Easyjet PLC
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Easyjet PLC
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Good morning, ladies and gentlemen, and welcome to the easyJet Q1 Results Call. My name is Dave, and I'll be your coordinator for today's conference. [Operator Instructions] I am now handing you over to Johan Lundgren to begin today's conference.
Thank you, everyone, and good morning to everyone -- everybody in this room as well and also everybody who is on the phone with us today. I have with me here my CFO, Andrew Findlay, as well; as well as Stuart and Michael from my IR team as well and a number of the analysts that covers easyJet as well in -- that is here with me in this room as well.So just to go through the presentation, and then [ unless ] you will have seen, we have issued 2 announcements today: one covering the Q1 trading and the other one announcing some changes to my top team. And I will, on this call, first cover the Q1 trading, and then I will talk up on the second announcement later on this call as well.Now you should have been sent slides along with the statements, which are also available on our corporate website. And as usual, we will review the Q1 results and then follow up with plenty of time for questions that anyone have. I will start some questions inside the room and then -- we will then move forward and take questions from those who are on the phone call as well.But looking at this slide and 2018 on the Slide #2 as well, we have had a strong start. We delivered a strong performance in Q1, maintained a focus on our key strategic objectives, enabling us to continue to grow profitably and deliver return to our shareholders. Our growth plans are purposeful and disciplined and see easyJet building and strengthening market positions in key airports across Europe while delivering a positive revenue trend throughout the period.Cost control continues to be key driver at easyJet, and we have delivered a strong Q1 performance in line with our full year guidance. This is despite the cost of the increased year-on-year weather disruption as well as the incremental costs associated with an improved load factor. As you know, we have invested in the resilience of our operation through the summer, which is delivering results for the customer. Our Q1 OTP figures have improved with Gatwick North Terminal being a key driver of overall improvement, increasing OTP for Q1 with 7 percentage points, which I think is a fantastic achievement in improvement.Our market-leading digital offering is continuing to develop with our new website driving increased conversion and ancillary revenue, and this is underpinned by the strength of our investment-grade balance sheet, which provides us with flexibility and ensures continued access to low-cost funding.On the next slide, passengers increased by 8% to $18.8 million in the quarter, driven by an increase in capacity of 5.5%, with load factor increasing by 2.1 percentage points to 92.1%.Revenue per seat at constant currency continues its improving momentum last year, with RPS increasing by 6.6% for the quarter, which is slightly ahead of the guided increase of low to mid-single digits. This increase is a very strong performance from ancillary revenue, increasing by 12.3% on a revenue per seat basis, actually provide customers with more of what they want, spending more in the full range of our products, from high [ cost ] to allocated seats, to hands-free bag. And Fever-Tree tonic was sold at GBP 900,000 of sales throughout the quarter.Cost control remained strong with headline cost per seat at constant currency, including fuel decreasing by 3.3%, aided by a lower-effective fuel price as well as continued delivery of easyJet's lean project.On capacity, excluding our Tegel operation, easyJet grew capacity by 5.5% in the quarter and is expected to grow by circa 5% for the half. This growth continues our disciplined or sustainable approach to deploying aircraft into strong positions throughout the network.As you can see in the graph on the left of the slide, growth on easyJet markets in H1 has been lower than last year, which is mainly due to the impact of Monarch, Ryanair and Air Berlin capacity decreases. In terms of expectation for H2 growth in the market, it is still too early to get a clear picture. What we do know is that IAG purchased vacant Monarch slots at Gatwick. And for this summer, plan on using BA to fly around 50% of those slots to number of short-haul European routes that compete head to head with us. Also, we are planning on that basis that Ryanair would fly a full summer schedule following the capacity decreases seen over winter.Regarding easyJet's growth, on the right-hand side, we can see that we've continued our strategies to reinforce our leading positions in the U.K. and Switzerland, to reinforce our strong #2 position behind the legacy carrier in France, which together with a city-focused strategy in Italy, the Netherlands and Germany is working. And as you know, we deliver our lean-basing initiatives out of Spain and Portugal.Moving on to the revenue. Our strong revenue performance in the quarter was driven by a number of factors: firstly, we continue to benefit from our winning business model, comprising strong market positions, a leading network and schedule and our award-winning customer service. This has been significantly helped in the quarter by the capacity decreases by competitors in the market. Ancillary revenue increased by 12.3% on a per seat basis at constant currency, making up circa 20% of the total revenue for the quarter and was driven by products such as our new bag offerings as well as yield management and growth in the take-up of allocated seating. Both of which were helped by the increase in load factor, up 2.1 percentage points for the period.Our strategy will be to continue innovating and offering customers the product and services that they want, which will enable easyJet to continue to build on this strong performance. These factors were supported by solid demand across the easy [ network ] and a disciplined approach to aircraft -- sorry, was on the wrong slide here...
And that was wrong.
There was -- yes, exactly. Look, it continues to be a disciplined approach to aircraft allocation as well.So on Slide 6. Costs. Focusing on costs continues to be key strategic objective for easyJet to ensure we maintain our competitive advantage. Headline cost per seat decreased by 3.3% at constant currency, while headline cost per seat excluding fuel at constant currency increased by 1 percentage, which was mainly driven by underlying inflation such as crude cost. This is a strong performance considering we experienced a 2 percentage point increase in load factor and impact of disruption and de-icing cost of severe adverse weather experienced during the quarter. This was highlighted by cancellations for the first quarter, increasing by over 100 -- increasing by 550 compared to last year. We had actually cancellations that were in excess of 1,000 cancellations for the Q1 versus the 500 that we've seen the year before. But despite the costs including that we kept our guidance on that.Our underlying cost performance has been strong results from volume-driven contracts with airports, navigation charge price benefits and benefit from fleet up-gauging, with our average seat gauge in Q1 this year increasing from 167 to 170 seats per aircraft.easyJet continues to be the driving force behind this -- easyJet lean continues to be the driving force behind this cost saving and has already delivered GBP 28 million of sustainable savings so far this year.And I also have to say that on the cost side as well because this is an important critical factor to -- for the success for this business. This is something that I will, together with the team members out there, been focusing relentlessly on this as well in order to be able to continue to offer extremely low fares for the customers that we have as well.Moving on then to Slide, let's see, 7. easyJet is always trying to make things easier for our customers and deliver a robust operational service. We know that airport and airspace congestion will not change overnight, but we are investing in the tools to ensure better performance and improve our on-time performance. We have invested in the resilience of the schedule and the operations over the past 18 months, which is delivering results evidenced by our Q1 OTP being above 80%, which continues the improving trend seen through the previous financial year. We're working together with DHL to disrupt the ground handling model and transform what we do at Gatwick Airport. Since starting in November, they have provided quality service, new ideas, innovation, and they razor-sharp approach to efficiency and consistency, which has been the driving force behind a 7 percentage point increase in our OTP at the airport in Q1 as well.So on the Tegel operation and moving onto some details around that. I'm happy to inform you that while it's still early days and with the first flight on Friday, January 5, the initial flying schedule is running along smoothly with a transition to wet lease aircraft happening at such speed and capacity gradually building up through the year as highlighted at our full year results in November.Our services out of Tegel has been warmly received by the Berliners, and we've had fantastic feedback from our customers since the start of the 5th of January. Considering the winter schedule was released around a month ago, we are in the very early days, but trading so far has been in line with our expectation and has been supported by significant positive PR on the day of launch. The summer schedule is due to be released by the end of the month, and we will update you at our H1 results. The headline loss of the new 2018 Tegel flying schedule is expected to be GBP 60 million, and we will update you in the more detail at our half results when we have more visibility on summer bookings.Regarding the transition to full easyJet operation in winter 2018, I'm pleased to say that we are on track to deliver this. Dry lease aircraft has been secured under easyJet terms and conditions, and the conversion process has also commenced. The first group of Air Berlin -- of ex-Air Berlin crew have completed their training, and there is a strong pipeline of candidates in line to complete training throughout the year. The anticipated non-headline PBT impact for the transition to an easyJet operation is up to GBP 100 million, which is no change to the guidance that we have previously provided. As a reminder, we expect that our Tegel operation will be PBT accretive in 2019.I'm sure you remember the next slide from our full year results that we have in November. This was a [ walk ] from the consensus at that time, taken into account upside to trading fuel and FX. We've seen a strong start to the year, which is highlighted by a further GBP 35 million net trading improvement since we last updated the market. It's important to note that this trading upside is somewhat underpinned by the benefits arising from current lower capacity at where we operate. However, it's also reflecting high costs such as those that's relating to increased loads, disruption and also de-icing costs that are also factors contributing to this. Taking these factors into account, would leave us with a pre-Tegel operation PBT of around GBP 530 million. When we take into account the unchanged GBP 60 million PBT impact from our 2018 Tegel operations as well. Therefore, we're flowing through this in a consensus model. The net cost -- net of the cost for the Tegel operation, this leaves a full year 2018 headline PBT consensus figure of around GBP 475 million.Regarding second half revenues, as you know, it is way too early to make assumptions at this stage. But what we do know is that Easter partly moves into H1 this year. As a result, you should expect the Q3 RPS to be down on the year. And competitive capacity plans are still very much unknown. And any free slot capacity currently in the market, from Monarch and Air Berlin, is highly likely to be filled for the summer. BA flies the Monarch slots to Spain in Gatwick airport being a good example of that.We're looking at the forward bookings. Customer demand is strong with encouraging levels of forward bookings. And as you can see, bookings are slightly ahead, which reflects building earlier loads than last year as well as an earlier schedule release this year. There are still around 40% of seats to be booked in Q2, which is 5% in front of the same time last year. Having a quick look on the second half of the year, the summer capacity outlook is still yet to be confirmed. And with only 20% of our seats booked at this stage, you can understand the uncertainty that currently exists with the revenue guidance for this period.Moving on to fuel and FX. This slide summarizes our forward jet and currency hedge positions. Although increases in fuel price impact us in the short term, our strong hedge positions sets us in good stead over the medium term versus a number of our competitors.Moving on to Slide 12. We plan to grow full year capacity in 2018 measured in seats flown by between 5% to 6% before disruptions. We expect revenue per seat at constant currency to increase by mid- to high single digits in quarter 2, which is an increase to the previous guidance that we provided.Headline cost per seat, excluding fuel and the constant currency, is expected to increase by circa 1% for the full year, assuming normal levels of disruption. Our FX and fuel guidance is changing slightly, taken into account market updates since our full year results announcement in November, with an expected favorable FX impact of circa GBP 5 million and expected favorable unit fuel impact of between GBP 80 million to GBP 100 million. And finally, the expected headline loss related to our Tegel flying has not changed from the circa GBP 60 million adverse impact on headline PBT.So Slide 13. So in summary, I've been in the business now since the start of December, and I spend a lot of time meeting people, seeing people across the network in the organization at our bases, suppliers, shareholders, some investors as well. And I must say that my impression of this is that this is a company with a really, really strong strategic framework, a framework with its strategies is clearly working as you can tell by the results that we announced this morning as well. And also -- and not only the strategy, but also with a depth and knowledge of its hugely talented people, people that are really, really committed, really passionate about moving this company forward as well. And just a reflection on what I've seen from this company from the outset, both as a competitor previously and also as a customer, this was always a company that I think focus a lot on their customer and that comes through everything that we're doing, which is really, really impressive. What we also can tell by that summarizing what we're seeing that is the business flowing through into the results as well. The strategy we have of the point-to-point primary airports taking #1 and #2 positions, really strong position, together with that absolute focus on the cost to make sure that the cost base is as low as it possibly -- it can be in order for us to continue to offer extremely low fares for our customers. That will continue to be a focus in myself and Andrew and the team going forward.So those are the things that really stands out to me. And there is a number of things we're going to deliver also in 2018 as well. Tegel being a massive focus for ourselves. We want to execute that because it's a 25-plane operation that we're doing, and we come off to a good start. We've been -- as I said earlier, the feedback from the customers has been fantastic on that. And Berlin is, by far, the biggest city in Germany as well. And together with operations that we already have in Schönefeld, I think it's an amazing position to continue to build on. We're going to move from 80 million to 90 million passengers this year. We are going to take into the fleet also the A321, starting in the summer. And we are transitioning also the fleet over from the 319 to 320neo, which will also deliver better fuel performance for ourselves as well. So there is really a lot to look forward, and there's a number of these important milestones in 2018 that I just wanted to point out as well. I just wanted to touch base before we kick off also with some questions here about the changes that I've done in the structure, which we also announced on this morning as well. One of the key things that I've done since I've started was actually really trying to get to know the team, really trying to get to know the people, the structure, understanding how we do things, why we do things the way we do. And I see that we are quite advanced in a number of areas, but there is one position that I have decided to announce that we have started looking for immediately and that is the one of Chief Data Officer.When I look around in our business today, we do a lot of things when it comes to the data science as well, but I want to have one position at the A and B level reporting into myself who basically takes a view about what do we do with all these 0.5 billion data points that we have in the company, how do we make sure that we know what data to collect, how we maintain that data, how we explore that data in order to drive further efficiencies in the companies, drive revenues and also the way we engage with our customers. And I think that also -- having up-to-date data will also allow us to have a better consumer insight and allow us to better take quality decisions based on what the data is providing us as well. So that's the position that I wanted to create. And when I also look, then, through the structure of the company, I decided I wanted to move the revenue and the pricing and the yield piece. It was currently sitting within -- that was previously sitting within our Chief Commercial Officer's area. I wanted to move that out and bring it into the scheduling where the areas of the responsibility for the scheduling lies, which is quite normal in the industry. And the reason why that is the case is that it allows us to get a more holistic view of everything from when you plan your aircraft where they're going to fly and how they're going to fly to also know what is the revenue intake you can plan and forecast based on that as well. So I wanted to do that and that also fits very well with the experience and the knowledge of Robert Carey, who is in charge of our scheduling and strategy at the moment that he was doing -- that he was -- should be doing this as well. And as part of those changes, that means that, that current position of Chief Commercial Officer basically wasn't there. So the role became redundant. And as a result of that, Peter Duffy has left the business.And I'm now going to work together with the rest of the team, which is in marketing, digital, customer experience and CRM to what -- what is the next -- the best structure to formalize that perhaps into also one position as well that will report into myself. But that will allow me to get closer also to those issues. I don't expect any other board changes at this moment of time. Like I said, this is not only about the board, it's a huge talent, massive strength in the team and in the organization as well, and we're building on that. And I think with this structure, we're getting ourselves in a better position to take advantage of the opportunities that exist going forward. So I think that concludes the presentation, and then we are happy to take some questions. First from the room, I believe.
Can you just make sure you speak up, so that I can hear you?
It's Jarrod Castle from UBS. I'll ask 3 if I may. What -- just a bit of color on why you took the easyJet role? And what do you think you bring that perhaps the previous CEO wasn't bringing? Secondly, any kind of views on when you look at CapEx and growth, if any initial changes that you foresee? And then, maybe just one for Andrew. Just give us the sensitivity now where things stand with currency and fuel in terms of changes?
I'll do the first one and you can do the 2 other ones as well. I mean, why I took the role? As you know, I used to work at TUI and I left TUI in the May 2015. And I have this relationship with easyJet, both as a customer. It was, dare I say, a favorite airline on myself. On the routes, maybe, we didn't operate clearly within TUI to travel in. And I think it was something about the company that it was actually had been transforming the way the people travel, the different price points that was out there in a different way, engaging with customers in a different way that I just thought was contemporary. I always loved the company as a customer. And as a competitor, I was quite impressed by it, by looking at the growth and looking at what it was doing. So when the opportunity came up, I thought that this is something where I can contribute. I have worked extensively as some of you know as well with setting up and working through pan-European structures. And we are on our way now also with the expansion we've seen in Tegel and Germany as well to grow that European part. U.K. will continue to be absolutely critical for us. It's big. It's huge. We'll get more opportunities there as well. But I also think with the European background that I've had that this will come into play. I also have focused a lot in my previous jobs that really, really putting the customer at the center in what we do, finding things that differentiate ourselves from others. And I think this is something that's been working well within the company in terms of having that price point, low-cost base, point-to-point flying to the primary airport and really, really engaging with the customers in a way that I don't think anybody else is doing. And that sits very close to me and that's what I will continue to do.
Yes, on CapEx, no change. So clearly, with the investment in Tegel that will have not balance sheet impact, obviously, from a capitalized perspective because we are seeing, obviously, significant growth there, but underlying no change. As you know, we've got 6 A321s coming into this year at the end of the year, which we pull forward from '19 into '18 as we get the benefit in the air, but no change from that perspective. With respect to currency, I'd say, around $10 on fuel is circa 3 to 10 -- GBP 3 million to GBP 5 million impact. On euro, it depends on the time of the year, but we'll give you some more guidance on that -- the half, but I think it's fair to say given the fluctuations, what we've given guidance on, is a reflection of what we think it will -- it's likely that, that be going forward. But as you can see from our hedging position, we're in a strong position place with both this year and FY '19. We'll continue to hedge forward. One thing we are building up our position on Tegel flying when it comes to fuel. Able -- you see that, that coming to that impact of it is marginal on our percentage coverage.
Stephen Furlong from Davy. Just 2 quick. And one for Andrew. Just on Easter, what's the effect of -- just from the time from [indiscernible] obviously you turned to Q2 in order to get some [indiscernible], roughly?
Yes. So I will give you the absolute numbers. We estimate -- and I'll -- just to be clear, it's very difficult to estimate Easter, if you find last year, we didn't get it quite right because it has an impact to when Easter -- how close Easter is to Western holiday as well, but we estimate around between GBP 35 million to GBP 40 million on Q3 into Q2. So well, that does the half. For the quarter is about 3% impact. So obviously, that -- it's a bolster in Q2, but obviously detrimentally impacts in Q3.
And can I just ask a follow-up on the French market. Could you just talk about that, how attractive you see that market? I mean, Ryanair is making noise as it's moving in there as well.
Yes, yes, we get a strong position in France. It's -- I mean, we are second in terms -- after Air France in terms of consideration from customers in that market stays a long way, way from the #3. So we believe that we still have plenty to go at Air France. We're opening the Bordeaux base coming up in this summer as well. And yes, I've seen the announcements of Ryanair as well. And I'm not sleepless over that. They will struggle to get into Orly as an example, they fly from Bogo. And I actually think that actually highlights the difference in the strategies, where we fly from those main airports, the primary airports rather than the secondary airports as well. But as with anything, you watch out for competitors, but mostly I'm focusing on what we do well. We'll continue success going forward.
James Hollins from Exane. Two for me. On full year capacity, when you were guiding, particularly to 5% to 6%, that's just for Q1, were there some disruptions or was there anything else within that small fallback? Second one is on, Berlin to Tagel. I was wondering if there are any sort of surprises, be they good or bad with what you've seen so far whether it's cost of the leases, staff recruitment, et cetera? And then, third is more generally, I imagine a lot of your time at TUI was spent discussing disintermediation, both as clearly a risk to the business strategically as well as potential upside for the airline. Even you've now made the, sort of, 180-degree turn on the [ British ] standard on that. Can you just sort of let us know how you used to think about it? And maybe how you think about it now?
Okay. You, why don't you do the capacity? I'll take this, the other one.
Yes, capacity. You're absolutely right. It just effects around disrupting. And we make sure we reflect that in the numbers if we can get to the [ near sticks ], but we will just make sure we give you a range between bottom of the stick. Talk about Berlin?
Yes. Markets in Berlin as well. I mean, there is no surprise into the cost that we have made as well. I mean, clearly, if we put the program of sale in beginning of December as well and take some time to get the loads up and the yields up there as well since it was a start on 5th of January, but the guidance we had on the PBT headline numbers for GBP 60 million still stands and the one-off that GBP 100 million as well as it transferred in setting up the bases still stands as well. We think that, that is realistic. But like I said from the trading a yield point, we're very early on -- into that, but so far, it goes as we expected it to be. And in terms of that disintermediation, on the contrary, this is great. They've asked me if they can go between us because we are the ones who's going to take customers from one place to another one. It's different if you're sitting in a vertically integrated travel group or you can have companies who come see and then take different part of your value chain. This is the value chain. So I think that having the assets whether that is the airline and the airplane itself actually to do that as well, that is a massive benefit. Then, you can have views on who's going to distribute that. But I think that our direct model that we have is working really well and that will continue to do so. So I feel very comfortable in [indiscernible].
Daniel Röska from Bernstein. And the first question, you're coming into the industry at an exciting time. Industry is consolidating. Arguably, we'll continue down that path in Europe for the foreseeable future. So where would you like to see easyJet among all those competitors at the [ air duct ]? I appreciate you want it to still be there. But how do you think the industry will look? And what will easyJet's role be? You touched a little bit on distribution. Second question. How would you see distribution changing now that kind of all the legacy is also moving away from the GDS? Doesn't that also pose some risks of disintermediation, again think about Google, sort of -- or the Facebook? Maybe also with your view from TUI, how did you think about this at TUI? How do you think about it at easyJet? And where you see kind of the selling of that capacity? How will that go forward? And lastly, on your comments towards the cost reduction, any specific areas to highlight where you think, look, this is where you think you can bring value to the company? How is that also related to IP and CEO role? Any specific areas where that'd fit? Something where easyJet could do better?
Yes. Okay. I mean, on the first one. So I think we are -- as you know, we are in a very strong position looking at the European short-haul markets. No doubt about that. But we still have a market share of 10% only. If you're comparing some of the other markets, and you would know this when looking at the U.S., you're asking more consolidated picture as well. The European market is still quite fragmented and with 10% of market share. So we believe that there is still a lot of way to go just looking at this organically further. But you know what, take a look at 2017, Monarch, Alitalia, Air Berlin, all the changes that happened in there as well. And I would also say that, that was as a result of -- partly result of what we have been doing well, what the company has been doing well as well. So I think that, that just underlines my belief that if you're focusing on the things that you do really well that is appreciated by the customers, so they come back to you more often than other ones, you will stand a good chance of succeeding. Having said that, it's also that we are because of our strength that we have in the company, financial strength, we can take the opportunity when others are in problems as well, as we've done with Air Berlin as well. So I think there is the [ mick ] to continue to grow organically, which we got scope to do, as well as also making sure that we do explore opportunity that exists because of other [ siders ]. I think from the -- the second question was about the distribution piece as well. I think distribution piece is very much for us who have a direct model. That's how we engage even closer to the customers. One thing that is the beauty of don't -- not having any agencies in between or not having others in between is that engagement and that direct relationship that you can have with a customer that is the key thing. That's the key thing for the success of how we can continue to do that, not if other ones is moving out of the GDS. GDS is coming to direct model as well. It's actually on how good you are with engaging with the customers at the right point in time. And we can fill in also on the cost side as well. I do think that we get more to do with the -- in the response to this, how we use the data as an example in terms of becoming more efficient in the way we do things, in terms of getting better quality for decision-making, in this -- in terms of not having to reconcile data, which will make sure that we do things and have processes in the company that is even leaner. There is a number of initiatives going forward as well in terms of reducing the cost such as the GBP 28 million come through in the Tier 1 on the lean project as well. And it's absolutely a critical thing that we continue to do so. That's what's been a successful -- what's got this company where it is today, and it will continue to be a success factor where the company will be tomorrow. I don't know if you want to add anything?
Yes, the way -- clear opportunities are around the structure management, the OTP simulation, where they can use data and machine learning to better simulate the operations of a network. We've got opportunities around predictive maintenance, which we've talked about earlier, which will take that step further. There's quite a few things in the operations there that we're not quite leveraging at the moment. So we -- from a cost perspective, that's a big opportunity. And the revenue opportunity, clearly, it's all around leveraging our customer data, and as we've said earlier, around packaging up deals to better leverage that. But I think from a management cost opportunity, there's a huge amount that we could crack on. We've already started. What we need to do is really bolster that [ theme ]. I think from a [ sales ] organization, this move has been welcomed because everyone realized it's the opportunity we now have with the stuff we've done with data science and the team that already exists, what more we could do.
I am Arthur Truslove from Credit Suisse with perhaps a scrutiny. As the first one, coming from a volatile industry and security well enough, it's a bit of a crack away of [indiscernible]. How effective and how appropriate do you think [indiscernible] target [indiscernible] margin [indiscernible]. The second question, the Alitalia fleet is obviously half of [indiscernible]. It makes you entirely a [indiscernible] with their problems much harder? Can you rule that out or [indiscernible] figure out a map? And third question, possibly [indiscernible] margins [indiscernible] consolidation [indiscernible] its revenue perhaps underperforming other areas of market [indiscernible] industry there or are trends [indiscernible]?
Yes. I mean, on the target -- and fill in here, Andrew is -- I think that -- look, it's one of the things where we feel comfortable giving the target where you have the stability or -- where you have to. And like I said, you're looking at the summers. We're only 20% sold in there as well, but we're -- we saw a momentum at the end of the last year. That has continued in there. There's no doubt that, that has also been because of easiness in some of the competitive pressure that exists in there. But I believe that in terms of looking at kind of the midterm and the longer-term's target, that's an opportunity me and Andrew and the team will have a chance to sit down and look at more here in the spring. I've only been 2 months into the business as well. Andrew, do you want to give any...
I think, certainly, we are in consultation with our shareholders around an EPS target for the purchase. But I think you're absolutely right. Johan hasn't had the chance to come to the business and figure out exactly what targets he'd like to set internally, and then we'll consider what we'll move to publish in the near term.
Alitalia, a short and boring answer. I can't comment on that. We did express in November -- November, it was, yes? That we -- or even earlier, that we had engaged with the commissioners on the issue of looking at part of the Alitalia assets, and that's just where things stand at the moment.
If you can, for the last [indiscernible]?
No, I can't comment on it, obviously. The third thing was?
Just hack to France. Obviously, consolidation benefiting everywhere else, but is this plan [ foolproof? Could you grow it ] at the moment?
Yes, yes. It's really -- we're really pleased with our performance in the number of our markets. We've been encouraged by it, therefore, launching the Bordeaux base as well. So it's definitely a market where we continue to see opportunities. Yes.
Andrew Lobbenberg, HSBC. I'm going to ask about the decision not to pursue aggressively the Monarch asset given the key strategic focus of filling leadership positions and exercising [indiscernible]. Why did you elect -- will take more in your home base or let IAG take more [indiscernible]. And then the second question would be around Brexit. So quite soon, the airline industry will be wanting to sell [ Summit 19 ]. It's not clear that we'll have full knowledge about what the traffic rights are at that time. How you are going to manage the risk of selling into an environment with unclear traffic rights? And within that, have you the same consumer confidence? Because if you say too much, then you will rattle consumer confidence and that could be a self-fulfilling problem for you and the industry. Now it's not [indiscernible].
Yes. I mean, on the Monarch piece, I mean, that was done prior to myself as well. But that was something that the company looked at, and they made a call to marshal on it as well. And they were -- we didn't think it was viable to continue after the interest that we have in there as well. I just want to say as well that if you're looking at that, you take Gatwick, as an example, that's 9 aircraft. The operation that we [ haven't taken ] at 25. We couldn't do both at the same time. The Air Berlin transaction strategically makes more sense for us. We believe it's a full-scale operation that gets us into that strong position that we have. We already had the strong position in Gatwick. But it's a bigger one, and it fits into that thing. But coming into markets, in this case, Berlin is a fantastic big market as well. So I do think it strategically makes much more sense to do. If you're looking at, Luton, as an example, there were 4 aircraft. I think the [ lessor's ] taken over them. And the only overlapping which I've seen that -- they've had is the one that they collided with us in the Luton into Reykjavik. And the other 9 planes that they had in Manchester has gone back into the slot pool. So -- and we don't know fully -- to what full extent BA and AIG (sic) [IAG] will now sell the former 9 aircraft. I think that they put 50% on the sale for the summer. It remains to be seen what they're going to do with that. But I think it's absolutely -- it will be an absolute missed opportunity not to do the Air Berlin transaction in Berlin, so we can build on that. On the Brexit one. We -- while there are still companies -- I think some companies that actually started selling already, 2 offers are on sale as well. We're confident that there will be a deal. I met with the Aviation Ministry in U.K. here last week as well. And after that meeting, I'm still very confident that there will be deals as well, and they are timed on it. They said that aviation will be a priority in the trade stops here in March or April, but they will start as well. And there's nothing that tells us that we won't see a deal. So I'm not concerned about it at the moment. Do you want to add?
No, I think from a point of view of Brexit, I think -- let's say that the package to operate is going to be ahead of us when it comes to scheduled release anyway. So to a certain extent, we won't be a leader, we'll be more of a follower in that situation. So it will be very interesting to see how they manage that. We'll learn from that as well as Johan said, we believe that it will be a solution. With respect to the Monarch, I think, look, we've got to make decisions with respect to how we allocate our assets. And I think it's best to say that Air Berlin was an opportunity that, really, we believe wouldn't come around again very quickly. Getting ourselves to a #1 position in Berlin absolutely fits with our strategy. So far, so good. The operation is working very well. We went through a lot of scenarios with respect to Monarch, and the assets there around what we would -- a number of scenarios of who and what would happen there. And frankly, we baked in a scenario that is actually slightly worse than what IAG is doing now. And we concluded it was still the right thing to go and do at Air Berlin. Frankly, what BA are doing, to a certain extent, is kind of holding the slot. So it will be very interesting to see what they do longer term because we still believe that there'll be a long haul solution against Norwegian for them. And we kind of expect that this short-haul has to come in, and frankly, having somebody like BA against this is a better decision from an RPS perspective than a Monarch. So with all the scenarios and with respect to Luton again, as Johan said, we looked exactly where, who and what the likely outcomes would be with respect to that, the outcome there. And again, we'd say it landed as we expected. So from our perspective -- and finally, the price that we know that IAG paid was well above anything that we would have concluded in any way for us, for Gatwick as well. It was definitely long-haul pricing for their slots. So all in all, it made absolutely sense to focus on Berlin, plan Berlin, get #1 there. And so far, so good.
Alex Paterson from Investec Bank. Three questions, please. Just in your sort of expectations for the year, with Gatwick, you're assuming roughly flattish yield. Is that not a bit conservative given what we've seen in the first quarter? Secondly, DHL looks like it's working very well in Gatwick. Are there other airports that you might think about deploying in them? It has to be -- I know there was sort of a transition cost as you moved them. But are there -- from a cost savings coming through as well? And then, finally, on the Tegel integration, have you had any snags? Are there any challenges that you can see with doing that?
You do the first one.
Yes, so I think it's fair to say that in Q1, we've been exceptionally supported by the actions of Monarch and actions of Ryanair and Air Berlin come out of the market. That's what has underpinned our performance. Q2, there will be a bit of a roll forward, obviously, splitting into Q2. Q3 and Q4, it's very hard to see exactly what the capacity because the IAG stats aren't out. We fully expect Ryanair to reinstate their domestics. So obviously, there will be an impact on domestic flying in the U.K. We -- obviously, we know that now IAG are coming back here with about 50% of their capacity in U.K. to Spain. And frankly, there's an element of uncertainty. We've only got 20% bookings for the second half. So from that perspective, we are, as you'd expect at this point in the year, still making sure that we don't overcook any expectation for the market. I think, for us, plan in Q1 was a great result, gives us momentum into the market. Q2, great. Q3, Q4, still uncertainty, and we do expect capacity to grow far more than it has done in the first quarter of the year. So from that perspective, I think where we are positioned is absolutely right. And I think our focus is on making sure that we grab the opportunities as they arise, as things pan out over the year, the coming quarters. But I think what we've said in the presentation is absolutely appropriate for what we can see in the market.
In regards to DHL, I mean, I think it's fantastic work that's been done there by Chris Browne and the operations team in there. I think that the efficiencies and the costs that we will get benefit from -- it would actually be just two benefits on that one. If you look at the improvement in the OTP in Gatwick, that's 7%. That represents a cost saving. Apart from that, it also represents a huge improvement for our customers. The actual ability is that we do fly on time as well. And we are definitely looking in, in other ways how we can take this model together with DHL or together with others to make sure that we can drive some of the learnings out of this one. Now having said that, I mean, it's in the wintertime, we know there are less capacity out there, but that's a good start so we can get that operation going. We did have busy Christmas and New Year in there as well, and they worked really, really well for us. And the main thing is to make sure now that we're getting in for the summer that, that is still something to continuously deliver. I'm spending a lot of time myself, together with the team, to looking at the scheduling, to looking at the way we can avoid disruptions, to looking at the way with things we can change things internally, also in order to reduce the disruption that we have because it brings annoyed customers and cost to the company. It's simple as that. And we kicked off some [ altitude ] up in 2019, in particular, to really take a holistic approach on this one. 2018 is very much planned at the moment, and we hope to see improvements on there as well. But that, it's got to be a focus for us. On the Tegel, no, there is nothing in there that is down south. It's being exceptionally well planned, I think, by the team in a very short period of time as you know. Since we engaged in this deal, people have been working relentlessly. I met with a lot of the ex-Air Berlin crew as well as part of the training, both the cabin crew and the pilot. And as you can imagine, they are extraordinarily, excited to come from what has been a huge period of uncertainty in their work and life to come and join us as well. And I think that they actually are -- I spoke to one of them here just the other week, who'd been on the flight as well, and he said it just feels like you're -- you want to bring out that spirit and the enthusiasm that they have to the customers there as well. So I think that's fantastic to see. But there's nothing else from the operation that will [indiscernible].
No. I think, it's fair to say we went in with a bit of trepidation. To the extent that we had wet leases going in, we expected -- [ especially ] going on the easyJet website, customers turn up and some lease your aircraft. Actually, ironically, the feedback has been pretty good.
Yes, it's more. I mean, really -- yes.
To the extent that we've got some BAe-146s flying from WDL, which is the wet lease operator, and actually, they're German-speaking individuals. And the -- all the domestic-flying passengers love the fact that they're German speakers. So it couldn't have gone better, frankly.
Great OTP.
I think, for us, like the underlying business, the uncertainties still lies in Q4. We haven't released the schedule for summer yet. That's coming out next week. And as we see -- as soon as we see visibility on looking exactly, it will give us more visibility around exactly where that GBP 60 million will land. And again, it's uncertainty like the others. But operationally, so far, so good. And the airport lends in and been very supportive in setting ourselves up.
Yes, [ Damian Brooke ] from Halkbank Canada. Three questions. First was just on the on-time performance in Gatwick, the up 7 percentage points. Historically, when you had significant material movement in OTP, how has that translated into either your net promoter or your repeat customers scores? And how long is the lag between that turning up in a structural rather than cyclical change in your revenue basis, customers' preparedness to pay all travel changes? If you just talk a little bit more about that, that would be very useful. Secondly, on the airport side. Could you give us some feel as how many passengers on either end of the route now touch airports where you have [ all new ] centric deals, and therefore, with the consolidation in the market and the nervousness that sits around on airports, was there headroom to do more of those kind of deals going forward?
Sorry, what type of deals?
The volume-driven effort...
Right, I thought so.
As more of them pass the rate. And then very finally, on the unit revenue. Could you just elaborate a little bit more on Q1 in terms of whether it's been very broad based or whether there's any particular areas you'd want to call out as being -- from the whole week as just being on average?
I have to admit I don't know the answer on the first question because it's too early for me to see what effect that -- the OTP is really critical for us. But I don't know what effect those points have in terms of customer retention and how they come back. But I'm sure, it's there. But that's definitely something that I will get into moving forward. But it has an effect. We know that in terms of the general perception of a flight, that going on time is one of the key parameters in there. So it does have an impact.
Yes, yes. I think there's a clear correlation between OTP and our CSAT scores. The 2 key areas of CSAT driver are OTP, in-flight and boarding processes. The boarding is one of the areas, so another area of focus is boarding and baggage as well. So clear correlation. Actually, the correlation is pretty rapid. So you improve OTP, your CSAT improves. To the extent that, that leads on to, obviously, improves potential customers see clearly there's a lag, but having a happy customer flying and leaving on time will, obviously, have an impact on our return customer base. And that's one of the -- that's why OTP is so important for us to focus on. The reason why we invested in relationship with DHL to improve the OTP in Gatwick. Because as you know, if Gatwick gets there, absolutely, [ we use ] the air network [ instead ] of the poll. So it's onto volume-centric. Yes, a fair proportion of our deals, even in some of our great-rated airports, where we can have some tied up market relationship are volume-centric. To the extent whether it might be a gauge mix or [ tax ] numbers, departing [ actuals ] or total passengers has some form of element of volume. And that's how we manage to deleverage our scale in these airports with respect to getting the best deal. I think, it's fair to say that's one of the things that we -- it's one of our big areas of focus is absolutely leveraging our growth in the airport so we can generate those deals that reward growth and reward flying to new destinations, all driving our business passengers or air passengers to new routes. And that's the fundamentals of what we do with respect to the airport deals. So it's about revenues but also, we expect to -- revenue in the quarter is pretty much network-wide. So the Germany -- there's benefits of Air Berlin. We've had benefits from U.K. from Monarch and Ryanair, flying to Spain, again, Monarch. France, obviously, the Alitalia, again some of the impact that we saw prior -- as prior years from all the disruption that we saw in France. One area in Q1 being very transparent that we've seen slightly slower performances on, Ski. But that's a relatively small part of the revenue in Q1. It obviously builds in Q2 as the winter season starts. But we suspect that because last year, it was quite a rainy in the Alps, so. And actually, there's no snow now. And week on week, we've seen that improve as we've progressed through Q1. Just looking through [ Antarctica ], because obviously, there's almost too much snow now in the Alps. So that's been one area, but the rest of it has been pretty uniform, good performance.
Okay, Dave, we'll hand over to questions from the conference call.
[Operator Instructions] We have a question from Savi Syth from Raymond James.
Just to follow up on the improved revenue outlook. I was just kind of curious and my first question was what versus the end of -- versus November, where you saw the real improvement, because I'm guessing capacity was about what you were expecting. I'm kind of curious where the kind of improvement came from. And then also, a second question. I was wondering if you can kind of provide an update on the ancillary revenue. I know there was some bad finishes last year, do we start lapping them? And when do we see the kind of the Hybris FCP system roll out coming on?
Yes. So on capacity, actually, if you look at our previous charts, actually, capacity in half 1 is actually reduced as we've gone through the quarter -- the first half, and that's the result of clarity around what's happening with Air Berlin and clarity around Monarch and Ryanair. So that has had an impact on Q1, clearly, and Q2 as we got clarity. And I think, for us, as you know, there's uncertainty. Until we get clarity around schedule and schedule releases from other airlines, clarity around exactly what the capacity number will be going forward has impacted our expectations. Obviously, Easter, we've got better clarity around Easter, at least the bookings, which has helped in Q2 but obviously, detrimented Q3. So that's fundamentally the underpinned for what we've seen in the performance of Q2. One other thing, if you looked at the slide there, you'll see that we've got slightly more bookings in the period than we have previously, and that's because we bought our schedule release date, slightly earlier. We were on sale slightly earlier, so we got slightly better visibility than we did last time around.
That's it. In terms of ancillaries, you want to talk about it?
Yes. Ancillaries, it's fair to say that we did quite a lot of work at the end of last financial year around ancillaries in our charging structures and our baggage. So I don't know if you've seen that in the quarter just gone, we have changed our baggage policy, we've got a split policy to weight with variable pricing on, which has been very successful. That will annualize through in Q4. So we won't -- sort of fit to be a sort of step-up in the Q4 through into Q1. And that will annualize throughout in the second half of the year. But fundamentally, we have seen an increased conversion rate as a result of our front end improvements on -- so we've got 2 steps to FCP, which is the front end website. We've seen conversion rates improve, particularly around some of our ancillary products. And we've seen improvement, actually, on board as well. With respect to FCP, that's going to be progressed over the year, and we'll see releases as we go through this financial year. But a lot of the front end impacts from a customer perspective is already in place. The bit that we still are looking at, which kind of falls into the whole concept of why we're focused on data is linking that with our CRM to better drive bundles and drive ancillary products even further. That will -- that is likely to impact more FY '19 and beyond rather than FY '18.
And just to add to that, I do think it's a continuous opportunity to keep developing ancillaries of choice to customers, what they want. If you're looking at the inside picture as we have an example, and we talked about the symmetry, as an example, 900,000 units sold over 1 quarter as well, and this provided a great uplift. So it shows also a reflection of the customers we have that they are willing to buy the ancillaries we have because they think it provides a great choice and also it provide quality ancillaries, better also contributes to the overall experience of what the easyJet stands for. So I think we're definitely going to continue to drive that. And 20% uplift, a bigger part of that uplift and it takes a bigger part of overall revenue as well. I think it's a good one because it provides choice, and it's something that also makes customers more satisfied with what they're getting.
And we have a question from Mark Simpson from Goodbody.
I have 2 questions. First off, just on the Tegel process. You've kept the operational cost to a loss expected this year at GBP 60 million. Any change to the exceptional numbers? You gave us GBP 100 million. I wonder if you could say A, have they changed. And can you actually break that number down to a bit more detailed -- that wasn't given in the last release, but it's a pretty big number, so we could understand that. Secondly, I would like to return to the sort of targets and return. We know within the LTIP you've got in the last report of accounts, 5 years of history LTIP awards from December '12 to December '16, can you tell us if an award has been agreed with regards to be made in December '17 for the 3 years to '20?
Yes. So on Tegel, I think as I said earlier -- we were very clear at the start, we've got an underlying impact. So we'll get better clarity on that once we release the summer schedule, but it is basically feels about right based on what we can see. We will update at half 1. With respect to the operation or the one-off, we've kept the guidance at GBP 100 million. But frankly, if anything we'll come, we believe we'll come in below that. So there's the cost associated with fundamentally ramping up the businesses associated with nonflying. So as you know, we are starting with wet leases, in the process of signing up dry leases. Those dry leases, aircraft needs to be completely converted to reach its state of standard, which we've already started. We also have to ramp up and train the crew, so there's an on-boarding element of that that's one-off that we incurred. So we're recruiting around 1,000 new colleagues in the operation within Tegel, so there's an element of that. And then there's an element of, obviously, the work we need to do to set the operations up in the business. But there are also will be an element of wet leasing as well, which is nonflying wet leasing in there. The mix between this, in total, is 160. The mix might shift slightly, but fundamentally, that GBP 100 million is likely to be lower. But we've kept the guidance there just to ensure that any unforeseen issues -- and we'll give you more clarity around that in the second half. But the majority of that relates to signing up the crew and converting the aircraft and -- basically setting up the operations within the business. And also in that cost is the element of the operating lease charge for the aircraft while they're not flying. Because obviously while they're not flying, they're on the ground. Until we actually get them flying, they'll become part of the trading performance of the business. All of that will go through FY '19, and we expect Tegel operations to be profitable. So the GBP 100 million is a one-off, and the GBP 60 million is effectively, the ramp-up of the operations. And we expect to be profitable in there FY '19. With the LTIPs, yes, there has been an award. And I think it's part of the AGM notice that has gone out. There has been an award for -- made in December for 2020.
Yes. I mean, obviously, the question on the actual thresholds has established significant reduction. But in terms of the previous comments and targets, I mean, to some extent given a better environment, do you assume that we've seen a trough in terms of those levels that in order to divest -- I mean, if you look at the December '16 award, vesting started at 9% return on capital, which is hardly a demanding target in terms of your business.
Yes. So I think it's fair to say that all of these are subject to consultation with our shareholders as per normal -- so our REMCO share, we'll consult with our shareholders with respect to those. And we'll adjust accordingly, and we'll take feedback accordingly. And that's the process that we've gone through every year, and we'll continue to do so. I think, as I said earlier, we have introduced a new major -- for the next, which is more -- so we got a more balanced tier to our EPS and return on capital deployed. And those measures, again, have been consulted with shareholders as part of the process.
And we have a question from Victoria Moores from ATW.
My question for Johan is what do see as the main challenge in being CEO of easyJet at this time?
I actually see -- the main challenge is to choose from all of the opportunities that we have. But no -- I mean, look, there are a number of things happening in 2019. We want to make sure land. We want to make sure that the Tegel operation -- that we execute that one properly. We want to make sure that we take deliveries of the A321s, which is the new aircraft type within the Airbus family that we'll do that correctly that, that comes successfully into the operation. We stay, as you know, very focused to the [indiscernible] situation. We are confident there will be a deal as well, but that is definitely an important thing to do. And then there are continuous focus on the cost, the [ STT ], which you know about the future commercial platform as well. But those are things that it's in there. And it provides also, in many cases, some of the more so tremendous opportunities for us. So I don't think that there is -- there are a number of things we have to go at. I think that the key thing for us will be to prioritize. The key thing for us to make sure that we actually -- we continue to do what we do well and really put a laser-sharp focus on these things that really matter for our customers, that really deliver returns for our shareholders and that's what I'm going to spend my time on. But there's nothing in here -- coming into the organization, nothing in here that you're thinking, okay, we need to change that or that doesn't the work. And you know that as well. This is a company that is in great shape as well. And now the opportunity is just to move that forward.
Thanks. Can we get just one more question, please?
That's currently all the questions coming through.
Right. Okay. With that as well, thank you, everybody, who was on the line as well, and thank you all in this room as well. So I hereby conclude this presentation. Thank you.
Ladies and gentlemen, thank you for joining today's conference. You may now replace your handsets. Thank you.