Europe’s low cost airline reported a 25% increase in full year profits to €503m last month and a passenger traffic growth of 5% to 76m. Given the ongoing financial crisis across the region in which Ryanair operates and the number of EU airlines that have closed this year alone – including Malev (Hungary), Spanair (Catalonia), and Cimber Sterling (Denmark) – this progress is rather commendable. Yet Ryanair is not a company to rest on its laurels, according to Jimmy Dempsey, Treasurer.
Jimmy Dempsey joined Ryanair as Head of Investor Relations in 2003 liaising with equity markets and the Group’s investors. In summer 2006 he became the Treasurer of the Group where he has responsibility for financing the Ryanair aircraft delivery programme of over 250 aircraft, all of the Group’s hedging activities including fuel, interest rate and currency hedging, online credit/ debit card payments processing, cash management, physical fuel purchasing and is involved in other ad hoc projects. He has a Bachelor of Commerce Degree from University College Dublin and is a Fellow of the Institute of Chartered Accountants in Ireland.
“Ryanair operates in the airline industry and the primary focus is the selling of airline seats. Our focus is on whether we have the ability to cover the higher cost of fuel through continued cost discipline and slower capacity growth. Ryanair has gone through a number of years of very rapid growth of around 10% to 20% annually through our aircraft delivery programme and we carry just under 80m passengers per annum, however we are now growing by a lower rate of 4%-5% annually providing the business with a better platform to manage higher oil prices,” he says.
Despite the impressive year end results, the company’s unit costs have risen by 13%, primarily due to a 30% increase in fuel costs and a 6% increase in sector length, and offset by a recovery in passenger revenues. Dempsey acknowledges that the price of oil is an issue that his treasury team work hard to manage on a continuous basis. “Oil is approximately 40% of our cost base and is therefore a significant issue for the business. It is one of the key drivers of how profitable the business is, particularly given the volatility, largely upwards, in oil prices over the past few years. It gets our attention every single day,” he says.
Oil is approximately 40% of our cost base and is therefore a significant issue for the business. It is one of the key drivers of how profitable the business is, particularly given the volatility, largely upwards, in oil prices over the past few years. It gets our attention every single day.
The other main focus, besides oil, at the moment for Dempsey and his team is monitoring the currency issue with the euro. The lack of stability and unpredictability of the future of the Eurozone could have an impact on the airline business in terms of pricing and sales should a country or countries decide to exit the currency union. “Our business has a heavy exposure to Spain, Italy and the UK – countries that have been heavily impacted by the credit crisis and face consumer spending issues. Ryanair has thrived in recessionary times as airline passengers continue to want to travel albeit at lower prices. Ryanair benefits enormously from this. A potential euro break-up is of more significance from a cash management perspective. We will continue to monitor what is happening with the Eurozone market and we will critically manage our funds, particularly our cash deposits, with an eye on potential issues relating to the crisis. However, it’s very difficult to put contingency plans in place as no-one really knows what the break-up or exit of a country from the Eurozone would look like,” says Dempsey.
Further to the above concerns, the European aviation industry has been challenged by an influx of governmental regulation and tax that may be detrimental to air traffic growth and tourism in general. Despite Ryanair having one of the strongest balance sheets in the industry, the next 12 months will demand the critical management and expertise of the airline’s treasury team. We speak to Dempsey to garner an insight into how this will be done.
Tell me a little bit about the structure of your treasury – how many people do you have on the team and how centralised is it?
I head up the treasury department and report to the Chief Financial Officer (CFO) Howard Millar. Our treasury department is set up in a similar way to many corporate companies; there is a front, a middle and back office. Three people – myself and two treasury managers – manage the front office while the middle and back office consist of six people who manage all of the day-to-day administration.
Between the three of us in the front office, we manage all of the debt raising, the currency hedging, cash management, and all the counterparty risk issues. I also manage the card payments processing and fuel purchasing parts of the business where we have another six people working. It’s a relatively small team and as the airline has grown rapidly we have to be very efficient and effective in how we operate.
How did you choose your cash management banks? Do you monitor this choice on an ongoing basis?
For the most part, we look at banks that we would consider to be of systemic importance across the Eurozone and globally. However, this continues to become more difficult. We generally trade with very large banks in each of the major countries around the world. To assess these institutions, we initially use a traditional ratings methodology but over the course of the last few years, we have been focused on Tier one capital ratios, credit default swaps, the support provided by the local central bank or government and various other indicators including news flow. The current crisis has seen banks’ ratings weaken considerably and this reduces the wider pool of banks that meet our initial requirements. Despite this, we have an adequate pool of banks that meet our current needs for cash management and hedging activities. Our treasury team monitors counterparty risk on a daily basis to ensure we are aligned with our treasury policy and keeps an eye on the news flow for key movements or downgrades. We then conduct wider quarterly reviews on each of our counterparties.
How are your relationships with these banks? What are your requirements?
Any bank will happily accept cash deposits so it really depends on the yield being offered and the strength of the bank as to who we decide to place our funds with. If you look across the other products that we use – in derivatives, in oil trading, in aircraft financing, interest rate swaps – it also depends on the banks’ appetite for aviation risk. We find that banks have a strong appetite for Ryanair credit risk given the conservative nature of the balance sheet and the strong profitability.
We have a number of core relationships that touch on nearly all of the aspects of our treasury needs ie fuel hedging, currency hedging, interest rate swaps, and the funding of our aircraft delivery programme that we have had over the last ten years or so. We would have other relationships with counterparties who don’t have any derivative or debt exposure to Ryanair but we still have cash management exposure to them. Our focus is on achieving the best deal within the confines of the treasury policy as set down by the Board. We continue to have dialogue with all banks, however there have been significant changes in the debt environment where traditional aviation banks have been deleveraging their balance sheet. We have positively reacted to this by accessing the capital markets through the use of a US dollar-denominated Exim bond and the first euro-denominated Exim bond.
What is your cash flow like? Do you have any requirement for a revolving credit facility (RCF)?
As an airline, we get paid in advance as passengers tend to book on average between six and eight weeks before they fly so we are always in a cash positive position. We are very working capital and cash rich so we don’t need any ongoing credit facilities to fund the operating business. We have successfully used debt secured on our aircraft to fund our fleet growth.
We are very lucky as nearly 100% of our sales are over the internet therefore our daily cash receipts are linked to large internet settlement files. This allows us to operate with a centralised cash collection facility with three acquiring banks that process the credit and debit card receipts from internet sales for daily settlement to Ryanair. We do have some small cash collections in our airports (about 160) around the network and we would tend to pool that cash back into our main bank account relatively quickly but the numbers involved are very small in comparison to the internet sales.
What is Ryanair’s appetite for debt? How has this changed over the years and what is the breakdown of the debt portfolio?
All of our debt is effectively secured on aircraft as they deliver from Boeing. As the business has grown organically through aircraft deliveries our debt requirement has grown simultaneously. We have taken delivery of over 300 new aircraft from Boeing in the last decade. Furthermore, within the last five or six years, we have annually delivered between 40 and 60 aircraft requiring annual debt facilities of between $1 billion and $1.5 billion. These transactions have been funded through a combination of US government export credit funding, Japanese tax leases (JOLCOs) operating leases and some bank lending. While the majority (about 75%) of our aircraft deliveries is funded on our balance sheet, about 25% are funded off-balance sheet financing through operating leases providing some flexibility on the ownership of aircraft.
What TMS and/or ERP system do you use in your treasury?
We have used Salmon as our treasury management system (TMS) for the past nine years and we have been very happy with it. All of our derivative trading, debt and cash management are booked in Salmon and it interfaces with our ERP system SAP. As our foreign exchange exposures have been growing, we are now looking at automating the currency trading for speed, ease and security. The business has expanded to non-Eurozone countries including Scandinavian and eastern European regions resulting in higher volumes and a variety of currencies, making a move to automated FX trading inevitable.
You mentioned FX exposures. What factors have affected the scale of this exposure over the last few years? How do you manage this exposure?
The majority of our exposures are closely linked to the fleet capacity in the airline. This determines the oil we consume and the related currency exposure. Oil is denominated in US dollars, and we have no offset from US dollar revenues. As a result we have to hedge both the oil price as a commodity and also the currency back into euro. We would have between $2.5 billion and $3 billion worth of oil exposure every year, depending on the price of oil. Recently oil prices have traded in a wide range between $90 and $120 per barrel.
They are currently somewhere in the middle of this range at around $100 per barrel however the euro has weakened considerably against the US dollar reducing much of the benefit of the lower oil price. We have hedged our aircraft delivery programme from US dollars to euros to enable us to reduce the fluctuations in our aircraft ownership costs. In early 2008 we hedged all of our remaining aircraft deliveries to the end of 2012 at EUR/USD rates of between 1.45 and 1.55. This extended to our entire remaining aircraft order book of approximately 180 aircraft. Executing an opportunistic long-term hedging programme and covering exposures for the next four years gave the business a significant long-term low aircraft seat cost in euro.
We haven’t seen any negative impact as such on the (already low) yield resulting from increased regulations however we have noticed that banks, as they adopt Basel III, are getting a better risk weighting on corporate deposits and therefore can in some cases pay a premium for consistent depositing.
What do you do with short-term cash? Has recent financial regulation affected your investment decisions at all?
We have just over €3.5 billion in cash that we generally invest over a short period of time – like many corporates of late; we tend to keep our cash pretty short. In the current unstable environment, we have generally placed cash deposits for security rather than for yield. Our management of funds has adapted as the bank credit crises has become a sovereign debt crisis. Our attitude has been focused on cash protection to the detriment of the yield generated.
We haven’t seen any negative impact as such on the (already low) yield resulting from increased regulations however we have noticed that banks, as they adopt Basel III, are getting a better risk weighting on corporate deposits and therefore can in some cases pay a premium for consistent depositing. The overriding issue for large cash depositors such as Ryanair is the generally low interest rate environment that impacts on the yields achieved. This is a result of a combination of a flight to quality and the central banks around the world keeping interest rates at historical lows.
Finally, where would your favourite holiday destination be?
It’s probably skiing anywhere in the Alps however this has become more difficult having young kids. Flights don’t tend to be a problem! I am also going to Le Marche on the Adriatic Coast with two other families where there will be nine children aged between two and eight. With three boys of my own, it would probably be quieter in work than on holiday.