H1 Earnings/media/Files/I/IAG... · Welcome to this results presentation. I want ... North Atlantic, principally coming from investing in the strong networks that we have, but expanding

H1 Earnings

Friday, 2nd August 2019

International Consolidated Airlines Group SA – H1 Earnings Friday, 2nd August 2019

2

Antonio Vázquez: Good morning everybody. Welcome to this results presentation. I want

to share with you that the board of director of IAG is extremely happy with the way the

management is performing and managing the company. Once more, we’re happy to share

with you very good results. We are one of the few airlines worldwide to report an improved

operating margin, compared to one year ago, and we are glad to present to you the highest

operating margin from European Airlines. As far as the dividends is concerned, the AGM in

June, shareholders approved at our AGM, a final dividend of 16.5 cents, in respect to 2018.

This makes a total of 31 euro cents for last year, which is a 15% higher and, in addition, the

AGM approved as well the payment of special dividend of €700 million, equivalent to 35 euro

cents per share, paid in early July.

As far as the board is concerned, we are pleased to announce the election of three new board

members, at the AGM, Steve Gunning as CFO who is going to be presenting to you today,

Margaret Ewing and Javier Ferrán. And I’m happy to welcome the Senior Independent

Director of the Board, Alberto Terol, which is joining us today. So I hand over to Willie.

Willie Walsh: Thank you Chairman, and good morning everybody. I’m very pleased you

could join us this morning for another good set of results. We continue to do what we

promise, we’re strengthening the platform, and you can see evidence of that, and you will see

more when Steve takes you through the financial performance. LEVEL has continued to

expand its business out of Barcelona, we’ve now opened the Amsterdam base as well, and

you’re now seeing more tangible evidence of the investment that British Airways is making in

new products in addition to the new club lounge at JFK and San Francisco, the first of the

Airbus A350-1000 aircraft has been delivered and that’s fitted with the new Club World Suite.

I think a number of you have been able to see that.

We’re seeing strong performance on NPS, particularly at British Airways and Vueling, and I’ll

take you through some of those issues later on in the presentation. And when we look to

grow – we’re growing the business, I believe, in a very sensible manner; 3.4% growth on the

North Atlantic, principally coming from investing in the strong networks that we have, but

expanding the network as well at British Airways, to places like Charleston and Pittsburgh,

LEVEL out of Barcelona to New York and the Air Lingus transatlantic performance continues to

be very strong, having launched Minneapolis just recently. Unfortunately, because of ongoing

delays with Airbus A321s from the Hamburg facility which clearly has been unacceptable,

we’ve had to postpone the launch of Montreal from Dublin until summer of next year.

LEVEL is also expanding our network into Latin America with the start of Barcelona Santiago,

and when we look at the growth on Latin America and LACAR, our Caribbean region, it’s

important to point out that some of that is actually into the Caribbean through the BA

additional seating on the 777-200s that are operating from Gatwick.

And Europe for us has been good; very strong performance on our domestic network. We are

slowing growth in Vueling through the peak summer to reflect the difficult ATC environment

which we anticipated and that is having a positive impact, both in terms of NPS, but equally

you’ll see that it’s – it’s offsetting some of the EU 261 compensation costs that we would have

seen and we’re investing that in resilience. And we continue to take advantage of the

strength of IAG in negotiating new contracts with the aircraft, both Boeing and Airbus, and


3

we’ve seen the orders for the 321 XLRs for Air Lingus and Iberia, the order of the 777-9 for

BA, and the recent letter of intent with Boeing for 200 Max aircraft.

Financial performance I think is very solid, an increase as the Chairman has said in the

quarter from €900 million last year to €960 million on a pro forma basis, better results at BA,

and at Vueling, flat at Iberia and Air Lingus, and a positive unit revenue environment. So,

you know, it’s a good second quarter for us, we are maintaining our guidance for the year, it

is unchanged, and you can read it in the document there. And as the chairman said, very

pleased to see the AGM approve the final and special dividend, and I thank all the

shareholders who have written to me to thank us for the special dividend in particular.

You’ll see we’re slowing down growth as we promised to do, so we’re tapering that,

particularly in the fourth quarter and I’ll take you through a more detailed presentation.

Before I do that, I’ll hand you over to Steve who will take you through a closer look at the

financial performance. Steve.

Steve Gunning: Thanks, Willie. Good morning. So, let me canter you through the results.

As Willie says, operating profit for the quarter, 960 million, that’s up 60 million on last year.

At constant currency it’s up 52 million, so FX not a big story at an operating profit level in Q2.

In terms of capacity, up 5.4%, as Willie was alluding to, we knew Q1 would be the highest

capacity growth; it’s less growth in Q2 of 5.4%, RPKs were up 6.6, so seat factor, load factor

was up 2. In terms of passenger unit revenue at constant currency, up 1.1%, which is a

turnaround from quarter one where we were down 1.4% at constant currency on RASK, so a

2.5-point swing, quarter on quarter. And clearly there was a benefit of Easter and other

holiday timings in that – in that number. And then finally on this slide, non-fuel unit costs, up

0.4 at constant currency. If we strip out the sort of non-ASK driven businesses, Iberia MRO,

BA Holidays, actually the underlying non-fuel unit costs are actually down 1.7%, so overall a

strong performance, all with a backdrop of fuel price – fuel costs up; fuel costs were up €245

million in the quarter, so to grow profit in that context was a good result.

Let me take you through a little bit more as to what’s been going on with the revenue,

because this is quite a turnaround in terms of how this graph looks compared to Q1. In Q1,

all of the regions with the exception of Domestic were showing a negative RASK movement,

and now, as you can see, all regions have improved with the exception of LACAR.

Let me just give you a quick canter around these.

Domestics. Domestic was the one strong region in Q1, it continues to be strong. This is

primarily driven through demand in the Canaries and the Balearic islands because there is this

price discount assistance that the residents are getting there. As Willie just alluded to in

terms of Europe, it’s a pretty good performance in Europe, both Iberia and Vueling had

positive RASK development, and if you looked at Q1, we were down 5.7 in Q1, so to be down

1.1 is a good improvement in those numbers.

In terms of Asia Pacific, all of our routes have improved on the quarter, with the exception of

China Mainland, and I think the main drivers of that is partly the Chinese economy, but

primarily the amount of capacity that’s going into – that’s being put into the market by the

Chinese carriers. With regards to AMESA, also a very positive performance, sort of three

points to highlight there; firstly, India, our performance there has benefited from the demise


4

of Jet, no two ways about that. Secondly, in terms of Nigeria, we did have some sort of

turbulence in Q1, particularly with elections, now with the other side of that, we’re seeing

Nigeria perform more solidly. We’ve also seen South Africa perform more solidly as well. We

have trimmed capacity there; Iberia took capacity out, BA has taken capacity out, so there

has been some degree of rationalization. But overall, AMESA, a good performance.

Probably the one challenging area at the moment is Latin America and the Caribean. Clearly

Argentina and Brazil have been a drag on this region in terms of performance. We think

we’re seeing both of those bottom out at the moment, maybe even some slight signs of

improvement on Brazil, with regards to Argentina, probably a bit too early to tell.

Interestingly enough, the rest of that region is performing well, but there is significant ASK

growth, but there is significant revenue growth performance in that area if you exclude

Argentina and Brazil. And then you turn around to North America, and there’s a very

disciplined and modest capacity growth in the quarter at 1.5%, and as you can see, a very

solid RASK improvement of 2.9%-unit revenue improvement. So, that’s very good,

particularly with new routes coming online, such as Pittsburgh and Charleston in that quarter.

So overall, strong revenue performance in the quarter and it sort of underpins the overall

results.

I’ll turn now to non-fuel unit costs and fuel unit costs. As I said earlier, non–fuel unit costs,

up 0.4 at constant currency. If you strip out the non-ASK driven businesses, actually an

improvement of 1.7%. I don’t think there’s too much to point out on employee and

ownership costs, both down at constant currency. Supplier costs are impacted to some

degree by the non-ASK driven businesses, so we see more engineering costs, particularly

MRO related costs coming through, and that’s one of the reasons when you strip those out

you see the unit cost coming down rather than going up.

With regards to fuel, fuel clearly is a story during the course of the quarter, up 245 million in

total, and so that has been a drag on the overall performance of the business. Interestingly

when you look at that, the actual commodity price year on year is actually down, but in 2018

we had significant hedging gains. In 2019 we had some modest hedging losses, so when you

look at that overall, you’ll see that the fuel bill has gone up. Let’s talk a little bit more about

fuel, so this – this slide basically sort of gives you a scenario based on our hedging book at

the moment, so a few observations here. We’ve based this scenario on 640 fuel, and you

know as well as I do, how volatile that is at the moment. I think it’s a decent proxy and

we’ve based it on 1.11 dollar to euro exchange rate.

And what you can see is in half two, so Q3 and Q4, remainder of this year, you can see that

we’re about 90% hedged. And so when you play through that scenario, our guidance for the

fuel bill cost for 2019 is 6.1 billion. If you look back to our numbers at the end of Q1, we

were guiding at that point to 6.2 billion, so a slight improvement there. I think if you look out

to the four quarters of 2020, you’ll basically see that at a euro level, we’re pretty much flat,

slightly down in half one, and we’re certainly down one to one and a half points in half two.

So that gives you a feel of where fuel is going and where our hedge book looks at the

moment.

If I look at the business as a whole, operating margin 14.2% is very respectful, is very good

operating margin for the quarter, only 0.4 down despite the fuel headwinds, RoIC above 15%


5

our target, at 15.6%. All of the businesses have had a good performance in the quarter, a

couple of things I would observe; if you’re eagle-eyed you’ll have seen that the Iberia return

on invested capital is down a point or so, that’s primarily driven by aircraft deliveries in the

quarter, building up the capital base. You’ll also see the Vueling operating margin actually

improve on the quarter, and that’s partly due to the improved operational performance and

resilience of the business, which Willie will touch on later on in the presentation.

In terms of this next slide, it’s – these are the half year numbers rather than quarter two

numbers, and these are at reported currency, not at constant currency. And what you can

see here really is that the – that the results were – the complexion of these results was set in

Q1, overall we were €205 million off of last year in Q1, because we had 60 million better in

Q2, we’ve clawed 60 million back in the second quarter, we’re 145 million off versus last year

for the first half, and you can see that coming through on the operating result numbers. Also,

if you look at that penultimate line at the bottom, you can see there the CASK number, which

includes the fuel price in it, coming through, and you can see a significant increase there, as

I’ve touched on. Overall the fuel bill for the half, rather than the quarter was up 499 million.

So, a significant improvement. So to, in one sense, to only be a 145 off year on year is a

good performance.

If we look below the operating profit line, you can see the profit after tax was pretty much flat

year on year and EPS slightly up. Only one item I would sort of bring to your attention here

is the net currency retranslation credits. This is a 138 million credit. This mainly relates to

FX hedging. We – we basically take out derivatives to hedge all of our dollar debt payments

going forward, including right of use assets, and clearly we took out a number of derivatives

around the start of the year. At that point, the forward dollar rate was particularly strong; it

was about 1.40 at that point. Since then, you’ll know that the forward brakes have come off,

so when we’ve marked these to market, we’ve had a significant gain, in the quarter and in the

half.

And last slide from me, just looking at leverage; leverages have reduced and improved,

primarily because we grow the cash during the first half of the year, so we’re sitting there

with 8 billion of cash at the end of half one; that’s pretty much consistent with the cash

position last – this time last year as well. Interestingly enough, you’ll know, as Willie alluded

to earlier, that subsequent to this event in July, we would then have paid out about a billion

of that with the dividend and the special dividend. So, overall a strong set of numbers, and

I’ll hand you back to Willie.

Willie Walsh: Thank you Steve, as I mentioned, we have trimmed our growth plans for the

remaining part of the year, and that’s in line with the comments we made at Q1. You can see

that for Q4, we’re now saying 3.2% growth, that was originally when we first presented these

charts at full year results last year, there was 5.9%. We’ve taken it down from 3.7; this is

the last figure we gave you, to 3.2, and that’s very much in line with what we said; we would

look for opportunities to trim the brand capacity increases to adjust to what we believe is

appropriate for the demand environment that we are expecting in the fourth quarter, and you

will see that flow through into next year. So, growth this year now planned at 5%. We’d

originally given you a figure of 6.5%, so you can see we’re doing what we had said we would

do, which was to look at the evolution of the year as we went through it and to take capacity

out if we felt that that was appropriate.


6

Our guidance remains unchanged, so our current fuel prices and exchange rates, we expect

our 2019 operating profit before exceptional times to be in line with the 2018 pro forma.

Passenger unit revenue was expected to be flat at constant currency and non-fuel unit cost

expected to improve at constant currency, and just to reaffirm that we expect passenger unit

revenue at constant currency to improve for the remainder of the year, so absolutely no

change to the guidance that we have previously given you. Now, you have seen this

investment case many times, so I’m not going to take you through it, but just to highlight a

few issues, as the chairman had said, we now have paid a total of €3.8 billion to our

shareholder since 2015. And that includes 1.3 billion in 2018, in relation to 2018. And we

calculated there a fantastic dividend yield of 8.2%, so if you were to have bought shares on

28th February, that’s what you would have got. So, you know, it’s clearly a very strong

dividend yield. Our cash priorities remain exactly as we said; we’re going to reinvest in the

business to support accretive organic growth. We have a commitment to maintaining a

sustainable dividend and any surplus cash that is not going to be used for inorganic

opportunities, and we’re not pursuing anything at the moment, will be returned to

shareholders. And as we’ve said many times now, it’s only the manner in which we return

that excess cash to shareholders that gets debated by the board.

We’ve highlighted the problems with ATC, it continues to be a major issue, although we have

seen a slight improvement in 2018, versus 2019. I have to give credit to Eurocontrol, but

also, we’ve got to take some credit ourselves, because we have moderated our planned

growth, particularly at Vueling to remove the biggest problem areas that we witnessed last

year. Now that does entail quite a bit of re-planning of the network, but I think it was

absolutely the right thing to do, so although the environment has improved versus last year,

it’s still very, very poor, relative to where we would expect it to be historically, and relative to

the targets that have been set for ATC providers across Europe. Eurocontrol through their

new director general, Eamon Brennan, is making a difference and has come up with a number

of initiatives that is improving the environment for airlines, but it’s still not good enough. We

continue to call for ANSP providers to make adequate provision of manpower to deal with the

planned ATC environments that we expect to see in 2020/2021 and beyond.

Some of these issues can be addressed through additional resources. Some of them require a

more strategic approach to be taken by European governments and we will continue to lobby

in a united fashion through our association – the association of European airlines, and we

believe we are being effective in the lobbying action that we have.

If we turn to Vueling, because Vueling got badly hit last year as you know, and then

encountered significant ATC disruption to its network, largely because of the poor

performance in Marseille where we had a number of strikes. We’ve redesigned the network

and put significant resilience plans in place and that is proving to be effective. We’ve seen a

19-point improvement in our net promoter score, our on-time performance improved by

almost six points, and flight cancellations are down over 80% versus last year, and you’ll

have seen a number of other European airlines highlight the reduction in the number of flight

cancellations. That is down to a lot of actions that the airlines are taking and Vueling in

particular has contributed to that, and to a slight improvement in the ATC environment versus

last year.


7

I’m pleased to say that based on Eurocontrol statistics for the period that is available,

unfortunately we don’t have it right up until the end of June, show that Vueling improved

from being number 31 out of the top 50, to number 12. So, it’s not just reflected in the

internal metrics that we were looking at, it’s also very much evidenced by the data that

Eurocontrol is providing us.

So, we avoided quite a significant amount of the additional EU 261 compensation that we paid

last year, but that’s been invested in the resilience, so you can see there, you know,

additional backup aircraft, additional crews, so we’re operating in a suboptimal fashion, to

reflect the ATC environment, but it’s absolutely the right thing to do for the business, and we

will continue to look at how we can strengthen that resilience as we go forward.

LEVEL, you will have seen that Luis Gallego is now responsible for LEVEL, as Chairman so the

level management team reports into Luis, and I think they will benefit from the significant

experience that Luis has in the low cost area in – and also understanding of the – the network

into Latin America and North America. We’ve had some significant milestones, we’ve now

carried more than a million passengers as of July of this year and we’ve expanded to eight

long-haul and 21 short haul destinations. We’ve put the fourth A330-200 into Barcelona with

new destinations from Barcelona to New York and to Santiago. LEVEL France celebrated its

first anniversary. LEVEL Vienna also celebrated its first anniversary, and we’ve now started

the Barcelona base with three aircraft serving seven destinations.

So, we’re very pleased with the performance, particularly so with the performance of

Barcelona, although as we highlighted previously, the results have been impacted as a result

of the depreciation, and of the currency in Argentina, but Barcelona is still proving to be very

effective. Some initial issues that we had to deal with in Paris, but the operation is now solid

and robust, and we’re seeing some of the shakeout that you would normally expect from the

competitive environment there, so pleased with the way LEVEL is developing and very pleased

with the guidance that Luis will be able to bring to that going forward.

Now, I just wanted to clarify issues in relation to aircraft orders. What you see there is the

Capital Market Day presentation that we gave you and just to remind you that the recent

aircraft orders that we have announced including the LOI with Boeing is absolutely consistent

with the plan – the aircraft deliveries that we gave you at Capital Markets Day. In fact, as

you can see from this, we still have a number of outstanding aircraft to be decided on, so

we’re pleased so far with what we’ve ordered, but there is more work that we need to do.

Disappointed, as you’ve heard me say previously, with the performance of Airbus, very poor

delivery from Hamburg on the A321, and it’s not just for us, as you know. I’m sure by now

you’ve heard every airline that is excited about taking the 321LR expressed huge

disappointment about the delays that they’ve encountered. We need Airbus to improve their

performance and they need to get working on that very quickly, because quite honestly the

delays that we’re seeing are just completely unacceptable and it is impacting on the growth

plans that we have, and that’s particularly true of what we want to do with Air Lingus on the

transatlantic. We’re having very, very constructive discussions with Boeing, and the LOI that

we signed, talked about deliveries between 2023 and 2027, we’re actually looking to see if we

can get some of those deliveries in 2022 and the engagement with Boeing has been very

positive and very constructive. But the simple message is, all of this is consistent with what

we said we would do when we gave you the fleet plans at Capital Markets Day.


8

Now, my favorite subject, Heathrow expansion. You know, if you’ve doubted my views on

Heathrow, I want to just reassure you that I’m right and they’re wrong; there is absolutely no

way that Heathrow can expand in line with the promises that they’ve made, and you know,

we will expose the comments for being untrue, as and when they make them. The total cost

of expansion is now 32 billion. If we just focus on what was originally talked about in terms

of the third runway, which the Airport Commission said would cost 17.6 billion, and Heathrow

very publicly stated when the government supported the expansion back in October 2016,

that they could do it for 14 billion and you still hear them making comments that they’ll do it

for 14 billion. You know, what you get for 14 billion is not what was promised, because that

14 billion does not give you any terminal infrastructure now.

In fact, if you look at what we’re now – what we were originally promised for 14 billion, it

looks like that’ll cost about 17.5 billion, and that’s escalating, and there is absolutely no way

that Heathrow can deliver this. We have no confidence in their ability to do it; they’ve

demonstrated absolutely zero evidence of them being able to do it and we’re particularly

concerned at the amount of money that is now being spent in advance of getting approval.

So they will have embedded about 3.3 billion of additional cost in the Heathrow RAB before

they get approval. And the regulator needs to step in. This is completely unacceptable. The

costs are, you know, out of control, and we still challenge Heathrow to demonstrate that they

can do it, so the government needs to be very focused on this.

I have to be honest, I was very pleased with the commitment from the former Secretary

State for Transport, Chris Grayling who I think was really good on this. I know he’s been

criticized for other issues; I can’t criticize him at all because he got this message and got it

very clearly. The only way we can support Heathrow expansion is if it’s done in a cost-

efficient manner and that is impossible based on what we see at the moment. So, we’re

going to be spending quite a bit of time with the regulator and with the government on this

issue. And this is before you get into the issue of climate change and the commitments that

the government has made. We’re absolutely committed to play our part to improve the

performance of our airlines and within the industry to influence the industry. You know, we

were influential in getting IATA to agree or get the industry through IATA to agree to long-

term targets. We’re still the only industry to have agreed these long-term targets.

We’re looking to continue to improve our carbon efficiency in advance of 2020, when we’ve

committed to carbon neutral growth. Then 50% reduction in net emissions by 2050. We’re

doing that through ongoing improvement in the performance of our business, through

operational measures, we’re improving our performance by taking delivery of new aircraft,

our carbon efficiency of 2018 was 91.5 grams of CO2 per passenger kilometre, and we have a

target of 87.3 by 2020, which we’re on track to achieve. We’re also investing in sustainable

biofuels, we’re absolutely convinced that this is a real possibility and we’re prepared to put

our money to support the development of the infrastructure and also to give the commitment

to take the product and that should give encouragement to other investors, and we’re calling

on the government to set up an office for sustainable aviation fuel to really drive the

investment in this area, because we believe there is a real opportunity. And through the

CORSIA, which is the ICAO platform, it’s the global first and the only industry to have a

solution on climate change at an industry level and this will see industries aviation reducing

its net emissions by 2.5 billion tons from 2020 to 2035, and this is through investment in


9

quality and measurable carbon offsets. This is very much the focus of the industry; we want

to ensure that we’re playing our part and we’re absolutely determined to do so.

Right, just to cover off two issues before I wrap up, you will know that the permitted

maximum notice was issued. I think most of you are familiar with the background to this to

ensure that we can retain the operating licenses of the airlines, it must be able to

demonstrate majority ownership and effective control by EU nationals. And like all listed

airlines, we’ve had this provision in our bylaws, it’s been in the bylaws since we created IAG

in 2011. We announced the permitted maximum notice on 11th February 2019 when our non-

EU shareholding had reached 47.5. So, we keep this under review, and you know, we intend

to remove the permitted maximum when possible. I can’t give you any guarantee around

when that will be, but this is under constant review and the board spent quite a bit of time

yesterday, you know, just considering the current position and the options that are available

to us.

And turning to Brexit; I’m not going to rehearse the first couple of bullet points there because

you will know the background to it. I would say that we remain confident that a

comprehensive air transport agreement will be reached between the EU and the UK, but the

important point is the next bullet point as required by the EU, we submitted through all of our

individual airlines, the plans on ownership and control to the national regulators in Spain,

Ireland, France and Austria, and these regulators have confirmed that the plans would satisfy

EU ownership and control rules in the event of a no deal Brexit. The EU commission has been

notified about the remedial plans by the national regulators. The plans don’t require EC

approval, but clearly the commission has the right under EU law, to investigate and where

appropriate request the regulators to implement corrective measures. But I’m pleased that

the national regulators in Spain, Ireland, France and Austria have acknowledged that our

plans satisfy EU ownership and control rules.

Just to wrap it up, you know, we are strongly of the belief that our book was unique and

maybe will not be unique going forward as everybody seems to want to copy our structure,

but this does drive innovation and superior returns for our shareholders. We’ve got a strong

portfolio of world class brands, we’ve got global leadership in our markets, we take advantage

of the integrated platform that we have. We have delivered on non-fuel unit costs, and at

Capital Markets Day this year, we’re going to give you, which I think is more important

actually, is the adjusted non-fuel unit cost, because as we’ve seen more and more of our

business in non-ASK related activity, I think what you really do want to see is, you know, how

are the underlying airlines performing, particularly in this area. So, we’re going to go back

and give you information on our performance from 2011 to date, in November on an adjusted

non-fuel unit cost basis.

Strong performance in second quarter of 2019, very pleased with that. We’re on track to

meet our financial target. We have an investment grade balance sheet, we are paying

dividends, we are pleased with the response from our shareholders and we’re maintaining our

guidance unchanged for 2019. So, all in all I have to say I’m pleased with what we’ve

achieved so far this year, clearly there’s a lot of work that we need to do, but we’re

demonstrating our ability to respond quickly to any changes in the external environment,

adjusting capacity as appropriate and I have to be – take this opportunity to, you know,

thank the team at Vueling for the actions that they have taken to stabilize the performance.


10

It wasn’t of their making the challenges that they faced last year, but they’ve demonstrated

that they know how to operate in difficult environments and the measures that they have

taken are delivering very positive results for our customers and for the business.

So, on that, I’m going to hand back go Andrew; Andrew will take us through the Q&A session.

Q&A

Andrew Light: Thank you, Willie and Steve. Yes, it’s time for Q&A, you’ll see in the seat

rests there’s a microphone, so if you want to ask a question, stick your hand up and I’ll pick

you and then if you pick up the mic. And in answering – sorry, in asking your question, if

there’s a grey button you press that down and you keep it pressed down and the red light

should show. We’ve got all the OpCo CEOs here and most of the management committee

team, so feel free to ask your question to whoever you want. James.

James Hollins (Exane BNP Paribas): It’s James Hollins from Exane, a few for me please.

Just firstly, you didn’t mention the premium versus leisure trends, I was wondering if you

could sort of – if ideally give us some data on how those are tracking and particularly

obviously Q3 is a more leisure quarter, whether you think Q3 RASK can be up or whether just

H2 as a whole. Secondly, Willie, you were quite ambiguous on Heathrow, I was wondering, if

you’re right, and obviously your campaigning goes to plan, what do you think will actually

happen? I mean both in terms of the UK government where they just say, okay fine, this is a

hiding to nothing, gilt edged platform etc., let’s just cancel it, and secondly what the CAA

might say in terms of those tariffs. Obviously, they’ve been, I think relatively okay so far,

saying they should be kept flat through the process, but just some more views because

obviously you’re closer to them than I am.

And then probably one for Alex, obviously BA versus the unions, it was nil all at half time, nil

all full time, nil all at extra time, I was wondering how we’re looking as we go into penalties.

Willie Walsh: James, thanks for your questions. As you know, we don’t break out the

premium and leisure, but just to say premium is performing very well, transatlantic premium

in particular, Air Lingus transatlantic premium, really, really good. So, you know, we’re

seeing good performance across the network with the exception of the areas that Steve had

highlighted. If you take out the Argentina and Brazil in Latin America, the rest of that area is

actually – is actually performing very well for us as well.

So, the areas that we had identified previously; Argentina, Brazil, South Africa and then

China. China I think is a combination, as Steve said, it’s a supply issue, with a lot of

additional capacity, and I think that reflects the second issue which is trade, because I think

you’re seeing a switch in some capacity that would have gone across the Pacific, is now going

into Europe, so you’re seeing, you know, capacity being redirected. You’re seeing a slowdown

in some areas, because a lot of capacity is not coming online for various reasons, but with

those exceptions, the rest of the network performs well, and it’s performing well both in

premium and in leisure. And you can see in the IMR, and Steve has mentioned it, that UK

point of sale is good, so I said again on the radio and TV interviews that I’ve done this

morning; we’re not seeing any evidence of a Brexit impact. We can’t – quite honestly, we

cannot identify any impact.


11

Now, I’ve heard what O’Leary has said and what others have said, and maybe that we’re not

as exposed to the whole of the UK in the way that they would be – our business has a much

heavier weighting towards London and the Southeast, so that could be one explanation for it.

But we’re not seeing any impact on bookings or the profile of bookings going forward, in

terms of the visibility that we have.

On the third runway, I’m sorry I wasn’t clear enough, this is a really, really important issue,

and it’s not just important for us; it is important for us, I don’t try and hide that fact, but it’s

important for UK Plc, you know because if you remember Heathrow is out there trying to con

people that this is good for the UK Plc. It’s not, it’s good for them and them only, and to be

honest with you, you know, we’re not going to allow it because they’ve got away with this for

too long. You know, they promise on time and on budget; it’s clearly neither on time nor on

budget, and it’s gone so far off budget that we’ve got to call them out. You know, when

they’re saying we can still do this for 14 billion but they don’t mention that that 14 billion

gives you zero terminal infrastructure, and actually to get the full value out of their own way

you have to spend 32 billion, you know, these are outrageous figures. And we really do need

people to wake up to what’s going on here, because if we don’t stop it now and force them

either to deliver to the original plans that they have, or stop them, you know, what we’re

going to be left with is the most expensive piece of infrastructure that will be underutilized,

because you’re not going to get people coming in here if the costs are driven up, as they will

be, based on this ridiculous investment profile that Heathrow is looking at.

So, you know, they should be honest and admit at this stage that they can’t do it, and maybe

if there’s somebody else that can do it better than them. There are others who are

interested; we’d have more confidence than some of the others who have expressed an

interest in developing the infrastructure and maybe that’s what should be done. But, you

know, the CAA can’t turn a blind eye to this, and the government can’t turn a blind eye to it,

and we don’t expect them to do it and we don’t believe they will do that.

Turning to BA, before Alex comments, let me just repeat what I’ve been saying to people; I

don’t like giving running commentaries, when there are negotiations ongoing. But personally,

you know, I do need to acknowledge, you know, I think BA pilots do a great job, they’re very

professional, you know, we know they have issues that have upset them, but if I look at the

pay offer that BA has made, I think it’s a generous sum, I think it’s a fair offer. This is being

managed by BA; I’m not involved in it, I won’t be involved in it, you know, this is for Alex and

his team to resolve, but I’m pleased to see that some of Alex’s team and representatives of

BA spent the day yesterday with BALPA, and maybe Alex, you can update us on what’s going

on.

Alex Cruz: [Inaudible] a great deal more than that, I was going to say it’s hard to tell if we’re

in the first half, second half, over time or penalties. I think the conversations continue. It’s

important that our team continues to – to be with them, they spent all day long yesterday,

they may be together tomorrow, etc., so I think it’s best not to comment. Very productive

discussions, and if there’s something certain about a football game is that it ends, and this

will also end at some point, and we’re looking forward to that.

Willie Walsh: Ireland’s got a good track record on penalties, we lost on penalties to Spain,

which you know, obviously we have to do from time to time, but you know, we have done


12

well on penalties in other competitions, but anyway, it’s for Alex to deal with. But yeah, I’m

pleased, we do have to acknowledge by the way that BALPA has not served any notice of

industrial action at this stage, that’s not to say they won’t but they – you know, they haven’t

at this point, which I think is a positive as well.

On the data there’s quite a detailed explanation, I think it’s on page 26, I’m just looking for it

now. Yeah, page 26, note 17 on contingent liabilities, so I think the best thing I can do is to

point you to that, because you know, there is a formal appeal process which we will follow,

and we’ve been very clear we will pursue this vigorously, but I think it would be wrong for me

to rehearse the arguments that we’re going to make, given that the first step on that is that

we’ll make representations to the ICO, and that will be done in the coming weeks. You know,

you’re asking the ICO to mark their own homework in one degree, so there is an appeal

process that follows that, and we’ve outlined some of that, so maybe the answer to the

question you ask is – it would be best coverage if I refer you to page 26 of the report.

On the environment and carbon, yes, you’re seeing the price of carbon is increasing; we’ve

factored that in, so going forward, it’s currently embedded in our fuel price. We will continue

to embed it in the fuel price, but we will give you more visibility if you want it on that. Our

gross emissions for the group last year was 29.99 million tons of CO2, so we expect gross

emissions to continue to grow. It will stabilize because of the investments we’re making but

the focus will continue – will turn to net emissions because we’ll be offsetting some of those

gross emissions through the various schemes that we’re involved in. But we’re fully

committed to that and we’re not arguing about it and we think it’s the right thing for the

industry.

We believe that in the short term there isn’t a simple solution for aviation, so therefore

aviation needs to use some of its money to provide incentive to others and we’ll only do that

where, you know, these are real carbon reductions. We want to make sure that the

investments that are made by the industry are quality reductions. I think that’s what

everybody wants to see. We’re not seeing any consumer pushback at the moment; there’s

clearly greater awareness in relation to the issue. I keep giving this statistic and it is

important, but 80% of all emissions from the aviation industry are from flights in excess of

1500 kilometres, and there is no alternative, and as you know, a lot of people don’t have an

alternative option when it comes to travel. So you know, there are options for some, but you

know, for a lot of people there aren’t any alternatives and you know, Michael O’Leary often

says it more colourfully than I do, but Ireland is an island and I think will continue to be an

island, and there’s not many easy ways of getting off the island without flying.

So, you know, what we’ve got to do is recognize that there will be a need for people to

continue to travel by air; we’ve got to make sure that that’s done in as efficient a way and

that we play our part to ensure that we reduce our environmental impact, and it’s great to

see that Ryanair and everybody else is highlighting what it is. I think that’s a positive for the

industry.

On capacity, we’ll give you more detail but – at Capital Markets Day, but we’ve said this

before, yeah, we admitted we got Q1 wrong, and you could have seen some of that in Q4 of

last year, you know, we tried some new things through Q4 and Q1, it didn’t work. We filled

the additional space, as you know, we – we had RPKs in excess of ASKs, but it was at a


13

significant yield impact and unit revenue impact. We’ve stabilized that, we’re now into

positive unit revenue, and we’ll be positive unit revenue for the rest of this year and Q3 and

Q4, but we recognize that you know, some of the initiatives we tried, we’re not going to

repeat, and that means our Q4 ASKs have come down, 3.2, and that – you see that flow

through into Q1 and beyond, so I think you’ll see us, as you would expect, to moderate the

capacity plans from the headline figures that we gave you at capital markets day last year.

Andrew Light: I’m going to take a question that has been sent in by email from Neil Glynn

at Credit Suisse; he unfortunately couldn’t make it because of the evacuation of Bank Station.

A question for Steve and one for Willie, and by the way if anyone else is out there, who

couldn’t get here, just email me a question and I’ll pass it on. On cash flow, disposal

proceeds of €458 million were strongly up year on year, is this all sale and lease backs, and

what does it imply for net CapEx in FY19? And does this explain why the lease repayments

have doubled to €823 million in the first half?

And then a question for Willie, I guess, or even Alex: UK point of sale, given the weakness of

GBP, how you’re thinking about trying to stimulate point of sale in the rest of Europe and the

rest of the world.

Willie Walsh: Yeah, I think on the UK point of sale, it’s clearly something that we have,

levers that can be operated that maybe other businesses can’t. And what we’ve seen

previously, you know when you see a weakening pound, the flow of traffic changes, so there’s

nothing new in this, we witnessed it back in 2016 and we saw a significant devaluation of the

pound. And we see it in other areas where we see currency devaluation. So, a great

example of that was Argentina, where Argentina was 60% Argentina point of sale, until they

devalued the currency there. It’s now switched into Europe point of sale, because Argentina

becomes a very attractive destination with the devaluation that has taken place. And we

have the ability to do that and we have the levers within our revenue management teams

that they can pull to adjust traffic flows and take advantage of, you know, what should be

increased inbound traffic into the UK. And I’ve heard a lot of people now talk about this as

being an option, and particularly London, because you know, I think London and the UK

clearly has a lot to offer from a tourism point of view, and also going forward, I think from a

business point of view, when there’s a bit more clarity around what’s happening with Brexit.

So, we’re reasonably relaxed. We clearly will have a translation impact as we’ve seen before,

but you guys understand all of that, given the – the BA profitability, BA revenue, BA

profitability, but in terms of the business, you’ll see us, you know, putting a greater bias

towards the non-sterling points of sale, and you know, we’ve been able to manage that

situation very well in the past. Steve.

Steve Gunning: Yeah, in terms of doubling of repayment of leases, I presume Neil is

referring to the cash flow statement on page 11 of the IMR, and really what you’re seeing

here is the move from the pro forma report – the statutory reporting last year, to the IFRS 16

reporting, so really all you’re seeing is the payment split in a different way, before those

payments would have gone through the operating profit, after exceptionals, now they come

out of there and they’re split between the interest payments and the repayment of leases, so

it’s a reclassification item, it’s not a change in the expectation in overall lease payment costs.


14

In terms of CapEx guidance, you know, I think we’ve been clear on our guidance when we did

the re-clarification. Net CapEx will be between 2.6 and 2.7, and we’ll update that guidance

when we get to Capital Market Day.

Andrew Light: Can I – Damian, can you remember to press the – I think it’s’ a grey button,

otherwise it can’t be heard on the webcast. Hopefully that works.

Damian Brewer (RBC Capital Markets): Damian Brewer from RBC, two questions please.

First of all on cargo; historically seen as lead indicator, and the data there has been quite

weak; there’s some debate about whether that’s really the case this time; can you elaborate

a little bit more about what you’re seeing there, and in particular whether any sort of

industries or customers in general which are causing the, I guess disruption and weak pricing.

And then secondly, I don’t really want to mention it, but the sort of B word, Brexit, given

what our politicians are talking about, could you elaborate a little bit more about how you’re

thinking about contingencies, for example, how much of the BA fleet is depreciated or near

fully depreciated? How much flex there is around there, and how you’re thinking about the

sort of Treasury function in the event of another currency devaluation. Thank you.

Willie Walsh: On cargo, for some time now, probably I’d say maybe eight or nine years, the

– there’s been a significant change in cargo and passenger performance and we no longer see

cargo as the lead indicator, because where we’ve seen cargo change, we’ve seen passenger

just continue, so we do look at it quite a bit and in fact just recently we’ve spent a bit of time

to challenge ourselves again, you know, has this become an indicator? We don’t believe it is.

It is an indicator of trade, but you know, the environment in which we’re operating, trade is

one of the inputs, but you can’t read anything into cargo performance or read across anything

that we’re seeing in cargo performance to the passenger performance, and that’s been the

case for at least eight, maybe ten years now, I think, and IATA has acknowledged that as

well. But Lynne, I don’t know if you want to comment on any cargo specifics?

Lynne Embleton: Yes, I can do. So, the cargo market is in a different environment to the

passenger market for sure, and the overall market decline that we saw in Q1 has continued

into Q2. Q1 started with weakness in Asia, by the time we get to Q2, we’re also seeing

weakness in Europe. So the – and of course we’ve also got more cargo capacity in the

market, which is part of what you’re seeing in terms of yield decline, is an overall supply

demand imbalance. If I look at the segments within this, there are some segments holding

up very well, perishables are holding up well, constant climate holding up pretty well. We are

seeing declines in some sectors that may be of interest, automotives for example, and some

of the high tech; we have seen declines there. But, it’s a mixed bag for us in cargo at the

moment.

Willie Walsh: And on Brexit, you’ll know that we’re currently operating 33, as of the end of

June, 33 747s, and clearly they’re nearly all – some of them are very close to being fully

depreciated, but in effect you’ve got a fleet of 33 747s that are – you could say are

depreciated, and we’ve also got a number of 777-200s, the early deliveries of the 777-200s,

effectively fully depreciated. So in relation to the long-haul, there’s quite a significant bit of

flexibility there and on the short haul, a lot of flexibility with the aircraft that are leased,

which is a feature of the business that we always looked at to ensure that we have flexibility,

and we’ve got flexibility to move aircraft around the group as well. So you know, at this


15

point, you know, we’re – we can’t tell you what’s going to happen after 31st October in some

ways, you’re not going to tell me but we’re planning our basis – our plans are based on there

being a sensible Brexit, whether that’s – so that’s not a hard Brexit.

In the event of a hard Brexit, we will review our plans and you would expect us to change

that, but at this stage we’re very comfortable with the flexibility that we have, not just within

the BA fleet but right across the – the airlines in the group; we’ve got a lot of flexibility. I

think we’re actually very well positioned relative to a number of our competitors and you

know, what you’ve got to look at, and we do look at it, you know, our relative position, we’re

extremely strong, relative to some, and anything that is going to impact on us is going to

have a huge disproportionate impact on a lot of airlines out there who are in a very weak

position today. When you look at the strength of our balance sheet, our cash, our fleet,

everything about the structure of our organization, our ability to respond quickly, you know,

we’ve all been here before, we’ve gone through a number of shocks, we know what to do,

we’ve done it before, we’ll do it better this time and we’ll do it better than anybody else, and

we’ve got the flexibility that others don’t have, and most importantly, the determination, you

know. So it’s – I hope we don’t have to prove it, but if anybody doubts it, you know, we’ll be

able to demonstrate what it is we can do. But I think you’re going to be looking to a lot of

other airlines to see how they’re going to survive, to be honest with you, given where they

are at the moment, and where they’re likely to be in the event of significant weakening in the

economic environment. Treasury –

Steve Gunning: Well not too much to say. Clearly, we’ve seen the devaluation of sterling

even from when we were looking at the guidance for Q1, and clearly we had to factor that in

when we made the decision to hold guidance this time round, and clearly we have a huge

Sterling profit stream that if there’s a devaluation sterling has an impact at Euro level, so

undoubtedly the case but we’ve seen this before in 2016, when the referendum result came

out there was a significant devaluation then, and we had a bit of a playbook established at

that point, and one of the benefits of BA is more than 50% of its revenue is non-Sterling

denominated, and because we’ve got strong point to point business as well, we do have the

ability to re-emphasize the point of sale mix that we have, and emphasize the inventory

availability to the other end of route, so yes, could there be some initial turbulence? Yes,

there could be. Do I think we’ve got the ability to adjust? Yes, I do. So, those would be

some of the factors we consider.

Rishika Savjani (Barclays Capital): Hi, good morning, it’s Rishika from Barclays. Three

questions, if I may. Maybe firstly just touching on the disruption environment in Europe. I

think you obviously said that you know you think a large part of the improvement has been

because of the investment in resilience by Vueling and by other airlines, I mean obviously

there have been a lot less strikes this year as well; how much of the improvement do you

think is just simply a function of that, and maybe just a bit of colour as to what you think

Eurocontrol has done that has been particularly good. That would be helpful. And then

maybe a second question on the transatlantic; capacity growth into the winter is quite clearly

quite benign. A large part of that, it seems to be the function of what some of the other low

cost long-haul operators have done, in terms of pulling back on the capacity, but maybe if

you give us a sense of your conversations with the joint venture partners around, you know,

the more mature capacity growth and how that’s kind of playing out into the winter and next


16

year. And then finally on the Capital Markets Day, I mean you’ve mentioned the cost

guidance and the change in the definition there; is there anything else that we can expect at

the Capital Markets Day? Maybe something on LEVEL financials, potentially, thank you.

Willie Walsh: Yeah, I think as I said, we have to give credit to Eurocontrol, they’re being

much more proactive in terms of proposing solutions to problems and I think there’s good

evidence to support them being given even stronger authority over the management of the

network as we go forward. But what they have proposed and what’s being implemented is

different routings to avoid the known pinch points, so there’s a lot of traffic has been taken

out of Karlsruhe which was a known pinpoint last year and continues to be. So, we’re

avoiding that. There’s been a change in the payment structure because previously the ANSP,

the Air Navigation Service Provider got paid on the basis of the filed flight plan, not the flown

flight plan, so you know you’d file to fly through a place like Karlsruhe or Marseille and then

end up bypassing it; they still got paid and the problem there is twofold, one, you’re paying

people for not providing a service, but two, the people that were giving you the service

weren’t getting paid for it, so they weren’t – there was no incentive for them to take on the

additional workload.

That’s changed, and I think, you know, they’re two very tangible measures that Eurocontrol

have taken, that will make a big difference. So, now you’re seeing traffic bypassing these

pinch points, there’s an incentive for the neighbouring ATC providers to take that because

they’re going to get paid for that work, and clearly now, you know, hopefully the ones that

aren’t performing will start suffering from a financial point of view, but also what Eurocontrol

have asked airlines to do. And I think there is good adherence to this is to fly the flight plan

that you’re given, you know, I know from past experience as a pilot, you’re always looking for

shortcuts, which is great if you want to get home a little bit early, the problem is that does

add to the workload of the ATC providers. And in an environment where they’re already, you

know, stretched, these what are considered the right thing to do, is actually causing

problems, you know, knock on problems, so that encouraged us to just – for everybody to

behave.

It was always expected that most airlines would but there would be one particular airline that

wouldn’t. I’m pleased to say they are behaving because it’s in everybody’s interest to do so,

so it’s all playing to a situation where there is still a lot of ATC restrictions in place; the

problem has not gone away, but you know, when you consider that there has been growth in

traffic, so Europe is handling more traffic this year than it did last year; there’s been a

reduction in the overall delays, and there has been a reduction in the strikes; you’re right, but

also there have been actions that can kick in if strikes are a feature that we see going

through. So you know, it’s a combination of a number of issues, but it is proving to be

effective.

On transatlantic, I need to point out that Air Lingus is not a party to the joint business, so we

can’t have any discussions with our joint business partners in relation to what Air Lingus is

doing, and they can’t participate, so you know, the – the only thing we can say is what’s

being said publicly, so I can’t give you any information beyond what you will have read

publicly because that would be inappropriate, but what we see and what I think everybody is

saying is, you know, there is moderation in the capacity plans that people have. Transatlantic

continues to be a fairly healthy environment. I think the fact that a number of the so-called


17

low-cost airlines disappeared, is evidence of – that’s a challenging business to get right. We

believe long-haul low cost is a potential profitable segment of the industry, but it’s only going

to be profitable if you have low cost and a lot of these airlines just didn’t have a low cost, not

a low enough cost to be profitable. And they’re still, you know, anybody who thinks they can

do it, we just look at their cost base and we know they can’t, so you know, I think the

situation that we’re seeing there is reasonably good. On Capital Market’s Day, it’s a bit early

to give you some details, we’re talking about the plans for that at the moment. As I said, one

area where I think you would get value is getting greater visibility on what we call the

adjusted non-fuel unit cost, how we measure that, and going back and looking at the

performance, because that’s really a more accurate assessment of the underlying

performance of the airlines, and it is being, you know, Steve gave you the figure, 1.9%

improvement in adjusted non-fuel cost for the half and 1.7 for the quarter. So these are

having a big impact, and you know, I think more visibility around that would be helpful to

you, so we’ll definitely do that for Capital Markets Day.

Jaime Rowbotham (Deutsche Bank): Thanks, Jamie Rowbotham from Deutsche Bank.

Three please. Firstly, going back to ownership and control, so the country regulators are

happy with your – your plans and as you’ve said, you don’t really need a blessing from the

EC, so would it actually be terribly radical just to push ahead with those plans anyway, thus

rendering the ownership structure at the IAG parent co level irrelevant, allowing you to lift the

permitted maximum?

Secondly, you talked a bit about the weakness into mainline China, but Asia Pac in general

looked very strong in 2Q with the ASKs up seven and the yield up two. What is driving that?

Is there a bit of sort of Asia point of sale strength there, and also it looks as though Iberia is

growing quite strongly to Asia; could you talk a bit about what’s going particularly well there

in 2Q. And then thirdly and finally, this might be a long shot, but going back to BA, and the

unions, I appreciate you don’t want to talk too much given the ongoing negotiations, but

some of the numbers going round in the press talking about you know, if we get into the –

into the unfortunate situation of strikes, there’s a suggestion of €45 million a day of potential

strike cost; is that a crazy number or is it a sensible rule of thumb? Thanks.

Willie Walsh: Okay, on ownership and control, it’s always important to remember that we

don’t just fly within the EU, there are lots of other jurisdictions around the world, and the

structure we have in place has satisfied them and I think there has been a fixation around,

you know, the EU issue, but you know, there are a lot of countries around the world that

don’t even recognize this concept of EU ownership and control, and that’s one of the things

we’ve got to bear in mind as well, so we’re looking at this. I think you know, certainly Capital

Markets Day will have a lot of clarity, because you know, the Prime Minister said this is all

going to be resolved by 31st October, and of course we believe him, so we’ll be able to talk

about that. On Asia Pac, Iberia’s growth is off a small base, when Luis was here, I don’t know

if you want to comment Luis, but maybe before you comment Luis, Steve is there anything

you want to say about it?

Steve Gunning: The only couple of things, just to say all routes, so it wasn’t specific, all

routes except for China, mainland routes, improved quarter on quarter. Probably what was

encouraging was we saw Hong Kong improve to some degree, and that had been a


18

challenging market environment, so it was across the board and we saw some improvement

in Hong Kong which was encouraging. I don’t know, Luis, did you want to add to that?

Luis Gallego Martín: In the case of Iberia, the base is very small as we are only flying to

Tokyo and Shanghai and we have increased the number of frequencies to Tokyo from three to

five, that is the reason of the huge increase that you see there.

Willie Walsh: And on BA, what BA – I think the figure that’s been quoted was in a

submission that BA made to the court as part of their appeal; it was first and foremost

specific to BA, and it was specific to an anticipated type of industrial action; there can be

many different forms of industrial action. The point I would make is obviously, what might be

negative and would be very negative for BA obviously will be positive for other airlines in the

group, and we will use other group assets. So, when we look at it from an IAG point of view,

it’s different to how we’d look at it from a BA point of view, but I can’t put a figure on it

because we’d need to, you know, understand what form of industrial action is being taken.

So, when and if they do serve notice, we’ll then put an appropriate mitigating plan in place,

BA will do whatever they can do to assist the customers and the rest of the group will do what

they can do to take advantage of the unfortunate situation and support and help BA in their

efforts to look after customers. So, we’ll wait and see.

Malte Schulz (Commerzbank): Yeah, hi, Malte Schulz from Commerzbank. Just to be a

little bit more clear also on – on expectations beyond – I mean we’ve already talked a little bit

on Asia, on North America, but on the rest it’s like a bit in Africa, India, what do you expect to

benefit more from the Jet Airways demise. And maybe also on your – a little bit on your ex-

fuel cost outlook for the rest of the year, should we just think of it, it will decline in a more

straightforward way, or is there a lower decrease in cost anticipated for the rest of the year.

Willie Walsh: The rest of the network, as I said, you know, as Steve highlighted India and

Jet, there’s not going to be a quick solution to Jet, I know there’s still people thinking about

trying to reincarnate Jet. I can’t see that happening personally, so there has always been

strong demand into and out of India, that continues to be the case. There has been some

traffic, you know, additional capacity put into the market, but it’s clearly performing better as

a result of the demise of Jet, and the rest of the network, again with the exception of the

routes that we’ve highlighted, it’s performing well.

The areas that we’ve been very much focused on and have been challenging ourselves is in

relation to specifically Argentina and Brazil. We are seeing evidence of Argentina stabilizing

and Brazil maybe improving a little bit, so we’re probably at this point more optimistic about

Brazil than we are about Argentina, but it’s still – you know, it’s still way off where we had

expected it to be. And in relation to China, you know, we don’t see anything changing there,

because you know, it’s clear that the trade between the US and China doesn’t look like it’s

going to be solved anytime soon, so you know, the China – Chinese carriers are clearly

looking to put capacity where it makes sense for them.

The other side of that obviously is that there aren’t that many aircraft being delivered into

China, and I think this is going to be an issue. We’ve seen some figures that are very

surprising in terms of what should have gone into China, now won’t go into China. So you

know, the supply of aircraft environment is clearly challenged by the grounding of the Max at

the moment, so when we look at all of the moving parts, the general environment that we’re


19

seeing at the moment is quite good and we don’t see that changing quickly. What is clearly

changing is the global economic environment, which is softening, but it’s still positive. And

you know, we’ve operated in worse economic conditions than this, so you know, we’re looking

at where we need to trim capacity, but we’re also looking at where we think there will be

opportunity, and we’re particularly looking at where we see vulnerable competitors as well,

because I don’t believe all of the airlines that are operating today will be operating this time

next year, and we’re in a position to take advantage of that as well.

So, on cost, you know, giving that we’re reducing our capacity, it clearly makes the challenge

of improving your non-fuel unit costs harder, but we’re continuing to say – well we see the

unit revenue improving in the non-fuel unit cost being flat at a constant currency basis for the

rest of this year, and that’s on the back of reduction in the capacity for [inaudible].

Andrew Light: I’ve just got another question by email from Andrew Lobbenberg of HSBC,

first question regarding the LatAm joint business, what is the timeline and plan to get that

operational, given the decision by the Chilean high supreme court? And then secondly on

London airport expansions, very clear about your thoughts on Heathrow, what are your views

Willie on Gatwick’s plan – London Gatwick’s plan to use the emergency runway as a second

runway.

Willie Walsh: So, on Lat-Am you know, clearly we were disappointed with the decision of the

court. We have continued to discuss the options available to us, with LAN, maybe Luis you

would comment.

Luis Gallego Martín: Yes, as you know, the restriction we have right now is Chile and we are

evaluating if we can develop the JV in the rest of the countries. We are now trying to find out

if we can do that or if we’re – it’s very complex to develop it that way, but that’s the situation

we have right now.

Willie Walsh: And on Gatwick, well clearly what Gatwick have demonstrated is that they can

expand at a much more realistic price. I’ve always argued that the economic case for an

expansion at Gatwick is much lower than at Heathrow, but if Heathrow’s third runway is

costing as much as, you know, we believe it is now, then that significantly improves the

economic case for Gatwick, because the problem Gatwick would have faced is that if you build

a third runway at Heathrow they will lose customers from Gatwick. That’s what history tells

you, that the operators at Gatwick will look to move into Heathrow, and then there’ll be a hole

in the Gatwick capacity. But if Heathrow isn’t expanded then I think there’s a huge

opportunity for Gatwick, and they’ve clearly demonstrated that they have a much more

sensible approach to expansion. As I was sitting there, I was thinking, did I give the

guidance wrong in relation to this, so I think I may have said non-fuel unit cost flatten – if

non-fuel unit costs improve – Steve, you’re supposed to interrupt me and correct me, that’s

your job now.

Steve Gunning: You got it wrong Willie, it’s the other way round.

David Perry: David [inaudible]. Right okay yeah, two questions, Steve, the pro forma

gearing falls to or fell to 1.2 under IFRS 16, and your predecessor had told us he thought it

would be inefficient to go below 1.2 times. I just wondered if you shared that view. And then

secondly, just curious if you’ve got any thoughts about how much money you might be


20

putting into the pension scheme as a top up next year. I think it’s just over 800 this year,

but maybe falls next year. Thank you.

Steve Gunning: With regards to whether it’s efficient or not, I’ll leave Enrique to his

thoughts on that one. Clearly, one of the things I’ve enjoyed over the last month or so, from

being in the role is doing our initial bond issuance, and it’s been very helpful to have an

investment grade credit rating, as a business to be able to do that. We got particularly good

coupon rates on the billion we raised. It was a half a point and one and a half points, so

getting the leverage at the right level is important for us. I do have a sympathy with what

Enrique is saying, that going too low isn’t capital efficient. In terms of pension schemes two

things to mention there really, the first one is on both of these or one of these is well

documented in the IMR, with regards to the APS pension scheme, we’ve reached agreement

with the trustees which we’re now awaiting court blessing on, and we’re hoping we will get

that in Q4.

The consequence for the company of that agreement would be, we’d be putting no more cash

into that scheme, effective 1st January this year. So that would be a big way – a big progress

and big development from where we were. Previously we were putting in 55 million a year,

plus we were putting in a cash sweep element as well, so that’s good progress but we’re

awaiting the court blessing and hopefully that will be Q4. In terms of NAPS pension scheme,

which is the one we closed the future accrual last year and previously had the deficit of 2.7

billion. It will probably be inappropriate for me to give too much guidance because we are in

the middle of negotiating this with the trustees as we speak. Actually the regulatory deadline

was 30th June for this, so we’ve gone past the deadline. We are having good constructive

talks, but they’re vigorous talks as well, and we hope to try and achieve clarity and

agreement by the end of September, so I think from my perspective and the way we’re

entering into these negotiations is having closed the scheme to future accrual is a real

positive, it de-risks the scheme, and I also look at the quality of the covenant that BA has,

which is stronger. So, you know, part of what the company is saying when it’s going to those

discussions is that needs to be reflected in whatever the deficit recovery payments are.

Andrew Light: Questions in the room. Okay I’ve got one further question on the email from

Johannes Braun of Mainfirst, and he says – I think it’s a question for Luis – on Latin American

weakness, to what extent does the strong growth of Air Europa play a role and how do you

view the longer term impact from a potential Air France KLM-Air Europa joint venture for

Iberia?

Luis Gallego Martín: I think as Willie said, the two countries that we are suffering are

Argentina and Brazil, the rest of the countries are behaving well. I think now we have an

advantage in the cost structure that we have in Iberia, that’s the reason we are growing, and

I think we are competing very well with all the other companies that are putting additional

capacity in this environment. So, I think that we are not worried about that. Our main

concern is Argentina and they are going to have general elections at the end of October and I

think it’s going to be a time where we hope the situation is going to recover.

Andrew Light: Okay thank you very much everyone for coming. We’ve referred to the

Capital Markets Day several times today; that’s 8th November, so hopefully all of you can join

us then, thank you.


21

Documents

H1 Earnings/media/Files/I/IAG... · Welcome to this results presentation. I want ... North Atlantic, principally coming from investing in the strong networks that we have, but expanding