easyJet's (EJTTF) CEO Carolyn McCall on Q1 2016 Trading Update Call (Transcript)

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easyJet PLC (OTC:EJTTF) Q1 2016 Trading Update Call January 26, 2016 3:30 AM ET

Executives

Carolyn McCall - CEO

Andrew Findlay - CFO

Peter Duffy - Group Commercial Director, Customer, Product & Marketing

Warwick Brady - COO

Anthony Drury - Head, Business

Analysts

Jarrod Castle - UBS

Oliver Sleath - Barclays Capital

Neil Glynn - Credit Suisse

Alexia Dogani - Goldman Sachs

Wyn Ellis - Numis Securities

Damian Brewer - RBC Capital Markets

Robert Murphy - Investec

Stephen Furlong - Davy Research

Andrew Lobbenburg - HSBC

Penny Butcher - Morgan Stanley

Andrew Light - Citigroup

Peter Testa - One Investments

Anand Date - Deutsche Bank

Operator

Good morning, ladies and gentlemen and welcome to the easyJet's Q1 Analyst Call. My name is Rosy and I’ll be your coordinator for today's conference. The duration of the presentation you will be on listen-only, however at the end of call you will have the opportunity to ask questions. [Operator Instructions]

And I’ll hand over to Carolyn McCall to begin today's conference. Thank you.

Carolyn McCall

Good morning, everybody thank you for joining us to discuss our trading statement for Q1 of 2015-16. Joining me is of course Andrew Findlay as well as members of our IR teams Stuart, Rachael and Michael. You should have been sent the slides along with the statement which are also available on our corporate Web site. Now as usual we will review the Q1 results we will follow-up with plenty of time for questions.

Turning to first slide, easyJet has delivered a good commercial performance in the quarter demonstrating the resilience of its business model. Following a strong start in October revenue was impacted by the tragic events in Sharm El-Sheikh and Paris. Resulting in lower demand in yield with revenue per seat at constant currency decreased about 3.7%, forward bookings for Q2 are showing a marked improvement in RPS compared to November and December. We expect the momentum of bookings to continue.

We have taken significant action as you can see on costs and the underlying cost performance was strong. It reflects the work being done by Andrew and the team right across the airline. Cost per seat ex-fuel increased by 1.3% which is better than the 2% plus that we communicated at our full year results. We are continuing to deliver the successful strategy that we have by investing in our network, developing a pipeline of commercial and cost initiatives and delivering solid operational performance and therefore sustainable returns to shareholders.

On Slide 3, we have added an extra 1.2 million passengers during the quarter representing over 8% growth, capacity increased by 7.3%. Load factor in the quarter was strong at 90.3% an increase of 0.6 percentage points despite the events in Sharm and Paris. This reflects of course a very strong October. Total reported revenue for quarter decreased by 0.1% to £929.5 million including a negative impact from foreign exchange of £32 million and reported revenue per seat decreased by 3.9% to £52.28. Non-seat revenue improved in Q1 to £16.3 million an increase of 12.7% as we continue to make improvements within flights and partnership revenue.

Slide 4, revenue performance at the start of the quarter reflected a continuation of the very strong demand that we saw throughout the summer. Underlying trading since then has been in line with our guidance at full year results, recognizing a high capacity in low fuel environments. The tragic events for Sharm on the 29th of October and then Paris on 13th of November had as you would expect direct impact on customer bookings, affecting demand and yield for the remainder of that quarter. As the second largest airline in France, we were of course disproportionally affected by the Paris attacks. Including the domestic network of France touching roots represent around 23% of our network. Bookings are recovering to normal levels. We expect to yield in the second quarter to continue to be effected due to the timing of events in Q1 with yield typically lagging demand.

Slide 5, focusing on cost continues to be an absolutely key strategic objective for easyJet to ensure we increase our competitive advantage. Andrew has renewed this focus since joining. We have seen some early rewards. Total cost per seat decreased by 3.7% at constant currency maintaining a stable margin. Cost per seat ex-fuel increased by 1.3% at constant currency which as I pointed out earlier is low than we communicated in November. The strong cost performance has resulted from volume driven contracts with airports, engineering cost reductions especially through the new component support contract, savings and business overheads and benefits from free up-gauging. We've also benefited from the effective savings in post hedged fuel price. EasyJet Lean is well on track and delivered 16 million of sustainable cost reductions in Q1.

As you can see on Slide 6, operational trends are improving after a busy summer on-time performance at Gatwick has improved. We've worked with our airport partners to find solutions to operate in a particularly constrained environment. This improving trend would've been significantly better, but for restrictions in capacity due to Brest air traffic control where they're changing their systems. 25% of our capacity goes through Brest and we are therefore we're more affected than most. We are pleased that by March, this will be complete. We are already seeing some improvements.

Punctuality is of course a cornerstone of our airline and we are always looking to improve it. Customer satisfaction is strongly tied to operational performance and the results for Q1 reflect this in all the categories. Our focus on disciplined capital investment on the next slide continued this quarter and so capacity increased by 7.3% to 17.8 million seats and load factors to increase by 0.6 percentage points to 90.3 as I said. This capacity growth has been focused on investing in our new bases in Amsterdam, Hamburg and Porto, as well as further strengthening our position in core markets including the UK and Switzerland. Looking forward next week, we're opening new bases in Venice where we are transferring four of our aircrafts from Fiumicino and also Barcelona.

Now, over to Andrew.

Andrew Findlay

So on Slide 8, moving onto the detail of our hedging positions for fuel, U.S. dollar, euro and Swiss franc. We now have 87% of the first six months of this financial year's fuel requirement hedged at $846 per tonne, which means that 86% of the full year 2016 requirement has been hedged at $823 per tonne. For this year taking to account the hedges currently in place, a $10 movement in the fuel price impacts profit before tax by $2.9 million and a $0.01 movement in dollar rate impacts PBT by £1.4 million.

Moving on into next year, we have 71% of the full year fuel requirement hedged at $643 per tonne. On currency to this financial year, we have 84% of our dollar requirement hedged at $1.62 and 84% of our euro surplus hedged at €1.23. For next year, we have 66% of our dollar requirement hedged at $1.54 and 61% of our euro surplus hedged at €1.33. So now on Slide 9, overall forward bookings are broadly in line with the prior year with 75% of seats currently sold for the half year. There has been little or no change to our view on market capacity in the first half of the year with capacity on easyJet markets increasing by 7.7%. There has been a significant recovery after the drop in demand in November and December, although as Carolyn mentioned yield tends to lag demand.

On Slide 10, moving to the outlook, we expect full year profit before tax to be in line with current consensus. We expect to grow capacity before disruption in the first half, which in seats flown by 38% and by 37% for the full year as we invest in our network. Revenue per seat is now expected to decrease in the second quarter by mid single-digits due to the impact of Sharm and Paris. On costs, we are expecting cost per seat excluding fuel at the constant currency to increase by around 1% in the first half and for full year, we expect between flat and an increase of around 1%. This is better than we communicated in November and reflects good early progress on cost savings across the business.

Currency has moved against us in the quarter and based on current spot prices is expected now to be circa 25 million adverse for the first six months and £50 million adverse for the full year. We expect the unit fuel benefit in the first half between £75 million and £85 million and between £165 million and £180 million for the full year, which on a full year basis is an additional benefit to between £15 million to £20 million. This reflects our exposure to the lower current fuel price. Full details of our hedge positions were provided earlier.

I'll now hand you back to Carolyn.

Carolyn McCall

Thanks Andrew. So to summarize, despite the extraordinary external events in Q1 and the adverse impact of foreign exchange, easyJet's resilient model is clear. We've delivered a strong cost performance and total revenue is in line with Q1 2015. We continue to see exciting profitable growth opportunities across our core markets and we've built an excellent pipeline of initiatives to drive returns. We continue to make disciplined decisions on the allocation capital to deliver sustainable growth and return for our shareholders. And finally full year 2016 outlook remains in line with expectation. This will ensure that we continue to win and continue to grow revenue, profit and dividends.

Thank you and I will now hand over to you for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And the first question comes from the line of Jarrod Castle from UBS. Please go ahead.

Jarrod Castle

Three, if I may. Just starting off, firstly, with France, obviously a big part of the network and you still plan to grow capacity 6% into that market. That's obviously the same number as in November. Did you think about reducing your capacity and redeploying it elsewhere, maybe healthier markets? Or is it the same level because others are withdrawing capacity and it's a market share grab as well, at the moment? Secondly, just on Egypt itself, when do you or don't you think you'll see easyJet back into that market? And then just lastly, just in terms of cost advantage, obviously, still very good ex fuel cost control, but looking, obviously, at the hedging ratio and rate of over $800 versus where fuel is today, when you look at all-in cost and you compare that to your -- the competitors, the legacy airlines, really, are you finding the competitive situation worsening on a relative basis? Or is this still a good situation for you?

Carolyn McCall

So, I'll take this in the order you said them Jarrod. On France, no look we are -- this is a short-term impact, it is an extraordinary event what happened in Paris, I'll be surprised if anybody would have thought that any airline operating the way we do in Paris because we do domestics remember as well as international of France, would not be affected, you've seen the Air France numbers and we're kind of comparable to Air France in France because we're the number two. So, it is short-term impact and I think we've dealt with it extremely well as you can see it from the numbers. It is quite amazing how resilient the model is. We did not think of redeploying our capacity because actually we're in very strong positions in France, we intend to keep those very strong positions and in fact to grow them. So, and actually you don't really see many other carriers withdrawing from France, what you just see is people holding firm and kind of gritting their teeth and getting through it. So, our strategy for France has not changed which is why our capacity for France has not changed.

On Egypt it's hard to tell when we will be back. We're closely working as you would expect with the British government on this, we speak to them daily if not weekly and we will be guided by when they say Sharm airport is safe to fly into, and then we will have to decide because remember with Egypt there's more of H1 effect, because it is a winter sun destination and so, actually that is what -- that is why there's been an impact in H1. If it was summer, we would already be doing very -- a lot of capacity to other beach destinations and say wouldn't be quite that kind of impact. So, it's hard to say when we will be back. I know the government want to -- us to -- want British carriers to fly back, but I would also say that we probably if it's second half that Sharm becomes open as normal. We will think about the schedule we put to Egypt, because you wouldn't go back to the same schedule you had necessarily for H1, because it's a different season and because demand will take a while to pick up. So, that's Egypt.

On cost, I'll let Andrew come in here obviously on the hedging ratios and so on, but I would say that in terms of competing with legacies, there's really no change for us, we compete very well with them and by legacies I also include their subsidiary airlines that are trying to do the lower fares, because actually their low fares are much higher than our fares and their cost bases are much higher than our cost bases today and that gap will widen further as we have accelerated our focus on cost.

Andrew Findlay

Hi Joe it is Andrew here. So, yes, hedging is absolutely the right thing to do I think our policy is robust and we’ve proven that from a point of view this business it does a lower fuel cost environment as well as the higher fuel environment. I think it takes away volatility at the market and managed our cash flow better. I think you need to remember that lower fuel obviously is good for the macro economy and drives demand across from a broader perspective. So you shouldn’t forget that. But I think with respect to the hedging position, it just makes us even more focused on driving cost out and excluding fuel, which is exactly what we’ve been focusing on and have done.

Operator

The next question comes from the line of Oliver Sleath from Barclays. Please go ahead.

Oliver Sleath

Yes, good morning, everybody. Three questions please. Firstly, just for your feel on the demand environment. I think your guidance for RPS down mid-single digit in Q2 obviously implies potential deterioration, compared to Q1. Can I just confirm that you do feel that's almost entirely driven by Paris and Egypt? In other words, if you were to strip out those incidents, how do you feel about the underlying demand environment perhaps in other markets like the UK, Italy? Do you still feel there's a flattish pricing out there? Second question just on Egypt, and more particularly to the -- more widely, North Africa, I mean, how are you seeing demand for places like Morocco, in the light of events in the Middle East, and is that having any impact on your capacity decisions? And just finally, aware that we've got the 186-seat A320s coming in from May this year, so I wondered operationally if you're making any planning for that, any particular routes or how are you looking at putting those into the network? Thank you.

Carolyn McCall

Demand environment is actually strong. So as you can see, and what happens I think when you get an external shock is you have to lower your prices to an extent to get your demand to actually stimulate the demand. Now, we did not cut prices to the extent that some other carriers did and that was a deliberate strategy from our perspective. So, because the fly primary-to- primary we just held our yields because of our revenue management system as firm as we could with the systems help if that makes sense. But it was important to ask not to stop promoting madly because we knew that this is a Q1, Q2 effect it's not a long-term effect. When I said very early days and we did the full year just literally days after Paris and I said look it's going to be difficult but it will come back and it has come back.

So actually the underlying demand environment is very strong and I think that is because people have got -- because there is money, there is disposable income out there and I think we see that in every single market. Having travelled to Italy and Spain and Amsterdam, Netherlands recently in the last three weeks, all three of those markets show really strong signs of consumer spending, as well as the UK does too. So all our markets I think are -- now what happens after Paris everyone just stop flying really they don’t fly to cities, they just take a bit of time out, they don’t need to go on business, they don’t go on business, they pick up the phone.

So you’ve just seen when you’ve seen demand full very rapidly because of a shock of terrorists what happens is you can stimulate it through pricing but actually the demand comes back quite quickly. What we now have to do of course is what we’re building is our yield. So the yield curve is now the thing that we’re very focused on and the good news on that is the underlying trend of the yield curve. So although Q2 will be quite tough on yields, it's still infinitely better than November and December. Right so it's the yield environment that we’re very focused on right now and the demand environment is actually very strong.

Andrew Findlay

So hi Oliver, we’ve cut the analysis every which way possible over the last few weeks as you’d imagine and everything indicates that the underlying position is in line with what we anticipated at the beginning of the year. So, which was slightly down, which reflects the capacity and the fuel that we saw at the beginning of the year. But all the analysis indicates that if it wasn’t for Sharm and Paris we’d be in line with where we anticipated.

Carolyn McCall

So we’ve had actually a very strong quarter. Now, is that all right Oliver?

Oliver Sleath

Yes very-very helpful, thank you again.

Carolyn McCall

And then on Egypt and North Africa, they’re very different. North Africa, the demand environment there is not better for obvious reasons because they’re not flying to Sharm, so I think they’re quite different. We’ve not taken any decision on North Africa which is to thin hard or to not fly. Morocco is still okay and I think it just depends on where you are flying from. Actually the British will fly to Morocco. Swiss are less are more cautious. So at the moment capacity decision on Morocco as they were but they were already after Tunisia, we had changed our capacity thinking really around North Africa post Tunisia which fell into the last financial year. And I have already told you about Egypt.

The other thing is just we have mentioned is in the winter you don’t -- it's not about redeploying capacity because frankly you already have capacity in the winter on your sunnier destinations, the Canaries, Cyprus, Spain you have already got that capacity. You don’t need to add more capacity to those destinations. You just fill your planes up even quicker to if that makes sense do your rebookings from Egypt. All the rebooking we were able to accommodate without putting another line of flying, so it is more economic obviously to do it that way. On the 186 seats of course, our engineering teams, in particular are very focused on that plan and that delivery and that looks absolutely fine at the moment, we are making forward to May.

Oliver Sleath

Thanks, and just I mean -- the deep transportation it is the one base first or I mean I guess they quite quickly you will build it up them --? Okay thanks.

Carolyn McCall

Yes, because our whole operation, we need it to be like as flexible and agile as possible so all our fleets and including Swiss, imminently, is totally interchangeable with the other. So we can swap aircraft and do whatever we want with the aircraft. So we never really only have -- the only exception would be somewhere like Orly where we put the A320s because of the capacity restrictions there.

Operator

Next question comes from the line of Neil Glynn from Credit Suisse. Please go ahead.

Neil Glynn

Just one quick one from me, on fuel hedging, you've obviously got quite a full -- a reasonably full hedging book for 2017 and I think it's a fuller hedging book than a lot of your European peers, but I wonder, as you look out towards 2018, you can see some airlines around the globe are starting to hedge out a little bit further than might have been the case historically, such as Southwest using call options in 2018, for example. So I was interested in terms of what thought you'd given towards potentially locking in the current low oil price for a more extended period than you have done over the last few years.

Andrew Findlay

Neil it is Andrew here. So just so you know it is something we are looking at but you might already know that the -- we're at contango position on the fuel hedging, so, effectively, although the spot prices drops off significantly the curves that are out for the year two to three, are still quite state. We are keeping a very close eye on it. At the moment from a point of view economic decision making, we don’t see it is quite the right time yet to go out there. But we are keeping a very close eye on the curves and as they flatten we might dip in there, and as you know we have got a very strong balance sheet so the credit lines needed to do that. We have got so we have that flexibility to do it. But we are keeping a close eye on it moment. But at the moment given the contango not quite the right time we think. We think it might be an opportunity if that goes up slightly.

Operator

Next question comes from the line of Alexia Dogani from Goldman Sachs. Please go ahead.

Alexia Dogani

Yes, good morning. I had three questions as well, please. Just talking about the first-quarter revenue per seat performance, as you suggest sort of excluding the one-offs, it was quite a solid performance. Would you say that there has been any change in sort of competitive and dynamics, or would you say the fact that the plan was in line with your guidance at the beginning was reflective of your capacity growth, rather than competitors' actions? Then, secondly, could you give some color on the accelerated cost Lean projects that you were able to deliver ahead of plan? And then, just finally, with the current oil prices, would you consider sort of revising up your capacity growth plans for the summer, having just said that sort of underlying demand is very strong? Thanks.

Carolyn McCall

Hi, Alexia. RPS so no it is exactly in line with where we thought it would be. Given the capacity environment our own capacity, which is very large actually for a winter season and the competitive environment. So there is absolutely no change in terms of what we thought, which is why it was very important I think for us. And we have really looked at this every which way we can see the booking curves, we could see what happened to after Sharm was very clear and we had to rebook a lot of people and we had to get back a lot of money, so that was a very easy one to look at and Paris was harder to disaggregate, but actually quite easy to see on the profile how demand just fell and which markets are affected the most and how those markets it is kind of plateaued and then started coming back, so the underlying Q1 was exactly in line with plan.

On the accelerated costs, I'm going to talk to Andrew, but I think I would just context up by saying the first thing I and the AMB were saying to Andrew as we needed to refocus and redouble what we were doing on the cost because we have EasyJet Lean and EasyJet Lean is going very well, but actually we are at the point where we want to restructure our cost base, to do a much deeper piece of work on cost and Andrew was able to look at every single budget line and reopen the budget and he was pushing out a very open door, but he can talk about that.

Of course Paris was a catalyst for us on cost and one of the reasons it happened so much more quickly I think is because we did look at the revenue situation in the quarter as you would have to do and we had to control what we had to control, which is what we can control and that is cost. So it accelerated a lot of what Andrew would've done anyway, but he kind of stopped doing some other stuff just to focus on cost for a period of time to get to what we could really do in terms overheads for instance, recruitment freezing, stuff like that and we didn’t freeze recruitment but that was a question that we did ask ourselves et cetera et cetera. So Andrew, do you want to come in?

Andrew Findlay

Yes, hi Alexia, so yes, it really was all around opening up the budget and challenging every line across the whole business. It was a team effort. And as Carolyn said, I was pushing against open door. There are now at a high proportion of our colleagues here shareholders or some kind of exposure to that. And seeing where we need to get to as a business from a cost perspective everybody was up for it, so from that perspective it was a team effort. It's across the business and as Carolyn said there's some short-term activities, we're looking to medium-term as we speak now to get the re-energization around cost and cost focus in the business and there clearly is a longer-term agenda as well, so ideally, we all recognize the 2% which was the guidance we gave in November wasn’t where we wanted it to be. We've taken action as appropriate as Carolyn said the catalyst to a certain extent has been Paris and Sharm. The fact that I've joined clearly there's a bit of energy there, so I think it's a real focus for us now as we continue through the year.

Carolyn McCall

And on oil, I think that we couldn’t grow if we wanted to, I'm not sure we do want to grow any further than we're doing now, Alexia, because I think we will be doing a very heavy schedule. We are taking in the 186s which will help us on capacity. So actually I think the key thing for us is to have a good operational summer of performance, keep our customers really happy which they are, but keep that loyalty, keep that kind of enjoyment of flying easyJet and make sure we deliver the summer because we are running a lot and we don’t have the aircraft, but I don’t think we want them actually this summer, so I think we are happy with our growth levels this summer.

Operator

Next question comes from the line of Wyn Ellis from Numis. Please go ahead.

Wyn Ellis

Actually most of my questions have been answered already, but can I just come back -- a couple of questions on traffic patterns. Are you seeing or do you think you'll see a switch towards more sort of short haul beach, which was very strong for you last year? Is that what you're anticipating this summer again and people may be avoiding Turkey or North Africa, Sharm, et cetera which may be closed? And within the traffic patterns as well, do you see any difference between business and leisure? Are people thinking about more flexible flights at the moment because of relative uncertainty? And then a final question is just on Easter. What are you building in for an Easter impact in Q2? And the falling, where Easter falls, how does that impact your guidance on revenue per seat?

Carolyn McCall

Switch to beach definitely I think there will be more of a switch to what would be considered western beach destinations. You will still get people going to Morocco and Turkey of course you will, but I would say where the greatest demands will be is all the beach destinations in the Med that we are very-very strong at delivering. So actually it plays very much to our strengths and I think that we will obviously take that opportunity so I think you are right I think there will be a switch to summer and it will be a perceptible if not a dramatic shift it will be a perceptible shift. Not really seeing any particular difference on leisure business patterns when demand fell off it fell off across the board certain markets were move effected as you would expect, but the business/leisure split was not content shift you will notice in our RNS we said that business capacity is growing at 6.5% well on track to deliver the 25% increase over that we've been saying so we are well on track signing more contracts, converting more TMCs so that's all on track to work and I'll just hand over to Andrew about the Easter timing.

Andrew Findlay

Yes hi there so Easter it is interesting Easter this year, I know clinically it lands the, actually Easter weekend lands in Q2 but if you notice a number of the holiday school holidays if you could do a little bit of research you will find a lot of the school holidays in a lot of the districts are falling in Q3 so it's not as clear cut as some of the analysts note might suggest so for Q2 we've given clear guidance around RPS we stand by that and so we do anticipate an element of Easter overlapping but at the Q2 and Q3 periods.

Operator

The next question comes from the line of Damian Brewer from RBC. Please go ahead.

Damian Brewer

Yes, good morning. A couple of questions please. First of all, I just want to understand the revenue per seat environment as the quarter progressed. You've given us, helpfully, numbers on the impact of Sharm El-Sheik, and the Paris impact, which suggests that these underlying yield was more or less flattish. Would that have been the picture for October, before we began to see the impact of those external events, or was it indeed stronger than that? If you could talk around that that would be useful. And then, secondly, just coming to the business market, typically business traffic up, I think you said 6%, traffic as a whole up 8%. At any point are you looking at accelerating those ambitions for business growth, or should we expect to see the mix of their airline move a little bit more towards leisure, with the accelerated seat growth in future? And if I could add a cheeky final one, there seems to be a lot of talk about consolidation in the LCC sector, whether real or not. When you're thinking about your capital allocation policy, which I think you indicated we might have news on in May this year, how does that play into the way you're thinking about that? Thank you.

Carolyn McCall

Do you want to take the yield?

Andrew Findlay

Hi, Damian, October was very strong I think it's fair to say that we had a very good October period RPS was very strong and as we said in the RNS November and December we saw a high single-digit decline, so I think from our perspective it was all around November-December where we saw the impact October as we went into the and came out of that deal in October period it was very strong. Hence the view that Q2 is a significant improvement with what we are seeing in November and December as the yields creep back up, so I think from our perspective that's why we believe that the demand is strong and all the underlying and analysis that we've done in that November-December period then did into January indicates that our underlying position is in line with what we anticipated at the beginning of the financial year.

Carolyn McCall

And then on business, we are not -- we are already accelerating growth in the business market so growing at 6.5% is strong growth because we always have a yield target that goes with that business growth it's not growth just for growth. So if we wanted to accelerate growth to a level we can just do that tomorrow because we will just do a volume deal with somebody and that would happen that's not important for us because we can fill those seats more profitably with leisure passengers and with the demand curve, so it's very important for us to accelerate growth in business at the right level at the right yield and that's what we are doing and we don’t intend to change that strategy really in anyway and so therefore you should expect really that the proportion of business travelers remains around 20% because we are growing at around 7% or 8% so you see quite strong growth on business and that our leisure profile will always be around 8% of the business. So there is no change to that and I'm not quite sure what your consolidation point is that you are saying that do we have the funding to be a consolidator or are you saying are we planning to do consolidation I don’t know really know what your question is?

Damian Brewer

Well, to put it simply, if there is scope for consolidation in industry, would that change the way you look out paying cash out to the balance sheet or would that be a side effect?

Carolyn McCall

Well, I think that’s very hypothetical question, not one we wish to answer right now.

Damian Brewer

And just to come back on the business thing. So, just to be clear, are you still aiming to keep the business traffic around 20% sustainable to growth in line with the seat growth?

Carolyn McCall

Yes, it's anything between 18% and 20% to any given quarter depending on the season, so yes.

Damian Brewer

Okay, so the slight under growth in Q1, was that an impact of Paris as well. So in other words if you haven’t had Paris and the impact of the French…

Carolyn McCall

Yes, because people stop flying to cities, so, and cities are primarily business destinations so yes.

Damian Brewer

And are you able to say how much of the French network was Paris touching? Of that I think 23% you said?

Carolyn McCall

To be absolutely honest to you we don’t break that out for -- externally because it's actually quite commercial information. So we’ve given you the French touching which we think is a pretty good indicator of what we do in France, and you can deconstruct by yourself.

Operator

Next question comes from the line of Robert Murphy from Investec. Please go ahead.

Robert Murphy

Hi, how are you doing? Two questions please. First of all, you seem to have had very strong non-seat revenue performance in the quarter. I was wondering could you expand on potentially the drivers behind that and maybe geographical areas. And then secondly, just with the warmer weather that we've had across Europe this winter, how has that been impacting your ski business, both in terms of your booking profiles and potentially the yield in those markets? Thank you.

Carolyn McCall

On non-seat really we’ve improved the way we present in flight. So we have looked at our product range, we’ve actually narrowed the product range because we had a massive amount of choice for in-flight, almost too much and too big. So it's much more economic for us to do it. You wouldn’t know if you got onboard because there is still a huge amount of choice, but it's a narrow range believe it or not, much more economic to deliver. But people really like it. So we’ve done consumer panels, our passengers vote on it, et cetera. So we bought on board things that people really want to buy.

Other than in flight on the partner revenue what we’re doing very well is as we’re improving our digital particularly our Web site and therefore our partner Web site that conversion rate is going up. And so that is definitely helping on partner revenue and actually there is a lot more pick up on that. So, that’s really where that is coming from, it's just an incremental improvement on all the lines on ancillary on non-seats. And on the warmer weather, you’re actually right. There was no snow up until Christmas but I am really happy to say that there is now snow and our ski bookings are looking quite healthy for Q2. So, I was really pleased about that.

Operator

Next question comes from the line of Stephen Furlong from Davy Research. Please go ahead.

Stephen Furlong

Hi, everyone. Just three quick ones, okay, summer, I mean it's a while away yet, but are you seeing anything in terms of the competitive environment, the capacity analysis you've got, to say anything is going to be different this summer compared to last summer? Second question, I'm assuming, Andrew, this is more for Andrew, but you're going to come back around May time to talk about costs more and capital structure, you inferred that in November. I'm just wondering how much more work has to be done. And then just finally back to the costs, with the benign weather, how much of the cost performance was related to de-icing or is a small portion of the outperformance? I just wanted to know that. Thank you.

Carolyn McCall

On the summer and the competitive environment really no difference to where we expected to be. So, we’re not seeing any changes, any shifts, any underlying shift at all we expect summer to be as we saw it really at start of the year, so no shifts there, Andrew do you want to take the other two?

Andrew Findlay

Yes, of course. Yes, there is still a lot to go forward in costs, we just started with actually a lot of the cost that we’ve -- cost improvement we’ve seen this year is all about reaping out and the budgets seemed challenging. As I said earlier, we’ve got medium term plan and we've already started working on bottom-up and top-down activities and obviously we've got a longer term pace, and I can give more color on that in May and similarly around capital structure, we expect to de-icing, we did anticipate a colder winter than last year so some of the improvement versus what we expected is resulting of de-icing the year-on-year it’s a very small difference, because effectively at the same period it was similar to what we saw this year, but again we anticipated is an improvement but we haven't given the exact numbers on that, but year-on-year it's about level, but yes, we'll come back on more detail on costs in May.

Operator

The next question comes from the line of Andrew Lobbenburg from HSBC. Please go ahead.

Andrew Lobbenburg

Can I ask a question on overbooking and the night boardings? As the load factors across the industry have been getting higher, there's been a bit of stuff creeping into the press about overbooking instances and obviously managing those will become a bit more complicated as you bring in the 186 320s. So to what extent are you guys overbooking to deliver these high load factors and how is it being managed? A second question might be on Rome and how are you optimizing the wind-down of the operation there. Will that bring you negative pressures on the unit revenues in Q2? And conceptually, once we're rid of Rome, how much support should that give us into the summer, into the second half? And then a third question on Brexit really and the risk of it. I know it was raised just as a risk in the bond prospectus and it got picked up in the press, but conceptually it's a challenge to the structure of a Pan-European airline. So to what extent are you doing contingency planning or to what extent are you minded to become engaged in the debate to lobby one way or the other? Sorry, it's quite sensitive I know but it's relevant.

Carolyn McCall

It's not sensitive to be honest Andrew, I'll take that, let me just one -- one at a time and Andrew just chip in here. We genuinely because of our high load factors and because we have had consistently the highest load factors in the industry, we have overbooked less than other airlines in the industry, we do a very small amount of overbooking, we don't do that at all in our peak periods. So, we have very clear views, now the only reason we do overbooking at all in the non-peak periods is because we get roughly five no-shows of flights, so on average that's what we get and that's what we're trying to bank because we're optimizing as you know Andrew everything we do and that's how we optimize our load factor. So, we have got a system, we have improved our system, so that we don't deny boarding when there is a seat on the plane for instance which I know have been publicized that some airlines have done. And when it does hit the media it tends to be a one off usually fairly famous person or someone with a bit of profile, that's when it hits media.

It actually doesn't happen as much as you would think, it happens. It really happens quite rarely and when it does happen we're very keen obviously to rectify it. So, we have system which is anyone wants to volunteer to get the next flight they get given an amount of money, quite large amount of money, they get the next flight, most people are quite happy with that, if they're not happy with that, we then look at other alternatives, so we have got a system of doing it, and we can do it at the gate now which we never were able to do before we used to do that at check-in. So, at the gate means you have far more up-to-date information, real-time information about how many seats you still have left on the plane. So, I hope that answers, it doesn't actually change at all with 186, the process, the procedure, what we do, how we do, doesn't change at all with the 186-seat.

On Rome, I was actually there two weeks ago and I have to say it’s been an incredibly seamless process, our crew have been amazing, there has been no deterioration in operational performance since we announced that we were not basing aircraft in Rome or crew in Rome, and only two captain crew and two pilots decided not to relocate with easyJet, so that is a 99 point something percent relocation, an amazing testimony I think to people wanting to remain at easyJet.

So the wind-down has been extremely effective, remember it's not so much of a wind-down because we will still be bringing 2.5 million passengers to and from Fiumicino which is a large number and we were bringing 4 million when we base the aircraft there. So it's still a very large network point and we will still have a couple of people based there, we’ll have ground ops there and we will have a small team looking over what we are doing in Fiumicino because it's an important network point.

So that’s that, as you know we are opening Venice next week, as I said we’ve got Naples up and running, the three aircraft go into Malpensa that also be seamless and all the people move with planes. And yes you will see, there is no negative really on Fiumicino on Q2. And you should see the positive elements of the reallocation of those assets in H2, you should defiantly see that because there is a large number of -- its eight aircraft, so you will see some benefit of that.

On Brexit, we made our position completely clear and we are very much kind of happy to talk in favor of Britain remaining in the EU. We think it's better for Britain, we think it's better for the economy of Britain. We believe it's better for connectivity, for low fares and actually Michael and Willie, I was with them again last week in Amsterdam announcing Airlines for Europe its -- they’re both completely on the same page about Britain remaining in Europe. So we will all be quite vocal about that, as I think other businesses should be stably fast.

From our point of view we obviously have alternative if Britain leaves the euro -- not the euro zone, so if we not in the EU, God-forbid, then we have got contingency plans and they are quite detailed contingent plans as you would expect. We will have about three years to transition to any contingency, so there will be no -- I don’t think there will be any kind of panic or it will be a transition. So we have a plan. But it's not a plan that we will discuss overtly for obviously reasons. And I don’t think there is anything sensitive about it, it’s just simply that we think it would be very difficult for our government to negotiate with 27 of the member States to get the flying rights that we have today within the EU and on that basis we have to think of alternatives and we’ve got strong alternatives.

So we hope that doesn’t happen and we will do everything we can to make sure that consumers understand that they are far better off within the EU when it comes to connectivity and low fares. But if that isn’t the case then we have a plan.

Operator

The next question comes from the line of Penny Butcher from Morgan Stanley. Please go ahead.

Penny Butcher

Two questions from my side. The first is to come back on the revenue components that you gave in the release with respect to Paris and Sharm, I think it was 1.5% and 2% effects on the revenue per seat basis. Can you give some color perhaps on what were the drivers of that, is it the outbound UK market to those particular locations or was it broad-based across the network that was effectively driving those weaker revenue per seats? And ultimately I guess what is also driving the Q2 weakness, which market have you had to stimulate the most in order to get the pricing back to normal?

And the second question is a follow-up on the Brexit side. Perhaps not a Brexit scenario, but what if maybe there are changes to the Schengen regime where some countries decide to reinstitute border controls, be it on a temporary or a long-lasting basis. How would you potentially go about dealing with that? Is it similar to the Brexit planning or does it affect maybe long-term capacity planning for Europe in general? Is that another consideration you have? Thanks.

Carolyn McCall

Okay Andrew will come in here on the revenue. So let's just take, Sharm and Paris are very, very, very different totally different in terms of drivers. Sharm was -- we could not fly right, no flying. We had to recover a load of passengers we had to then also anyone who was booked up to whenever, we had to offer them the ability to rebook to other destinations if they wanted or we had to give them their money back, so that was Sharm and so what you're seeing is the effect on Q2 of Sharm because a lot of the re-bookings of Sharm will come through in Q2 which they paid for ages ago.

So Sharm is very different the 1.5% that's why it's 1.5% because Sharm is a longer sector, it's got higher yields in winter, it's very robust yields environment in winter for obvious reasons because not that much winter sun four hours away from the UK for instance UK’s primary market is Sharm. So it's the cancellations and the re-bookings and the recovery which is all within the 1.5%.

Paris is completely different because it was really about demand and that's why you see a less -- almost disproportionately less negative effect. The 2% doesn’t quite reflect the impact to Paris actually because Paris was a much-much-much bigger impact on European citizens and certainly it was for everybody a very difficult thing on demand. It was network wide, it affected city-to-city travel in particular and there were certain markets clearly more affected than others, but all markets were affected in Europe. But Italy was severely affected by Paris, in fact more or so than France ironically, but Italy and France I would say were the worst affected of our markets by the Paris attacks, although it is important to state it was a network wide issue. So that really is the revenue situation.

On the borders, honestly whatever happens on border controls, border controls are border controls, if something changes on that Penny, then we'll be working with our government to make sure that it is not overly restrictive, that it's not -- that it doesn’t get in the way of operational performance, et cetera, et cetera. We'll work with airports about how they funnel passengers through, but it will not change our strategic decision making about markets. It would just -- we will have to work around whatever comes through.

So there's no point doing loads and loads of contingency planning on something like that because bluntly, it could all change tomorrow. So we'd rather find out what is really going on, get some fair warning on it and then make a plan for it.

Operator

The next question comes from the line of Andrew Light from Citigroup. Please go ahead.

Andrew Light

Just a broad question, do you have a view or a target on the proportion of fuel cost savings after hedging that you would like to retain or you think is reasonable to retain?

Carolyn McCall

All of it, no. Seriously, we try and retain as much fuel as we probably can. We don’t target it because it's very difficult; it varies by market and varies by route, never mind by markets. Where it's more competitive, we give back a little bit more of fuel because we invest that benefit into being more competitive, where we're growing the market, we invest a bit more on fuel, where we're very strong we keep more fuel. So it's a very -- it's difficult to answer that as a broader question because actually it varies by market, by route, by time of day, by -- it's just, but our general outlook really about fuel is we know we have to reinvest some of the fuel into fares because that's what everybody will be doing and we have to be absolutely competitive, but where we can take benefit from the fuel there we will.

Andrew Findlay

I think it's fair to say that we know exactly what our marginal costs are for every passenger and every flight on this network. We feed that into our revenue management system and that revenue management system is designed to maximize the yield between the revenue and cost and that's how it's designed and the algorithm works in that way, so as Carolyn said that algorithm is designed to maximize the benefit that we can get from top-line and we know exactly what the marginal cost is and where we can leverage that we will do.

Operator

Next question comes from the line of Peter Testa from One Investments. Please go ahead.

Peter Testa

A couple of questions please. Firstly, just on understanding a bit on the yield development for Q2, you're going from a high single figure down in November, December to mid-single figure down in Q2. Is that all the French recovery, but still a full impact of the absence of Egypt or is there other movement happening inside the network? And what assumption have you made on late booking? Then just a question on costs, can you give some view as to how much the extensive disruption had as an impact on cost per seat or cost overall? And then lastly, just with the bond, or the medium-term note launch, if you could give some comments on how that fits into capital allocation. Thank you.

Andrew Findlay

Hi Peter, it's Andrew. So on yields, yes, just go back in time so effectively in the beginning of the year we guided to a slightly softer RPS and we see that as the underlying number, with respect to October, very strong across the network, November and December as we said high single digit decline. We didn’t anticipate when we gave guidance at the start of the year that Sharm would continue all the way through to the first half of the year. We did give a view that the contribution impact if we didn’t fly to Sharm for the full first half would be around mid-single digits which is what we’re seeing and it is actually in line with what we anticipated. But we’re seeing that RPS impact obviously continuing through the Q2 period, which we didn’t anticipate when we gave the original guidance.

The second piece on Q2 is fundamentally the improvement of demand coming back in as a result of Paris and then the yields growing back up through the Q2 period. So that’s how we’re seeing the lower single digit improving to -- sorry, higher single digit improving to the mid-single digit as a result of that transition and that lag effect of the yield seeping through into the revenue per seat numbers.

With respect to cost disruption, on Sharm we’ve given you a very clear view on what the contribution was. On Paris clearly there was an element of disruption of course but it wasn’t -- to be fair, it wasn’t as big as you’d expect given the fact that we cancelled flights and we didn’t -- it wasn’t a case of we had a significant amounts of stranded passengers where we had a significant amount of hotel accommodation we had to spend, as we did in Sharm, but we’ve given there an indication of what the impact to Sharm is which was mid-single digit contribution which incorporates the revenues and the cost impacts. And we anticipate that we’ll anticipate normal -- our guidance we’ve given on cost for the full year anticipates a normal disruption level for the year, rather than any significant events as we saw last year.

With respect to the EMTN program, this is as you rightly say this is part of the review, so we are moving. We’ve had a look at our structure and we are -- we’re looking to take advantage of the non-secure debt market. We have got a very-very strong credit rating from Moody’s and S&P, we were top of the league. We’ve got a strong balance sheet and we’re using that to take an opportunity to go into a market where we’ve never been before. So, raising cheaper debt and we’re very clear on our policy around using sale and leasebacks around managing our residual value exposure on our aircraft.

But this gives us an opportunity to access a cheaper, deeper pool of funding which we didn’t have before. So, although we’ve done the road show on EMTN we’re now waiting for the appropriate time in the market. And as you would expect the last couple of weeks hasn’t been the right time given the spreads to go into the market, but we’re keeping a watch in brief on that over the coming weeks.

Operator

The next question comes from the line of Anand Date from Deutsche Bank. Please go ahead.

Anand Date

I'll be quick. I just wanted to talk in a bit more detail about cost ex-fuel please. Could you just detail by percentage points how you think you've brought down the cost guidance to flat to 1% now? And I think in one of the slides you talk about £16 million of sustainable cost savings made in Q1. This might be part of the review that Andrew is going to do at some point. But at any stage can we actually expect firm, absolute numbers, cost savings targets, which cost line they're actually coming from and how you're delivering them? And then just looking at one of the bullet points where it says you're making airport savings driven by discounts on additional passenger volumes, should we be thinking that you actually require volume growth to get these savings? Or actually is the majority just a look at the cost base as it stands, I’m not thinking about revenue and there is just cost we can take our on a like-for-like basis?

Andrew Findlay

From our perspective we -- it’s been effectively from everywhere. We've ripped open the budget, we've looked at every line, we've challenged every cost center owner, we've looked at every opportunity where we can take cost out and we've guided naught to flat and, frankly I'd love to be at the lower end of that range for this financial year, it's something we’re absolutely own to, it's been a team effort. So I will give more detail on cost clearly at H1 as we show the P&L, but at this point in time, we're absolutely on it and we're confident that we can hit those numbers.

With respect to Lean, as Carolyn said, we've reenergized, we are working top-down and bottom-up, we expect to maximizing those savings, we are thinking Lean in this business and it's been a culture that we've had for the last five years and we continue to enhance it going forward, I think it's a great opportunity, people get it within the business and as I've said it's been a team effort.

With respect to airport savings, we are growing business and it is absolutely our duty to leverage scale and it's all around gaining efficiency from that scale and everything that we do should be challenging buyers and people who procure services for this business to communicate the fact that we're a growing business, we've got a great balance sheet, with fantastic credit, we're good for the money and so therefore we should get the best deals and that's absolutely what we're focused on and it's been -- we've been living with that for the last five years and we could do more.

So, as we grow over the next few years, it’s something we again, we’re got be absolutely focused on. And a lot of the partners that we do business with like the fact that they do business with us. We are a good strong solid business.

Anand Date

Can I just ask a follow-up as well? Just on the Airlines for Europe stuff. Should we actually be optimistic that we can get a single sky or better navigation charges out of this? Is that actually a realistic expectation?

Carolyn McCall

Yes, I mean I think that you should be optimistic that the five largest airlines in Europe have actually got together and agreed completely to agree on what they agree on. So I mean 80% of the big issues facing European aviation, we all agree on and we are a very powerful and very vocal voice with the commission and actually with member states. And so a lot of things that stop single European sky are very strong member states and actually having five CEO's completely focused on lobbying and inflecting and changing people's position on things like single European sky and making airspace management more efficient, there are lot of savings for airlines in airspace management, it's also environmentally appalling that actually we do these routes we shouldn't be doing because of traditional structures for airspace.

ATC strikes are another very good example where the five of us are absolutely as one and I think the commission has got the point that actually there are other things you can do before taking up the strike card and striking and disrupting millions of passengers across Europe as a result of one ATC, I mean the Lille ATC hasn't turned up today, there just is not air traffic control in Lille today. So, that's French ATC and that's what we believe we can use both the commission and the member states with all voice to change.

So, I think yes, we are looking for action from the commission and we're looking for it this year because I think they know that there have been a lot of talk about aviation matters in Brussels and no action, and actually what we’ve said is we want to see some action and the aviation package is quite encouraging, but it wouldn't be encouraging without action.

So, yes, I think the A4E is a good thing to have done and let's see how we go on it, but it's about action not just chat.

Anand Date

If I look at Airlines for America I think they report PRASM, can we expect a PRASK from the European airlines? I think that would make everyone's life a bit easier.

Carolyn McCall

They may -- they report what?

Anand Date

They report PRASM, so they give some sort of revenue metric for the industry.

Carolyn McCall

I doubt we'll get that far. Anand, no one has ever asked us to do that before as an industry in Europe and you can try and we could discuss it, but it's never been asked.

Operator

We have no more questions coming through. [Operator Instructions]

Carolyn McCall

And if there are no more questions, Rosie, that's absolutely fine by us and we want to just say thank you to everyone who attended the call.

Operator

We have no further questions.

Carolyn McCall

Okay so I should say thank you now. Thank you very much indeed for joining the call. See you soon.

Operator

Thank you. Ladies and gentlemen for joining today's conference. You may now replace your handset.

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