easyJet plc Capital Markets Day
Sep 27, 2017 AM EDT
EZJ.L - easyJet plc
easyJet plc Capital Markets Day
Sep 27, 2017 / 10:00AM GMT
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Corporate Participants
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* Alberto Villaverde
* Andrew Findlay
easyJet plc - CFO & Executive Director
* Andrew Hodges
* Andrew Middleton
* Carolyn J. McCall
easyJet plc - CEO & Executive Director
* Chris Browne
easyJet plc - COO
* Chris Hope
* Gary Smith
* Ian Cairns
easyJet plc - Director of Customer
* James Millett
easyJet plc - Director of Digital and Marketing
* Lis Blair
* Mike Hirst
* Paul Ablin
* Peter Duffy
easyJet plc - Chief Commercial Officer
* Robert Carey
* Simon Cox
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Conference Call Participants
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* Alex Paterson
Investec Bank plc, Research Division - Analyst
* Anand Dhananjay Date
Deutsche Bank AG, Research Division - Research Analyst
* Andrew Lobbenberg
HSBC, Research Division - Head of the European Transport Team
* Damian Brewer
RBC Capital Markets, LLC, Research Division - Analyst
* Gerald Nicholas Khoo
Liberum Capital Limited, Research Division - Transport Analyst
* James Edward Brazier Hollins
Exane BNP Paribas, Research Division - Senior Transport Analyst
* Jarrod Castle
UBS Investment Bank, Research Division - MD, Head of the Travel and Leisure Sector, and Co-Head of the Global Transport Sector Team
* Johannes Braun
MainFirst Bank AG, Research Division - Director
* Mark A. Simpson
Goodbody Stockbrokers, Research Division - Analyst
* Neil Glynn
Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator
* Penelope Jane Butcher
Morgan Stanley, Research Division - MD
* Stephen Furlong
Davy, Research Division - Transport and Logistics Analyst
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Presentation
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Carolyn J. McCall, easyJet plc - CEO & Executive Director [1]
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Good morning, everyone. It's fantastic to see so many of you here today. And welcome on behalf of all of the team at easyJet, many, many of you might hear today. This is the Gatwick Training Academy, in case you haven't noticed. It was only opened in 2015 in October. And of course, this is our Capital Markets Day. Now there are 3 things we want to do with all of you today. The first is going to depth on the key areas that give easyJet structural and capacity advantage. The second is to let you hear from many more of the people at easyJet than you would normally hear from. So you will see strength and depth. And third, to demonstrate how robust and sustainable easyJet's business model is.
What we're not going to be able to talk to you about today is, obviously, current trading. But also, we won't really be able to talk about any of the current consolidation opportunities that are out in the market.
The format is that there will be a number of presentations. After each presentation, there's an opportunity for you to ask lots of questions. Lunch is around 12:30, followed by coffee break at 2:15, and we hope the presentations this afternoon will conclude at about 3:30. This will be followed by a tour of the North Terminal, where you will be walked through the passenger journey from the world's largest Auto Bag Drop. You'll hear the term, ABD, quite a lot, Auto Bag Drop; true to boarding one of our brand-new NEO aircraft; as well as going to our maintenance hangar. Again, that's only a year old. We built that specifically for the Gatwick facility, and you will see some of the innovative future projects we are working on there. In fact, Peter hosted an innovation day for the media earlier this morning, and that seems to have gone very well.
So first on the agenda is a deep dive into the market and our network. It gives me real pleasure to introduce you to Robert Carey, our new Director of Network and Strategy. And he only joined us 2 weeks ago. But of course, in orange years, that is about 2 years. So bear that in mind. Robert was a leader in the airline practice for McKinsey for the last 11 years, working with over 20 airline clients around the world across a range of commercial, strategic and operational issues. And prior to McKinsey, he worked for Delta and America West Airlines. So please welcome Robert Carey.
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Robert Carey, [2]
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Thanks, Carolyn. Good morning, everybody, and thank you all for coming. As mentioned, given my past life allowed me the opportunity to work with many airlines around the globe, we thought it would be useful today to -- and helpful to share a bit of context on where I see the airline industry today and, specifically, the European aviation landscape in that broader context.
Overall, it's a good time in the airline industry. For the first time in the history of the industry, we are, as an industry, returning our cost of capital. Or maybe I should say the industry is doing what I've heard easyJet has been doing for a while. Even Warren Buffett, who famously suggested the Wright Brothers should have been shot after their pioneering first flight, has now invested in the industry. While broadly doing well, if I look at Europe, 5 Cs come to mind that will create both challenges and opportunities in the near term. We'll talk about each of these in turn. But at a high level, first, you've got consolidation, obviously. Finally, we seem to be reaching the long-envisioned inflection point. Though this is creating opportunities, it also means the competitive landscape in the coming years will be different than it is today.
Second, convergence. You probably all remember the famous Pepsi versus Coca-Cola blind taste test challenges of many years ago. If you were to do a similar taste test today between full-service airlines and low-cost airlines, you would have a hard time telling a difference.
Third, costs. We are an industry that continues to feel the pressure of rising costs. This is not going to change.
Fourth, congestion. Passengers -- excuse me, passenger volumes are rising, and airlines are responding with more flights to more places with more planes. This growth drives congestion, both in the airport and, increasingly, in the sky.
And finally, our customers. This is the new battleground for airlines. Specifically, there's an arms race to leverage digital, analytics and rapid innovation to create a distinctive and distinguishable soft product customer experience.
Let's dive in each of these. Having spent significant time working in the Americas, it is interesting to move to Europe now. As most of you know, the U.S. market underwent a fundamental transformation over the last 10 years. 10 years ago, if you do a similar pie chart, as the one you see on the left for the U.S. market, it would've looked very different. You had 8 major airlines operating, and the top 4 had only 40% to 45% capacity share. Today, the top 4 airlines in the U.S. have a capacity share of more than 70%. And U.S. domestic is not the only place we've seen this. Across the North Atlantic, the 3 large JVs today control 80-plus percent capacity between the U.S. and Europe.
Now let's come back to Europe today, which bears a striking resemblance to the U.S. 10 years ago. The top 4 airlines are only about 40% capacity share of the market today, but this is going to change. European governments are finally coming to grips that they can't protect their markets from more efficient airlines, such as low-cost carriers.
Wave one has already begun, with airlines such as Air Berlin and Alitalia that are in the midst of public sales. And this is just the beginning. It's going to take some time to play out, but I believe we will start to see mergers and consolidation between non-dying airlines to create real leadership positions and superior customer offerings.
Take a look at the products for sale on the screen, including a 9NINE Carob Seed bar, Hendrick's Gin and Superdry. Assuming I blindfolded you and offered you those on a flight, would you guess you are on board an easyJet plane? Reality is that customers have spoken with their wallets and their feet. I looked at this with multiple airlines in the past. And in short-haul travel of flights up to 4 hours, customers are choosing based on schedule, convenience and price. Rather than a cheap, low-quality, tasteless meal, they want a reliable, consistent experience that will get them there on time. If anything, the distinctive part of a flight they may remember is a friendly interaction with the crew. Further, legacy airlines have finally discovered what low-cost carriers pioneered, that customers liked the personalization ancillary models allow, giving them access to more flights at lower fares.
Compare easyJet to BA today, we both now charge for seating, food and hold baggage. Legacies are going even further than this with the introduction of basic economy products, stripping even more out of what they offer. At the same time, low costs have moved the other way, adding new products, such as flexible fares and perks, such as speedy boarding, to capture more wallet share and create a better customer experience. You'll see a bit later what Peter's team has been developing here. I was impressed. What easyJet is developing and the approach to revenue is really trendsetting for the industry. All this to say that in short-haul travel today, low-cost airlines and full-service airlines are offering near identical products.
Legacy airlines' network advantage is also disappearing. You saw easyJet announce Worldwide connect 2 weeks ago. Peter will talk more about this later, but this is very exciting for me. The industry has long recognized the potential of getting feed from low-cost airlines and their multi-based models to create volume and destinations, where long-haul airlines sometimes desperately need feed from beyond points to create more balanced customer -- passenger demand. Ultimately, it's the customer who wins here. They get new routings and paths they didn't have before.
Second, it forces more head-to-head competition between legacies and low costs, as legacies are forced to compete and unable to prop up yields with connecting traffic. Finally, it will give customers more choices and more options on how to travel and what airlines to take. Around the world, the value-creation potential is already proven. Just look at JetBlue or Alaska in the U.S. and what this has done for their passengers and for these airlines. I think easyJet is in a great position as the first to announce this.
And to be clear, it is more than just connections. For example, LCCs have eaten away at historical schedule advantages by using their ability to stimulate demand, and thereby create business-friendly schedules focused on when customers want to fly. Just look who has the earliest arrival from London to places like Amsterdam and Rome.
This slide is what I used to call an oldie, but a goodie. Around the world, airlines continue to face ongoing factor cost increases, as you can see in these charts. This is nothing new. And honestly, this helped create the market opportunity low-cost carriers seized. Of course, you all heard about fuel cost before, and I think maintenance is interesting, but we'll focus a little bit today on wages. And specifically, let's talk about pilot costs. Thanks to the growth of global airline models, pilots are now a global labor pool. This mean that pilot costs face pressure based on growth having everywhere around the globe. Thanks to legacy airlines that pressured pilots during challenging years, pilots are now asking for their fair share of newfound profitability to make up for givebacks. This creates cost pressures for all of us. But in this environment, I see low-cost airlines, again, as the winners and best able to respond. You'll hear more on this today from Andrew and Chris as -- and their teams, especially around ideas, such as LEAN, programs that we're doing, such as iPads and Parma. And the creation of seasonal bases are creating new way of working with a keen eye to cost, and ensuring everything we do is something our customers want and is better for our people. This is true thought leadership by easyJet and helps fight the tide on rising costs to keep our product competitive.
The good news is this chart shows business is booming. The challenge is that we haven't seen the investment necessary to keep up with this level of growth, as we are all using the same resources to service this demand. The obvious starting point is the airport themselves. You'll hear more on this in a little bit from both Andy and later today from Chris and her team. 70-plus percent of our flights already touch an airport that is constrained. Europe will need more runways and more gates to keep up. But the challenges go beyond the airport themselves. The airspace is also constrained. Just think about London. We have at least 5 major airports all leveraging the same airspace. Delays due to London's airspace tripled from 2015 to 2016, and this is only going to continue. We can't build more capacity overnight, but airlines that manage this smarter will become clear customer champions and build a competitive advantage. You'll hear what Andy, Peter and Chris' teams are doing to help our customers and minimize these delays. These are leading programs.
This is the new battleground for airlines, as I mentioned. Before coming here, I worked with multiple different airlines thinking about how they could leverage new tools, including analytics, digital, agile thinking and rapid innovation to rethink the customer experience. Gone are the days when airlines focus on just giving you the better seat. I put here many different examples of what airlines have developed in terms of new customer solutions that are innovative. They are individually impressive, and I think my individual -- my personal favorite is probably Air New Zealand's coffee app, where you can preorder your coffee from security and is ready for pickup in the lounge. But these are actually win-wins. Customers love them. And many are more efficient, both in time and cost. That said, few airlines have yet to put it together into a single comprehensive offer that rethinks what the customer journey should be. This is where easyJet excites me. easyJet is flying ahead of the pack here. You can see here how easyJet already has an end-to-end customer offer that is among the best I've seen. Further, as you'll see during the innovation tour and through some of the ideas today, this team is not standing still, and more to come.
So if we think about the 5 forces I just walked through, I see different airlines winning. As I'm sure you sensed, I see low-cost airlines as strong winners in this environment. They manage cost better, they are more agile and innovative and they can actually make growth profitable. On the flip side, legacies will struggle to succeed, as they have not yet really tackled tough changes needed in their core platforms. Instead, they have been skirting the issue through LCC subsidiaries. But the jury is still out on their long-term success. I used to show a chart as a consultant that highlighted the, let's just say, very, very short list of long-term successful LCC subsidiaries.
Which brings me to easyJet. In my first few weeks here, many people asked me why I joined, and the answer is very easy. I've always admired this airline from afar, though I never really had a chance to work with them as a consultant. I can't tell you how many times during discussions with other airlines and in forums I used easyJet as an example of what to do and how to be successful. When Carolyn called me, it was a no-brainer. What I've seen in my first few weeks, and many of the things you'll hear about during the course of the day today from Peter, Andrew and Chris' team, have only reinforced that decision for me. Looking at the European environment, I see many more opportunities to build on our strengths and grow, and I'm really excited about our future here.
With that, I'm going to hand over to Andy, who's going to walk through our exciting network platform.
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Andrew Hodges, [3]
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Thank you, Robert, and good morning. In the context of the broader market dynamics that Robert has just outlined, I'd like to remind you some of the key elements of our network strategy. Mostly, we've refined and honed that approach over recent years, the core principles of the network strategy have been in place at easyJet for many years. Put simply, there are 3 components to our strategy: purposeful investments, maintaining a strong capital discipline and being well-positioned in an ever-changing environment. This translates to protecting our profitable core markets; capturing the national opportunity that exists in France; targeting investments in other key cities, where we can win; and driving lower costs from efficient basing, for example, by seasonally basing aircraft in Parma. I'll now spend some time outlining some of the details of the 3 components.
Firstly, purpose of investments. We see a strong correlation between scale being #1 as an airport; or in constrained airports, where we're #2 to an entrenched legacy, and strong sustainable returns. And the drivers for this correlation are clear. Being the largest player, almost by definition, translates to offering the best products to our customers; the widest choice of routes with the best choice of frequency and timings, which is clearly attractive to high-yielding business passengers and also likely the strongest brand awareness. But scale also brings cost benefits from lower airport charges, unless they're regulated; ground-handling costs, add-ons and media spend. And similarly, scale brings operational efficiencies from improved crew productivity and significantly more flexible scheduling, which can better support utilization and also flight times.
You'll see from the chart that the airports where we hold the #1 position, which account for around half of our capacity, deliver significantly stronger returns than our average. And to call out, we also do better in airports that are constrained. And these are typically markets like Amsterdam or Paris, where there are large legacy carriers acting as a hub. We'll never surpass them in terms of scale, but we will compete well and offer a very competitive product in a very attractive market. And clearly, our ambition is to convert more airports into these strong leadership positions.
We've made strong progress in building this advantaged network position. And since 2013, we've added 12 million seats to our network in airports where we're #1 or 2. We both added to the number of leading positions that we hold and also deepened our market share. Airports, where we hold the #1 or 2 position, currently account for nearly 3/4 of our capacity. And actually, if we slice this data at a route level, we'd see that 98% of our capacity touches an airport, at which we hold the #1 or 2 position. Whilst we're always striving to improve the quality of our network, we balance this with seeding new markets of future development. And so this proportion is likely to remain steady in the years ahead. Our network is further strengthened by the positions that we have developed in constrained airports. And the table here shows that airports that are most slot-constrained, IATA Level 3, account for 72% of our capacity. And actually, in the top left-hand corner, you can see where we're both #1 and Level 3, 32% of our capacity sits.
The combination of a leading market position and constrained airport infrastructure provides significant competitive advantage over other low-cost carriers. For example, we've seen many attempts from Lingus, Norwegian, Ryanair, to name a few, to develop strong presence here at Gatwick, and on each occasion how this Europe position has won through.
I've already mentioned the leading positions deliver sustainable returns. And by the way of a small case study at 2 highly constrained airports, Amsterdam and Lisbon, we see around a 5 percentage point premium in RPS over network average performance across the last 5 years.
And finally, by deploying larger gauge aircraft into these slot-constrained airports, we can continue to grow and leverage this leading position. We see significant opportunities to continue to grow profitably. On our current routes alone, the capacity of inefficient legacy carriers represents in excess of 180 equivalent easyJet aircraft worth of flying. And this grows to in excess of 370 equivalent easyJet aircraft when looking at city paths. Both far exceed our current future fleet growth audits certainly in the near term. But clearly, there are many further opportunities for growth, including natural market growth, stimulation through competitive pricing and the expansion of our footprint into new markets. And despite our rapid growth over the last 22 years, we still represent only 9% of the European short-haul market.
Looking ahead, in fact, we expect that around 3/5 of our capacity growth will be targeted at deepening existing #1 positions or converting #2 positions to become a #1. And this should deliver somewhere between 5 and 10 further #1 positions to our network by financial year '21. The remaining 2/5 of our network will be allocated to seeding new #1 or 2 positions. And in both cases, we'll continue to take share from inefficient legacies.
In making these investment decisions though, we remain highly focused on driving returns from the allocation of our finite capital. You'll have seen this chart on many previous occasions, and I'm sure you'll continue to see it going forward. It shows the returns that we generate on our routes, normalize the capacity, with the best on the left and the worst on the right. The strength of our portfolio on the left-hand side allows us to invest in developing strategic positions and to invest in new routes and new markets. However, we're not afraid to churn routes that show no prospect of delivering strong returns. And in some cases, we're also not afraid to reallocate aircraft from airports where we project that the prospects for our returns is too low. And our decision to reallocate aircraft away from Hamburg is a good example of this as were our decisions in Rome and in Madrid. By taking these tough decisions, we can reallocate our capacity into markets and routes that deliver better returns and also strengthen our market positions for future sustainable results.
Finally, to echo a point that Robert made earlier, the market is ever-changing. And currently, we see the pace of that change accelerating. For our markets, we see a slower rate of market growth as weaker competitors begin to withdraw. And here are just some examples of competitor capacity withdrawal from our markets. But there will be many more. We remain focused on the prizes that matter for us, but ready to adapt to the sequence of our plans, if necessary, to seize time-sensitive opportunities that present themselves.
So to sum up, we have a winning network strategy. Our growth is focused and purposeful. We're highly focused on driving short-, medium- and long-term returns from our finite capital, but we are also alive to an ever-changing environment, and we respond to high-quality opportunities that present themselves. Thank you.
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Unidentified Company Representative, [4]
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(inaudible) So Q&A. Does anyone have a question?
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Questions and Answers
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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel and Leisure Sector, and Co-Head of the Global Transport Sector Team [1]
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It's Jarrod Castle from UBS. Two, if I may. Can you just give some color in the network you've said by full year 2021 moving up into more #1 positions, just kind of thinking between Eastern and Western Europe? And then also you showed a slide by 2035 growth in the U.K. and France at 50%. Can you just about some of the growth markets beyond that, that we could think about to kind of with a longer-term time frame?
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Andrew Hodges, [2]
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So picking up the first question initially, at the moment, you can see from our priorities, we believe there's a lot of opportunity to continue to grow in our existing markets. And you've seen probably from the charts the balance of investments that we're envisaging. So of those #1 positions, we see that prospect within our current footprint. But moving on your second point, we absolutely do see some opportunities to expand a little way beyond. But our focus absolutely remains on broadly the shape of the network you see today.
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Robert Carey, [3]
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Yes. And maybe just building on the second question you had around the growth rates. That was an IATA study on just what they see overall demand doing. I think as we look at thinking about the network and where to grow, obviously, we're pulling a bunch of different factors in what we're looking at. IATA's one great source of how they think the market's going to grow, but we have many other factors we look at in what we're considering. And so I don't think that's necessarily indicative of where we think all the demands are going to come or how our plan will play out. That's a little bit what we react to as the market evolves.
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Alex Paterson, Investec Bank plc, Research Division - Analyst [4]
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It's Alex Paterson from Investec. Could I ask 2 questions, please? Firstly, you mentioned pilot and crew costs are rising given the capacity growth. I just wondered if you could say anything about things you might be doing to sort of mitigate that. I hear that unemployment in pilots is actually quite high in Europe. Of these, is there anything -- does that help you at all? Can you bring those people back in? Or are they not going to be able to work for you? The second thought was, I've noticed that it can be quite difficult to increase capacity at airports in the U.K., particularly Heathrow and Gatwick. Sort of during my lifetime, I don't think they've increased much at all. Are there other airports in the U.K. that you think could be interesting to you, where perhaps the volume or traffic is currently low, but that you could take a dominant position and grow with the strength of your brand and other network?
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Robert Carey, [5]
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Yes. Andy, you want to take the second one, and I'll take the others?
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Andrew Hodges, [6]
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Yes, of course. So let me answer the second one first. So we have actually been able to grow our capacity at Gatwick, I think, as evidenced over something in the last 10 years a very significant growth. Clearly, that airport system at Heathrow is constrained really now in terms of numbers of movement. But as you also know, we are going through an up-gauging of aircraft. So it's absolutely possible for us to continue to add seats into the Gatwick market for many years ahead, both with 320s and also the larger 321s. And then in terms of other opportunities to grow in the U.K., we have a very strong presence across the country and a leadership position, many other efforts across the country as well. There are some constraints, but by no means the level of constraint we see typically here at Gatwick. So there absolutely is opportunity for us to both add additional tails and, in time, also to benefit from an up-gauging as well.
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Robert Carey, [7]
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Yes. On the pilot cost question, I mean, it's a global trend we're seeing, and it is what it is. I don't want to spoil the rest of the day for you by answering the question too much up here. I mean, you heard us reference the iPads that we've been deploying, flexible staffing models. I think that you'll see a lot of innovative ideas coming in -- across in Andrew's presentation and Chris' presentation later on. So I'd say hold the question for now. You're going to see what we're doing on that dimension. And look, it's exciting. It's exciting, let's say, based on what I've seen relative to other places. It's exciting. You in the back.
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Unidentified Participant, [8]
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I'm glad to hear that you are focusing on return on capital, which has obviously been one of your benchmarks for some years. If you look at your chart on Page 21 and comp that to say the return profile in 2015, when you peaked at 22% ROCE, there's obviously a lot more routes, which are under that 12% benchmark, which you're targeting. Within churn, are there a large number of routes which you think you have to get out of because of that benchmark? Or what's the remedial action to bring that longer tail back up to your targets?
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Andrew Hodges, [9]
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So the overall shape of the curve actually is very similar to previous years. And we see that in the long run, we need to continue to invest and maintain our strong positions on many of those routes. Within that side of that chart I think you're referring to, there are multiple remedial actions that we're continually doing, and that would vary from additional marketing investments, pricing activity, but also on the scheduling size. We often will try to optimize supply and demand, matching frequency with changing demand levels, and also trying to optimize the timings of those routes. And really, it's only where we see there's no material prospects for those routes to deliver a long-term return that will then churn them. So everything you see we're holding onto is a route that we believe has a very strong potential to the future.
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Robert Carey, [10]
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I think just to build on that, as a consultant, I got to see that chart from many different airlines at different points in time. If you were to draw that chart from those airlines, this one is actually remarkably left-hand focused in terms of how much is above that line. If you go back, and I won't get the exact number right, but there's a quote from Glen Hauenstein and his investor relations presentation, I think, about 2 years ago at Delta, where he was asked about his growth movements around in the network, and I think he mentioned something in there around 20% or 25% of his capacity is actually below bottom performing line, profitability line. And he just -- they're constantly redeploying that. So it's something every airline faces. I mean, the nature of it is, as Andy said, we've got new routes, we've got developing routes and we're doing our best to optimize it over time.
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Unidentified Participant, [11]
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I suppose I'm just trying to reconcile the sort of claims that your network has become stronger with the facts that the tail has become longer in the sense of underperforming your target.
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Andrew Findlay, easyJet plc - CFO & Executive Director [12]
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Sorry, it's Andrew Findlay here. I think it's fair to say that we are very, very conscious around the ROCE number. We said at the time, back in 2015, the 22% is a ROCE number that's unsustainable. It was exceptional. It followed the year of a CapEx holiday because we were waiting for the NEOs to arrive and we were running off the older fleet. Now those NEOs have arrived. We see that as a huge opportunity for us to drive incremental opportunity from both a return and cost perspective. Our approach to network optimization hasn't changed. We look at it on a portfolio basis. If we focus purely on making sure we hit those ROCE targets in the short term, we wouldn't have done Amsterdam. We would not be in a position where we are now, where we are in a very strong position with Amsterdam. We're seeing that move from the left-hand side of the graph to the right-hand side of the graph. I think it's fair to say that what we see today is a reflection of the overall economics of the business with the introduction of the NEO and ligaments of CapEx. But the network, if you look at it per se, is absolutely in the same position or stronger positioning. It was, last time, I think you're going to take into consideration the longer-term decisions we take, which are reflecting some of these shorter-term graphs. So I think you'll take that into consideration. 22% back in 2015 was unsustainable, so it's unfair to compare it like-for-like. Questions?
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Anand Dhananjay Date, Deutsche Bank AG, Research Division - Research Analyst [13]
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Sorry, can I -- it's Anand from Deutsche Bank. Can I ask 2 questions, please? With regards to any new slots that become available at slot-constrained airports, what do you think actually makes you best positioned to win those slots as opposed to other competitors potentially bidding for them as well? And then secondly, with regards to this sort of base churn, should we expect more airports to be exited from? Or actually, it's about done now?
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Andrew Hodges, [14]
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Okay. So I'll answer the slot question, first. So there are some pretty well-defined rule sets for how slots are allocated from the pool. New entrants are given a preference. So we would clearly rank behind those airports. So we have an existing leading position. But otherwise, slot coordinators tend to favor airlines that offer strong products throughout the year because their main name is to maximize the utilization of those airports. And so by offering the strong products that we do, actually, we are well-positioned in that decision that's taken. And clearly, by maintaining strong relations with slot coordinators and working with them, we also can have insights as to how to leverage those slots. The second question, so would you mind just refreshing that one for me?
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Anand Dhananjay Date, Deutsche Bank AG, Research Division - Research Analyst [15]
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Yes. So the second one was just on the bases -- you mentioned, for example, Hamburg. Should we expect more bases to be shut? Or are we kind of done with that process now?
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Andrew Hodges, [16]
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So we have nothing in scope, currently, for any further base churn. But we're always live to that as a possibility. And that's part of our nature of strong capital discipline. So if in the future we ever got to the point where we could not see the same return, then, absolutely, that would be in play for us. But we have no current plans for that to happen.
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Andrew Findlay, easyJet plc - CFO & Executive Director [17]
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Just to step in, we have a regular view of where we are on routes and bases, et cetera. And so, I think, Andrew, he's kind of have put it in a very nice way, but I have -- I won't call it debt list. This is something that I look out on a quarterly basis. So my rebuttal was actually, if we don't get returns, we shut it down, unless we can be convinced otherwise by the inputs from the network team, the country team and the strategy team around why we should maintain those routes going. And so it's almost a rebuttal of presumption that we'll close this down, unless we've got very clear line of sight. That's the way I would see those returns. Hamburg is one of those decisions we made, but it's very clear based on what we had to invest to get that to be a profitable base. It was unsustainable. We took that decision to show that we are very willing to make those decisions, and we'll continue to do so. But it's clear from our point view the discipline that we go through on a quarterly basis to look at the routes. We'll make that decision, particularly on a route basis and show them through. And if necessary, we'll do it on a base basis. But I think, it's fair to say that's an ongoing process and we'll continue to do that.
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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [18]
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I'm Neil Glynn from Credit Suisse. And just one, please, maybe for Robert. And I guess, with your 3 easyJet add-on perhaps, the 3 big legacy carrier groups in Europe are all generating huge amounts of cash long-haul, which gives them the option to certainly invest out in short-haul to protect or even maybe grow market share. That seems to me to have changed the landscape a little bit, but to what extent do you think that impacts easyJet's share opportunity? Or does it push easyJet to focus more on the smaller fry rather larger than the big 3 legacy carrier groups in Europe?
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Robert Carey, [19]
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Yes. Interesting question. So I mean, as you laid out, right, obviously we know the legacies have -- and I won't go to too much with their models now. But I mean, the legacies have obviously leveraged their long-haul networks to great advantage, as we talked about in the network slide. I think, you see them facing new competitive pressures in long-haul today, right, growth of Norwegian and others. I think, it's forcing them competition across the world. I think, in our -- in easyJet -- if I bring it back now to the easyJet environment, I don't know that it changes much for us. I think we're, as Andrew laid out and Andy said, we've got a clear set of what we're trying to do. It doesn't really change too, too much based on that and we go where the opportunity lies. So to the extent it opens up opportunities, sure. But it hasn't changed too, too much in the immediate term.
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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [20]
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It's James Hollins from Exane. Just one for me on at this stage. Just coming back to your debt list. I was wondering what number of basis might be on that on a sort of average quarter? And secondly, what would the guys and girls that have to persuade you to keep it open? What would persuade you? What types of things?
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Andrew Findlay, easyJet plc - CFO & Executive Director [21]
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Right. So let's be clear. It's on a route-by-route basis, not a base basis. There's no basis at this point in time than the kind of debt list. This is on a route basis. So effectively, the things we take into consideration and we discuss at length around on a regular basis are the age of that route, and so whether it's matured or not; the actions of the competitor and what's the competitor activity in there; what's the opportunity at each end of that base, specifically at the capturable market; what the dynamics are in that short-term period as to whether there's been things that are outside of our control that may make that result look different to what it would do on a normal basis. So for example, there's been some kind of disruption event that impacts that [project]. So there's a number of things that we go through. And I think, clearly, all of those, those routes, would have been decided upon because they fit within our strategy and they link our strategy with the network decisions we make. So from the point of view of those discussions, we're not knee-jerk. And so we give these routes a certain period of time to form and develop, and that's a key constant decision-making process. We don't take this lightly, absolutely not, but we do go on a regular basis and I challenge the team around why that should be the case. And we have a good solid debate around various things. And one of the -- and we make the decisions as we get -- as you'd expect we would be.
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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [22]
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So just on Hamburg decision, for instance, would it been just there was sufficient route-by-route analysis in that base to suggest that was, I guess, competitor activity, et cetera? Was that not looking great?
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Andrew Hodges, [23]
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Yes. So that was a broader view as well. So we've looked very closely at Hamburg as to what it would take for us to establish a strong sustainable set of results. And actually, with very, very significant investments, that could potentially have been a way for us to do that. But we always have to weigh up what our other opportunities are as well, and weigh up returns and risks. And so we came to the difficult position, actually, that it was much better for us to reallocate both the capacity that we had at Hamburg, but also the additional capacity we think it would have taken for us to clearly win through and put it somewhere else where there was a lower risk and probably a higher level of return.
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Andrew Findlay, easyJet plc - CFO & Executive Director [24]
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And the base decisions are -- so a better recommendation is made and that decision is raised. But to the end, the management team -- the executive management team has made those calls. It's not taking much.
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Stephen Furlong, Davy, Research Division - Transport and Logistics Analyst [25]
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Stephen Furlong, Davy. Just more on expansion. What criteria do you use to actually make a destination an actual base of, say, of 28 bases? Some of your competitors operate more, have a larger number of bases, but you have more concentration. That would be useful.
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Andrew Hodges, [26]
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So clearly, first of all, we're looking at the market fundamentals of catchments, GDP, things of that nature. And I think, over time, you all have seen that before we ever get into considering a base, we would have quite some considerable experience flying inbound to that destination. So we build up quite a picture and quite a depth of knowledge and flavor for that market. But building beyond there, it's looking at what kind of a position we can build. So really reflecting what we spoke about a little earlier, whether we can reach the #1 position, a commanding position in the market, looking at the constraints or otherwise of that market, and really understanding whether there's something new that we can bring to that market that's not already offered. So it's a combination of all of those things. But clearly, we don't look at one opportunity in isolation. We would weigh up probably a variety of options and then try and pick from those the best that we want.
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Andrew Findlay, easyJet plc - CFO & Executive Director [27]
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One of the other -- so one of the other things, we look at also around crew and [nimble] around crew, because obviously when you build into a base you're flying in and you work, I guess, your network point, then you overnight, then you (inaudible) around that. And obviously, then you look at the relationships you've got with the country at large around whether you'd be willing to build up that base on employee. So we did it in Amsterdam. It took a long time to go to that position and over time. So we flew into Amsterdam for the longer time. We've done -- spoke to a number of the employees around our -- we are the acceptable face -- obviously seeing a sense that we employ locally. We have good employees. We treat our cabin crew and pilots well. Based on forecasts and that, we open the base, and then we expand from that point onwards, and then we get ourselves in the position of being very strong at very constrained airports. There's a lot of factors that are taken into consideration, because obviously once we move into a base -- for us, to move out is a big decision. So I think we've taken a lot of time to consider all the aspects around the GDP and the demand (inaudible), but also crew aspects and the manning of that base as well.
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Stephen Furlong, Davy, Research Division - Transport and Logistics Analyst [28]
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(inaudible) Just one more. I was just looking at Slide 19, where you've got the pie chart, so the city-pairs and the airport-pairs. When you talk about the 371 aircraft or the 123 million, in your analysis, clearly, some of that is going to be key short-haul feed for the legacy carriers. So is there a point at which you actually went up against, that just not going to pull out of these routes, therefore, it's not going to be as easy?
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Andrew Hodges, [29]
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So clearly, those charts are illustrative. We're not, for a second, saying that all of our growth will be on those routes. And I think I gave a few examples of other parts that we look to grow into as well. But I think, over time, we do see that we actually compete very, very effectively with legacy carriers, even when we are competing on routes that feed some of the long-haul network. So it's our superior unit cost that went through. And I think if you look, for example, at our success in regional fronts, we've grown very, very strongly competing against Air France, for example, on many of the domestic routes. So we can coexist, but also we can demonstrate that we take share from those carriers as well.
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Andrew Findlay, easyJet plc - CFO & Executive Director [30]
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I just want to -- I think that's a good segue to the next section. So we're going to be talking about easyJet Worldwide, which is obviously an opportunity there for us to feed into the [stronger] plays in those markets. So (inaudible) segue into the next section.
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Unidentified Company Representative, [31]
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I'd also like to say, we've got -- the Country Directors are in the room. So they obviously have very specific knowledge of their markets, if you want to talk to them at lunchtime, feel free: Frances, Francois, Thomas and Sophie. So please chat with us then.
All right. Now, Peter and the team.
==============================
Presentation
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Peter Duffy, easyJet plc - Chief Commercial Officer [1]
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Good morning, everybody, and welcome to our, first, on the sale day of the summer schedule. I think you've probably been online yourselves to book your summer holiday flights already. If you look on the chart over here, you can see we've sold 260,000 seats already this morning. We went on sale about half past 5; 10 past 6, we were filling 7 planes every minute. So I think that just gives you a sense of the scale of this sort of the highly digitized B2C operation that we're running here. And I guess, I don't need explain to this audience that, that is against the context of the usual economic uncertainty, intense competition, geopolitical events that never really go away for today's airlines. So I guess, I'm beginning this session on revenue by using this morning's position on revenue on the seat sales to make a very simple point, really. Because I think what you've heard from Robert and Andy is with our winning network strategy, when we combine that with our responsible and stable social model, a strong and resonant customer proposition, and also easyJet's compelling and trusted brand, we really do win in the market, and in turn, that will drive sustainable returns for our shareholders.
Now, our commercial success rests on the ability to attract and retain our customers. And you'll see that this year's revenue growth will be driven not just by increased capacity, but also because we've been flying fuller planes with improved passenger loyalty, since we've got more customers coming back to us more regularly than we ever had done before. And I do want to remind you that the U.K. socioeconomic profile of easyJet is very different to other lines, apart from people like British Airways, very similar to British Airways. So really, typically the customers' favorite supermarket is Waitrose. And I think this combination of fuller planes, improved loyalty, affluent customer profile is proving itself a really relevant and important platform for stronger ancillary sales growth. And we're going to be talking more about that a little bit later in the presentation.
Now, when I say that we're pretty good at attracting customers, I wouldn't want you to think in any way that we are getting complacent. Nothing could be further from the truth. We know our passengers' expectations, obviously, get more demanding every single year. So everything the team are going to talking about this morning has our customer-centric approach to business at its foundation. So perhaps we can begin by showing some of the feedback of this most important of our stakeholder communities, our customers, in terms of what they say to us.
(presentation)
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Peter Duffy, easyJet plc - Chief Commercial Officer [2]
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So a summary of the very many thank you get. See, that is a balance to perhaps what you may read in the mail online. It's much more typical sort of the sort of feedback that we get on a daily basis at easyJet.
So in order to continue to attract and convert and retain customers, we have to constantly invest and focus, I'm going to just touch on 2 areas in particular, data and digital, which are absolutely core to us today. Because I'm going to be describing how we're taking that focus on those 2 areas and we're going to apply that right across the whole of a customers' journey with us. It's a sort of airline-wide approach to revenue generation, and then Chris Browne will later be picking up on how that is taking into the operational area and what we're doing with data and digital to begin to drive change in value on that side as well.
Before I get into the detail about -- there are 2 pieces of sort of foundational work that I'd really like to make you aware of. So I'm going to ask Lis Blair, who's our CRM and Insight Director to come and help me with the first. Lis?
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Lis Blair, [3]
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Good morning. So I'd like to start today with our new data hub. It's rolling out in weekly stages, as I stand here today. It's a cloud-based environment, which allows us to very securely store vast amounts of customer, operational and financial data. It moves us on significantly from the static databases of old, which no longer fit the purpose in today's age of big data. The Hadoop environment that we have chosen is an infinitely scalable, flexible, open source architecture, chosen by many of the more progressive data and digital companies, including Airbnb. It gives us a firm foundation to maximize the commercial and cost-saving opportunities that data can bring. Its scalability will allow us to ingest richer and bigger data sets, significantly increasing our competing capability, and for example, will allow our algorithms to be aware of more factors at the time of making pricing decisions. And you'll hear more about this from Peter shortly.
Now, the rest of the presentations you'll hear today will describe lots of applications at this capability, both internally and for our customers. But it's important to understand that we're building an environment which makes data available right across our enterprise, providing a single source of truth for our data scientists to be able to connect and draw meaning from previously separate data sets, with applications across the business, including pricing, schedule optimization, predictive models for aircraft maintenance and crew rostering, just as examples. And in addition, we will use data to transform the customer experience, enhance revenue opportunities and drive down cost to serve. The data hub will be the cornerstone of our personalization strategy on the web, mobile and contact centers and onboard, all of which you'll hear more about shortly. See, it is the beating heart of the commercial platform upgrade.
Part of the reason we are so confident that this investment in data will deliver is because it builds up the foundations of our award-winning CRM program. Through continuous enhancements to our use of analytics and automation, we've been able to deliver increasingly personalized and targeted communications to our customers, generating both cost and revenue benefits. On the cost side, the program has reduced our reliance on traditional paid media, taking marketing cost per seat down by 10 -- 25% over the past 5 years. And on the revenue side, the CRM program consistently drives customer loyalty and enhances customer value by over 30%. To be in the program, like more than 20 million of our customers across Europe, we simply need your marketing permission, or to be absolutely clear, that you haven't opted out for marketing activity.
In a 12-month period, 30% more customers in the program make a booking when compared to customers outside of the program. And those that book, go on to book more frequently and spend more on their flight than [ancillaries] with easyJet every time they fly, meaning that each of our marketable customers generates 50% more flight revenue and 47% more ancillary revenue every year. And the framework that will be tested and proven with this program will form the basis of our multichannel personalization and optimization plans, which James, Ian and Andrew will talk more about shortly.
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Peter Duffy, easyJet plc - Chief Commercial Officer [4]
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Thanks, Lis. So the second piece of foundation work relates to your calls for greater transparency between seat and nonseat revenues. In 2011, we switched to a nonseat definition that only included third-party revenues. So from FY 2018, we're going to be adopting a definition, which is better aligned to every airlines. So it will include fees, bags, allocated seating revenue, in addition to partner income. This will be available from this year-end. And I can tell you now that your first analysis will be that the number is lower than for some of our competitors. However, I'll be drawing your attention to the inclusion of fee revenue and our customer-focused philosophy, which distinguishes us from certain other airlines.
In line with current regulation, we only pass on the charges we incur for credit card processing, and we're going to be stopping this next year. Some of our competitors apply many more charges than fees, and of course, if we did this too, it will deliver significant levels of additional ancillary revenue. But these fees and charges tend to be unfair, customers don't like them, they can't be substantiated, and over time, I'm sure they'll prove to be unsustainable revenue streams.
Our ancillary revenue has increased by 35% in 3 years at constant currency without the need for the "got you" fees. Our strategy will be to continue to focus on persuading customers to buy the products and services that they want, because we make it easy and because it makes sense. That's what today's revenue presentation is about, and that's what we're turning to now.
So because we're a customer-driven organization, I'm going to use a simple 5-part structure that replicates their journey with us to demonstrate how we'll be using data and digital to generate more revenue across the whole airline. I'm going to ask (inaudible) to talk you through this journey in the following the way. So firstly, we're going to look at how we use data to personalize the buying experience, then we're going to move on to how we use mobile to commercialize the customer journey. Thirdly, we'll pick up on personalizing products and offers, then talk about connecting customers through our people. And then, finally, we're going to use the digital inflight experience as an example of how that's all brought together.
So let's begin with the seat selling process. We have a distribution strategy which is simply expressed as direct is best. We prefer customers to shop at our environment, whether that's easyJet.com and the mobile app or the mobile app, because it's commercially better for us and it's experientially better for the customer.
As you notice, preference for direct selling doesn't mean that we're against indirect distribution. In previous sessions, we had talked about our partnerships with global distribution systems as an example. But we use third parties to reach groups of customers who we can't reach so easily through our B2C offering. Business customers being the obvious example.
But we ensure direct is always best value for the consumer and to cover the cost of distribution, we apply point-of-sale fee for partners who take our inventory, but want to conclude the sale within their environment.
Now given this strategy, let's look at how we're using data and digital to generate revenue through, firstly, seat and bag pricing, and secondly, changes to the sales funnel. So today with the seat pricing, we have our own bespoke and highly sophisticated rules-based revenue management system. It's supported by an in-house team of data scientists and IT specialists. 90% of flight pricing interventions are automated. And we make around 30,000 daily inventory adjustments. We have 100% automation on bag pricing and allocated seating, and the algorithms range from rules-based to machine learning. The system is supervised by pricing managers who have the trading experience whenever it arises, if they need to.
Now, we recently have the system audited by the globally renowned revenue management expert, Dr. Peter Belobaba, who's from MIT's global airline industry program. And in summary, he concluded it was the best rules-based revenue management system that he'd seen. However, we can't be satisfied with that. easyJet needs to be at the forefront of the AI revolution. And so over the next 3 months, we are trialing 3 major interlinked initiatives to take revenue management to the next level.
Firstly, market diagnostics. Our revenue management system will be fed with competitive pricing, among other dynamics, making it more accurate and responsive to demand. In setting our prices, we'll be able to understand the context of other prices and run real-time simulations with various outcomes to understand what's optimal. Secondly, we will be able to make better short-term forecasting from using more information, which means that we can be much more refined about our performance forecasting at a granular route than sector level. Already, we're establishing -- challenge our hypotheses, which essentially looks to test to market and ask us questions around where we're too cheap, where we're too expensive, are we priced correctly, all with the objective of maximizing RPS. And thirdly, we're going to be essentially able to wargame different price and market price scenarios and very quickly ensure that we're making the right plays at the right time. So the net effect of these initiatives, when combined with what is already a world-class RMS system, is really very exciting. And we're confident in the expectation here, because of some recent tangible success we've had in the area. And I'll just touch on 2 quick examples we've delivered in the last 6 months, which, in themselves, have generated over GBP 20 million of additional revenue to the current financial year.
But firstly, bags. We established some new insights in relationships between ticket price movements and bag pricing, which then put life from the sales funnel, improved our revenue performance by 30% above the projection. And this is still to fully annualize that we see the opportunity to optimize these algorithms even further.
And secondly, business customers. This spring, we evolved our B2B sales strategy to focus on the corporates and intermediaries to deliver incremental value through the purchase of high-yielding seats and ancillaries. And by mining deep seams of data, it helps us to profile and segment our business space and the teams have been able to materially improve the yield from this important group of customers. And again, we think there is plenty more opportunity here.
So inevitably in a presentation like this, I'm only able to just touch the surface of what is this fascinating area. But if Alberto stands up -- Alberto Villaverde at the back, who is our Head of Data Science. Stand up, Alberto, so they can all see your face and [can] find you. Go and have a chat with Alberto at lunch, and he can really explain a lot more of the detail about how all of this works.
So now, while seat revenue is clearly an enormous engine of growth of the airline, we're also really excited about the revenue potential of both our mobile platform, but also our new website and reservation system.
So I'm now going to ask James, James Millett, our Director of Digital and Marketing, to update you on where we are with the changes here.
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James Millett, easyJet plc - Director of Digital and Marketing [5]
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Thanks, Peter. I'll start by focusing on mobile. Our app is incredibly popular with customers, and at 4.5 stars, it's the most loved airline app in Europe. Today, we placed real focus on building compelling features that make travel easier and these initiatives are now used at scale. In August, 24% of customers used mobile boarding passes, and across the summer, we sent over 15 million personalized push notifications, with critical travel information like boarding gate and baggage belt numbers. Customers made over 9 million flight status checks, which were enhanced with live updates direct from our control center, along with live map-based tracking of incoming flights. They also opened our app over 600,000 times every day. In short, it's used and valued by generation of easyJet.
A third of our e-commerce bookings are made on a mobile device, up 9.3% versus the same quarter last year. And there's over 21 million downloads at our platform now represents a huge opportunity to commercialize further. We have added Apple Pay to remove the payment friction, and usage of this has now grown to 12% of all transactions. Now this is a blink-and-you-miss-it demo, but I guess, that's the point. Customers simply tap and use their thumbprint, making it even easier to spend with us. It's so quick, we'll show it twice.
Nice and easy. Through the app, customers can now add bags, seats, hotels, cars, insurance, lounges, and most recently, in-destination activities. This focus is already getting significant traction, with mobile customers spending over 35% more than web-only customers.
Looking at the last quarter, we've seen an increase of 62% in post-booking ancillary revenue on the app. And for in-destination purchases, that number jumps to 250% growth year-on-year. There is a lot more to come here. We will extend further into the travel value chain, with products like Fast Track security, and more inventive revenue maximization opportunities, such as targeted airport offers through FLIO, one of our Founders Factory partners.
We'll also launch a travel checklist feature to present the products in more compelling and interesting ways and use the data we hold on customers to make this increasingly personalized. Critically, we believe easyJet has a growing strategic advantage over other travel players when it comes to commercializing the broader travel opportunity. Customers have our app opened during their trip for both information and function, like mobile boarding passes, giving us the chance to commercialize the end-to-end travel journey.
Our thinking isn't bounded by a traditional definition of an airline. We have the opportunity to position ourselves as a travel marketplace that also flies 280 planes.
One of the other strategic areas we're investing in is personalization, and I'll turn to that now.
Given the capability, and this one Peter talked about in data, we're working to bring this to the forefront of our dotcom environment. This will allow us to leverage our data fully by launching a broader, more targeted product set to create new and incremental revenue opportunities. We have already seen significant improvements since we launched the first stage of this program in July of this year, with the new front end of our website delivering a 6-percentage point increase in seat attachment rate, as an example. The new Hybris platform and back end systems will allow us to more easily integrate additional products across the value chain and merchandise them to customer groups in dynamic and compelling ways.
Business and family bundles are obvious examples of these. But in time, we envisage selling theater tickets, golf tee off times, in-destination child care and ski (inaudible), to name just a few. Using ski, as an example, we fly over 1.1 million customers each year, an enormous, and as yet, relatively untapped audience for us beyond the core flight product.
Here's a video, which explains our vision for the user experience.
(presentation)
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James Millett, easyJet plc - Director of Digital and Marketing [6]
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The new website very simply facilitates more targeted broader content. Lots of these opportunities unlocked through the technology investments we're making, but it also comes from being inventive with product. We've already started building significant momentum here through 2017. Examples include the launch of our new hands-free bag proposition, which has sold over 300,000 bags since May, a product that went from concept to launch in less than 8 weeks. Preorder meal deals and vouchers are now available across our network, which Andrew will touch on shortly, and will be integrated into the site next week. A new insurance provider goes live on Monday, which will offer more targeted products based on the profile of the booker. And products like car parking, which go hand-in-hand with booking a flight, will be integrated during 2018.
In summary, we're building significant momentum focused on more products, clever targeting and relevant merchandising in order to drive increased ancillary revenue. Thank you.
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Peter Duffy, easyJet plc - Chief Commercial Officer [7]
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Thank you, James. So we talked a lot about data and digital systems. But of course, at easyJet, what makes us really special is our people, and particularly, their connections with our customers.
So I've asked Ian Cairns, our Customer Director, to come and talk to you about our plans to use data and digital to enable them to leverage that more into the future. Ian?
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Ian Cairns, easyJet plc - Director of Customer [8]
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Thanks, Peter. Good morning, everyone. I'm operating [and my] staff are crucial in delivering the easyJet experience. And to do that, we recognize they need to have more information at their fingertips. The digital tools will not only help empower our people to better serve our customers, they will also help us to reduce cost to serve and open up new revenue-generating opportunities. Now I'm going to be really upfront here and admit we're still in the early stages of enabling our frontline to be a revenue-generating platform. But with over 18,000 customer-facing employees and representatives, the potential is clearly huge. So although I can't commit to this platform delivering materially for us in the next year, we will be laying the foundations for delivering in 2019, 2020 and beyond. And there are 3 areas where we're focusing effort. Firstly, in the airport. Already, over 4,000 of our airport staff use ground crew assist, which provides flight information direct to their smartphones to help our customers in times of disruption. And this rollout continues. But the really exciting stuff is around the digitizing of manual processes: biometric-enabled boarding gates, visas that are verified and stored on our mobile app and electronic refreshment vouchers directly sent to your mobile boarding cards during times of disruption are just some of the technologies that our teams are testing over the coming year, with rollout expected from 2019. And by removing some of their manual duties, our people will have more time to engage with customers personally, opening up ancillary upsell opportunities.
And on customer services, the team already use a really sophisticated case management and workforce system, and we're going to add to this by providing greater customer insight and next best action prompts to the agent, enabling them to open up and cross sell when appropriate.
We're aware that our 900 customer service agents are currently largely an untapped revenue-generating opportunity. We're working with our partners to train this community to enable them to confidently sell products and services during relevant customer interactions, both over the phone and via our new chat channel. This new capability will be live next summer.
On board, we are well advanced with our connected people strategy, and Chris Browne will talk to more of this later.
But recently, for instance, our crew in Switzerland have been trialing on new Toughpad ePlus technology. These new devices process on board orders and payments more quickly than the old ones, and critically provide our crew with the name of each individual sitting in each seats. And this opens up much more potential for more personalized onboard service. And in the future, we will expand this trial to include personal profile and sales history to further tailor that conversation. And in doing so, we expect in-flight sales conversion to increase.
We're also trialling an innovative approach to customer service recovery, a small test sell of cabin -- a small test sell of our cabin crew, and they're able to record customer services issues on board, on a purpose-built app, which on arrival, alerts a customer services agent to outbound call that customer to resolve the issue quickly. The ambition here is to have a network-wide capability to listen and respond to our customers' concerns quickly and empathetically.
Both of these onboard trials are still in the early stages, but are going well, and we expect to roll out to the rest of the network from later 2018.
So as I said, we're still in the early stages of creating a new commercial platform here, but hopefully, I've been able to give you a glimpse of the ancillary revenue potential of better connecting our customers with our people.
Back to you, Peter.
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Peter Duffy, easyJet plc - Chief Commercial Officer [9]
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That's me, but not for long, because I'm asking Andrew Middleton to come and join me. We're going to stay on board, but I'd like to provide some examples of how we're using digital capabilities to begin to disrupt traditional line propositions.
So Andy, do you want to explain a little more?
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Andrew Middleton, [10]
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Sure. So James has already talked a little bit about our ancillary revenue philosophy, which is about building a product set well matched to our varied customers' needs and merchandising it, effectively.
The ancillary revenue growth we've delivered this year provides evidence of this strategy in action. We've launched a number of new products, formed new partnerships and increased conversion levels through our new web platform.
To provide a case study of this approach, I'm going to talk about our in-flight retail business, which shows how we are continuing to evolve what we offer our customers, and therefore, drive our commercial performance.
Peter mentioned at the start that we have a discerning customer base, and over the past 2 years, we've brought our food and drink offering in line with the taste of those customers.
Moving, for example, from Pepsi to Coke, and from Gordon's to Hendrick's Gin. This has been a huge success, resulting in profit per head growth of 22% from FY '15 to FY '16. We're now replicating this with our boutique, the onboard gift shop, by introducing brands such as Chloé, Kiehl's and Ray-Ban. This was to be integrated into the connected crew initiatives that Ian has just mentioned.
We've already soft-launched and rolled out a prepay and preorder service, with a proposition based around saving customers' time and money. All items are for exclusive discounts and customers no longer have to wait for the trolley to arrive to be served on board as crew deliver a personal, exclusive service for those who have made preorders. Whilst currently only sold via e-mail, we've already delivered 190,000 e-commerce in-flight retail transactions, suggesting a very large opportunity when it's integrated into the booking form.
Looking forward, we see this digital platform being an opportunity for us to extend our product offering. We might partner to curate a premium wine list as an example, or perhaps tailor the offer by destination or service different dietary requirements.
Not only will this enable us to provide customers with more choice than they could access in the airport it also gives us the first opportunity to secure a share of their wallet, currently preserved for the airport retailers. We'll also reduce cost to serve through operational efficiencies from pre-loading sold inventory, minimizing wastage and less cash handing, driven by both preorders and prepay vouchers.
Now having established an e-commerce platform to support in-flight retail pre-flights, I'm delighted today to be able to announce that we'll also be trialing, later this year, a completely new, free to use, in-flight digital commercial platform called [Air Time]. This will disrupt the traditional high-cost model of in-flight entertainment whether an airline provides and maintains the devices. With Air Time , the customer simply streams contents to their own device.
And crucially, we maintain ownership of the customer experience in a way that's grown to our Wi-Fi product misses out on.
We're also really excited that our headline sponsor will be Rakuten, Japan's largest e-commerce company, and the current share sponsor of Barcelona Football Club. Air Time will offer a highly personalized digital environment to our customers on board, access through their devices via closed network Wi-Fi as well as TV, films, music, language learning, and destination guides and games. We will target relevant advertising to customers based on their profile and content.
Initial response from partners has been as enthusiastic as you would expect. The chance to get access to over 80 million affluent consumers a year, with an average dwell time of 110 minutes, is clearly tempting.
Without giving away the economics, Air Time will be profit-enhancing from Day 1. It's another example of our commitment to developing completely new revenue platforms.
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Peter Duffy, easyJet plc - Chief Commercial Officer [11]
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Thanks, Andrew, very exciting. Now I can't finish without commenting on worldwide, which as you know, we launched 2 weeks ago. We've been infused by the response from our customers, prospective airline and airport partners, and also the commercial results we've had so far.
Our first booking was from Nice to Fort Lauderdale, which is a route not served directly. And in fact, of the dates in question, none of our legacy competitors offered a one-stop connection. And we've seen bookings come in from right across the U.K., from Mainland Europe. Bookings representing a mix of both unserved O&Ds as well as customers taking advantage of the compelling fares that we're bringing to market.
So this is a first step in a strategic move, which we do see as a challenge to the last bastion of the legacy airline model. The response from the industry, since the announcement 2 weeks ago, has been reaffirming, I think, is the word. Today, I'm delighted to announce that we've signed partnerships with Aurigny to serve Guernsey, with both the self-connect product from Gatwick, but also the distribution agreement, which is similar to the one that we have with Loganair.
But furthermore, we've agreed with Neos, Italy's long call leisure airline; La Compagnie, who serve New York from Paris with an all business class cabin; and Corsair, who cover destinations across Africa, Caribbean and Indian Ocean, to distribute their flights before the end of the year.
I'm also very pleased to announce today that Worldwide will be distributed on Google Flights, as will easyJet flights and easyJetHolidays. easyJet flights will go first, coming just in the next few weeks, and then Worldwide and easyJet holidays will follow beyond that. But I really don't want you to think we are stopping here. We have many active discussions with a number of very exciting prospective partners. So I anticipate we're going to have further announcements in the coming weeks on Worldwide. The momentum is really possible because of the simplicity of the model for both of us and the partners.
So in summary, we've taken you through a 5-part customer-centric commercial journey. I hope we've demonstrated both our investment in new platforms and our relentless innovation in product, data and digital, can deliver sustainable commercial returns. We're offering customers more choice, greater personalization, and simply, an easier travel experience.
So as well as generating a revenue upside, I hope you can also see that we should have -- we're going to use digital and data to actually deliver structural cost savings. And I'm just going to point back to Lis' case study on CRM right at the start, while growing loyalty and revenue, we also reduced marketing cost per seat by 25% at the same time. It's a -- we see this to be a win-win.
So you're going to hear much more about our cost focus this afternoon, but I hope our recent commercial history gives -- what gives me the confidence that this team is well paced to capitalize on this rapidly-changing technological landscape, and hope you can see that we have a clear vision of the future and some specific programs to deliver against it. I hope you've been able to convey this morning our vision, but also give you some insight into our future plans so you can share some of that confidence yourself.
So thanks very much for listening. We're open for questions, and the team will kind of join me on anything specific.
==============================
Questions and Answers
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Peter Duffy, easyJet plc - Chief Commercial Officer [1]
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Neil, you go first.
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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [2]
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Two questions, please. The first one on Worldwide. Obviously, only launched recently, but I wonder, can you can give us some early flavor in terms of, specifically, time of booking? I guess, if you have very, very early bookers at low fares, that is truly helpful, but the -- I guess, to optimize the new platform, late bookers at higher fares will be more attractive.
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Peter Duffy, easyJet plc - Chief Commercial Officer [3]
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Well, I'll ask Andrew to cover. I think the answer is we've got a hold of everything at the moment. So not only have we got integrating flights with us and the partners, but we've also got easyJet interconnecting flights as well. So we've seen an awful lot of that. At the moment, you are still linking through from the banner from the site. From the start of November, it's going to be in the booking funnel, when you'll be able to go straight through to the destination. So you'll be able to go from Aberdeen to New York, which I think will create a step change again in terms of where we are. And did you want to put any more detail on that?
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Andrew Middleton, [4]
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Sure. So I don't have any data today from today, with the schedule release, but what we've seen in the last 2 weeks is, as Peter says, a bit of a mix. So we are seeing quite a significant amount of volume for bookings this side of Christmas. And ultimately, that's coming from O&Ds as Peter mentioned, just aren't being served currently. Some of the things that we expected, so we're seeing good volume in New Jersey connecting into Gatwick and then, beyond. That's the sort of thing we'd expect, and that's why the Aurigny partnership makes sense to serve Guernsey. There's also been some kind of surprising examples for us. So we're seeing volume on Greek Islands to Spain, for example, which at the moment, are only serving 2 stops. So it's a real mixed bag. I think with schedule release today, we'd expect to see some further out bookings, but at the moment, we're also seeing close in.
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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [5]
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And the second question, just on the business traveler. I guess when revenue proceeds were -- was persistently rising, the business traveler was obviously a key benefit there in terms of mix. But over the last couple of years as revenue proceed has been declining, has that been including positive help? Or positive mix for us?
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Peter Duffy, easyJet plc - Chief Commercial Officer [6]
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So the business passenger typically books in the last few weeks, and so it carries a yield premium. So they're still a tremendously important segment of customers who we take, so about just 1 in 5, essentially, are business customers. The number of business customers is broadly a function of the shape of the network. So where we're going to and the nature of the schedule. But absolutely, the focus is still there, because by attracting those people, we're getting our higher-yielding, later booking passengers. It's really core to the strategy story.
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Unidentified Company Representative, [7]
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And our business yields are improving year-on-year. So our strategy of trying to get people to book later, let's get that late booking market is -- seems to be working so far this year. So I think that will continue, a really, really important market for us still.
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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel and Leisure Sector, and Co-Head of the Global Transport Sector Team [8]
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It's Jarrod, again, from UBS. Just in terms of -- I guess, can you give some flavor to how much cost you're putting into the business to launch digital? And how much of all of the stuff gets capitalized versus going through the income statement? And maybe just some color in terms of the evolution of that ramp up, both over the last 3 years, but maybe looking into the next 3 years, if there can be any color there? And then, secondly, just some color on how you approach in-house versus, I guess, out-house solutions and staff up for them?
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Peter Duffy, easyJet plc - Chief Commercial Officer [9]
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Sure. By far away, the biggest investment is in FCP, our future commercial platform, which is the Hybris investment, and Chris can talk a bit more about that. Adrian can talk about -- more of that specifically if you want to know that. So that has been a 3-year program. This past financial year that's closing has been the biggest investment of that to date, and we're looking still there in the later part of next year. So that has been, by far and away, the most significant level of expenditure. Everything else by comparison, you wouldn't describe to be material. So building the data environment, whilst some small number of millions isn't anything, which is going to stand out in terms of the overall investment of the airline in terms of what happens. So -- and the second question, go on, just refresh my memory on the second question?
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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel and Leisure Sector, and Co-Head of the Global Transport Sector Team [10]
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Well, just coming back to the first. So how much additional kind of cost is going through either the P&L or for capitalized...
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Peter Duffy, easyJet plc - Chief Commercial Officer [11]
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Sure. Do you want to (inaudible) so we -- capitalized...
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Andrew Middleton, [12]
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We have a specific set on what we're spending on (inaudible) it's in this in the CapEx guidance we've given. We'd depreciated now 5 to 7 years, would leave us, the business case that we've got on that absolutely pays back from the point of view of the P&L. So point of view of the cost guidance we've given, is actually baked into that. This was around long-term driving, capability driving, accelerated driving future.
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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel and Leisure Sector, and Co-Head of the Global Transport Sector Team [13]
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I guess, Andrew, is that cliff now going to kind of slowly reduce i.e., you've gone through the hump in terms of the investment on some of the projects?
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Andrew Middleton, [14]
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We're still working on FCP. So effectively we've said a lot of the CapEx spend, non-aircraft CapEx spend, has been spent on FCP in FY '17. We still see that coming through in '18 as we launch it. We'll start depreciating from that point on. But I think it's fair to say, this is an enabler. So not only in the past these guys have been hugely frustrated with systems and the capability of our systems, and what it does and doesn't allow them to do. What FCP does is open the world up to give them the ability to do things that we've never dreamt of being able to do in our existing systems, and also, as a result of that, we're taking away the cost of change out of the business. From Chris' team, which is (inaudible) around development, and giving it the power to this team here so they can make those changes more rapidly and really leverage the capability in the CRM database that we've got better to drive revenue.
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Peter Duffy, easyJet plc - Chief Commercial Officer [15]
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Yes. So it replaces our existing reservation system that you guys switched, I think it was 15 -- I think it's even more than 15 years old. So the cost of change was becoming prohibitive from working off that platform, and we need to just move to a new environment.
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Andrew Middleton, [16]
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There was also a question about development philosophy. So essentially here, we're very clear about the capability that we have in-house, very much that data and AI capability that we've touched on here, in terms of design of our digital channels, business analysis and the architecture, that very much sits in-house, and then we use best-in-class partners for specific IT development. And what we're finding over time is the more and more projects we work on. Those partners really do want to work with us. So we're seeing that those innovate place people come to us and as a result, we're driving very good commercial relationships. So hybrid is the answer.
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Stephen Furlong, Davy, Research Division - Transport and Logistics Analyst [17]
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Stephen Furlong from Davy. You talked about easyJet having a strategic advantage over other travel providers in commercializing the end to end travel journey and kind of being a travel marketplace. I'm just wondering, conceptually, you think -- I know it's kind of top goal at the moment, but asset heavy like an airline can be at the forefront of this on a more medium-term basis versus the whole virtual kind of -- or OTAs or even on the hotel side versus the airline side? Just wanted to get your opinion of that, Peter.
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Peter Duffy, easyJet plc - Chief Commercial Officer [18]
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Yes. So just [for your feedback], but I think the point we were trying to make is that the customer has our app open during the journey. That's the app that they're looking to get information from. That's where the mobile boarding card is. So the opportunity to begin to commercialize that in moment sits with the airline, and what we have is that that's loved and is used by our passengers. So we think that puts us in a particularly strong position. In terms of the other part of the question, which is around the booking final versus an OTA. We're encouraging directors best. We want the consumer to come to us. We're putting a pricing reason in for doing that. And then, by driving that environment from data and personalizing that experience around the consumer and what we know about the consumer and how they behave with us consistently or because of other customers who behave in that sort of way, we think we are in a relatively unique position to begin to take advantage of both of those.
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Andrew Middleton, [19]
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And I guess, sort of linked to that, if that has really driven our strategy around mobile, where we've really built out day of travel initiatives, build our audience in very much a way that social media companies would, and now we're really looking at commercializing that scale and that level of usage.
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Penelope Jane Butcher, Morgan Stanley, Research Division - MD [20]
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It's Penny Butcher from Morgan Stanley. Two questions. One on the Worldwide product, given all you've talked about so far this morning on connectivity with customers and the relationship you have create a very positive feedback. With the Worldwide partners, how connected are you? So for example, if a Norwegian flight is late or a WestJet flight is late, how does the customer on your side find out about that? How quickly does that all happen? And how does it get resolved? What is the sort of basis of that customer management relationship? And the second question is, you've mentioned on the potentials for product sale areas like, maybe, a wine partnership or something like that. How do your airport companies feel about maybe preselling people products that they make a lot of money out of?
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Peter Duffy, easyJet plc - Chief Commercial Officer [21]
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Yes, I'm going to bring Andrew in on both these. So -- oh, go on Andrew.
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Andrew Middleton, [22]
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Yes. Sure. So in terms of the first question, so the GatwickConnects product that sits in the middle of the two is really the key bit. And so customers, when they make a connected booking through Worldwide very much sort of guided to the GatwickConnects service. Gatwick are actually very responsive, but also, actually, proactive in terms of managing any issues. So they'll know if the easyJet flight from Nice to Gatwick is delayed, and they'll go and meet the customer to try and support that connection through to Fort Lauderdale. I think the spirit of what we've tried to do with Worldwide, which is true if some of our other product initiatives is about actually getting a product type to market and we will be continuing to work with both Gatwick and with our airline partners to evolve, improve that product and going forward. And so that's very much the spirit of how we've tried to approach this initiative and the other product initiatives that we've launched.
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Peter Duffy, easyJet plc - Chief Commercial Officer [23]
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So we see this as the consumer demand is going to run ahead of the supply here. We're going to get a lot of people who are going to start to begin to use this, and it's very much the first step of a process which will begin to evolve and change over time, and will become increasingly integrated as an experience. But we have to land stage one, and we have to do that pragmatically.
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Andrew Middleton, [24]
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Just in terms of the sort of relationship, so we're working very, very sort of closely with both the airline and the airport partners on a number of parts of the product to try and work out what's Step 2. So we're building that sort of development road map in conjunction with those partners. So clearly it's the worldwide by EasyJet products, so we're kind of taking the leading role in that. But we've got kind of active engagement from the right parts of those organizations.
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Penelope Jane Butcher, Morgan Stanley, Research Division - MD [25]
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And on the other ancillaries?
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Peter Duffy, easyJet plc - Chief Commercial Officer [26]
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So the other opportunity we have here is that we know who you are, we know where you're sitting, and we can begin to bring product on to the plane which is appropriate for the consumer, and we can begin to presell that. So essentially, our in-flight offering has been what's been available on the trolley when you are sitting there. So we have the capability to begin to deliver whatever we want the consumer that makes economic sense for both us and then to begin to do. So it will be a period of experimentation in terms of how that begins to work. But we will absolutely just expand our offering as we would do on the trolley so that's going to meet the demands of the customer, but we're just going to be delivering that in a different sort of way. But I think there's another dimension to your question as well, which is quite interesting. When you talk about FLIO as an application, which is something we're doing with Founders Factory, where, essentially, they are mapping ports and looking at restaurants and geo mapping where you are versus the restaurant to begin to identify where there is capacity. you'll see a bit of this later, where there is capacity in a certain restaurant versus another restaurant. And if we can then message you real-time because we understand you're a party of 4 and Jamie's Kitchen has a table with 4 seats there, you're 5 minutes away and we can offer you 10% off if you go within the next 15 minutes. You can begin to see how that works, and we take a rake of revenue, which we have no access to. So that's why we're excited about our app and we think we have this advantage because the consumer has it opened for our information, for our product in the middle of the journey. It just creates new opportunity.
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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [27]
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Damian Brewer, RBC. Two questions, please. First of all, on the market diagnostics, you mentioned -- we had a comment there about competitive pricing. Can you talk a little bit more about how much of that you effectively looked to already in terms of the way you sat and priced your different inventory? And what kind of change one could expect to see there? Does this mean you'll be more active say if Norwegian has got low-priced inventory to Malaga, or say your first morning flight to Amsterdam is selling maybe 20% below care level or something like that? How does it work in practice? And then, the second question. Within if you like the easyJet ecosystem or says a lot of development here. Once the easyJet sort of IT and technology starts to touch other providers whether it's airports or ground handlers, et cetera, how do you bring them up to speed so the thing sort of work seamlessly and you don't bump into any bottlenecks on that side of the system?
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Peter Duffy, easyJet plc - Chief Commercial Officer [28]
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Yes. Okay. So the first one first. Now I dare say, if you take to the microphone, Dan, you can correct my answer as I kind of go. But let me -- so essentially, the way I would describe RMS is a closed system today. So essentially, every flight, every sector has its own yield curve and you know where the price gets more expensive as you get closer to takeoff. Essentially, we have that 75 different yield curves that we work off as a basis, but the reality of that is it's much more nuanced, and we look at the demand and supply of every individual flight because we want them to manage the inventory so we have enough left for the late yielding passengers on essentially day minus one to kind of take off. And so, essentially, we use price to actively control that inventory as you get closer to takeoff. So if we're selling too much, prices will go up. Let's shake that off. Faster if we're not selling enough, it will be more stable for a period of time. And what that means in practice is, if a competitor comes head to head with us, the way today's system works is you wouldn't necessarily look at what their pricing strategy is because we'll just have a look at the demand coming into to our system and saying how does that system need to react as a consequence of this incursion, which is essentially the same fight going 15 minutes later from somewhere else. I guess, the difference between today and tomorrow is that, if you look at what drives that definition of the late price, it's essentially a plus N, whatever N is, it's a function of a closed system. So by looking at external pricing N could be a variable, which is essentially under calling what that could be versus where the competitor is kind of charging. So that's the opportunity to not change the system in terms of how it works because it works very effectively for us, but actually, particularly in the late market, I think, nuance those prices in terms of understanding where they should be absolutely placed relative to the competitive environment that the customer sees. Alberto, do you want to just pick up on that?
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Alberto Villaverde, [29]
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No. I think you covered quite well everything. The only thing to add is we -- RMS is a closed system at the moment, and we want to look at the cases in which we will benefit from ingesting information from competitors. That doesn't mean that we will drive whatever the competitor does or anything like that, but only in those cases because we understand the market dynamics where we'll need to have an action.
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Peter Duffy, easyJet plc - Chief Commercial Officer [30]
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I think this is the exciting component of sort of data NAI because it's not to say that we're wrong today, actually. We may not be wrong in every scenario, we may not be right in every scenario, but what we can do by ingesting bigger data sets is to actually begin to just role-play out some of these scenarios and begin to understand what different outcomes would look like. So essentially, it's what we probably would have called AB testing, 10, 15 years ago, but just on a nuclear scale. I'm sorry, the second one, Damian, go on, remind me. I'm not too good at remembering second questions at the moment.
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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [31]
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Sure. (inaudible)
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Peter Duffy, easyJet plc - Chief Commercial Officer [32]
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Yes. I think that's a really interesting point. But actually, the whole point of what we need to do is to actually connect ground handling and to actually begin to connect the crew and the plane in a very relevant way. So what we're wanting to do is to begin to take as many of the tasks off, say, ground handling agents, certainly, in terms of their customer interaction as we can, to enable them to begin to focus on the consumer. So part of that will absolutely be delivering information to them about where that flight sits within the overall journey. Levels of information that they don't have before. So let me give you kind of a live example of something that we could see happening. Let's say there's a disruption event, and we know that we have to communicate 1, 2, 3, 4. Instantly, we could provide to the ground handler how many families of young kids we have on the flight, what their names are, to go and find out the 4 families in this scenario, the PRMs, people who have reduced mobilities, who require special assistance, we could point them in that direction. We can give them clear messaging around what is likely to happen. You can see that we can just begin to transform those experiences by using data and just delivering that to the front end in just a very different way. Actually, the complexity of doing that isn't particularly enormous, but to your point, how they actually used that technology within their outsourced structure, I think, is one of the things that we're going to just have to begin to learn and get to the bottom of. But we're on that journey because with the ground agent, assist product we have at the moment, they're using our technology today to begin to do something.
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Andrew Middleton, [33]
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I think there's a point here around the sort of maturity of easyJet as a digital organization. So this isn't about a central digital team or a central IT team gifting technology out to the network. This is about business sponsors who are living and breathing and seeing those opportunities, actively driving those projects through the organization. So some great work that Chris will talk about later and is very much driven by the operations team who are close and bought it. I think that's a real differentiator for us.
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Peter Duffy, easyJet plc - Chief Commercial Officer [34]
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So Chris will be describing things that when you go through innovation day, you'll able to have a look at and I think, that, hopefully, will reassure you about the relationship that Chris has built between easyJet and Gatwick as an example, where we used their function, their capability to begin to transform our customer experience. So I think that will, maybe, address some of the issues you raised.
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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [35]
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It's James Hollins from Exane. Two for me. This management has done a pretty phenomenal job since 2010 of improving the product perception in the consumers' mindset. I think your Capital Markets Day a few years ago, you gave a little bit more data, but more detail on how the average age, the average demographic of an easyJet customer has evolved. Perhaps, maybe it's the time now if you could do a bit more or certainly sort of some recent trends in, if nothing else just average age. And the second one, would just be, if you can give a bit more split on the GBP 1 billion of ancillary revenue? And if not, which areas have been the key parts of the growth over the past few years?
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Peter Duffy, easyJet plc - Chief Commercial Officer [36]
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Okay. So on the first, if you look at the repositioning of the airlines since 2010, I think what's interesting versus other repositionings that other organizations have gone through is we probably brought our brand more in line with our customer base than changed our brands and ask for a different customer base to come. But as a result of bringing in line with the customer base, the aftermarket customer base we have, what we've done is attract more and more of those people to begin to come to us. So initiatives like allocated seating, if you look at what's happened internally with the in-flight offering, digital and how that's changed, I don't think you can underestimate the combined effect for all those components have had about making easyJet, essentially, a go-to airline for affluent Europe. So I'll get Lis to comment on the specifics, but we are getting a bit older. We are staying up market, and if you look at our biggest customer segments, they are people who own second homes. They are people who are going on second and third leisure breaks. We do the U.K. ski lift, essentially. If you think about business customers, if you think about this very big audiences who easyJet carry, they are absolutely the affluent middle classes of Europe. Lis, do you want to just build on that?
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Lis Blair, [37]
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Yes. Absolutely, so the average age has eked up very slightly year-on-year as I think we're around 41 now across Europe and that does vary by market, but certainly not more mature markets. We see a more mature customer base, which reflects the higher socioeconomic profile. And yes, in terms of all of the customer trends, why they're booking and traveling with us, we're seeing growth in the regular travel so our Flight Club members, for example, who are really coming back time and time again to easyJet because they try us and they love us.
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Peter Duffy, easyJet plc - Chief Commercial Officer [38]
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Okay. And then, the second question, in terms of the structure revenue. I'll get Andrew to come in and comment on that as well. So the sort of revenue and revenue, really. So a number of the partner deals we have are, essentially, profit deals, where we go into a relationship with them, and essentially, we get a profit contribution kind of back. And so we focus very much on how we begin to drive value for the consumer and those initiatives and in turn, how that begins to drive profit coming out. So I think all our partnership deals are quite exciting. But I think, importantly, we've been quite innovative in terms of how we have thought about product and how we have thought about how we begin to deliver product to consumers. So let me give you an example. We've done very well on in-flight media, seatback advertising has been something which has been very strong and is continuing to be strong kind of going forward. And at the heart of the Rakuten deal is that sort of thinking applied into a digital environment and how do we kind of begin to continue in that way. I think all the work that's happened on bags is a very early stage of how we see tomorrow working, where we'll become much more innovative around our products, and we'll be able to offer a greater range of bespoke product to passengers because it's highly targeted. So the description I've used frequently is the way airline websites tend to work today is that you buy a seat and then, we say, and would you like, and would you like, and would you like, and the consumer gets very well trained in pressing continue, continue, continue. Now if we can begin to just think about that as other industries have done in a more meaningful way for the consumer and understand that I'm not always a business customer, and perhaps at weekends, I maybe going skiing or I maybe going on holiday with my family. And not work to a very templated approach to all of that, but the website can dynamically change and react in the way that lots of retail websites, then we think there is a tremendous opportunity to begin to kind of grow that forward. So it wouldn't be, but it's all about third party deals. It's as much about how we begin to innovate internally on our own product and actually develop that in a way that's bespoke for consumers.
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Andrew Middleton, [39]
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Yes. So I'll just say the growth this year has been very much driven by positive product choice and so to Peter's point around the introduction of new products. So we've got examples of hands-free bags. We've got introduction of tours and activities through a partnership with GetYourGuide as well as the merchandising of our existing product set. So we've seen -- we talked about the growth of the whole bag revenue through pricing algorithm changes, and the merchandising benefits of the new web platform for allocated seating, where we're seeing material increase in attachment rates, and that's kind of clearly delivering for us, commercially. So I think the strategy will continue to be to try and broaden our product set and to try and match our product to our customers to kind of what our customers value, and then to continue to iterate and evolve how we merchandise those products in order to drive the revenue.
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Peter Duffy, easyJet plc - Chief Commercial Officer [40]
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So what we are saying in that is that we're not particularly interested in the got-you fees. So I don't want to charge you because you didn't have time to actually check it online before you got to the airport. That is not what the strategy is. The strategy is all about how we get the customer to buy stuff that they want from us.
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Unidentified Company Representative, [41]
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One more quick question.
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Unidentified Participant, [42]
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I gather lunch is pending, so I'll just ask one area of focus. Your pricing, your sort of strategy, it seems to be pricing optimization, in terms of inventory management. But where do you think you go in terms of targeting the individual booker so it becomes dynamic pricing, rather like you sort of targeting them more on the ancillary, but I'm thinking about the booking process.
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Peter Duffy, easyJet plc - Chief Commercial Officer [43]
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Well, if I understand the question, I think if you're just testing if we have different prices for different customers, I don't think that's what will happen. I don't think consumers would react very positively to that. But I think what you will see a different value offers wrapped up for different consumers in different ways, so the nature of loyalty will begin to change dramatically and that will have undoubtedly a pricing dimension as well. Can you see a world where our loyal customers get baggage deals in different sorts of ways, have different levels of flexibility on ticketing, have different access to different levels of benefit, yes, absolutely. I think that's how it's going to work. But the way pricing works today is trying to maximize RPS. So that obviously is a function of yield and load and it's making sure that we sell the most number of seats that we can, at the best price for the consumer. And so I don't see that fundamentally that will be shifting. What I'm talking about with the AI work is just the sophistication of how we begin to set that pricing.
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Unidentified Participant, [44]
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Sorry, just to come back, and I'm quite surprised because other airlines are talking about targeting the same process on that individual dynamic basis. (inaudible) for Swiss, it could lift their yield by 6%. Obviously, Ryanair wants to go down that way. So why don't you think you'll be going down that path?
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Peter Duffy, easyJet plc - Chief Commercial Officer [45]
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So maybe I'm misunderstanding the question, but if I found out that I paid GBP 100 less for -- or you paid GBP 100 less for your seat than I paid...
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Unidentified Participant, [46]
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They have these ready though, so...
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Peter Duffy, easyJet plc - Chief Commercial Officer [47]
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Not really. So I think if you look at one of the big issues that consumers challenge us on, it's there's a perception out there that essentially we use looking data to actually begin to set prices, which of course we don't. The prices are all set just by the last booking, that's how it begins to work. I think the way that will come to market, and I'm sure every airlines may want to do it in the way that you described and the best of luck to them, but I think the way that will come to market is there will be a fixed set of prices for the consumer, but then you'd be able to offer additional value to them based on their individual profile. And so different groups, different customers on different loyalty levels will undoubtedly be able to access certain packages as well. And I think that's, probably, how broader commerce works today.
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Andrew Middleton, [48]
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I think, maybe we're interpreting the question around search behavior, but actually, historic behavior for particular products may be different. So I use example of insurance, it goes live on Monday, and that's a relevant dynamic price depending on the flight window that, that customer has chosen. So it's not based...
(Break)
==============================
Presentation
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Peter Duffy, easyJet plc - Chief Commercial Officer [1]
------------------------------
Right. I'm now going to introduce Andrew to do his cost section.
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Andrew Findlay, easyJet plc - CFO & Executive Director [2]
------------------------------
Good afternoon, everybody. I hope you've had a good opportunity to talk to some of the team at lunchtime. I'm Andy Findlay, the CFO, and presenting with me this afternoon are Paul Ablin, our Finance Director; Simon Cox, Head of Airport Development and Central Procurement; and Mike Hirst, Director of Treasury and Tax.
Today, along with the members of my team, I'll be focusing on the cost aspects of the business and the strength of our balance sheet, which we are using to invest in the future growth of the business.
The key message I would like you to take away today as in the markets and airports where we operate, we are a cost winner. As you've seen Andy's network presentation earlier, our strategy is focused on operating a highly-efficient, low-cost operation in primary airports across Europe. Our network decisions are not driven by costs, but a drive to secure strong, long-term, sustainable and profitable positions in key airports in order to secure long-term sustainable returns for our shareholders.
Whilst cost is a fundamental element of easyJet's structural advantage, it is not -- it's only part of the story.
Alongside network and revenue strategies we implement, we also have a clear customer focus with the aim of delivering sustainable returns by attracting a loyal base of customers. As a result, we choose to employ our crew on a local basis, which not only means we have more engaged crew, but also means we have a positive and sustainable relationships with many European authorities that some other airlines do not enjoy.
On a cost perspective, we compare favorably to the legacies so that we compete against, and we are a winner in the airports we choose to operate from. As we grow in those airports, our cost position improves.
My job, and that of the wider team, is to minimize every part of the cost base that we can, whilst recognizing the environment in which we operate and the customer focus we believe in by leveraging the advantages that we, at easyJet, have.
On the left-hand side of this slide, you will recognize the cost components of our cost base. Like any airline, fuel is a significant component, and at easyJet in FY '16, this represented some 27% of our costs.
As you would expect with -- as with our primary network, airports and ground handling cost represent significant proportion of our costs at 31%. Split's approximately 70-30. And crude cost is our second biggest nonfuel cost at 13%.
Looking at this cost base in a different way on the right-hand side, you can see what the drivers of our costs are. What this chart shows, for example, is that 19% of our cost base is driven by passenger numbers, and within that, over 14% are exposed to some form of regulatory framework. It also shows that, because of our network configuration, in total, around 40% of our nonfuel cost base is regulated, and therefore, has a longer lead time to influence.
Despite this, easyJet lean continues to deliver. Our increased focus on lean since 2015 shows that it is working, and our efforts are delivering. Based on the cost guidance we gave at the half year and at Q3, cost per seat excluding fuel on a constant currency in FY '17 is expected to be marginally lower than that in FY '15. This is despite the regulatory environment and inflationary pressures we are seeing. This is also despite the increasing cost of disruption, one of the biggest challenges that the airline industry faces today. European airspace and ground-based infrastructure is becoming more congested and customer awareness and customer claim rates continue to rise for EU261 compensation across the industry as a whole. Excluding disruption costs, FY '17 headline cost per seat ex fuel at constant currency will be down 1% to 2% versus FY '15.
We remain confident in our ability to control costs in the long term and our target of delivering flat CPX ex fuel at constant currency in 2019 against 2015.
I would now like to hand you over to Paul, our Finance Director, and the individual who's been driving the lean agenda within the business over the last 2 years.
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Paul Ablin, [3]
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Thank you, Andrew. easyJet's low-cost principle is to ensure that in the markets and airports where we operate, we are the cost winner. We have already had a strong cost culture, but this is constantly being enhanced to ensure that everyone is cost-focused and disciplined. Our people are as proud of saving a pound of cost as they would be generating an additional revenue. This relentless and forensic focus creates sustainable cost reduction throughout the business. We vigorously challenge all areas of spend whilst leveraging the competitive advantage of our scale and strong balance sheet to exploit these cost opportunities, which you have seen demonstrated recently by our investment in A321s amongst many others. Alongside our forensic cost and efficiency focus, we ensure flexibility of our spend that allows us to mitigate short- and medium-term volatility and inflationary pressure while ensuring we deliver sustainable long-term profitability.
Our long-term focus and innovative thinking means that we have a healthy pipeline of future lean initiatives over the coming years.
For example, next year, we anticipate delivering lean savings in line with this year. easyJet lean is not a long -- not just a long-term cost reduction program as alongside driving sustainable cost savings, it puts focus on the efficiency of the business and our ways of working.
Also, this is not a stand-alone project that happens to the business. We have embedded this program throughout the organization within our underlying processes and the way we work.
The program consists of 3 key areas: Lean work streams, cost strategic initiatives and lean cost culture.
The lean work streams are dedicated towards providing this forensic focus and identifying and delivering cost savings for all our key cost drivers. These work streams are led by the relevant executive leadership team members, many of who you will hear today or meet today, and all really delivering across the business. You will see as -- see many of these examples through the various presentations today, including supply relationship management, the use of data, reducing bureaucracy and investment into future technology.
Cost strategic initiatives are our portfolio of major strategic projects which are biased towards cost and efficiency. These are run a separate, formal one-off projects to ensure that they are appropriately delivered and controlled. The A321 investment; NextGen, our organization transformation review; Gatwick North Terminal consolidation projects are example of some of these strategic cost initiatives we have undertaken recently.
Lean cost culture and process efficiency is all about embedding lean and efficient ways of working within the business and ensuring our people have the tools and resources available to drive their lean ideas forward.
We find that some of our best ideas come from the people closest to the action. For example, iPad trial in Parma, the [RFI-identified] tooling and engineering are ways of improving turn efficiency on our aircraft.
This workstream is underpinned by a network of lean leaders who operate at all levels of the business. They are all empowered to drive this lean culture, deliver process improvement activities and support in our communication.
The lean program has been able to deliver sustainable cost reduction, with GBP 250 million of savings achieved over the last 5 years.
I will now hand over to Simon Cox, our Head of Airport and Development and Central Procurement, who will take you through airports and ground handling, our biggest cost area after fuel and an area that has significantly benefit benefited from lean.
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Simon Cox, [4]
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Thank you, Paul. Good afternoon, ladies and gentlemen. My name is Simon Cox. It's my pleasure to talk to you about how easyJet is leveraging our position in the marketplace with regards to airports. I think the key message for you is that the easyJet proposition is compelling. But more importantly, that we're using that position to lower our costs and increase our competitive advantage.
As many of you know, and will be aware, there's been a narrative describing how costs have been increasing at regulated airports in recent years. The key cost pressures are well known in an environment where regulated airports represent a majority of our traffic. However, I would think it's a mistake to believe that regulated airport costs are somehow uncontrollable, and my team spend a great deal of time and effort continually working to build relationships that reward our model of growth and efficiency in primary airports.
Of course, regulated airports are driven by the desire to make commercial returns, but they equally want to act to support strong airlines that will drive future traffic growth. At the same time, they're equally concerned with reducing their own cost levels to increase returns. In this regard, easyJet is unique in its efficiency at large airports and our ability to stimulate traffic.
So the #1 priority for me and my team is our focus on achieving long-term deals that provide cost certainty and cost advantage. We also look for cooperation in areas that support our low-cost model, especially in relation to infrastructure, aligning our interests with those of the airports and achieving deals that provide certainty to both parties. And Gatwick is a great example of this.
Now of course, we have fruitful bilateral discussions with more and more airports. As a carrier that's able to grow even in congested airports due to our upgauging process, we differentiate ourselves from legacy competitors, especially in our ability to stimulate new traffic and serve a wider set of destinations.
Of those, I'll highlight, the close cooperation between network and airport development. You heard earlier on this morning from Andy about our disciplined and purposeful allocation of assets to bases. My team form an integral part of those decisions to maximize the financial benefit from the deployment of those assets. Now, of course, we work both on base allocations but also on where we fly those assets to. So I want to share with you a small example.
So recently, we've been expanding in Croatia, where we've grown significantly in specific airports using inbound flights from a number of our bases around the network. This helps lower our costs, builds handling efficiency and makes establishing market awareness more effective.
Lastly, but by no means least, we have a team focused on the key regulatory issues in Europe. Working closely with airlines for Europe, they target significant policy issues such as transfer charges and how they distort airport costs at major legacy hubs and other issues such as the European Airport Charges Directive. Moreover, they are focused in ensuring regulation of individual airports is effective.
So just moving on to our proposition and the nature of that proposition in a bit more detail. We're going back to the central question of how we use that to lower our costs. Earlier, I mentioned the desire from airports that they only invest in capacity that can be effectively utilized. For example, in the U.K., there's an increasing concern to airports that their CapEx is being driven by a congestion of first wave, driven in large part by peak U.K.-based flying. Even in airports that are considered not to be full throughout the day, their capital expenditure is being driven by peak demand that creates inefficiency.
So in order to unlock lower prices, we, easyJet, and our unique advantage are able to offer much higher utilization of that airport infrastructure. And from an airport's perspective, easyJet is able to deliver a far higher number of passengers for each aircraft based at that airport.
For example, looking at Jet2 in airports such as Edinburgh, Manchester and Stansted, we are able to deliver over 2.5x the number of passengers per aircraft based at these airports.
So from an airport perspective, the CapEx is being driven by needing to have to deliver aircraft stands for only a small part of the day for only a small part of the year. And for that reason, airports are willing to heavily discount to get year-end traffic and high utilization of their infrastructure.
So having sort of presented a little bit about the theory of how we do this, I would like to bring that slowly to life with the practical application of this using the case study of regional France. As you know, regional France is already a highly important market to us and increasingly so as we move towards #1 positions. We see that the easyJet model can grow effectively and we're able to operate at high levels of efficiency. So what we're seeing happen there is the commercialization of airports with part privatization and the emergence of commercially minded airport management teams.
Secondly, that has driven an increasing ability to do bilateral deals, significant growth incentives and some long-term agreements. They understand low-cost infrastructure and the charges associated with a lower capital expenditure, and then there's increasingly a willingness to work with us on our automation agenda, auto backdrop and, increasingly, automation in other parts of the customer journey.
So by combining all of these factors and the effort within my team, we've seen a much improved ability to influence and work well with airports across France.
Equally, our ability to drive traffic means that we are able to negotiate incentives. For example, 65% of all growth at Lyon Airport in the last 3 years has -- have been driven by easyJet, so you can understand that they're very keen to talk to us.
We have a presence on domestic, city and leisure routes. We're able to grow in each segment and are far more attractive than the legacy incumbent. Our potential to grow means that we are willing to do longer-term deals, and we see that as a continuing trend where our ability to drive competitive advantage is enhanced.
So in summary, I think easyJet has the possibility to make even greater use of those attributes to lower its costs and even in what appear to be congested airports, especially given our ability to grow what others cannot or will not. We're now starting to see the benefits of that and historic trends of high airport inflation flattening. But of course, we don't -- as far as keep our cost flat, we will continue to work to reduce and further enhance our competitive advantage.
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Paul Ablin, [5]
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Thank you, Simon. I would like to start with our most important cost line, our crew. I'd like to say how proud we are to have such high-caliber customer-focused crew. They are the face of the airline and do an outstanding job in sometimes very difficult circumstances.
We have seen a reduction in CPS since 2015. easyJet's business model of employing crew across Europe on local contracts deliver significant value in attracting and retaining high-quality crew. Although this may be at a higher cost than some of our competition, we believe this is the best long-term and the only sustainable resourcing model in the markets we operate. Our investment in this area has driven structural benefits including low crew turnover at just 4% for our captains, and a strong pipeline of pilots and crew. This has been achieved through employee engagement programs to ensure a constant flow of communication on key issues and to enable our frontline staff to be empowered to make decisions.
We also implemented a new scheduling and rostering program to ensure our crew are best optimized while not compromising work-life balance, as we offer increasing flexibility through initiatives like the preference system.
And finally, we work towards reducing fatigue as we constantly improve and update our world-leading fatigue management system.
Moving on to engineering and maintenance. Our forensic focus has seen us deliver a 5% savings in CPS since FY '15. Our lean savings have enabled us to offset a variety of engineering cost pressures such as A319 fleet aging; meeting the regulatory modification requirements; and substantial currency impact from the U.S.-day-denominated parts. This saving has been achieved whilst maintaining the highest levels of safety standards.
We have been able to exploit one of the biggest advantages of the easyJet fleet, in that we operate a single fleet family. We have used the economy of scale, coupled with innovation and performance efficiencies in our maintenance program. We tender the maintenance and supply contracts every 3 years to make sure that we receive the best possible deal. We have adjusted our maintenance program to block-check maintenance, allowing us to package the variety checks we are regulated to do in the most optimized way.
Engineering continues to lead the way in how we approach this cost base, when we think -- where we think outside the box and develop market-leading innovation to help us reduce costs while never wavering from our #1 priority, safety.
Let me give you some examples of this innovation, and you will see some more examples if you attend the innovation session later today. One of our recent unique innovations is the BladeFix application. This calculates the most efficient way of replacing the blades, saving us not only the money on direct repairs, but also provides details of our stock, helping us locate the most optimal blade to use. This is delivering savings of $250,000 per year.
We have also developed a new app to report cabin damage incidents. Instead of filing in various paper reports, the crew can now log everything electronically and instantly send it to the engineer who can assess damage and prepare the necessary components, reducing the possible disruption in our operations.
In line with the digital innovation, and along with the introduction of iPad technology elsewhere, we have introduced Toughpads in every cockpit, which replaces the heavy printed log books and improves both efficiency and flexibility.
Moving to ownership costs, which has seen a slight increase in CPS. But this reflects that easyJet has invested significantly in the business model in recent years. However, our active fleet management is driving long-term cost benefits as we invest in fuel-efficient and higher-gauge aircraft. You already see the cost advantages of this investment throughout our P&L, for example, fuel efficiency in our new aircraft. It should be noted that our focus on doing what is right for the longer term has seen some additional cost arising from the active management of the residual value risk of our A319 fleet, where we have recently completed a sale and leaseback program.
As with other areas of spend, easyJet has taken a low-cost approach to ownership such as leveraging our scale during lease negotiations and using our strong balance sheet position to access advantageous funding arrangements.
We have been able to upgauge our fleet using the retrofit program, increasing our A320 aircraft to 186 seats from 180. From summer 2018, you will see the first of 30 235-seat A321s added to our fleet, which will give -- which provides greater structural advantage. Chris Browne will take you through our fleet investment in more detail later in the day.
It should also be noted that we have built fleet flexibility, which means that we are able to change the fleet growth program, both up and down, which allows us to manage our ownership cost in line with our external factors.
As Simon referred to earlier, easyJet operates in primary and highly congested airports where slots are very constrained. The upgauging of this -- of the fleet allows us to maximize our growth in these airports in the most efficient manner. The addition of the A321s will additionally deliver 8% to 9% cost-per-seat benefit, even in today's fuel cost environment, an incremental contribution per annum compared with A320 NEOs.
Now to overheads. We have seen a 2% decline in CPS since FY '15. easyJet has put a strong focus on controlling overheads to ensure that costs associated with delivering the strategy are both efficient and effective.
Our overhead costs are significantly impacted by disruption costs, driven by greater airport congestion and increased EU261 claim rates. This will be covered later in the day along with the many lean initiatives that have been designed to help control these costs. easyJet has invested in numerous lean projects to help offset this cost pressure such as NextGen; Gatwick North Terminal consolidation, which we'll cover later; contact center improvement program and many other initiatives.
In addition to -- in addition, the easyJet program management framework ensures that critical business projects such as the future commercial platform are undertaken with robust cost control and governance.
I'd like to give a bit more color to the NextGen project. This is an organizational transformation to increase efficiency and reduce overhead costs. We carried out a root-and-branches review of our organizational design, which incorporates all functions and focused on finding the most efficient and cost-effective ways of working, and structure that enables both rapid and clear decision-making.
NextGen is now targeting GBP 15 million of annualized savings with a 6- to 9-month payback on the investment. This is a reduction of the original planned of GBP 20 million, as communicated, but further savings have been put on hold while we deliver the new European AOC and explore opportunities.
I will now hand over to Mike Hirst, our Group Treasurer, who will talk you through our strong balance sheet.
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Mike Hirst, [6]
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Thanks, Paul. Good afternoon, everyone. For those of you who don't know me, I'm Mike Hirst. I'm Director of Treasury and Tax. I also have responsibility for fuel procurement, insurance and customer payments including revenue protection.
The next few slides, I'll be talking to the capital structure of the business and how this has led to one of the strongest investment-grade ratings in the sector. I'll also give you more insight into the sources and uses of our cash and talk in a bit more detail around our fuel lean initiatives and hedging policies.
easyJet's conservative financial policy has resulted in the strong investment-grade credit rating. Only 8 airlines globally have an investment-grade rating, and easyJet is amongst the strongest on the -- of these.
Talking through the diagram on the left, we have diverse -- access to diverse sources of funding, and our CapEx program is funded by a combination of cash generated from operations and debt.
Currently, debt is sourced from institutional investors via access to wholesale debt capital markets, and this is facilitated by our Euro Medium Term Note Programme. This allows rapid access to deeply liquid funds that are available at attractive rates on an unsecured basis.
Our investment-grade rating ensures a [way] to achieve at least 1% to 2% better than some investment-grade airlines.
We hold a liquidity buffer which is designed to enable easyJet to survive significant short-term shock events. This is currently sized at GBP 2.6 million per 100 seats and fulfilled partly by cash and partly by a $500 million revolving credit facility, or RCF, supported by a group of 12 banks.
The facility is as good as cash. It's got no financial covenants, no material adverse change clause and secures on aircraft as a pre-agreed valuation if drawn. It's currently unique.
We do not use the RCF to fund the general working capital cycle of the business. The intention is to draw on it to fund short-term shock events only. It has never been drawn and remains undrawn as of today, and we are also supported -- exploring new ways to support the liquidity buffer, and therefore, make the balance sheet more efficient by holding less cash.
Unlike many other airlines, we use sale and leaseback transactions on older aircraft to manage residual value risk and give greater fleet flexibility in the event that we need to reduce capacity.
Sale and leasebacks are not used as a primary source of funding for the business, and therefore, our lease arrangements with lessors tend to be shorter than the average in the sector. This, coupled with the fact that we have fewer leases than other airlines, means that we are less reliant on more expensive operating leases to fund the business. This delivers significant cost advantage compared to other airlines.
The impact to fleet of buying new aircraft outright using a combination of our own cash and unsecured debt along with managing residual value risk and fleet flexibility using sale and leasebacks can be seen in the table at the top right.
As at 31st of August 2017, 74% of our fleet was owned versus leased, about some 207 aircraft; and nearly 90% -- 97% of our owned aircraft are unencumbered. That's 202 aircraft. The net book value of these unencumbered aircraft is currently around GBP 3 billion.
We're heading towards 80% of our aircraft being unencumbered that supports the business and be able to raise unsecured funds.
We have clear hedging policies in place to manage jet fuel price risk and foreign exchange risk in U.S. dollars, euro and Swiss francs versus sterling.
Given our functional currency is sterling, all our hedging policies are designed to remove cash flow volatility in relation to GBP. So for example, we do not remove cash flow volatility in relation to commodity hedging in isolation. We also overlay a GBP-U. S. dollar hedging strategy to remove cash flow volatility of the commodity price in GBP terms, and I'll explain a little bit more about this later.
All of these factors form the key pillars of easyJet's capital structure, and as a result of it is being able to obtain one of the strongest investment-grade profiles in the sector, as can been seen in the table on the bottom right.
We also have a clear dividend policy, with returns linked to company performance, currently 50% of net income. The intention is to maintain an investment-grade credit rating, as a strong balance sheet forms a key part of our overall strategy, and therefore, all the investment decisions and returns to shareholders are considered in this context.
This slide shows our net cash position versus our competitors' net debt positions as at 31st of March 2017. These positions exclude pension liabilities and operating leases, which, for some of our competitors, are very significant. As mentioned previously, our operating leases are comparatively fewer in number and shorter in term than our competitors, and we do not operate defined benefit pension schemes. Therefore, our off-balance sheet commitments are much smaller than those of our competitors.
The impact of the new leasing standard, IFRS 16, will effectively capitalize leases onto our balance sheet at circa 3x annual rentals rather than the 7x multiple we currently use in our ROCE calculation today.
The debt maturity profile of the business is shown in the chart on the right. We have no significant refinancings until the revolving credit facility comes up for renewal in FY '22. We repaid all our aircraft mortgage financing before 31st of March 2017, leaving the majority of the fleets unencumbered. And we have a conservative funding strategy which aims to optimize sources and cost of funds whilst minimizing refinancing risk, specifically, the funding strategy aims to smooth maturities or minimize the amount of debt maturing in any specific financial year, currently maximizing at $500 million, ensure access to cost-effective funding is in place to repay debt maturities at least 12 months in advance on diversified sources of funding.
The strong opening net cash position and the long-term funding maturity profile mean that we're in good shape to be able to support our plans for FY '18, '19 and '20.
This slide shows sources and uses of our cash in FY '16 and describes the outlook for FY '17 and '18. As highlighted on the previous slide, we have a net cash position with very little debt maturing in the next 4 years. This puts us in a strong position and as we step up our investment in new aircraft. Significant funds from operations, along with access to deeply liquid and cost-effective funding, plus actions we have taken in FY '17 and FY '18 to improve our working capital position results in us being able to maintain our investment-grade ratings for FY '17 and into FY '18 and beyond despite this planned step-up in new aircraft investment. This leaves balance sheet strength and flexibility to consider strategic options, including participation in potential M&A activity as the sector in Europe begins to consolidate.
We have a pipeline of initiatives designed to reduce fuel burn and collaborate extensively with our suppliers to achieve ongoing cost efficiencies. We have significantly reduced our requirement to tanker fuel by aligning fuel logistics costs around the airports where possible, all supported by increased capability in data analysis and automation. As mentioned earlier, fuel hedging continues to form a key part of our strategy to support the strength of the balance sheet by reducing cash flow volatility caused by commodity price and foreign exchange rate movements.
As a reminder, our policy is to hedge our commodity and FX exposures using simple forward contracts on a rolling 24-month basis. We semi-actively hedge between 65% and 85% of forecast year 1 exposures and 45% to 65% of forecast year 2 exposures with the CFO approving any discretionary hedges.
We have recently enhanced the decision-making progress for the discretionary element of our hedging programs by referencing a basket of market indicators to assist in the decision-making. The strength of our balance sheet and investment-grade credit rating allow us to hedge longer and to a higher level than most of our competitors, and we've achieved greater cash flow certainty for FY '18 and FY '19 as a result in these volatile markets.
I'll now hand back to Andrew to summarize.
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Andrew Findlay, easyJet plc - CFO & Executive Director [7]
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Thanks, Mike. So to sum up, whilst 40% of our nonfuel cost is regulated, this represents some short-term challenge and something we can address over the medium term. EasyJet lean is working. FY '17 CPS, cost per seat, excluding fuel, at constant currency is expected to be less than in FY '15. We have significant opportunities to leverage our scale, growth and supplier relationships. Not the least, our fleet up-gauging over the coming years provides a foundation for this cost per seat opportunity and provides a distinct competitive advantage. We have been consistent in that despite the pressure of increased EU261 claim rights, we are committed to deliver the FY '19 versus FY '15 flat cost per seat at constant currency at normal levels of disruption. And today, we have shown you the way in which we will achieve that. After the coffee break, you will also learn more from Chris Browne how we address, in particular, the disruption cost challenge. Finally, all this is underpinned by continued balance sheet strength, which remains industry leading and continues to support our growth plans.
So with that, I'll invite Q&A, if you want to join me at the front.
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Questions and Answers
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Mark A. Simpson, Goodbody Stockbrokers, Research Division - Analyst [1]
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It's Mark Simpson with Goodbody. Just want to pick up, both the commentary on Slide 44 and your summary on 58. Explicitly, you're saying that actually ex fuel cost per seat, constant currency will actually rise over the next 2 years despite all the things that you're actually attempting to put in place. Can you just explain where you think that inflation will come from in that 2-year period?
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Andrew Findlay, easyJet plc - CFO & Executive Director [2]
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So we've been very clear on our guidance when we gave that guidance back in 2015 that FY '19 will be in line with FY '15 on a constant currency basis. We were very clear at the time that will be a bumpy ride to get there as we invest in various things and as we save cost in various things. I think where we expect to land in FY '15 were actually lower in FY '17. We're actually low than where we were in FY '15. We saw a reduction in '16. We'll see a margin increase in '17, which is wholly in line with our expectation. And for the following 2 years, we'll -- we're very clear on achieving that guidance. We've stated back in FY '15 on being flat in FY '19. I mean, it's fair to say we've been very clear on what those inflationary pressures are. As you've seen, we've got disruption. We've got crew inflation. We've got regulatory increases. But despite all that, I think the team and the business have done a great job at maintaining that cost guidance and delivering on the lean initiatives that we've seen today.
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Johannes Braun, MainFirst Bank AG, Research Division - Director [3]
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Johannes Braun from MainFirst. Two for me. Firstly, on the airports, on the regulated airports specifically, you mentioned that you also want to tackle the cost base of regulated airports. Now one reason why costs at regulated airports are so high is, I guess, the dual till system. And my question would be if there is any initiatives also maybe in -- within airlines for Europe to change that system back to a single till system in the medium to long term. Obviously, that's not an issue for the short term. And the second question on staffing on crew costs. Obviously, your main competitor has some staffing issues currently. And one reason they mentioned why there is some, yes, difficulty to retain pilots is that Norwegian is offering them long-haul jobs in Dublin specifically. Now with Gatwick and Paris also having Norwegian operations on the long haul, I was wondering if this is an issue for you as well.
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Andrew Findlay, easyJet plc - CFO & Executive Director [4]
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I'll give the first question to Simon. Let me answer the second question. Firstly, they aren't our main competitor. Let's be clear on that. They happen to be a competitor that's in a low-cost environment. They're not on primary airport routes that we are, and the overlap is relatively small. With respect to our crew and our captains, I think -- so yes, we want to pass it to Chris. Chris can talk to it. This is Chris Browne, everybody, our COO.
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Chris Browne, easyJet plc - COO [5]
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Hi, everyone. Absolutely not an issue at all. In fact, next summer, we need a total of 450 pilots. And since -- ever since we opened the recruitment process on the 1st of June this year, we've had 2,200 applications. And actually, it's not just about -- as you know, at easyJet, it's not just about quantity of people that are applying to join us but indeed the quality, and I can say that it is fantastic quality. Not an issue at all for us at easyJet.
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Andrew Findlay, easyJet plc - CFO & Executive Director [6]
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Great. Thanks. Simon, do you want to take...
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Simon Cox, [7]
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Yes, sure. So yes, there is a specific initiative. We know that the -- in all probability will be new charges are active, so airlines for Europe will lead on that with our regular crew team. Of course, as a point of disagreement, single till, dual till, and it's difficult to believe there'll ever be a fundamental agreement. But what I would say in conversations with airports, they absolutely recognize the value of our customers. So I'll give you a small example, they would want to get great car parking revenues, and they understand the power of easyJet.com. So they would love to be selling their products on our website. So there is a commercial relationship that we're having, and there is a commercial alignment outside of the regulatory framework, which, frankly, we're not always going to agree with them on, but there are other ways where we can lower our cost in regulated airports. And I think they are understanding that they must build cost efficiently, and we have a way to add value. And that should be rewarded in lower cost for us.
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Andrew Findlay, easyJet plc - CFO & Executive Director [8]
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Go on, Damian.
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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [9]
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Damian Brewer, RBC. Just one question, the ambition of the flat cost per seat. You operate in an industry where, in the very long term, revenue per seat comes down. Why is a flat cost per seat an ambition enough?
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Andrew Findlay, easyJet plc - CFO & Executive Director [10]
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I think when we put the target out of -- in FY '15, we knew exactly what inflationary pressures we were. We knew exactly what the investments we needed to make. We believe that we've got everything in line not to deliver on that flat cost per seat. I think it's working. I think we would love to deliver more, and we will absolutely strive to deliver more, but we've got to balance that with the customer service proposition that we believe is important for this business as you've seen all the things that Peter talked about around customer proposition and customer service. And I think it's very easy to strip out cost from a business and damage it in the -- or take cost out in the short term and damage it for the long term. There is a fine balance between the lean initiatives that we're undertaking. And all the work that Paul and the team are doing are keeping that absolutely in mind, making sure that we do the right thing for this business for the longer term with the one eye on the fact that we believe that customer proposition is absolutely key to the success of easyJet for the long term.
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Unidentified Participant, [11]
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You gave the IFRS cap multiple of 3x, which I don't think you've ever given before, so just a couple of questions around that. One, does that make you rethink kind of the split between leases and owned? And two, what does that mean for the management incentive program when you look at return on invested capital?
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Andrew Findlay, easyJet plc - CFO & Executive Director [12]
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All right. So I'll start and I'll pass it. So the -- I'll go backwards. That's something for the board to decide upon. And at this point in time, the IFRS accounting changes will be reflected as -- effectively, we're neutral impact on that from an incentive perspective. I think the 3x, you'd probably be able to work it out. So we give enough disclosure on our accounts if you wanted to do a discounted cash flow based on the operating lease note. You can work that through. I think from a point of view of what decision that changes, accounting doesn't change the commerciality of the underlying business. That's one thing. And I think the way that Moody's and S&P look at it are very different. They take that into consideration as well, but I think it's worth noting. And as Mike very clearly stated, it's worth noting that although we talk about roughly at 7x, that is a very prudent way of looking at our business. But fundamentally won't change our decision-making. So I don't know, Mike...
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Mike Hirst, [13]
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I think just to add to that, I think the other points are we're just pointing out here that we don't have as many operating leases as others because of how we actually use them. They're shorter in duration. And, therefore, when you're thinking about the off-balance sheet arrangements that the entire sector has, the impact of IFRS 16, in particular, on us is not as pronounced as others. And I think that's quite an important point that we actually want to get across today.
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Unidentified Participant, [14]
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So 30-70 mix is still there or thereabout?
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Andrew Findlay, easyJet plc - CFO & Executive Director [15]
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So as Mike said in the presentation, we are certainly heading towards an 80%, but that isn't a target we're -- that we're -- we look at the economic underlier of that. That's not a specific target we're looking towards. Because fundamentally, a number of aircraft is kind of irrelevant in a way. It's the value of that aircraft that underpins that number of aircraft. And the majority of the operated leased aircraft to lower value is the 319s. So actually, this 70% in value is much higher, but that number is just an indicator of where we're heading towards. So actually, we're looking towards more owned aircraft than we are leased. Neil?
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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [16]
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Neil Glynn from Crédit Suisse. If I could ask 2. First one on ground handling. You've mentioned price pressures with less competition in the market. And obviously, there's been quality issues on the ground handling site, too. Is there a growing argument for taking some more ground handling in-house, for example, here at your largest base? And then the second question, there was a mention of trying to carry less cash on the balance sheet. Would I be correct in thinking any reduced cash requirement would be used to pay down debt and reduce financing cost track?
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Andrew Findlay, easyJet plc - CFO & Executive Director [17]
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So the ground handling, please.
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Andrew Hodges, [18]
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Okay, sure. So I think whether you consider going in-house or third party, I don't recall -- the question is what their level of capability is. And clearly, we're going to explain the advantages of the move to DHL later on in the day. So I think it's -- we think those capabilities exist outside of our organization, allows us to focus more on our core capabilities of running the airline and our crew, et cetera. So that's the path we've chosen to go down. By bringing in a new entrant, we're sort of acknowledging the fundamental issues in that marketplace, and at the same time, trying to disrupt and up their overall quality in the handling market.
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Andrew Findlay, easyJet plc - CFO & Executive Director [19]
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I think it's fair to say that -- I don't want to take Chris' thunder. But with DHL coming in, you've got to recognize that they have a phenomenal expertise in managing both people and process and putting technology overlay onto that and absolutely lends itself -- sorry, Chris. But it absolutely lends itself to the market we look at. Now for us to invest in that, you wouldn't get the efficiencies of scale that they can bring. And clearly, our strength is around flying aircraft and driving revenue through the digital platform. So Mike, do you want to talk about...
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Mike Hirst, [20]
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Yes. I mean, just on the liquidity buffer. We've really done a lot of work on the GBP 2.6 million by 100 seats. So I think the first thing to say there's no intention to actually move away from that. The size of the liquidity buffer is the size of the liquidity buffer, but it doesn't necessarily have to be supported by all cash. So for example, we support it via the revolving credit facility that I mentioned. We're looking at alternatives to be able to support it further, not using cash. As you can imagine, the cost of carry of holding a significant amount of cash on the balance sheet is significant, and therefore, if we can find alternatives to pull it down a little bit, not so much to sort of like to repay our current debt that's outstanding. Because if you look from the debt maturity profile, there's virtually nothing due until FY '23, '24, when our big Euro Medium Term Note Programme bonds come up. I think it's more to potentially delay the next timing to market for a big capital raising, which, obviously, presents itself with significant cost savings on the interest line.
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Andrew Findlay, easyJet plc - CFO & Executive Director [21]
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Okay. Gerald?
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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [22]
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Gerald Khoo from Liberum. Two questions. Firstly, you talked a lot about how you segment your cost base. What percentage of your airports are you paying (inaudible) rate, i.e. the full public tariff versus some sort of negotiated discount? And secondly, with regard to the medium-term cost per seat module cost per seat target, what's the relative importance of lean versus up-gauging in achieving that 2019 target?
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Andrew Findlay, easyJet plc - CFO & Executive Director [23]
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(inaudible) we want to disclose that. Do we?
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Andrew Hodges, [24]
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No. What I would say is make significant progress even in those airports where we may be paying tariff to change the structural charges, so they benefit towards our model. So for example, in Amsterdam, there's a significant structural advantage in using the H-pier, which is highly efficient and lower cost. And airports are changing their approach to incentivizing growth. So even in those airports that traditionally we would have seen as tariff highly regulated, we're still able to get the financial benefit. And we are increasing the number of airports where we have a genuinely bilateral deal. And I'll move on to the up-gauging point. The up-gauging is clearly very important to us. We've given some really clear guidance around the advantage that it gives to the different aircraft gauge. We are slowly moving that, and you start to see that come through in the cost per seat guidance, but it's all very much baked in. You can't look at this just as one mechanism because they all support each other. I think we have delivered GBP 250 million of those cost savings. And it's worth noting those cost savings we've got, of which up-gauging is a part of that, they are sustainable cost savings. We're not just doing one-offs within there. So all of that is baked in to allow us to deliver that flat cost per seat.
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Andrew Findlay, easyJet plc - CFO & Executive Director [25]
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And I think it's fair to say in the guidance horizon that we've given, a lot of the up-gauge comes out beyond that because, obviously, the 321s come in late next year, and they move into the following year. So we haven't given guidance beyond that, so we'll give color around that in due course. But yes, effectively, we're seeing some up-gauging benefit now, but a lot of that will through as the 321s start building up in the portfolio and as we start reducing our A319 mix as we exit those. We've got a number of exits, which we'll talk about later today. James?
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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [26]
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It's James Hollins from Exane. Just 2 on disruption. A lot of talk on EU261 costs across the industry. I was wondering if you could perhaps give us an indication of what percentage of your total cost that might be and how they're moving year-on-year, whether it's massive, small or sort of in line with growth. And the second one, again, you guys historically and sensibly have talked about resilience and additional costs going into the business for that. Is it working? How's the performance here at Gatwick? And do we expect those costs to actually continue to go into the business in '18 to make this even more resilient?
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Andrew Findlay, easyJet plc - CFO & Executive Director [27]
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Okay. I'll talk about disruption. We haven't disclosed the exact figure around disruption, but it's fair to say that if -- I think it is going up as a result of the claim rates, which we just -- we talked about in the presentation. So to give a feel, that's between FY '17 and FY '15. We would see -- effectively, our cost per seat would actually be down 1% to 2% if disruption -- if the increase in disruption was stripped out. So you can see the significance of it and why it's so important for the economics of this business. And I think the industry, as a whole, are realizing that disruption is a key driver in some of the decision-making we make around some of the investment decisions we make, particularly around where we put our aircraft, how we fly our rosters and then how we fly our schedule. And to that point, Chris will talk more about that in the presentation following. I think with respect to the resilience piece, again, Chris will talk to that in the next. So hold your question, and we'll come back to it at the end of Chris' presentation. Is that okay?
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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [28]
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So it's great. Just on that -- the cost per seat, down 1% to 2%, if it wasn't for disruption. Is that GST EU261 cost? Or are you talking about other delays in logistic cost?
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Andrew Findlay, easyJet plc - CFO & Executive Director [29]
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As I said, it's just the cost. It's the cost, the EU261 plus the welfare associated with the delay, so it doesn't include other aspects of it. As you can see, it is a significant driver of decision-making in the organization as the industry as a whole. Penny?
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Penelope Jane Butcher, Morgan Stanley, Research Division - MD [30]
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Penny Butcher from Morgan Stanley. Just to come back on the crew point, and I appreciate you gave an earlier answer about the pipeline of recruitment. Specifically in the U.K., though, is it correct -- are you due next year to update your agreements with BALPA and Unite from the last agreement? And I mean, in the context of certainly rising CPI, RPI in the U.K., can you talk a bit about how you plan around that?
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Andrew Findlay, easyJet plc - CFO & Executive Director [31]
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Yes. So...
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Chris Browne, easyJet plc - COO [32]
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I mean -- sorry. Absolutely not. Actually, we spend a lot -- an awful of time this year putting in longer-term deals with a lot of our unions actually, and I think that just goes to the testament of the relationship that exists between easyJet as a company and its workforces. So the last year, we signed multiple 3-year deals, which, actually -- well, I think it speaks for itself because we just want to focus on doing what's right for the business and bringing in the multiple improvements that I know that we can bring, both in terms of how we look after our customers, and indeed, our crew. So...
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Penelope Jane Butcher, Morgan Stanley, Research Division - MD [33]
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Is it fair to say, though, the rates have to go up...
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Chris Browne, easyJet plc - COO [34]
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Oh, yes, yes. I mean, it's not -- it's all related to -- in terms of our RPI or CPI, in some cases. But more importantly then, it's always been a bit of a -- not necessarily -- yes, but a negotiation in terms of what that cost actually means in terms of what productivity we can then drive. There are multiple layers of agreements in these negotiations in -- sorry, multiple levels of agreements in every deal that we've done to try and get -- make sure that it's a win-win, both for our crew and, indeed, for the organization. And I would say, actually, I know we've talked a lot about disruption, but I have to say, when we have seen disruption, the commitment from our crew to get our aircraft and our customers around the track has been truly outstanding. Even when you get [full] here at Gatwick or -- you don't need me to tell you the multiple issues that we faced as an organization. Bring it. Just bring it.
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Penelope Jane Butcher, Morgan Stanley, Research Division - MD [35]
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Okay. Great.
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Chris Browne, easyJet plc - COO [36]
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Thank you.
==============================
Presentation
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Andrew Findlay, easyJet plc - CFO & Executive Director [1]
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Right. So whilst Chris is up there, we're just going to -- so we only just finished lunch, so we're going to skip the next coffee break. Hopefully, that means that those of you who are getting away quite quickly after this can do that. So we're going to crack on straight away, I hope you don't mind, with the ops presentation.
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Chris Browne, easyJet plc - COO [2]
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Thanks. You sprung that one on me (inaudible). Good afternoon again, everyone. In this section of the day, my team and I will be highlighting the many initiatives we have taken as a team that helped EasyJet fly to and from very high-demand, slot-constrained primary airports.
We really are unlike any other airline in Europe, delivering a service that makes travel easy and affordable to our customers. I will begin with an overview of our operation, taking into account the growth we have undertaken over the past 10 years. I will also cover the very strong position we find ourselves in and the initiatives we have launched to deliver this, a summary of the ever-changing operating environment in Europe and the steps we were taking to avoid customer disruption, and finally, run through our fleet up-gauging program that my team have delivered with minimal fuss, which, considering the size and complexity of the job, only proves the quality that makes up the easyJet operations team, who, indeed, have made me feel incredibly welcome since I've joined.
To give you some context as to the scale of our operation, easyJet has grown from a 2 aircraft, 3 airport operation to having the premier network in European aviation. We truly are a Pan-European airline, flying around 80 million customers to and from primary airports at very affordable fares. Now to make this widespread operation work, we employ over 10,000 crew in 28 operating bases around Europe. We fly 874 routes to over 130 airports. We also have maintenance deals in place at 27 different locations. We fly around 1,700 flights a day in the summer and sometimes more, and that's roughly 1 every 40 seconds. And all of this is seen -- overseeing 24 hours a day from our operations control center at London Luton Airport. And actually, this is a very good time to remind you of the fact that at easyJet, the safety and security of our customers is our #1 priority, and it will never be compromised.
Our continued delivery of operational improvement initiatives has been producing results and driving an efficient operation for many years now. As Andy told you earlier, having #1 positions in primary airports and flying 2 slot-constrained airports delivers the returns that our business model is based upon. Our operation, unlike any other, works efficiently in these environments, and that is driven by the constant delivery of initiatives such as Auto Bag Drop facilities. Here at London Gatwick, we have the biggest Auto Bag Drop facility in the world, which sees over 90% of our customers pass through bag drop in just under 5 minutes. With further rollouts planned, we expect 72% of easyJet customers to be using Auto Bag Drop across our network by the end of 2018, a market-leading app to ease our customers' journey through the airport by providing up-to-minute information such as gate numbers, bag pickup locations, flight tracking and the ability to self-manage in disruption.
Our fleet up-gauging program, which has recently seen the first delivery of our 320neo, delivering cost per seat savings and lower fares to our customers, as well as our airports-of-the-future initiative, highlighted by the work here in the North Terminal at London Gatwick that you'll get to experience later today.
Now as you know, it's been a pretty tough period operationally for our industry. Primary airport congestion has risen dramatically over the last 2 years. European short-haul capacity has increased by 100 million seats, and London traffic has increased by 15 million seats, clearly putting pressure on the infrastructure. London Gatwick itself has moved from 5 days with over 900 movements in 2014 to 57 days in 2016, and delays due to London airport congestion tripled from 2015 to 2016.
Additionally, airlines have had to deal with multiple ATC strikes across Europe that have disproportionately affected us at easyJet because of the number that occurred in France alone and the fact that 2/3 of our flying program flies over French airspace. As you know, we proactively take steps to counteract these external factors. Avoiding customer disruption involves a combination of preventing the problem before it happens as well as minimizing the impact on the customer when an instant does occur, whether that be ATC delays, inclement weather, strikes, or indeed, technical issues.
As highlighted through this year, we prioritized investing in schedule and crew resilience to deliver an even more efficient flying program after a very tough 2016 summer period. As an example, the schedule, or schedule, rather, is built up from individual building blocks. We call these operational parameters. They define such things as flight times, turnaround times, fire breaks, aircraft maintenance, downtimes, catering and cleaning to name but a few. And these are defined by route, destination, maintenance base, time of day and many other factors. We have rigorously reviewed the accuracy and suitability of all of these parameters in the light of the operating environment to ensure that they reflect what we can actually deliver.
In addition, we are developing new systems to further enhance our schedule design, deliver on-time performance simulation and better manage our huge slot portfolio. This approach to sustainable forward planning and resilience will reduce disruption and improve customer satisfaction as well as help with our union agreements and greater crew stability. Our aim is to offset, over time, any costs associated with this work through reduced disruption costs and savings from our lean program.
Initiative delivered so far this year include leasing 2 rapid response aircraft, which deliver engineers and parts wherever they are needed, allowing us to get tech aircraft back working as quickly as possible. Combined, these aircraft saved around GBP 3 million in quarter 3 disruption costs this year. Other initiatives we continued to invest and include predictive maintenance, which has begun to reduce parts failures and increase reliability with 20 confirmed successful removals so far; optimized spare parts positioning and additional spare parts inventory, optimizing crew standby levels at all times and focusing on delivering a solid first wave performance every day; and of course, what Chris Hope will be taking you through later in this presentation, Gatwick North Terminal consolidation and DHL ground handling. I am pleased to say that our program is working. The number of cancellations and delays over 3 hours has been the lowest for the past 3 years when normalized to take into account increased volume.
Now one of my team's key objectives is delivering the fleet up-gauging program. Being able to consistently deliver on fleet changes is a key enabler for our fleet strategy and demonstrates how the operations team supports the airline, in addition to delivering a very busy flying program.
In terms of new aircraft, we have delivered our new A320 186-seat aircraft on time in May last year, delivered our A320 186-seats retrofit on time and more of this in a minute, delivered our A320neos on time in June this year with an excellent entry into service, flying a normal program from its very first day. And we're already working very hard to deliver the first A321s into our fleet next July.
Now regarding the A319 redelivery progress, we have had a perfect record since 2013 and plan to continue this into the future. Our A319 exit strategy depends on efficient, on-time return of our aircraft at the end of their lease. Our ability to enter and exit such a large volume of aircraft allows us greater flexibility and gives us leverage with lessors. Our track record of returning well-maintained aircraft quite frankly speaks for itself. We always deliver a great product, which is in really high demand. The ability to deliver fleet changes consistently on time also means we minimize costs and avoid punitive late delivery payments. Our A319 aircraft are now in service with a number of other noncompeting airlines worldwide who are building their fleets with easyJet's spec aircraft, and this helps maintain a strong demand.
As I mentioned earlier, I'd like to give you a little more insight into the work that goes on behind the scenes and talk to you about the 186-seat conversion. We took on a significant program and delivered this on time and below budget, converting 49 aircraft in a 5-month period. As you can imagine, this involved extensive planning; setting up a logistics warehousing hub in Germany; moving parts from the USA, Europe and the Far East; placing project teams in 4 locations across Europe; modifying our seating and IT systems; and training all our crews. These aircraft are now flying alongside our new deliveries, and we have over 80 186 aircraft flying today, which gives us over 900,000 additional seats per annum with no significant cost increase.
Our fleet-focused, up-gauging and cost-saving plan has been the part of the business for many years now and is something that our team are very proud of. It started way back in 2003 when we took on the Airbus A319 and has developed over the past 14 years with additions such as Sharklets, lightweight seats, the extra 6 seats on the A320 CEOs, the LEAP engine on the neo and will take us to 2018 when we receive our very first A320neo. This demonstrates that we've been able to successfully take advantage of the latest technology whilst maintaining our operating model. In fact, I believe the opportunity now exists to further exploit the many digital initiatives available to further improve our operation, improve our customer service and reduce our costs.
I would now like to hand over to Gary, Gary Smith, who is easyJet's Head of Engineering, who will take you through the very exciting digital program in operations at easyJet.
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Gary Smith, [3]
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Good afternoon, everyone. In this section of the presentation, I'm going to introduce you to what I think is an exciting set of current activities and future opportunities that can truly transform our operation.
As Head of Engineering, my team are at the center of enabling the aircraft to be part of the digital operation, and the technology now becoming available puts us on the verge of being able to do some very powerful things.
Firstly, we've identified 6 main areas where we can apply digital technology. We've already rolled out devices to crews as a trial, and I'll talk more about this in a minute, and we've deployed electronic flight bags to our aircraft for some time. These 6 areas will allow us to form a digital ecosystem around the aircraft and throughout the operation, and the true benefits are realized when we start to integrate the data flows between these 6 areas.
I think it's important to show you what we believe are 6 of the key reasons for enabling the digital operation. I'd love to select 2 of these to expand a little. As we grow, we believe that we can scale up our operation but use technology to allow us to do this without adding equivalent cost. As an example, today, every aircraft has a paper tech log, a book where we hand record defects and -- with the aircraft and the action taken to close those defects. These are then scanned and added manually into our main engineering system and also manually verified. Every aircraft we add into our fleet, therefore, adds workload into the organization. Using an eTechlog, the engineer and pilot on board can electronically enter details of defects directly into our systems, and there's no further manual input required.
As a second example, using digital, we can create what we call a single version of the truth. What we mean by this is that we will be able to record electronically every event on and around the aircraft and operation each and every sector and day and basically allow us to replay a day's operation. By doing this, we can track what went well. And more importantly, when we do have delays, we will know exactly when this happened and why without any manual recording or debate. This will allow us to follow up and modify our procedures and our parameters much more quickly and accurately.
To talk about the Palma iPad trial, we started a very interesting initiative in March this year when we opened our first seasonal base in Palma de Majorca. The concept of iPads has been very successful and has been greatly facilitated by pilots and cabin managers adopting these devices. The iPads provide 3 key benefits. Firstly, they offer the ability to open up aseasonally with a much reduced fixed infrastructure and with a greater speed. The need for traditional crew rooms is minimized as the iPads allow crew to complete their preflight briefing digitally and more efficiently. Secondly, the iPads allow our crew to report directly to the aircraft, giving them the ability to manage their preflight time much more effectively and to minimize their journey time. We also have -- we've also seen a significant improvement in green light boarding, and this resulted in an improvement in on-time performance at first wave. Finally, the iPads allow our crew to communicate more efficiently. And with a suite of electronic forms being deployed onto the iPads, this allows crew to work paper-free throughout the flights, reducing lost time and increasing accuracy. The trial has been a great success, and the approach taken during the trial was to trial and learn. And given this success, we are going to deploy the iPads across other bases with Southend being the next location.
Central to the success of the digital operation is the ability to place the aircraft at the center of this capability. Until now, the technology to do this has not been available. This is changing quickly, and I wanted to give you all a quick overview of how this would work. When the aircraft is certified, you've all seen the photos of the interior of a cabin being full of test equipment. This is collecting data from all the aircraft systems. We are already operating data today -- aircraft today with prototype equipment that then collects all this data from the aircraft's nervous system and transmits this to the ground. This is central to the concept of predictive maintenance. We've been collaborating with Airbus in trialing this pioneering technology via the Skywise platform. EasyJet engineers are working closely with Airbus engineers and data specialists, and we have already successfully deployed algorithms that have avoided operational interruption. The ground-based data hub can then provide advanced analytics and feed data into our safety systems, our ground operations systems, and of course, our engineering systems. This equipment allows collection and transmission of 60x more aircraft parameters and over 200x more data per sector. We can then use the same system to provide copper-only WiFi to connect to the electronic flight bag and electronic tech log. Here, we see opportunities for optimizing fuel burn and avoiding disruption using weather and wind data. Finally, we can connect the cabin, providing a seamless end-to-end journey experience to the customer and allow the crew to work on board as they work on the ground. As an example of this, we've announced that we'll be trialing our new airstream system from late this year, which will allow our customers to get access to digital content on board.
In the future, whilst this capability is deliverable with ground connectivity only, the technology is also available to connect the aircraft up live during the flight using digital satellite technology for safety and operational data and air-to-ground technology for customer connectivity. We are watching developments in this area very closely. This demonstrates that connecting the aircraft is central to the digital operation and what we are now able to do with this -- with the technology becoming available. We are very excited about what we can do with this technology in the future.
On that note, I'll now hand over to Chris Hope, easyJet's Head of Gatwick. He will take you through the transformation of our Gatwick operation in more detail prior to your North Terminal customer experience later today.
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Chris Hope, [4]
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Right. Good afternoon, everyone. In the final part of this presentation, I want to take you through our Gatwick operation. We need to give you a feel for the size of the operation that we manage day to day as well as the hard work that's gone into delivering the airport of the future concept and a consolidated operation in North Terminal.
Gatwick, as an airport, carries over 44 million passengers per year, and easyJet is the clear #1. Based on passengers carried, we have 42% of the capacity, the next biggest carriers being British Airways and Norwegian on 14% and 9% capacity, respectively. Crucially, we have 57% of the early morning departure slots. As an example, this morning, we departed 66 aircraft before 9:00 in the morning, whereas all the other airlines, together, departed 50.
Gatwick's single runway is the busiest in the world. During the summer, it operates over 900 movements per day, and that's 50% more than each of the runways at London Heathrow. We're also located in the busiest airspace in the world.
The cooperation with Gatwick Airport is helping us deliver our airport of the future, and it's helping us make travel easier and more affordable for our customers. That's included the North Terminal consolidation, which was a 3-year program to develop the North Terminal and facilitate the airline moves. The smooth transition in January this year has now made travel much simpler for easyJet customers. Our contract with the airport ensures we have the most competitive cost base at the airport. And on future expansion, we're working with Gatwick Airport on plans for additional pay capacity to support our future growth, deliver resilience and to be designed in a way that supports our low-cost operating model.
Working collaboratively with the airport and investing in our schedule has provided greater resilience and improved our performance. Throughout summer 2017, our on-time performance has been improved every month versus last year, including the peak month of July, where on-time performance was up 7 percentage points.
The schedule resilience has provided greater recovery, contributing to a 13% reduction in delays due to late running aircraft, and our overall delay time is reduced. Despite the continued challenges with ATC strikes, on-route ATC delays and weather, less than 1% of our customers have been subject to cancellation or delays of more than 3 hours. We know we still have work to do to continue to drive better performance for our customers, but I believe we perform well compared to our competitors here.
For the last 3 years, we've been working with Gatwick to create our airport of the future, and we're now really seeing the benefits of it in North Terminal. Our mobile host has provided useful information on departure gates and baggage belts to over 5.5 million customers, and the introduction of Auto Bag Drop has transformed the experience for easyJet customers. Previously, with our manual bag drop desks in the summer, typically, wait time would average 20 minutes with a typical maximum time of 40 minutes. With our new Auto Bag Drop facility, over 90% of our customers will wait less than 5 minutes and no one should wait more than 10 minutes. And our customers love it. In the first summer of operation, our customer satisfaction for bag drop wait time increased by 22 percentage points year-on-year.
The upgraded security in North Terminal to Gen II security has also reduced waiting times. Prior to introduction, the system in North Terminal could process 170 passengers per lane per hour, which is similar to Terminal 5 at Heathrow. The new security facility has been processing over 600 passengers per lane per hour. That's noticeably reduced the waiting times, and that's also reflected in our customer satisfaction scores for security, which are up 11 percentage points, thanks to the new facility.
We've also constructed our easyJet hanger with a new maintenance provider, and you have opportunity to see more of that later. And we've established our easyJet training academy, which is where we are right now. Not only does the academy provide extra training capacity to support our growth, it also eradicates the need for travel for our 2,500 crew based at Gatwick. And Gatwick has better connections to many of our European bases had also reduces wasted travel time for the many of them, too. Since opening in October 2015, we've now trained over 10,000 crew in the academy.
The focal point for our airport of the future is the new bag drop facility, which you'll be able to see shortly. We set out a vision in 2014. The vision was to make travel easier for our customers by making the journey through the airport simple and easy to follow and by cutting out queues to enable them to reach the departure lounge as quickly as possible. To assist with the design, we brought an expert with experience of managing flows through public buildings. The concept was to create space, make flows natural and create a feeling of relative calm. We introduced a digital signage, which, along with the use of color and lighting, helps to make wayfinding intuitive. It also provides flexibility to change the layout and the use of the area from hour to hour.
As you can see, prior to development, the area wasn't attractive and wasn't well utilized. The area is now been transformed, and we're really pleased by how closely it reflects to our vision. The introduction of the video wall provides opportunity for infotainment for the short periods that customers are using the area, but it also allows us to share operational information in the event of disruption. You'll notice that one of the escalators has been reversed, so after a quick backdrop, the natural flow avoids crossing traffic and takes customers straight up to the new security entrance.
As Chris mentioned earlier, we've created the largest Auto Bag Drop in the world. Not only has it cut queue times by 75%, it reduced the number of people required to support the operation, gaining further efficiency. But the best part of it is the investment was provided by the airport as part of their capital program. A whole airport-of-the-future concept is based on the influencing planned airport development rather than requiring large-scale investment by the airline.
And so from the team, we really look forward to showing you the new facility shortly for those that want to join. In the meantime, I'll hand you back to Chris to conclude.
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Chris Browne, easyJet plc - COO [5]
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Thanks very much, Chris. We believe that our airport journey is now well ahead of all our competitors. However, we do not plan to stand still. The transformational changes we have made at Gatwick are being rolled out across our network, and we will continue to further -- to make further innovations to make the customer journey easier and more affordable.
As you heard earlier, we have also recently aligned a strategic partnership with DHL. DHL have a proven track record for bringing value into new markets by building on their logistical strengths and applying innovation to improve performance. The first focus for us is on a smooth transition in just 34 days' time, and I'm pleased to say that we are well on track. Over the next 2 to 3 years, we expect to see a step change in both performance and cost.
The next phase of the airport of the future program will focus on the boarding process, using facial recognition technology and e-gates to reduce queuing time, speed up boarding and improve the efficiency of our turnarounds. We will be commencing trials of this technology in Gatwick and Luton in 2018, and subject to those results, expect to have implemented this in 5 of our preferred airports within the next 3 years.
I do hope we have demonstrated our credentials as pioneers, continuing to innovate to deliver better service to our customers.
To conclude, I'd like to leave you with a very short video, which summarizes the concepts we are developing in collaboration with Gatwick Airport and gives a flavor of what travel will look like with easyJet in the not-too-distant future.
(presentation)
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Chris Browne, easyJet plc - COO [6]
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Thanks very much for listening.
==============================
Questions and Answers
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Chris Hope, [1]
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Any questions?
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Chris Browne, easyJet plc - COO [2]
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Neil?
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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [3]
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Just one quick one. Clearly, the business is becoming more and more digital as, I guess, we'll see elsewhere in the industry. It obviously heightens the emphasis on cybersecurity, given recent events. Can you give us a little bit of detail in terms of how you plan for that and whether that incurs more costs, more headcount within the business to take care of it?
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Gary Smith, [4]
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All our systems that we deploy throughout the company have to go through a very sort of rigorous cybersecurity process, whether it be onboard or off-board. Obviously, to be -- from a technical perspective, to be -- to allow us to fit them on the aircraft, they have to be certified first. They have to go through extensive testing. And then in terms of -- we actually get to fit them on board, our information security team get heavily involved in looking at the cybersecurity aspects as well. So in terms of extra cost, I don't think it drives a lot of extra cost. That's just part of putting this equipment on board.
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Chris Hope, [5]
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(inaudible)
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Chris Browne, easyJet plc - COO [6]
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Do you want to come up here?
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Chris Hope, [7]
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Yes. I mean, alongside a big digital agenda, I mean, there's bigger -- been a bigger focus and a big investment on information security across easyJet for the last 3 years, so we have a number of teams back in the hangar, both dealing with -- are kind of certifying new initiatives and making sure they are fit for purpose when they roll out but also monitoring our ongoing. And when we roll things out digitally and making sure that we monitor constantly for any kind of infringements. So the size of that team has grown significantly by many times over the last 3 years, and there's an ongoing technology investment that goes alongside all the things that you've heard today to make sure that what we're doing is safe and secure.
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Chris Browne, easyJet plc - COO [8]
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Thanks, Chris. Andrew? Sorry.
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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [9]
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Damian Brewer, RBC. Just a question about the [ultimate], which is in the start of this, your frontline and your passengers, customers who travel with you. Clearly, you already score quite well on the external scores like Skytrax and Glassdoor for your staff. When you put these measures in, in particular airports like here at Gatwick or particularly crew bases, do you see any impact on sort of the correlation that has, either with customer net promoter or repeat travel scores or indeed the way your staff feedback to you about the way they think about the airline?
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Chris Browne, easyJet plc - COO [10]
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Yes. I mean, I can't take credit for this because, obviously, Carolyn has been planning to hear this for the last 7 years. But I would say -- and Chris, I'll hand over to Chris in a minute. There was a bit of dissatisfaction here at Gatwick before we moved into the North Terminal. The crew in here is almost like a village in its own right. And I think if you were ever to be here at, say, first wave, 4:30, 5 in the morning, it's a buzz. It's unbelievable. And everyone is just so grateful for the fact that, combined with Gatwick, we invested what we did in the North Terminal here. And I think that's replicated throughout the network in Europe. Milan's another big base for us, been there recently. And crew from all walks of life are actually very, very enthusiastic about easyJet, and in fact, what we can do in the future. So I think it's fair to say we've -- easyJet has always looked after its crew really, really well because I have a saying and that is the frontline is the bottom line when it comes to this particular business, and they can make all of the difference. And actually, as I've been a regular customer for easyJet for many years, many, many years, and I always, always find that like easyJet was like coming home to me. So I mean, I was -- sorry. I'm going to talk too much. One thing -- and the fact that you could actually chat with a crew and they're so engaged and so enthusiastic about the company, it's just -- well, to me, it's a big [USB] that we've got. Chris, was there anything about Gatwick or...
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Chris Hope, [11]
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Yes. I think at that part of the airport of the future, Gatwick, clearly, has been quite a big change for our crew as well. So we went from 2 terminals into 2 -- sorry, 2 crew rooms into 2 terminals into 1 crew room that could support a consolidated operation, and that was a great opportunity to look at how they work. It's the concept we've been working on with our crew over the last couple of years, and there's a couple of our crew managers that you'll get a chance to meet, those that do the tour, and talk to them about it is to really engage in our crew in the way we also engage with our customers, so really listening, understanding what's important to them. So internally, out of all the moves and the changes with the crew and the way they work, actually the big thing that's important to them in the move was car parking. So we managed to get a solution on car parking and made their life easier. So we're really have been focusing on listening to crew, what's important to them and really trying to make their life easy as we do with customers. And there's been a really palpable change in the kind of morale of the crew here and how engaged they are, and that certainly shows on board. And I think it's also a sense of pride in what we're doing as well. So I think to see we're doing stuff really makes a big difference to our crew, makes them feel really positive about easyJet.
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Chris Browne, easyJet plc - COO [12]
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Yes. We launched the iPad trial in Palma just to see how it would go down, because clearly, if we were to be able to combine reduced costs with improved engagement, both for customers and crew, it would be really, really positive. And we started by just using it for wave 1, so get those first wave aircraft away on time. And actually, as a result of it being so successful, our crew are now saying, "Can we do it for all of the waves throughout the day?" Now if you could think of that across the network, if we could -- if the business case stood up, then actual fact that would reduce the need that we have for very expensive, I would say, crew rooms at airport and actually speed the whole thing up, so investing in that digital technology. And actually trying to mimic to a certain extent the fantastic initiatives that have been taking place from Peter's team into the operational environment, I think, is very powerful.
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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [13]
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It's Andrew Lobbenberg from HSBC. I was going to ask what complexities do you get for managing different aircraft sizes? Because for a long time, easyJet was loyally looking for simplicity. But currently, you're on 3 aircraft sizes. And quite soon, you'll maybe be on 4, no? So how do you manage it from an operational perspective? How do you cope with the night boardings? And indeed commercially, how do you optimize that as well?
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Chris Browne, easyJet plc - COO [14]
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Yes. I mean, just suffice it to say, it is slightly more complex having the different aircraft types. That all goes back to making sure that we have the correct schedule in place so that the A319 is in the -- is on the last end through. It's right up to where we deployed 321s, which are coming in next summer. Having said that, it is still a single fleet type or a [crew] type rated. So from our point of view, it isn't an issue. But you're quite right. Where we need to be even more forensic is in the case if we ever have technical aircraft or downgrades, we have to be much smarter on how we manage that. So going forward, we're going to look at putting actually 320s into the standby program as opposed to the 319s. With a fleet of 300 aircraft, we do need to have the adequate level of standby to make sure that we can deliver our on-time performance and our proposition to our customer. So yes. In summary, it is a bit more complex, but it's not like operating different fleet types.
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Gerald Nicholas Khoo, Liberum Capital Limited, Research Division - Transport Analyst [15]
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Gerald Khoo from Liberum. Just listening to all the things that you've been doing in the terminal at Gatwick and also thinking, to a certain extent, about GatwickConnect. Obviously, Gatwick have been presumably very cooperative in this process given the fact that you are their largest customer. How scalable, how transferable are both the measures that you've described in the terminal and also GatwickConnect? Obviously, you would like to do them in other airports. But how easy is it to transfer that to airports, especially where you're not the #1 airline?
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Chris Browne, easyJet plc - COO [16]
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I'll hand over to Chris in a minute, but that's exactly what we plan to do. We won't name which airports, because clearly, it's a matter of negotiation. And I think Simon would shoot me if I were to name those. But clearly, we will look at the ones that are the most constrained, where we've got greatest customer improvements to make. And an actual fact, it has to be the future. But Chris, is there anything that you wanted to add to that?
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Chris Hope, [17]
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No. I think someone might say that more -- I think the good thing about Gatwick, they're very transferable. A lot of the focus on things like Auto Bag Drop was about the user interface. That's been a big part of it, really to make the transaction very simple and very quick. And then the other bit of learning that I think really stands out and if you look at other people using Auto Bag Drop, you'll see it's a real difference and affects queue time is actually how you manage the queue up to the machine. So we avoid queuing, but how you feed the machine is important. So that kind of process and interface is very transferable even on different kit and different airports, the ability to influence, say, some might say we'll view it to how we negotiate that.
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Andrew Hodges, [18]
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Well, what I would say is that what's not to like for the airport and what we're doing. It's low capital expenditure. It helps them spend more time in the shops. A lot of the airports have common ownership, and we'll learn from this. So Edinburgh is -- has the same ownership as Gatwick, so they'll be looking to deploy it. So I think there's a -- an alignment between what's in it for the airport and what's in it for easyJet. So absolutely say it's transferable and actually very desirable for other airports to copy.
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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [19]
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Damian Brewer, RBC again. Can I just ask one, just, practical question? You mentioned that you've sort of reduced your queuing time, what was it, 70%, 75% here. And I'm sure it's common experience for some people who've joined here today, we all passed British Airways check-in here and so then see and they've got bag drop and then a massive, snaking queue How much of what you're doing here in some technology or interface or the hardware is so unique or an easyJet, if you like, IP rather than industry IP. And, therefore, the structural advantage around is something that's (inaudible)
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Chris Hope, [20]
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So I think to the degree, what we've realized now, look at how people do it is not the technology itself that really makes a difference. It facilities the difference, but what really makes the difference so before is actually how we manage the queue to get people to machines quickly. And when we first started trying Auto Bag Drop, we spent a considerable time, and quite a controlled way, experimenting with different ways of managing the queue to build up the best way of doing it. And the second thing was the interface. That's our own intellectual property. The other thing that's really important, too, for many airlines is the high volume of people that already checked in online. So only about 3% of the customers that come here need to check in, so it's all based on a one-step process. And the 2 things in the airport you look at, I think, as you go through is British Airways, who, in South Terminal, you see as you walk through, have got twice the number of bag drop desks, including the Auto Bag Drop that we had when we were in the South, even though we had more passengers in the South than they have now, and we had lower queue time. And I think that's about how they managed the way that they feed people into the machines. They've not really changed the process, and then you've got other people like Norwegian who use a 2-step process. And I think what we've shown is one step is absolutely the way to go. So in answer to it, I think there is some intellectual property that's quite easy to retain. Some people will copy over time, but the bottom line is that's about us continuing to step ahead. So by then, in a couple years' time, Auto Bag Drop will be fairly normal for people. We'll be on to boarding, and we just keep ahead of the competition all the time.
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Chris Browne, easyJet plc - COO [21]
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Thank you. Thank you.
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Chris Hope, [22]
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Super. Thank you very much.
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Chris Browne, easyJet plc - COO [23]
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Thank you.
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Chris Hope, [24]
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Carolyn?
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Carolyn J. McCall, easyJet plc - CEO & Executive Director [25]
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Great. So you've seen it's an exciting time for both the industry and also for easyJet. It is, of course, not without its challenges. You will be aware that the short-term outlook continues to seek capacity growth over the winter, albeit at slightly reduced levels, which will likely see continued pressure on yields into full year '18. There are many moving parts right now between a dynamic competitor landscape, geopolitical forces, growing congestion, the arrival of new technology and the dislocation of some established legacy airlines in established markets.
Now easyJet, I hope you've seen and heard today, is very confident. It is positioned extremely well in this environment. It has a robust and sustainable business model, and much of the change in the market reinforces the airline's competitive strength. The reasons for this, as you've seen throughout the day, and I will just summarize now, is, one, our network strategy is crystal clear. We know that we get to #1 positions in a key airport or into a #2 position to a weaker legacy incumbent. And if we do that, and as you've seen, we do that really effectively, we can create an offer that provides, not only a better proposition for our customers, but certainly higher returns for our investors. We will continue to pursue this strategy with clarity and purpose, and we have a clear road map for the future and how to grow more of these positions in the next 5 years. You've seen our name mentioned in the recent round of consolidation. We will continue to look at these opportunities with the aim of building an even stronger network and long-term higher returns.
You've heard about our focus on cost. It is genuinely relentless, but it's most importantly now culturally embedded as a lean program, and it balances securing significant savings with delivering consistently and efficiently for our customers and crew. It sounds a lot easier than it actually is in a very live ecosystem, where there are a lot of external forces at play. And I do think that easyJet has got that balance right and has managed to do that quite well for the last 5 years, but it is a fine balance. Lean is a mindset. It goes beyond cost. It's how we work and how we innovate. It's not just operational. It's not just marketing and commercial. It's the IT. It's finance. It's the whole company, and we really need to keep that critical and sustainable balance going way into the future.
We are certainly innovating, as you've seen, to stay ahead. You saw across all the presentation from Peter's team, the new commercial platform, the new reservation platform; Andy's Jet Worldwide; Andrew's team's lean initiatives to Chris's team's use of iPads in Palma, our first seasonal base as you know, but actually increased satisfaction for our customers and for our crew, and that's kind of winning combination through innovation.
Engineering. We're reducing both fuel use and carbon emissions. You will have -- you will hear a bit later, for those of you that are staying, about our new joint venture partnership with a company called Wright Electric, and that is all about electric engine in 10 years' time. Gerald, I'm sure you were betting on that, too, in the future. All these go to show how easyJet is innovating end to end in our use of digital and new technology. It is creating a new way of travel, and this is all about generation easyJet, and generation easyJet is embracing it.
You've just seen the airport of the future video, which is very transferable, as Simon has just said. We are not living with a status quo. We continue to challenge ourselves to make things easier for our customers and our crew and to deliver operational excellence however challenging the environment is. We expect it to be challenging. We know about airport and airspace congestion and that will not go away for the next few years. I mean, there is no -- there are no plans, for instance, in London airspace for that to go away until something called LAMP is implemented. That is probably 5 or 6 years away. So we know this is what we have to live with, and therefore, we have to invest in the tools to be able to manage the disruption that is caused by that congestion extremely well and keep an eye constantly on EU261 and reducing those 3-hour delays.
And lastly, we are focused on our people. We don't just talk about it because it sounds good. We mean it. And actually, our people know that. I'm sure a lot of our people will be watching this video if they can sit through 6 hours of it, but they know we mean it. And our engagement scores are actually in the top quartile for airlines across the world. They are the ones who deliver day in and day out. They are the ones that go the extra mile when we need them to. They help our customers willingly, and they do that whether there is disruption or not.
So we've designed our business model, so we base our people where our aircraft are based. You know this already. We pay our taxes. We recognize social legislation in each market we operate in. You may well ask, "Well, what's the benefit of that?" The benefits are manifold. We have strong relationships with governments and regulators right across Europe. There is no way we would have been able to set up that EU AOC in Austria as quickly and as efficiently as we did with already aircraft registered there if we did not have those very strong links, those very strong relationships and if those governments and regulators did not trust us. We are in very good shape as we transition to the future AOC structure, which ensures our risks around Brexit are completely minimized.
As a result of all of this, we will continue to see significant customer growth over the next 5 years. Most importantly, our customers are really loyal. 75% of them return every year, and that is a hugely different number to 2010. It's something like 30% of an increase. Our model, combined with our people, is formidable. It is a winner, not just now, but absolutely a structural winner in the long term.
Thank you all for taking so much of your time to be here today. We really appreciate it. I hope you've enjoyed hearing what we all have been doing in more detail, and I hope, those of you staying, enjoy the tour of the North Terminal and also see some of the innovation a bit later on. So thank you all very much, indeed.
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