaken by the Germans, the French and the Spanish, who are just laughing at the British policy. They keep opening up new runways, developing new runways at the main airport. And while the U.K. government is sitting on its hands, dithering and dribbling. But I think it'll come in time. In the meantime, I think Stansted has some significant growth potential but only when it recognizes that the way to grow is to reduce the unsustainably high charges. I mean, they've doubled the charges there over the last 5 years. And it's not just Ryanair. Even as we cut capacity back at Stansted, our market share at Stansted has actually risen from just under 60% to north of 70%. It's just that everybody else's pulled out of Stansted in an even faster rate than Ryanair.

Operator

We take our next question from Jim Parker with Raymond James.

James D. Parker - Raymond James & Associates, Inc., Research Division

I'm curious if there's a phenomenon we're seeing in the states regarding some carriers how -- fuel prices are very high of course, and how they're cutting back on sector length, which means they burn less fuel but the proportionate cut back or pullback in the fare is much less. So it ends up being a profitable stage length or maneuver. Why is Ryanair not doing this or have you considered it?

Michael O'Leary

Anything else?

James D. Parker - Raymond James & Associates, Inc., Research Division

The other thing is, I notice, you're saying that you've increased your wages 2%. I'd like to know which proportion of the labor force -- who got the 2% and how can you keep your nonfuel costs, keep them stable or going down with very little capacity growth?

Michael O'Leary

At the moment, I mean, sector length is very much a byproduct in Ryanair's model of the airport deals that we're offered to from time to time. So we continue to be very opportunistic. We go wherever the airports give us the best package of efficient facilities and low costs. And as you can see in the third quarter, that meant we had average sector length increase of 7%. Oddly enough, I never cease to be amazed by the flip-flopping strategy of the U.S. carriers. Generally speaking, slightly longer sector length reduces your fuel consumption, you spend more time and accrue with a less time in decline. But if I had my -- or if we had a choice, we would clearly fly more shorter sectors, not because of the fuel saving, it's just that you tend to get higher yields on the shorter sectors or in other words, you don't get 3x the fare for 3x the sector length. But the opportunity for us in Europe continues to be driven opportunistically by airport deals and also by the fact that, really, if you look at across the continent, the real competition for us, there's going to be, as consolidation plays itself out, there is 5 principal carriers: Lufthansa, Air France, BA, easyJet and Ryanair. There's only one low-fare carrier in out of those 5. And the other 4 are massively or significantly increasing fares and in some cases, fuel surcharges, and send the traffic in our direction. So I think we will continue to grow or expand opportunistically. We will still have headline growth for the next year or 2. How will we continue to keep a downward pressure on our operating costs? By continuing to be very vigilant. We expect airport handling costs to continue on a unit basis to be low. We still haven't decided, I think, there's unlikely to be any pay increase here at the company in April of 2012, given that we're facing a EUR 350 million fuel bill increase. And we'll continue, then to fight with suppliers on a regular basis and try to minimize costs, particularly in areas like aircraft, financing, maintenance. The one that we'll struggle with would be Eurocontrol and obviously, -- would be Eurocontrol and fuel. But I would remain hopeful that on the sector length adjusted basis, we'd be able to keep costs at least flat over the next -- sector length adjusted excluding fuel, at least flat, during FY March '12.

James D. Parker - Raymond James & Associates, Inc., Research Division

And, Michael, you're sector length for FY '13, what do we anticipate the..

Michael O'Leary

Actually, honestly, we have no answer -- no idea yet. It all depends on the final outturn. Again, my guidance to you at this stage, which will be general, will be kind of flattish. But it really depends what deals we get at which airport. And it's too early to say yet, we haven't finalized the budget yet for FY '13.

Operator

We take our next question from Gorm Thomassen with AKO Capital.

Gorm Inge Thomassen - AKO Capital LLP

Two questions if I may. The reserved seating, what's been the uptake and what is the revenue potential? That's my first question. And the second question, if you could just go a little bit into what's been driving the ancillary revenue growth of 8%?

Michael O'Leary

Thanks, Gorm. The reserved seat uptake, again, here you got to be careful. The reserved seat uptake has been pretty positive but only on the first 80 routes that we rolled it out on. Now we generally selected those kind of holiday routes and longer sectors, where we thought reserved seating would be an attractive proposition. So thus far, in the first summer, we saw kind of 3% and 4% uptake. What was more important though was that it didn't seem to reduce the priority boarding much. Priority boarding fell by about 1%, where we thought originally anybody taking up reserved seating simply wouldn't buy -- it would be a straight switch. It has turned out not to be. And I think that's because people are recognizing both that, A, the reserved seating is an attractive offering. But also a lot of people who don't want to sit in the front row or in the over wing exit, but still want to board the aircraft early to get either an aisle seat or window seat close to the front like myself. And they are very happy to buy the priority boarding and not to take the reserved seating. So I think -- now, having said that, I think the uptake on it, it will decline as we roll it out now across the fleet. There's lots of very short routes where it just, philosophically, I don't know what to determine. I just don't think there'd be much of an uptick on reserved seating on 40 -- I got a Dublin-Liverpool flight of 40 minutes. Why would you want it or need it? But I think also over the system, we would still expect, certainly, over the peak summer months to generate, we would hope to continue to grow both priority boarding, which is now a mid-double digit, mid-teens and reserved seating, which started off at 3% or 4%, but it's 3% or 4% on what we think would be the more -- the easiest routes for us. So I would expect that would decline as we roll it out across the piece. But that, overall, the revenue will be win-win. Generally, onto an ancillaries, continues to be a strong performance across most of the categories of ancillaries. We continue to see strong -- for a strong sales, hotel, the new Hertz product. We've been working on dynamic packaging, the credit card, income fee, the admin fee, all of those. Really, we've only been working on to increase the takeup are -- to increase the takeup of those on a per passenger basis. And I think if you look at the numbers over the quarter, the fact that ancillaries are up 8% on a per passenger basis really highlights how well we've been able to manage that profit. But there's no big standout, there's no big easy one. So...

Gorm Inge Thomassen - AKO Capital LLP

Are you still trying?

Michael O'Leary

I think we're always trying new things, I mean, the reserved seating, that reserved seating was good on the 80 routes and in total revenue terms, you wouldn't notice it yet. No, generally, we're very focused on working with partners to try to encourage -- to offer our passengers more attractive propositions and to try to encourage them to take up some of these propositions.

Operator

We take our next question from Andrew Light with Citi.

Andrew Light - Citigroup Inc, Research Division

I've noticed in your various press releases of late, that there seems to be an increasing focus on Eastern Europe albeit from a low base. I mean, do you see that as a major source of growth in the future? And if so, what's changing there? And then secondly, just as a query on that, Howard, on the FX, those numbers you gave, $1.36 to euro for FY '12, $1.38 for FY '13. Are those hedging levels you're at? Or is that the effective after considering hedging of the current spot?

Michael O'Leary

First, Andrew, I think -- again, I will overlay this with the fact that we'll always be opportunistic anyway. But yes, I think there's no doubt that the, what we would call Central European countries, we would expect those to be a source of significant growth over the next 2 or 3 years. Again, more because the pullback of the flags continuing, I think, the financial difficulties of the airlines like Malév, Wizz Air, not particularly, I don't think they've ever made a profit and don't seem to be in expansion. I think that -- so a lot of the airport in Central Europe, who a year or 2 ago had lost the silly people like Wizz and Malév and some of these other guys. airBaltic showing up often to pay the full charges but that would be -- that really seems to have pulled back quite significantly. The example we've given is Budapest, where 18 months ago, we pulled out of Budapest where we were just getting p**** around by the airport. There's been, what I would call, a reproshma between ourselves and Budapest, where they're very concerned about the future of Malév. And I think they're very concerned to get us back in there quickly. Because let's face it, Bulgarian tourism needs Ryanair more than Ryanair needs Bulgaria. But having said that, then you see events like the Spanair collapse on Friday, the continuing kind of uncertainty that it seems to exist over some of Air Berlin's capacity. And there's undoubtedly other opportunities in what you call Western Europe. But I think it's more likely in the next -- more likely absent anything else not going bust and there will be more bankruptcies in Western Europe of the second-tier flaky carriers. I think it's more likely that you'll see further base and new route announcements in Central Europe. As I said, we'd be very -- I expect that we'll be announcing at least one more base in Poland before we get to the summer, hopefully by the end of February. But we're now down to having -- there's 3 Polish airport going through a kind of a final bake-off to try to get a 2-aircraft base from us. And that may well be complicated by how our discussions go today, this afternoon and through the remainder this week with Aena and the Generalitat in main Catalonia. about possibly diverting some of our aircraft into El Prat or Girona to take up the quite considerable slack left by the Spanair demise. So I think Eastern Europe will continue to be a growth area for us. Particularly, we are taking on, really, competitors like Malév, like Wizz Air, people like that. I think as we've expanded in Spain and Italy in recent years, they've had a bit of a holiday. Now we're moving into those areas. Not because, by the way, we're targeting any individual airline. It's just the airport wants us in there and wants us to go there quickly. Howard, do you want take the currency and on the exchange rates?

Howard Millar

Yes, under the absolute rates we have hedged us. And so it doesn't allow for the balance to be hedged. So if you look at FY '13, we've hedged 90% in the first 3 quarters and 50% in the fourth quarter. So that's just above over 80% of our hedge in place at $1.38. And obviously, the balance is whatever is remaining, 7%, 8%, whatever the rate turns out to be in the next few months. So I guess, the average, if it's current rates clearly is below the $1.38. So we'll have to see where that pans out over the next couple of months.

Operator

We take our next question from Peter Hyde with Liberum Capital.

Peter Hyde - Liberum Capital Limited, Research Division

Can I just ask sort of one question in 2 slightly different ways, which is sort of new routes and additional routes. One, if you're putting new bases, do you think your brand name is strong enough now that you don't have to particularly have kind of cheap lead-in fares? And I suppose the other way of putting that is, if you are talking to, let's say, some Spanish airports and some of these European airports, when you look at those routes, do you actually think you need sort of cheap lead-in sales, i.e., is a new route dilutive to the overall network or do you actually think these days because you are so strong that you get maturity fairly quickly?

Michael O'Leary

Was that the 2 questions or is there a second one coming, Peter?

Peter Hyde - Liberum Capital Limited, Research Division

No, that was the 2-part question, really.

Michael O'Leary

I mean, I think that the reality for us, I'm not sure that our brand name is all that -- that it's much about a brand. But I think that the -- there's so much recognition of Ryanair out there now across the piece. In some cases, positive recognition, some cases negative recognition. But everybody across Europe recognizes the fact that we have very cheap airfare. I think the difference going forward and certainly, I noticed somewhere like Budapest last week, when we were coming back with 5 routes, competing with Malév. We launched -- got a EUR 9.99 kind of one-way fares, with seat sales. Two years ago, that would have been a free seat sale. Not because there's any other competitor out there with pricing anywhere close to Ryanair, it's just that we were growing the capacity about 15% or 20%. We were having to fill sales 8 million, 9 million, 10 million additional seats in one year. What happened in the last 2 years, you slow that down quite considerably by grounding aircraft this winter, we're only growing the seat capacity by 4 million seats in this fiscal year, next year something similar. So really 4 million seats on an 80 million base is only 5%. So the amount of additional capacity we're shoveling into any one market is now relatively small compared to our, if you like, underlying capacity. So the incremental capacity growth is much smaller. And then we're putting them into markets, where opportunistically somebody else has fallen over. Whether it's Air Berlin taking capacity out of Palma or some of the German airports. Spanair, clearly creates -- I mean, Spanair in many ways creates a disability for us. We prefer an airline to continue to be incompetent or trading because it's kind of -- its vacuum make it more difficult for us to turn up immediately and fill them. Although, fortunately, by having 80 aircraft sitting on the ground, we will be able to turn up in Barcelona in El Prat within 4, 5, 6 weeks, with a couple of additional aircraft. But that will absorb most of what we have left in terms of summer seat capacity. Now there may have been incidence that we were offered, for example, 4 secondhand lease aircraft for summer 2012, as recently as 2 weeks ago. Which, again, kind of take me back to the point that our secondhand market is completely crap, and some of the lessor still haven't put away aircraft for summer 2012. But unless we got a really major financial incentive to do so, I wouldn't be interested in leasing somebody else's empty aircraft. I think what the real driver of our yields at the moment, is the fact that we're not competing with ourselves by adding 8 million, 9 million, 10 million additional seats a year. We really cut it back to growing at 3 million, 4 million, 5 million seats a year. So we're down to low-single digit capacity growth and across a much better spread of markets across Spain, across Italy, across Central Europe. Really, the only market we're not growing in at the moment is in Ireland. And whereas the fares are rising in Ireland, the costs are rising even faster. I was asked on Irish radio this morning, how do you justify a 17% fare increase? Well, I said, The oil went up by 18% and Dublin Airport charges went up by 40%, so I don't even have to justify. Maybe you should ask the government how they justify a 40% increase in airport charges on an island where traffic is declining for 5 years in a row." So I think, really, I don't think it's a brand name per se. Although, clearly we're very well known everywhere now. I think it's just the message continues, we keep drilling home the message, not so much the Ryanair brand, but that the Ryanair pricing is so much cheaper than everybody else. And as the others then raise fares, raise fuel surcharges. You see easyJet, for example, dealing with very significant cost pressures. Back worrying about pilot negotiations and silly stuff like that. I think they'll be under much greater cost pressure going forward than we will. And that helps us, I think, it helps our -- with just keeping our direction.

Operator

We take our next question from Eamonn Hughes with Goodbody.

Eamonn Hughes - Goodbody Stockbrokers, Research Division

Just a couple of questions. You chatted a lot actually at the start of the call about kind of an abnormally favorable winter and de-icing costs and the stuff like that. Is it possible at all to quantify that for the quarter and maybe kind of -- would there be a similar guidance in terms of Q4? That's the first one. Secondly, just of load factors, with Aena touch in the quarter, just wondering, is that a trend we could maybe expect kind of rolling into the final quarter and maybe your views on load factors maybe into next year, whether there's any to the shift in tactics from yourselves? And then I just want to chat a little bit about the cash flow then maybe after that, if that's possible.

Michael O'Leary

Okay. Eamonn, yes, I mean, I again, like I call -- some of the coverage of the results this morning was a little bit overenthusiastic. And somebody did a piece on stellar Q3 numbers. Like we made GBP 15 million compared on GBP 900 million turnover, which is good in the airlines business, but I wouldn't exactly call it stellar. And I do want to caution everybody, we had a really dreadful Q3 prior year comparable with winter weather disruption, de-icing costs were horrendous. So we picked up -- an awful lot of that turnaround is in that. You didn't have the same -- we don't have the same adverse weather impact in the comparable Q4 last year. So it's a much more like-for-like comparison, and we do have an enormous fuel cost penalty in Q4. And also, the ownership costs and -- or staff cost at ground they needed the fleet for it [ph] the full 3 months. So I -- we will definitely -- I mean, you know that we will definitely lose money in Q4. Clearly, the question is, how much at the moment? Given our profitability, we are expected to lose about 70 million. And the thing is, can we lose a little bit less than that? We'll certainly be doing our best. But it's difficult in this quarter, particularly with the fuel cost increase. Load factors, there isn't anything specifically significant. The load factors are marginally down in Q3. We expect a similar outturn in Q4, marginally down. And again -- but that we won't have kind of planned for that, it's almost part of the presentation of by having lead-in fares of EUR 9.99 instead of free seat sales. We want to enter -- complete Q4 and enter into Q1 and Q2 of next year without doing any massive seat sales or doing free seat sales. We want to try to reeducate at least our customer base, EUR 9.99 is going to be the lead-in fare. Book it now if you see it because it's not going to get any cheaper than that. But certainly, we are making no resistance on people who are trading down to us from the Spanair, the Air Berlin, the easyJets and the Aer Linguses. And we will continue to, I think, to see a slide in the people coming trading down to Ryanair's prices from those higher farer, in some cases, fuel surcharging airlines. But I expect the load factor in Q4 to be somewhat similar to Q3, down marginally on the prior year.

Eamonn Hughes - Goodbody Stockbrokers, Research Division

Okay. Just in relation of the cash from, Michael, you mentioned earlier on about just in terms of timing, and you discussed various options for you on the CapEx side, but you talked about in terms of winter, you can release [indiscernible] sort of part. But, obviously, the summer, if you want to expand, you were talking about to the 2015, 2016. So I mean, on with context to that, with significant free cash flow in next year and the year after, the EUR 500 million dividend, as to the case that -- and it's not guaranteed, buybacks on top of that, or could we be looking at more regularity on the dividends given that the lead-in on investment is still a couple of years and I know you pay a fraction upfront?

Michael O'Leary

Yes. I, again, I mean, like -- I get very reluctant to try to come up with forecast to an 18 or 24 months out because in this business, there's a curve ball coming somewhere. I mean, it's fair to say this year, if current trading and profitability continues through the summer, we are very likely to generate something like EUR 800 million -- EUR 700 million, EUR 800 million in free cash flow. I think that we committed that there will be a second special dividend before the end of FY March '13. And I'm not -- we have no decision made yet, and the board hasn't even begun to look at whether that would be at the end of this calendar year or in the early part of calendar '13, but it's sometime around then. I would be very reluctant, and I don't -- I would almost say at this stage, there definitely won't be any more than 500 million. But I think it's fair to say that all of the things being equal and there's no untoward event like break-up of euros, terrorism, something untoward, I think we would want to complete another 1 or 2 share buybacks, maybe do 2 more share buybacks at 100 million apiece. So that through a combination of maybe 500 million in dividend and maybe if, subject to being able to complete them and liquidity is the big issue for us when we're trying to do them, maybe 1 or 2 share buybacks of 100 million or 200 million cumulatively would see us kind of use up most of that 700 million between now and March FY '13. We've got some feedback from some shareholders who obviously find it attractive to receive dividends. There's another group of shareholders who find dividends unattractive and would prefer the share buybacks. And we think, given that we have tried in the past to do both dividends and share buybacks and neither seems to be the solution in terms of getting people to focus on Ryanair's extraordinary cheap and very affordable share rate -- our share rate. I think we need a mix of both to give us that flexibility. I would be nearly certain too, by the way, that if there's a special dividend in -- before the end of FY March '13. There will not be a special dividend in the year to FY March '14, but then we will try to do more share buybacks during that second year. I am very reluctant, and obviously, I'd be a significant beneficiary of dividends, but I am very reluctant that we don't get ourselves into this having an annual dividend policy and bulls*******, listening to shareholders, whining on about our dividend rate not being significant or not growing enough. I think it's a cyclical capital-intensive business. There will still be lots of opportunities for us. We clearly have another aircraft order to place sometime between now and the end of calendar '15. But I think our focus is on the -- for the next year or 2, trying to maintain profitability with a very big fuel cost headwind and having enough common sense to -- if we generate strong cash flows, giving it back to shareholders through a mix of dividends and share buybacks.

Eamonn Hughes - Goodbody Stockbrokers, Research Division

Okay, Michael, just so I can be cheeky, just one last one. I imagine there are a lot about the positives around possible options in Germany, Central Europe, Spain. You mentioned Ireland as the one area where you would be looking to cut back. So if you kind of churn in the mix a little bit in the portfolio, where else beyond Ireland do you think might lose out a little bit in terms of the focus in the next 12 months or so?

Michael O'Leary

Yes, honestly, it's really very difficult, Eamonn. I think Ireland will definitely -- is likely to lose another aircraft or 2 at the -- at Dublin and probably at maybe Cork airport. At the moment, falling off U.K. provincials are going very well for us. We have seen very good expansion, particularly in the northwest of the U.K. We have the new base in Manchester, which is performing well. Liverpool is growing strongly, Leeds Bradford doing very well. And there's some, I will call, fairly inferior competitors up there in that neck of the wood. And I think I would say some consumer nervousness about booking well in advance with a number of the carriers up there. We'd like to encourage that trend wherever we can. But really, we'll be getting down, I think, apart from Ireland where the airport, the depart -- the passenger charge in Ireland and depart parking passenger based at Dublin now is nearly EUR 19. And there's a EUR 3 passenger tax. So before we get sent on a departing passenger out of Dublin, we have to pay over EUR 21 to the Irish government and this bastard child, the DAA monopoly. So again, I couldn't have put it better than I think Christoph Mueller described the DAA airport charges this year as insane. Although I hear the Minister was on Irish radio at the weekend, claiming the -- blaming the problem of Irish tourism on Ryanair's prices, which is quite interesting. It seems, despite his youth and vigor, he's been captured by the civil servant, the bureaucrats within in the space of 12 months because he seems to be singing their song. But really, it depends on where the deals come. I think there's an opportunity for us to maybe cut back some capacity around the edges in the U.K. We might take another aircraft or 2 out of Stansted. We might -- but really, that's about it. I think Dublin and Stansted will be the focus of where -- if we have to come up with a couple of spare aircraft quickly for really good deals at other airports, I think it's Dublin and Stansted is where they'll come from.

Operator

We take our next question from Brian Devine with NCB Stockbrokers.

Howard Millar

Michael, sorry it's Howard here. I'm just going to drop off. I'm going to do that meeting for you. I'll give you a shout later on this evening.

Michael O'Leary

That's fine, thanks, Howard. Sorry Brian, go ahead.

Brian Devine - NCB Group Limited, Research Division

Yes. Just on Spain again. Just in terms of how the average fares be held up for you guys to-date in Spain? And just given that you said you could probably can only allocate 3 or 4 aircraft yourselves in Spain, do you think there's further opportunities for fare increases, given the drop off in Spanair? And just secondly, on Aer Lingus, I have seen press reports that the pension deficit is now in the recent EUR 700 million. Would you be opposed to Aer Lingus, despite its remonstrations against doing this -- committing money to help solve this problem for once and for all?

Michael O'Leary

Yes. On Spain, again, I would urge, caution Spain -- Ryanair doesn't put prices up, what we do is we manage our load factors. We want to fill 85% of our seats on a year-round basis. But I think what we're seeing in Spain -- remember -- fares in Spain last year were very low, partly because Ryanair was growing so rapidly. We were growing -- for example, we think we're still -- we just combined March, we will complete our first 12 months with a base in the main Belfast main Barcelona airport El Prat in addition to bases in Reyes and Girona. We -- but this year, we're adding up a new base in Palma, which is funding of Air Berlin's largest base. And that isn't even in Germany. It's actually down in Palma. But we're also adding other bases, a very good spread of the bases this year, Billund in Denmark, Baden in Germany, Palma in Spain, Paphos in Cyprus, Wroclaw in Poland and probably effective one to come in Poland. But I think what we're -- it's too early to say yet what the outturn from the Spanair situation would be, but I think it's inevitable that there would be less seat capacity in the Barcelona market this summer, although we will certainly want to add seat capacity. I think we would certainly want to keep the Boeings, the Clickairs and the Iberias on us. And if that means we have to add some additional frequencies or 1 or 2 new routes into the Barcelona market, then I think we would see us do that. We might have to do that by switching maybe an aircraft or 2 out of Girona and putting it into El Prat. So we'll play with some the capacity within Catalonia, itself. But we would be determined to make sure that Barcelona, El Prat is well served and that we keep all the iceberg [ph] fuel surcharging competition down there on us. Though easyJet has a tiny presence down that marketplace, it's really now going to be between ourselves and the Iberia's subsidiary of Clickair Boeings. And our experience to date is when you're competing with an Iberian subsidiary, it's a bit like taking sweets from a baby. So, very concerned about the report in the Aer Lingus pension, the whole thing, the whole development there and then a couple of developments in Aer Lingus, which we would be concerned about. Obviously, I would say we are one of the bigger investors in Aer Lingus, we did so on the base of an IPO prospectus 5 years ago, which clearly signals to both markets and to their perspective shareholders that Aer Lingus has a fixed contribution to the pension schemes. They account for the pension schemes on the base of their defined contribution pension schemes. Their annual account every year for the last 5 years has reinforced that message. Therefore, it's quite clear that while the pensioners of the scheme, who are also former DAA employees so they may have the defined benefit entitlements. But it's absolutely clear in our minds that the contribution rates are fixed dividend in Aer Lingus and have been accounted for in on that basis for the last 6 years as defined contribution. This is something -- I think, we're drawing the attention of the various regulators, the newly -- the regulators in Ireland, both at Stock Exchange, the Central Bank and also the -- because if they've been telling the stock -- the shareholders this and providing for their pension liabilities on the base that it's a defined contribution pension scheme. And to be fair, we accepted it as the defined contribution pension scheme. I think all of our experience in Ireland suggests that if it wasn't a black-and-white defined contribution pension scheme, the unions would have had them in court long before now -- I'd say, assert that it's a defined benefit. And I think the very fact that the Irish unions haven't gone near a courtroom, clearly suggests in our minds that the Aer Lingus's interpretation is right. We welcome the comments of Christoph Mueller and Andrew McFarlane at the Investor Day in London recently where they couldn't have been more black-and-white. They said it was a defined contribution pension scheme. They said Aer Lingus will not make any further contributions over and above the -- I think it's [ph] a 6.35 or some of its percentage of contribution rate. And I think Christoph Mueller also offered that if there was to be any change that it would clearly have to come back to shareholders for prior approval. If you take all of that kind of background music that was -- which they couldn't be clearer, you really have to wonder what the hell Aer Lingus are doing down in front of the Labor Relations Coalition in recent weeks with the DAA and the unions, disclosing the pension deficit. It's defined contribution pension scheme. This is a deficit tough [ph] -- but they probably shouldn't be paying to it. Clearly, we're very concerned this will be yet another example of the unions and the government raiding Aer Lingus's shareholder funds as a kind of a sweet jar. They've done it before when they bailed out the ESOP. The bank was going to foreclose on the ESOP debt we understand in December 2010. Aer Lingus just wrote a check for some EUR 27 million to pay off the ESOP bank loan. Seemed to us to be a clear case of favoring one shareholder over others. Yet the Irish Stock Exchange and the Central Bank did nothing. It ran again in March 2011 when, lo and behold, this -- they leave and rehire scheme and negotiate and approve by the current Board of Aer Lingus blew up in their faces. The employees had to pay 30 million in tax liabilities and yet again, shareholder fund were simply raided without permission or approval of shareholders, they wrote a check to gather revenue of something like GBP 30 million and here we are again, a company that had clearly told its shareholders, their [indiscernible], the stock exchange and the regulator, that they don't have any liability for any debt to the pension scheme is down in the employments of one of the bloody useless their labor quangos here in Ireland. The Irish government clearly, and in our view, inappropriately putting pressure on the company to kind of sort out the pension scheme so the Irish government can sell its stake -- its shares. And we will be very concerned that the shareholder funds will be misappropriated in some way to make a contribution to pay off the pension scheme deficit. We have our lawyers looking at it. I think we will see some time in over the coming week or 2, we will be, I think, taking steps. We and possibly some other shareholders taking steps jointly to ensure that the board of Aer Lingus honors what are clearly the binding commitments in its ideal prospectus. And in its subsequent annual accounts, that Aer Lingus doesn't have any liability toward the pension scheme over and above its fixed contributions and that no more shareholder funds will be wasted, or time wasted down talking in front of the Labor Relations Commission here. One other development and so what's interesting in the weekend, it appears that the Minister has now decided in his wisdom that Aer Lingus should pay a dividend. As you know, Ryanair has been calling for a special dividend to be paid for about 12 months now. We even asked for an EGM to be held so at least so the shareholder could offer their opinion on the subject. And again, we're told to go to h*** by the Board of Aer Lingus and our views ignored. I suspect now that the Minister has asked the Board of Aer Lingus to jump, the response would be held high the Minister, and then how big a dividend would you like, which will -- and reinforces, yet again that Aer Lingus is really run and controlled by a government-appointed board, and then the shareholders like Ryanair are ignored although usually, what we are called for -- or comes to pass -- with the passage of time.

Operator

Next question comes from Jonathan Wober with Societe Generale.

Jonathan Wober - Societe Generale Cross Asset Research

Just 3 questions, please. First of all, if I can come back to the question on airport costs. In your statement, you attributed the higher growth of airport costs versus passenger numbers to a number of things: the higher charges at Dublin which you all know increased average charges in Spain. But also, you talked about the mix of new routes and bases launched. I wonder if you could just expand on that last bit a little bit? Because I thought -- it was my understanding that new routes and bases would be on the basis of lower airport costs. And second question is, can you explain -- in the guidance, you talk about FY '13 fuel costs being up by EUR 350 million. A couple of months ago, you said it would be up by EUR 250 million. I wonder if you can talk us through the difference there? And then the final question, just a quick detail is, what was the average number of employees for Q3, please?

Michael O'Leary

Thanks, Jonathan. Let me get that. The airport costs, I mean obviously, one of the bigger ones has been Dublin. We are happy we have an air bridges issue and some cost increases at the Spanish airport. The mix of new airport, new bases and destinations, yes, while new airports are, generally speaking, lower costs than they've been if you like Dublin and Stansted, in some cases, the structure of the deals that we typically, say, for example, in some places, Spain, we are booking and paying kind of published charges at the airports but receiving either discounts back from the airport or some marketing support from the local or the regional tourism authorities in order to deliver growth. So it's more a function of how some of those are booked. But clearly, new routes and bases in Spain will be slightly more expensive, for example, than new routes or bases in some of the Central European or in the U.K. airports where we've opened up new bases. Some of that would also though, be reflected then, in increased marketing support or reduce marketing spend below the line. I think you've got the numbers mixed up on the fuel costs. The EUR 250 million would've have been a reference to the FY '12 figure our fuel a increase. Jimmy's here now shaking his head at me, but no, we've never had a figure at EUR 250 million for FY '13. Do we?

Jimmy Dempsey

Well, Jonathan -- hang on. I'll clarify it. And 3 -- 2 of the move from EUR 250 million to EUR 350 million is a combination of what we're looking at in terms of capacity for next year and also which is the larger number and is the movement in, where the currencies and the oil price have moved. Like if you look at the oil price between November and now, it's largely driven by the fact that euro price of oil has considerably changed. So that's driving the price much, much higher.

Jonathan Wober - Societe Generale Cross Asset Research

Okay. Didn't you have a significant currency hedge in place already?

Jimmy Dempsey

Well, we have had a currency hedge in place, but we didn't have it fully locked out in November. We would have guided in November our currency position of around 50% at the back half of next year [indiscernible] revenue.

Jonathan Wober - Societe Generale Cross Asset Research

And just to reconfirm on FY '12, you had said EUR 350 million increase in this year as well, is that...

Jimmy Dempsey

That is correct.

Jonathan Wober - Societe Generale Cross Asset Research

And then just the last question on average number of employees, please?

Michael O'Leary

Generally, at the quarter end, the average headcount is 8,500, up from 8,000 at the -- on the prior year Q3 number.

Jonathan Wober - Societe Generale Cross Asset Research

Okay, so I did not quite catch it. There was interference on the line, but maybe I'll come back to Jimmy to [indiscernible]?

Michael O'Leary

Up from 8,000 to 8,500 the end of Q3, but that figure is a slightly artificial number and that it excludes the number -- quite a considerable number of cabin crew and pilots who are off the payroll at the end of Q3 either by virtue of unpaid leave as we ground the aircraft or have been furloughed for a number of months during the winter.

Operator

We take our next question from Gerard Moore with Merrion Capitals.

Gerard Moore - Merrion Stockbrokers Ltd., Research Division

I have 3 questions as well, please. The first question is just on the fare increases within the quarter. Ignoring sector length, would you say that the underlying increase was fairly standard across those countries? Or were there some countries where it was a little bit difficult to increase prices because of customer weakness, austerity measures, et cetera? The second question is really following on from Norwegian Air's aircraft deal that was announced recently. Will that change at all your view of the Scandinavian market even in terms of your operations there presently or in the future? And the third question is just on the fuel forecast for next year, the EUR 350 million. Does that also include perhaps some costs for the ETS carbon scheme, or will that be reported separately?

Michael O'Leary

Yes. There's no -- I mean, the fare performance and the year performance across in Q3 has been pretty uniform across the business with 2 exceptions, the fare increases out of the Irish airport and at Stansted has been slightly higher than that because that's where most of capacity cutbacks have taken place and also where we're paying the highest airport charges. So, generally speaking, other than that, it's been remarkably uniform plus or minus exchange rate movement between sterling and the euro. The Norwegian aircraft deal we think is a very strange one. I think it's, in a funny way, it makes it more likely that we'll expand significantly I think in the Scandinavian market but over a 2 -- maybe in the next 2 or 3 years. We think they will have suffered enormous indigestion trying to fund and take on that kind of fleet growth. Now where -- the vendors might provide them with short-term funding, we don't see any capacity for -- Norwegian has all the smell of an Air Berlin mark 2 [ph]. Last year, they were announcing long-haul aircraft orders. They have 787s coming, now they have A320 MAXs, and now with 737 -- or no, A320 NEOs and 737 MAXs. For an airline that struggles to get very far out at Scandinavia and which has clearly benefited from SAS, has difficulties up in Scandinavia, I think they have quite decent niche up there. But if not one of -- either by profitability or market cap, I think their market cap retail [ph] last week or 2 weeks was about -- between EUR 250 million, EUR 350 million. This is not an area and I'd like to be trying to finance a couple of billion of aircraft orders for particularly when they've yet to demonstrate any ability to open or grow bases outside of Scandinavian market. I do think -- I mean if I was given my choice, I think we will expand significantly in Central Europe in the next 2 or 3 year. After that, I think the next great opportunity will be in Scandinavia. I think SAS will implode at some point in time. The only way forward, I think, is either the Scandinavian government put in some management who will finally actually manage SAS or Lufthansa will be sort of encouraged or induced to go up there and work the Lufthansa magic. There has been such a success with British Midland and SN Brussels, they may be, say, encouraged to go up there and repeat that formula up in Scandinavia. Either way, I think it's inevitable. It may be the next 2 or 3 years, there'll be significant cutbacks in SAS. I don't think Norwegian has the capacity to grow or fund the kind of aircraft orders they announced last week. I therefore believe it's inevitable that we will see a growing trend of Scandinavian airports coming to talk to us and taking the place of the German and Central European airports who are presently talking to us at the moment. In terms of fuel next year, we have included ETS in that number, but it's a very small number. It's really immaterial. I mean, I got a total budget for the ETS in the next 12 months is EUR 15 million, EUR 20 million. We expect to recover that in our EUR 0.25 ETS tax so that all of our passengers can be fully aware of what these idiots in Brussels are doing with their stupid environmental taxes that just increase the cost of flying who are not in any way penalizing road transport or ferries or coaches or buses.

Gerard Moore - Merrion Stockbrokers Ltd., Research Division

And maybe just very quickly is that ETS cost also based off a carbon price of around EUR 8 per ton, the current spot price?

Michael O'Leary

Yes.

Jimmy Dempsey

Current market price.

Michael O'Leary

Yes.

Operator

As we have no over further questions, I would like to turn the call back over to you for any additional or closing remarks, Mr. O'Leary.

Michael O'Leary

Okay, folks, again thank you very much for participating in the call. If I could leave you obviously with 2 thoughts. One, the Q3 numbers are heavily distorted by a very weak prior year comparable. I wouldn't expect to see that necessarily repeated in Q4 where we don't have quite such a weak comparable. And obviously, the bigger challenge for us, and I think many other European airlines for the next 12 months, is going to be a very significant fuel headwind, so I would urge caution on some of the more irrationally exuberance in terms of airline share prices over the last week. We should be tempered by a bit more, I'd say, nervousness about oil prices we know will rise significantly in the next 12 months. Demand will continue to be, I think, generally soft across Europe but characterized by, I think, a continuing speed in the switch from high fare fuel surcharging flag carrier airlines to Ryanair. Other than that, we're not doing the roadshow, obviously, on the Q3 results. If anybody has any follow-up questions, please feel free to direct them to David Broderick, our Head of Investor Relations here in Dublin, or myself, Howard, Jimmy Dempsey, Neil Sorahan, and we'll be happy to talk to you individually if you want to give us a call off line. Thanks, everybody. Thank you, Liane, to help with the call. Bye-bye, everybody. Thank you.

Operator

With that, we conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ryanair Holdings plc's CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts