Brexit risks and mitigating actions, aviation market, freedom of movement, tax, ownership, currency, airline

Ryanair Holdings plc – Annual report – 31 March 2020

Industry: transport

Group CEO’s Report (extract)


The challenge of Brexit, and in particular the risk of a no-deal Brexit, remains worryingly high. The UK have now chosen to leave the European Union in December 2020. While we believe this is a regrettable decision, it is one we must now accept and implement. We hope that between now and the end of the year, the UK and Europe will agree an appropriate and sensible trade deal to cover air travel, which will allow the free movement of people, and allow the deregulated airline market between the UK and the EU to continue to flourish. The UK was one of the first EU countries to pioneer airline deregulation and competition in the mid 1980’s and it would be very damaging for the UK not to continue to be part of the European “open skies” market, which has so substantially benefited British jobs, British families, and thousands of British tourism related businesses.

As a Group of 4 EU airlines, we believe the Ryanair Group will be less effected by a no-deal Brexit than many UK registered airlines, but we still expect adverse trading consequences to arise from a no-deal Brexit. We have put in place the necessary legal measures both to restrict non-EU voting rights, and restrict non-EU share sales for a period of months (after a “no deal” Brexit) so we can ensure that Ryanair Holdings remains majority owned and controlled within the European Union, and we therefore expect all of our four AOC’s in Ireland, Poland, Austria and Malta to continue to operate freely.

RISK FACTORS (extract)

Risks Related to the Company (extract)

The continuing uncertainty associated with the Brexit process could adversely affect Ryanair’s business. The U.K.’s exit from the European Union on January 31, 2020 is likely to have a significant impact on the U.K. and the EU. In order to smooth the transition, the U.K. will remain subject to EU law during an implementation period, which is expected to end on December 31, 2020. According to the withdrawal agreement entered into between the EU and the U.K., this implementation period may be extended by a further two years, subject to political agreement. However, U.K. law currently prohibits the U.K. government from agreeing to an extension, and the U.K. government has confirmed its intention not to seek an extension, which significantly increased the risk of a “no-deal” or “hard” Brexit on December 31, 2020, whereby the U.K. would no longer be subject to EU law but there would be no agreement in place between the EU and the U.K. governing their future relationship, which could affect the Company’s business and operations in the U.K.

The future arrangements between the EU and the U.K. could directly impact Ryanair’s business in a number of ways. They include, inter alia, the status of the U.K. in relation to the EU’s open air transport market, freedom of movement between the U.K. and the EU, employment rules governing the relationship between the U.K. and the EU, and the tax status of EU member state entities operating in the U.K. Adverse changes to any of these arrangements, and continuing uncertainty over potential changes during any period of negotiation, could potentially materially impact on Ryanair’s financial condition and results of operations in the U.K. or other markets Ryanair serves.

As a result of no-deal contingency measures unilaterally implemented by both the EU and U.K. in 2019 in anticipation of the then likely no-deal Brexit, the risk of a cessation of flights between the U.K. and the EU27 in a no-deal scenario has been substantially reduced. In the event of market access restrictions between the U.K. and non-EU destinations (and in respect of U.K. domestic traffic), Ryanair expects to be able to use its U.K. subsidiary Ryanair U.K. Limited (“Ryanair U.K.”), which received an Air Operator Certificate and Operating License (“U.K. AOC”) from the U.K. Civil Aviation Authority (“U.K. CAA”) in December 2018. Alternatively, the Company may decide to cancel such routes.

Ryanair is exposed to Brexit-related risks and uncertainties, as approximately 21% of revenue in fiscal year 2020 came from operations in the U.K., although this was offset somewhat by approximately 16% of Ryanair’s non-fuel costs in fiscal year 2020 which were related to operations in the U.K.

Brexit could also present Ryanair with a number of potential regulatory challenges. Brexit could lead to potentially divergent national laws and regulations as the U.K. determines which EU laws (including, but not limited to, in respect of aviation safety and security, consumer rights and the environment) to replace or replicate. It also requires special efforts to ensure Ryanair’s continuing compliance with EU Regulation No. 1008/2008, which requires that air carriers registered in EU member states be majority-owned and effectively controlled by EU nationals. The Board of Directors has taken action to ensure continuing compliance with EU Regulation No. 1008/2008 if U.K. holders of the Company’s shares are no longer treated as EU nationals for the purposes of EU regulation No. 1008/2008. For additional information, please see “––Risks Related to Ownership of the Company’s Ordinary Shares or ADRs” below.

Brexit has caused, and may continue to cause, both significant volatility in global stock markets and currency exchange rate fluctuations, as well as create significant uncertainty among U.K. businesses and investors. In particular, the pound sterling has lost approximately 16% and 14% of its value against the U.S. Dollar and the euro respectively since the Referendum. Further, the Bank of England and other observers have warned of a significant probability of a Brexit-related recession in the U.K., which may be further impacted by the negative economic effects of the Covid-19 pandemic. The Company earns a significant portion of its revenues in pounds sterling, and any significant decline in the value of the pound and/or recession in the U.K. would materially impact its financial condition and results of operations. For the remainder of fiscal year 2021, taking account of timing differences between the receipt of sterling denominated revenues and the payment of sterling denominated costs, Ryanair estimates that every 1 pence sterling movement in the €/£ exchange rate will impact income by approximately €8 million. For additional information, please see “––Currency fluctuations affect the Company’s results” above.

Currency fluctuations affect the Company’s results. Although Ryanair is headquartered in Ireland, a significant portion of its operations are conducted in the U.K. Consequently, the Group has significant operating revenues and operating expenses, as well as assets and liabilities, denominated in U.K. pounds sterling. In addition, fuel, aircraft, insurance, aircraft leases and some maintenance obligations are denominated in U.S. dollars. Ryanair’s operations and financial performance can therefore be significantly affected by fluctuations in the values of the U.K. pound sterling and the U.S. dollar. Ryanair is particularly vulnerable to direct exchange rate risks between the euro and the U.S. dollar because a significant portion of its operating costs are incurred in U.S. dollars and substantially none of its revenues are denominated in U.S. dollars.

Although the Company engages in foreign currency hedging transactions between the euro and the U.S. dollar and, from time to time, between the euro and the U.K. pound sterling, hedging activities are not expected to eliminate currency risks. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

Risks Related to Ownership of the Company’s Ordinary Shares or ADRs (extract)

EU Rules impose restrictions on the ownership of Ryanair Holdings’ ordinary shares by Non-EU Nationals, and the Company has instituted a ban on the purchase of ordinary shares by Non-EU nationals. EU Regulation No. 1008/2008 requires that, in order to obtain and retain an operating license, an EU air carrier must be majority-owned and effectively controlled by EU nationals. The Board of Directors of Ryanair Holdings is given certain powers under Ryanair Holdings’ articles of association (the “Articles”) to take action to ensure that the number of Ordinary Shares held in Ryanair Holdings by non-EU nationals (“Affected Shares”) does not reach a level that could jeopardize the Company’s entitlement to continue to hold or enjoy the benefit of any license, permit, consent, or privilege which it holds or enjoys and which enables it to carry on business as an air carrier. The Directors, from time to time, set a “Permitted Maximum” on the number of the Company’s Ordinary Shares that may be owned by non-EU nationals at such level as they believe will comply with EU law. The Permitted Maximum is currently set at 49.9%. In addition, under certain circumstances, the Directors can take action to safeguard the Company’s ability to operate by identifying those Ordinary Shares, ADSs or Affected Shares which give rise to the need to take action and treat such Ordinary Shares, the American Depositary Receipts (“ADRs”) evidencing such ADSs, or Affected Shares as “Restricted Shares.”

The Board of Directors may, under certain circumstances, deprive holders of Restricted Shares of their rights to attend, vote at, and speak at general meetings, and/or require such holders to dispose of their Restricted Shares to an EU national within as little as 21 days. The Directors are also given the power to transfer such Restricted Shares themselves if a holder fails to comply. In 2002, the Company implemented measures to restrict the ability of non-EU nationals to purchase Ordinary Shares, and non-EU nationals are currently effectively barred from purchasing Ordinary Shares, and will remain so for as long as these restrictions remain in place. There can be no assurance that these restrictions will ever be lifted. Additionally, these foreign ownership restrictions could result in Ryanair’s exclusion from certain stock tracking indices. Any such exclusion may adversely affect the market price of the Ordinary Shares and ADRs. Since April 2012, the Company has had the necessary authorities in place to repurchase ADRs as part of its general authority to repurchase up to 10% of the issued share capital in the Company. See “Item 10. Additional Information—Limitations on Share Ownership by Non-EU Nationals” for a detailed discussion of restrictions on share ownership and the current ban on share purchases by non-EU nationals.

In light of Brexit, in March 2019 the Board of Directors passed a number of resolutions which become effective from the date on which U.K. nationals cease to qualify as nationals of Member States for the purposes of Article 4 of EU Regulation No. 1008/2008 (“Hard Brexit Day”). In accordance with the powers delegated to the Board of Directors pursuant to the Articles, the Board has resolved that with effect from Hard Brexit Day:

(i) All Ordinary Shares and Depositary Shares held by or on behalf of non-EU (including U.K.) shareholders will be treated as “Restricted Shares” (within the meaning of the Articles);

(ii) Restricted Share Notices will be issued to the registered holder(s) of each Restricted Share, specifying that the holder(s) of such shares shall not be entitled to attend, speak or vote at any general meeting of the Company for so long as those shares are treated as Restricted Shares;

(iii) Notwithstanding the powers vested in the chairman of general meetings of the Company pursuant to Article 41(J)(i) of the Articles, the chairman will not vote any Restricted Shares at any meeting of the Company.

Licensing authorities in Austria, Malta, Ireland and Poland have confirmed respectively in the case of Lauda, Malta Air, Ryanair DAC and Buzz that these resolutions ensure that the Company’s subsidiaries will remain compliant with EU Regulation No. 1008/2008 should Hard Brexit Day occur. These resolutions will remain in place until the Board determines that the ownership and control of the Company is no longer such that there is any risk to the airline licenses held by the Company’s subsidiaries pursuant to EU Regulation No. 1008/2008. For the avoidance of doubt, the prohibition (referred to in the second paragraph of this section) on non-EU nationals acquiring Ordinary Shares in Ryanair Holdings plc, as announced by the Company on February 5, 2002, continues to apply. Consequently, with effect from Hard Brexit Day, U.K. nationals will not be permitted to acquire Ordinary Shares in the Company. In addition, in order to provide contingency in the event of disruption to existing traffic rights on Brexit, in December 2018 the Company’s subsidiary, Ryanair U.K., secured a U.K. AOC.

As of June 30, 2020, ADRs accounted for approximately 44.8% of Ryanair Holdings’ issued ordinary shares (assuming conversion of all outstanding ADRs into Ordinary Shares).

Holders of ordinary shares are currently unable to convert those shares into ADRs. In an effort to increase the percentage of its share capital held by EU nationals, on June 26, 2001, Ryanair Holdings instructed The Bank of New York Mellon, the depositary for its ADR program (the “Depositary”), to suspend the issuance of new ADRs in exchange for the deposit of Ordinary Shares until further notice. Holders of Ordinary Shares cannot convert their Ordinary Shares into ADRs during this suspension, and there can be no assurance that the suspension will ever be lifted. See also “—EU Rules Impose Restrictions on the Ownership of Ryanair Holdings’ Ordinary Shares by Non-EU nationals and the Company has Instituted a Ban on the Purchase of Ordinary Shares by Non-EU Nationals” above.