Q1 2019 Earnings Conference Call Friday, 10 May 2019 IAG Q1 2019 - - PDF document

Q1 2019 Earnings Conference Call

Friday, 10 May 2019

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 2

IAG Results Presentation

Willie Walsh

Chief Executive Officer, IAG Highlights Overview Okay, thank you very much and good morning. Thank you for joining us for the call. Before I hand over to Enrique to take you through the detailed presentation, just allow me to make a few comments. We are very pleased with our first quarter performance. As you know, it was a challenging quarter for European airlines, and we have highlighted some of those issues, talking about the fuel and FX headwinds and the timing of Easter, which we always said would impact on our Q1 performance and market capacity in the quarter, which clearly impacted on yields. Our passenger unit revenue declined by 1.4% at constant currency, but we saw a further reduction in our non-fuel unit cost, down by 0.6% at constant currency. And as Enrique will show you later on, when you take out the non-ASK-related costs associated with Iberia MRO and BA Holidays it improved even better than that. And while we saw a slight decline in our ROIC, it is still ahead of our 15% target. And we are sticking to our guidance for the full year. We expect to get there in a slightly different way. We are now saying passenger unit revenue is expected to be flat at constant currency and non-fuel unit costs expected to improve at constant currency, and therefore, for the avoidance of any doubt, we expect passenger unit revenue at constant currency to improve for the remainder of the year. We are also adjusting capacity and now forecasting full-year capacity growth of 5.3% compared to the 5.9% that we gave for our previous call, and we will go through that in a moment. You may have seen yesterday we announced our AGM to be held on 20th June and, subject to the approval of our shareholders at that meeting, you will see some very generous cash returns to our shareholders, with a final dividend of €0.165 per share and a special dividend

• f €0.35 per share.

Financial Results

Enrique Dupuy

Chief Financial Officer, IAG Profitable Quarter Good morning, everybody; thank you, Willie. So, as has been just said, Q1 ’19 has been a challenging quarter for IAG and for the industry, especially the European industry. We will be probably the only, or one of the only European companies to achieve positive operating profits and positive net earnings figure for this quarter, and it shows our resilience and

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 3 determination to reach and to commit to our targets, the ones that we share with you from time to time. Operating profit Operating profit then for this quarter has been reaching €135 million, which is €205 million lower than last year, but if we carve out the negative impact of FX, especially the strength of the dollar in respect of last year through the quarter, this means the real comparable constant currency terms has been a drop of €144 million. And as you will see, most of this drop is basically referred to Easter holiday change in timing, and that is basically confirmation of the messages that we have been sharing with you through the last months. Unit revenue In terms of how this €135 million has been built up, we have to mention positive passenger unit revenue performance at constant currency basis of -1.4% and total unit revenues, again at constant currency terms, of -1%. The difference shows again the growth of our third-party MRO business and handling business in the case of Iberia, and also British Airways Holidays. Costs On the cost side, we have been probably beating our expectations, the ones that we had for this first quarter, and achieving a -0.6% improvement constant currency and pro forma compared with last year. And as Willie was advancing, if we carve out the costs that are related to these non-ASK activities as Iberia, third-party MRO, British Airways Holidays etc, the real underlying positive performance on the non-fuel unit cost basis has been -2%. Of course, fuel has not been helpful through quarter; it has been a significant headwind for us, for the rest of the industry, and has then driven total non-unit costs, again constant currency basis and pro forma, to a positive 2.2%. Basically the duration of the margins this quarter refers to the difference between this total unit revenue slightly negative performance and the total unit cost increase. We have been producing a capacity increase of 6.1% against last year, and then RPK figure of 6.4%. It also shows in some way that revenue weakness has been more related to yield pressure than to real passenger numbers flying in our network. Non-fuel cost performance If we can pass to the second slide, basically we are trying to split and detail how the difference between the operating profit in ’18 and the first quarter ’19 has been doing. So first, remind you again, this negative net impact of FX, again stating that it is basically transaction-related, so strong-dollar-related. Of course we have been growing 6%. and there is a margin increase having to do in this chart to volume increases. It is about €21 million. Impact of Easter And then again having to mention the negative impact of passenger revenues, which is basically related to yield, as I was saying, and very much referred to Easter holiday migration

• n the timetable between somewhere in the middle between Q1 and Q2 last year and the full

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 4 Q2 in this year. It is always difficult to evaluate precisely, surgically, what is the impact of Easter holidays. A reasonable guess it has been around €65 million. Non-passenger revenue improvement again worth a mention; the improvement in activity and then margins related to Iberia, MRO, also marginally British Airways Holidays; and then of course fuel costs. Fuel cost increases for the quarter have been a very relevant combination

• f market prices and hedges, which has been creating for us this headwind that in unit terms

will be in the range of 15% out-turn and 11% on constant currency terms. The positive is coming on the management and the achievements on the non-fuel costs, which has been bringing us a positive contribution of around €22 million for the quarter, leaving then the operating profit for the first quarter at the €135 million level. Unit revenue and capacity So, unit revenue and capacity. These couple of pies is a chart that we bring to you every

• quarter. This quarter probably is showing in terms of RASK one of the weaker performances

that we have seen in the last quarters. It is related to capacity. It is also related to weak demand in some cases, and also, very specifically in the case of Europe, to Easter holidays. Domestic and European So very quickly going through it, domestic is still benefiting from this positive performance on the Iberia specifically and also a little bit of Vueling domestic networks. It has to do again with incentivisation of traffic attached with subsidies for islanders, Balearic and Canary

• Islands. And then there is Europe revenue, unit revenue weakness, which is very much

related to Easter and weaker demand. And, surprisingly or not, the UK does not appear as the weaker region in these charts in this quarter. It is more around Germany, Spain and

• ther areas that have been basically concentrating their weak revenue profile.

Asia Pacific Asia Pacific, again a very similar picture as the last quarters we have been sharing with you, and again very specific weakness on some specific areas, again mentioning in this case Hong Kong and maybe a little bit of Tokyo; Hong Kong having to do basically with overcapacity developments lately on some of our competitors. Africa, Middle East and South Asia Africa, Middle East and South Asia has had probably one of the best performances for the group on a low capacity increase. Latin America and Caribbean Latin America and Caribbean is of course basically again a quite concentrated negative impact, and we have to refer here again to Argentina, basically, and Brazil. Although there is a difference; Brazil we believe is already bottoming and may be showing some spikes of

• brightness. In the case of Argentina it is again a very troubled market and is probably

bumping on the bottom and will only get better probably through Q3 and especially Q4 when the impact of devaluation last year gets fully rolled over. North America In the case of North America we have a -2.3%, but if we basically split or carve out the negative implications of the high growth we have been producing there in LEVEL, Aer Lingus

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 5 and Iberia, with lower unit revenue type of structural basis, we see that that averaging down effect has been creating most of the negative figure. And we can say that British Airways is remaining on positive unit revenue performance in the North Atlantic, which is again a matter

• f fact that we are basically providing us confidence in the performance of these important

sectors for us on the remainder of the year. Costs Fuel costs So on the cost side, of course, starting with fuel, this 11.1%, we will explain again in the following chart how we see the performance for the following quarters. It has had also to do with a strong performance, so low fuel costs, fuel unit costs, we had in the first quarter of year 2018, that has made the comparables for ’19 slightly more difficult. Employee unit costs Employee unit costs also, as the previous quarter, performing very positively. Again you will see productivity of the group for the first quarter has been still growing in a very significant way – more than 3% – and this is again one of the structural facts behind this non-fuel employee positive cost performance and savings. Supplier Supplier is marginally negative, but then it is here where most of the impact of the costs that are related to Iberia, MRO, maintenance costs, British Airways Holidays handling costs are basically being charged. So if we were to carve out the negative, so the savings, the negative figure in this quarter for the supplier, it would be consistently higher. Ownership Ownership is quasi flat, and this also is a positive sign having to do with a number of additional aircraft that we are bringing to our operations in these last quarters, and specifically in Q1. So that is how we get non-fuel 0.6% negative and really minus 2% in terms of underlying basis, and a total non-fuel cost increase of 2.2%. Referring now more precisely to the fuel chart, we are basically re-evaluating our fuel bill for 2019 and we are getting to an approximate figure of €6.2 billion. And this is referred to a kerosene price of $670 per metric ton and a value of the euro against the dollar of 1.12. These are mainly spot type of references, so we feel comfortable with a figure of €6.2 billion as being the appropriate estimate for the fuel bill of the whole year. Especially noting that

• ur level of hedging for the remainder of the year is high. It is above 80%, and this gives

this figure quite a bit of consistency. You also see how the fuel cost increases for the following quarters will be gradually diminishing, especially in Q4, and probably entering into neutral or even slightly positive territory through 2020. This again shows that we will be able to digest this big increase that happened since early or mid-2018, keeping the basic achievement that we had stated on our Capital Markets Day in terms of results, in terms of profitability ratios. So talking about profitability ratios, ROIC has achieved a decline since last quarter. This is basically the substitution of quarters. So Q1 ’18 was a strong quarter in terms of profitability, in terms of ROIC as well, has been substituted by the first quarter ’19, which I have been

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 6 explaining is a weaker one. So this substitution effect has been creating this drop in ROIC for the last four quarters, but still showing a figure which is above 15%. Operating margin trend has been dropping, again because of the reasons I have been explaining; normalised margin for the last four quarters for the group still holding at the 12% level. Another type of consequence that you are seeing here in this chart of the application of IFRS16 is about the ROIC convergence between the different companies of the group. So companies such as Iberia and Vueling that had a higher content, higher component of

• perating leases, have been benefiting and increasing their ratios. And that is because of a

right of use equivalent that we have been evaluating is lower than the eight times notional figure that we were using in the past. Having said that, British Airways is still the company achieving profits in the first quarter of the year, the same as the full group. ROIC in Aer Lingus is still holding at very high levels; above 20%. So most of our main messages, our main achievements, are being kept, are still there and will be there for the remainder of the year. So leverage improved, and again this matter of the way IFRS16 is in application on our figures, especially on our net adjusted debt figures. Also because, as you see in the first quarter, end of the quarter, is capturing a significant cash increase having to do with the sales that are going to be flown, and that have been already flown, by our passengers through the month of April. So that cash increase has been one of the basic arguments and reasons why our cash position has been holding very strong in the first quarter, even through this reduction in our operating profit figures. The other one has to do with basically less restructuring cash costs in this year against 2018. So finally, and because we do not want to bore you with too many figures, of course you have

• n the appendix a lot of the details. We are going to be running very quickly through these

basic consequences of the application of the IFRS 16 new accounting methodology. So the usual suspects which we have been sharing with you: a little bit of a lower CASK ex- fuel, having to do with the way the rental costs are treated and now split between interest and depreciation. There is EBITDA replacing EBITDAR because there are no more rentals to be considered as such at the operating profit level. Higher operating profit margin, again due to the exclusion of the interest element on

• perating leases. A similar adjusted level of operating margin, so we were not so far away

when we were applying the eight times, and then we were splitting the rental in a slightly artificial way between depreciation and interest charges. Normalised operating profit margin as the numerator of ROIC calculation will be slightly lower due to adjusted right of use, aircraft depreciation and also the inclusion of amortisation depreciation of the intangible software investments. So adjusted EPS is going to be having ups and downs depending on the relative age of the

• perating lease contracts, but as a whole the differences are going to be smoothed through

the period of our business plans, so through the next three or four years, having positive or negative small deviations against the non-IFRS 16, pre-IFRS 16 figures.

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 7 Net debt is where we really find the big change, and of course it has to do, as we had advanced you, with the fact that the liabilities attached to the right of use calculations are well below the notional ones considered under the eight-time multiplier. So no surprises, and it has been as we told you. And then creating a leverage difference, positive difference, so a significant reduction coming down then from the prevailing 1.6 levels, 1.5 levels, to the one-ish levels in which we are moving today. Equity free cash flow has been a pure cash metric so will not change. And return on invested capital (ROIC), is going to be changing very slightly. Again, probably this could have positives and negatives for the next years. This year will be slightly higher basically because

• f the inclusion in the numerator of additional margins due to the way we treat other non-

fleet rentals and also this IT depreciation, which will be part of the numerator now. In the case of the denominator, it is going to be again experiencing a little of a drop, and then it is again on the new definition that we are applying. Basically a new element that appears as absolutely rational is now we are averaging the invested capital to the last four quarters of the year instead of taking the end of the quarter last figure, which was a bit unfair. Sorry for this very detailed explanation, and I am passing back the word to Willie to explain

• ther important issues around our future performance.

Outlook

Willie Walsh

Chief Executive Officer, IAG Okay, thank you, Enrique. Turning now to capacity for 2019, as I mentioned in my opening remarks, we are now adjusting full-year capacity growth to 5.3%, down from the 5.9% that we previously gave you. And you can see that that takes effect mainly in the fourth quarter with a reduction from what we had previously announced at 5.9% to 3.7% capacity growth in Q4. This is a number of measures taken across all of the airlines. I think it is fair to say we tried a couple of new initiatives in Q4 of last year, rolling into Q1 of this year, which did not quite work out as we had planned, and therefore we will not be repeating that and you should expect therefore the lower growth that we are showing in Q4 at 3.7%. That will flow through into Q1 of 2020. And finally, just to reaffirm our guidance for the year, as I said, we are sticking to our guidance and, at current fuel prices and exchange rates, we expect 2019 operating profit, before exceptional items, to be in line with 2018 pro forma. Passenger unit revenue is expected to be flat at constant currency, and non-fuel unit costs are expected to improve at constant currency. And again, just to reiterate, we expect passenger unit revenue at constant currency to improve for the remainder of the year. So I will now hand back to the operator and we can start taking your questions, thank you.

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 8

Q&A

Savi Syth (Raymond James): Yeah, good morning. Just a couple of questions from me. First, on the lowering of the revenue outlook slightly for 2019, I am just kind of curious to know what region has caused that change. And so the second question, it is a bit of a long-term and conceptual question, but you do have jetBlue that has announced wanting to do trans-Atlantic, and there is a bit of a difference with jetBlue versus Norwegian in that they actually have a premium product and a strong network, at least on one side. I am kind of curious on your thoughts on what that impact might be, what the competitiveness will be, and also just what the implications are for Aer Lingus, given the strong relationship there with JetBlue. Thank you. Willie Walsh: Okay, thank you. I think the best way of dealing with the unit revenue is it reflects the weaker performance in the first quarter, which clearly was lower than we had

• expected. Our outlook for second and third quarter remains as we had originally planned.

We are not seeing any evidence of activity that is unusual. The areas of weakness across the network are the ones that we have highlighted to you before and are the areas where we are making adjustments to capacity, and they are principally in places like Argentina, Brazil and South Africa. So we have already announced we are cancelling the Madrid-Johannesburg Iberia route, and BA is cutting capacity into South Africa as well. And we will be slowing down growth in the fourth quarter into these markets. It just reflects the macroeconomic environment in those countries. The rest of the network is performing pretty much as we had expected. I think the issue in Q1, as we mentioned, was a capacity issue, an industry capacity issue. And we have to put our hand up: we contributed to that in Europe. So we had strong capacity growth in the quarter. In our case, as you can see from the figures, we grew capacity in the quarter by 6.1% and RPKs grew by 6.4%, so we did fill the capacity we put in there, but it clearly had an impact to the yield. I think other European carriers saw similar situations and may not have been as successful in filling seats as we were. So, as I said, the adjustment to the unit revenue for the year really does reflect the difference in performance in the Q1 to what we had planned. The rest of the year we see very much in line with our original expectations. On jetBlue, I think we have been hearing about jetBlue coming into Europe for four or five years now, so it does not come as a surprise to anybody. I think they are talking about 2021,

• r maybe 2022. We know, like everybody else, that there are delays to the delivery of Airbus

aircraft, so that may impact on their timing as well. We do not really see it changing. We have been anticipating it. We have been waiting for it. The relationship between Aer Lingus and jetBlue remains strong and we expect that to continue, so we are not proposing to make any changes to that. It is Aer Lingus’s desire that they continue to work with jetBlue, and we see no reason why we should change that. I think everybody is waiting to see where in Europe they actually fly to, given the slot restrictions that apply to most of the airports that they probably want to serve. So we will wait and see, but it is a long time away and it is not anything that would be concerning us.

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 9 Jarrod Castle (UBS): Thank you. Good morning, gentlemen, and, Enrique, if I am not mistaken, this is the last set of results, so I guess, on behalf of all the analysts, thanks for all the help. Three from me. One, any update on shareholding structure conversations with the EU, if those are constructive? Two, anything to be said at this stage in terms of conversations with the unions and British Airways? And then lastly, obviously we have got coming quite a big special and ordinary dividend on 8th July, but any thinking in terms of further cash returns as we move through the year? Thanks. Willie Walsh: Thank you. So, in relation to the conversations that we have, it is important to point out that the main conversations take place with the national regulator, because it is a national regulator that has responsibility in the area of ownership and control, certainly in the first case. We have had comprehensive discussions with those. I cannot disclose the details. I think it would be wrong for me to say that, and you should expect the national regulators to make some statements in due course. We engage also at the highest levels with the Commission, and we remain confident in our position in relation to our structures and a post-Brexit, whatever type of Brexit it is, environment that we will continue to operate. And we are pleased that the Air Connectivity Regulations have been passed and we have seen a corresponding and liberal approach being adopted by the UK government, so we remain confident in relation to these issues. The conversations with the trade unions in British Airways are ongoing. Obviously we do not provide a running commentary in relation to that, but BA continues to engage in open dialogue with the trade unions and, if there is any news to report, we will clearly be the first to tell you in relation to that. It is a lovely special and ordinary dividend that will be approved by our shareholders at the AGM, hopefully, on 20th June. In relation to any future return, cash return to shareholders is

• bviously something that the board will discuss at the appropriate time. But we have always

been clear that, where we are generating any cash in excess of the cash that we believe we can use sensibly, that is money to be returned to shareholders. And the debate has always been around the form in which that money gets returned, not whether it gets returned. And that continues to be the attitude of the board, which they have reaffirmed on a number of

• ccasions, and I have no doubt that the chairman will reaffirm that at the AGM on 20th June.

Stephen Furlong (Davy): Hi, guys. Just want to, again, Willie, maybe just give your general comments on. I know you are a proponent of consolidation. You are very well positioned, a net debt to EBITDA of 1x, but I think you said fairly recently maybe don’t expect anything from IAG in 2019/2020, so just a general comment there. I just want to ask about the April traffic stats. Maybe any comments there, because it looks like a very strong performance by Aer Lingus. Maybe it is Easter, not so much by LEVEL, but maybe it’s the law of small numbers? And then maybe just on the also the cargo market, because that is also a bit weak? Thank you. Willie Walsh: Thanks, Stephen. Yes, we are very clear; we believe consolidation will continue to benefit the industry in Europe. We are pleased with the activity that has taken place and we are pleased that a number of our competitors are talking about actively pursuing further consolidation. I can reaffirm that we are not actively considering anything at this stage.

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 10 As I said, we do not normally comment on rumours and speculation but, in relation to Thomas Cook, we are not looking to do anything with Thomas Cook. I think the only ones I have seen to confirm their interest has been Lufthansa, and I believe their interest principally relates to

• Condor. But we are not looking to do anything there. So again, as we have been clear, if

there is an opportunity, we are well positioned, but we do not see anything that we would consider to be attractive or that would make sense to us. That is not to say it does not necessarily make sense to others, but it certainly does not make sense to us at the moment. And yeah, April traffic stats were good. You are right: April was very good for Aer Lingus. There is an Easter impact in that, and it impacts on the airlines in a different way. Easter is, as Enrique said, normally positive for leisure and negative for business travel. So we did not see any change in patterns associated with the Easter activity. And just to say it up front, we see no impact of Brexit or any Brexit-related issues, either in the first-quarter results or in anything we are seeing in terms of booking patterns at the

• moment. I have been asked that by a number of journalists. And LEVEL is just in that

growth spurt, so you should expect to see it take a little bit of time for it to catch up. On cargo, the cargo situation remains challenging. As we have always said, it is structurally a market where supply always exceeds demand, and that will continue to be the case as you see wide-bodied growth to deal with the growing international passenger demand and the associated empty space in the cargo holds. So we are not seeing anything that is particularly

• different. It is a challenging year, which we expected it to be, and we think that is going to

be the case through the rest of this year. We have long given up looking at cargo as a lead indicator for passenger, and that continues to be the case. We do not see any correlation between the trends that we see in cargo and the trends that we are seeing on the passenger side of the business. Stephen Furlong: Okay. Thanks, Willie, and thanks, Enrique. Jamie Rowbotham (Deutsche Bank): Morning, Willie and Enrique. Just one question from

• me. The good start to the year on non-fuel unit costs is clearly there for all to see, but back

at the full-year results you were also quite clear that this would probably not be one of the years where you were able to reduce non-fuel unit costs, and now you say it can be. So could you just give some specifics in terms of what has changed, please, on the outlook for non-fuel unit costs? Thanks. Willie Walsh: I think this reflects the strength of IAG and the flexibility that we have, that we can change and change quickly to respond to changing market conditions. And that is exactly what we did. As I said, we tried a slightly different approach with some of the airlines to the commercial activity in the fourth quarter and the first quarter, and it did not work. I do not mind admitting we put too much capacity in there. We were able to fill it, but it is at the expense of yield, and it was something that we tried, we thought it was right to do it and we got it wrong. We are not going to repeat it. So when we could see that that was not working the way we had planned, we started taking action early. And this is something that we have done; we responded early to the increase in the fuel price that we saw in 2017 going into 2018 and we adjusted pricing early, and that is what we are going to continue to do. So it reflects the flexibility that we have, and if we see

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 11 the need for a change in approach, we will do that. We have a number of initiatives that we have accelerated in relation to our non-fuel costs approach. There are no major big programmes there, it is just the ongoing focus that all of our operating companies and all of the managers in the business have in relation to cost. It demonstrates the control that we can exercise over our cost base, and we will continue to do that. Enrique Dupuy: We achieved some improvements through Q1 on our cost management targets and that is something that we want to retain, so that is nothing that we are going to be giving back again through the following quarters. On the other side, the underlying minus 2% gives us really a lot of confidence in our ability to make these improvements structural through the year. So that is why we have been more confident in re-targeting a reasonable, small, modest reduction in non-fuel unit costs for the full year. James Hollins (Exane): Hi, good morning. First of all, many thanks, Enrique, and best of luck, and then a few from me. Just the first one, does that capacity planning in any way, certainly if it were to go through to 2020, impact your CAPEX guidance? Is it still technically 2.6 to 2.7 this year? Secondly, it feels like many, many quarters since you have not mentioned BA Holidays as being extremely strong. I was wondering if that ever is showing signs of calming down, or whether it is just super strong and maybe continues for a long time to come? And then thirdly, clearly you are not doing Thomas Cook. I was just wondering, on Norwegian, obviously you have sold your shares and said you are not doing it. Have you technically ruled yourselves out forever, and technically when could you come back? Is there any regulation that says you cannot come back fairly soon with another bid, particularly at 38 krona where it is now? Thanks. Willie Walsh: Thank you. I will take them in reverse order. No, there is nothing to prevent us, but we are not on Norwegian, we are not active. So we are not locked out if something were to happen there, but I can assure you we are not looking at it and we are not intending to do anything. And as you saw with Liverpool, 3-0 down, you can always come back, but I am ruling it out at this stage. BA Holidays continues to perform well. It has been a strong performer and continues to be a strong performer and it has become a real player in that market, and it reflects the customer base that we have and the network that we clearly have as well, which is a particular strength that BA has that other carriers cannot match. Sorry, you are going to have to remind me of your first question again. Sorry, CAPEX, yes – no change. We are still looking at CAPEX this year in line with the guidance that we gave you, 2.6 to 2.7, yeah, but we will update you at Capital Markets Day in November in relation to both future capacity plans and future CAPEX plans. As I said, the capacity you should certainly expect us to adjust from the previous figures that we gave you, and that should have an impact on CAPEX associated with capacity growth. But it is too early to give you any insight into the longer-term impact of that, and we will do that at Capital Markets Day. James Hollins: As you got your Liverpool reference in there, I think I had better mention I am off to the Brighton v Man City game, so I will see if we can do you a favour this weekend, Willie.

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 12 Willie Walsh: Please do. The Seagulls are one of my favourite teams, obviously. James Hollins: Always have been, right? Yeah, thank you. Willie Walsh: Absolutely. Always have been a big fan. Andrew Lobbenberg (HSBC): Hi, guys. Can I ask about Vueling and the performance in the quarter? There was quite a large drop in the margin; was that just purely an Easter timing or was there anything else going on there? Can I ask about the 787 delays that continue and seem to drag on? How is that affecting your capacity plans, and where might we come in for any compensation issues from Rolls? Are they to be seen in any part of the financial statement? And then in terms of LEVEL, obviously you are not disclosing its profitability specifically, but in its very high-growth mode, is it performing in line with what you expected and is there a differentiation in how it is performing long haul against short? And Enrique, thank you very much. It has been such fun working with you for such a long time. Enrique Dupuy: Thank you, Andrew. Willie Walsh: On Vueling, yes, it is fuel and Easter principally. They did see some weakness, softness in the Italian market and in the French market, which I think was not just Easter related, but, as you would expect given the leisure focus that Vueling has, it was principally the issues that you have highlighted, Andrew. On the 787, the additional inspections on the TEN engines will have an impact because we have to take aircraft out of service to complete the inspections. We are not expecting to see any issues with the engines but, as I said, there is a strict maintenance inspection programme that does require us to take the aircraft out of service to complete those checks, and we will be pursuing additional compensation from Rolls-Royce. I am probably a little bit more positive about the situation; it is clearly very frustrating and annoying for us, but we do think that Rolls have now identified solutions. It just requires them to get the solution manufactured and delivered to customers. So it will have a very small impact on capacity with the 787 programme; we will have to adjust that to deal with the additional maintenance inspections required on the engines. And LEVEL, yeah, it is still very early days. What I can tell you is LEVEL Barcelona is performing well and is profitable and in line with our expectations. LEVEL long haul and Paris is behind expectations. I think we have seen a very strong capacity and competitive situation in Paris, but we are seeing a number of those competitors now withdraw. But the Paris performance has lagged behind. And on the short haul, as everybody knows, Vienna has seen huge increase in capacity, so that has had a big impact on yields in the Vienna market, which are behind what we had

• planned. But as we have said before, the financial performance of LEVEL is embedded in the

figures; there is no separate exceptional cost that others are reporting in relation to their initiatives in these markets. So we remain confident about LEVEL and particularly very encouraged with LEVEL’s performance in Barcelona.

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 13 We are more confident given what we are seeing in terms of competitive reaction now to our performance in Paris, and Vienna is performing in line with what everybody else has said Vienna is doing. It is a market where customers and the airport are making – well, the airport is certainly making money and customers are getting great offers, but it is challenging for the airlines. But, as I said, it is a yield impact. The volumes that we are seeing and the customer reaction to the LEVEL product on short haul has been well in excess of our expectations. Sumit Mehrotra (Société Générale): Thank you. The most important question has been asked by Andrew, but I just have to ask you about anything specific you saw in the domestic

• sector. I see unit revenue is up 2%, so if you could highlight a few geographies that have

been doing well for you in the domestic sector? Secondly, on the North Atlantic market you say that British Airways underlying unit revenues have been doing well. What are your expectations for this summer, early indication of the bookings and how the trends are in unit revenues? Especially, your thoughts about pressures from the long-haul capacity growth from low cost airlines this summer? And then lastly, I know you have limited elbow room to discuss your employee costs, but do you expect the impact to be felt in Q3 this year, and whether it will be more loaded towards H2 rather than H1 from the BA discussion? Thank you. Willie Walsh: Thank you. Domestic, as Enrique said – I think he pronounced it ‘Icelanders’; we would say islanders. Enrique Dupuy: Sorry for that. Willie Walsh: So this is Spain activity between the Canary Islands and the mainland, which has been very, very strong. We have been using Iberia wide-body aircraft to serve the market there. So it is just a very, very strong performance in the Spanish domestic market that has continued into the second quarter. Transatlantic is fine. Business continues to be strong. We are not seeing any unusual trends and we are not seeing anything that would concern us in relation to capacity. In fact, I would say quite the opposite because we have seen some capacity come out from the low-cost carriers that have pulled back or disappeared. So nothing to say on transatlantic through the summer. And obviously I am not going to provide commentary on the employee discussions. They are

• ngoing, and it would be wrong for me to say anything at this stage. But when there is

information, we will be very clear with you in relation to any impact. But, as I said, we are not going to provide a running commentary to the negotiations that are ongoing at the moment. Sumit Mehrotra: Sure, and just a quick follow-up on the North Atlantic bit. Do you see the pressure this year to be lower than last summer? Willie Walsh: It is competitive on the transatlantic, but I think the capacity growth is lower than people would have expected with the collapse of WOW and with Norwegian clearly experiencing challenges and adjusting capacity accordingly, and with the ongoing issues on the 787 and a few other things. There is certainly less capacity growth this summer than we would have expected. But the underlying demand environment continues to be very good, so

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 14 it has been a good market, and the trends that we are seeing at the moment are very much in line with what we expected to see in the second and third quarter. And, as you know, we have limited visibility into the fourth quarter at this stage, but we do not expect any significant change in the capacity outlook that has been adjusted as a result of those changes that I mentioned earlier. Sumit Mehrotra: Okay, thanks. And thank you, Enrique. Malte Schultz (Commerzbank): Hi, thank you, and first of all, of course, thank you,

• Enrique. Two questions left from me. First of all, can you give just a little bit more colour on

the different development within your premium cabins and economy, particularly on the long- haul flight, of course? And also we spoke already a lot about the North Atlantic, but not so much about Asia. Do you foresee any areas where you can rather maybe increase a little bit capacity, and did you already adjust your capacity outlook for the travel area like Hong Kong, or is there anything planned? Willie Walsh: Okay, I will deal with Asia and I will let Enrique just comment on the premium long haul. On Asia we are increasing capacity in some markets, but we have seen significant capacity coming in from the Chinese carriers, and that clearly is very significant. Less so for us, because of our footprint in China relative to a number of our European competitors who would have a much bigger footprint in that market. Hong Kong, yeah, we are seeing a lot of capacity coming into Hong Kong as well. We have always had a strong position there. But it is principally from China, from the Chinese carriers with significant capacity growth. But, as I said, our exposure to China is a lot lower than our main European competitors. Enrique, do you want to comment on – Enrique Dupuy: Yeah, nothing very special to mention. So the performance through the first four months of the year is very consistent with our expectations. So figures, yields, unit revenues on the premium cabin are performing as we thought. So there has been a little bit

• f a shift in terms of some of our companies having to do with the calendar, having to do with

the timing of Easter, but what we are seeing for the first four months and what we are seeing into the rest of Q2/Q3 is looking positive; no special weakness to be recorded in the business

• cabins. Maybe more what we have seen in terms of leisure and especially, as we have said,

very much referred to the intra-European market. So that is basically the message. Operator: Our next question comes from the line of Nuala McMahon from Goodbody, please go ahead with your question. Nuala McMahon (Goodbody): Hi, guys; just two questions from me. The first one just on your pricing outlook, specifically in Europe. So European pricing was down 5.7% in Q1 and, while you expect that to improve in Q2, should we still be thinking about it as down year-on- year versus last year? And the second one is just on your IT platform. So previously, Willie, I know you were quite excited about what you were doing with your NDC providers, but that commentary seems to have faded a bit and it probably feeds into our view. How are you feeling about spend in your

• verall IT systems? Are you happy with how they sit currently?

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 15 Willie Walsh: On the IT systems, yeah, we are happy. We continue to invest where investment is justified. NDC is performing well. We are one of the leaders in relation to that. It is more of a commercial strategy and distribution strategy than an IT strategy in relation to NDC. On Europe, yeah, we have commented, and I think everybody else has, that capacity in Europe was strong, growth in the first quarter was very strong. That is moderating in the second and third quarter, but it was clearly, from our point of view, although we filled it and improved our seat factor overall – as I said, 6.1% ASK growth across the network, 6.4% RPK growth – it was at the expense of yield, and I think that is exactly what everybody saw in the European market. So we, as I said, we put our hands up and said we got capacity wrong there, but we have adjusted it and we are not seeing anything in second or third quarter that is out of line. Enrique Dupuy: So maybe the MAX issues will contribute to moderate capacity increase through Q3 and Q4, depending on how the whole thing ends and when. But it appears that some of our direct competitors were using or planning to use MAX’s for the following quarters, and that is going to be also then a contribution for a moderation of our capacity growth intra- Europe. Nuala McMahon: Okay, so sorry, just on the European side, while I understand what you are saying on the capacity side, do you actually expect pricing to be up year-on-year for the summer period for Europe? Willie Walsh: We do not give any details of that. We will give you the details after it has happened, but we do not give guidance in relation to that. Neil Glynn (Credit Suisse): Good morning. If I could ask two questions, please? The first

• ne – best of luck, Enrique, for the future, and I thought maybe, as a departure gift, I might

ask you a question on the transfer pricing for the first quarter within the unit revenues, if that is okay? Just looking towards the RASK down 1.4% year-on-year, you have obviously highlighted on the slides that the differential between that and the regional performances is partially transfer pricing and Avios redemptions etc. But the gap seems wider than it has been over the last few years, and I just wanted to check whether there was anything specific in there and whether that should normalise, if you will, through the rest of the year. And then the second question, just on the other revenue; obviously a very strong performance year-on-year, I think partially due to maintenance as you have called out. But I guess your visibility is probably okay on the maintenance pipeline for Iberia through the rest

• f the year, so I was hoping you could help us in terms of understanding whether there would

be any particular lumpiness second quarter, third quarter or fourth quarter on that or whether it should be quite uniform through the year? Thank you. Enrique Dupuy: Yeah, I will take the two questions. So on transfer traffic payments and flows, yes, they have become in Q1 an important part of the difference between what we call the raw figures, the regional figures in unit revenues, and the final minus 1.4%. The other ones to mention which have also been contributing to bridge that gap are around ancillary growth. So ancillaries have been growing significantly on this quarter in respect on

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 16 last year. And again, other variety of reasons, among which Avios is one of them, outdated paper is another one. So there is a basket of different matters why there has been this raw difference between the raw figures on unit revenues and the final RASK combined figure for the group. We see probably that gap is going to be closing through the following months. Especially, we believe transfer traffic payments will become narrower through Q2 and Q3. They are explained basically by the different unit revenue performance, due to the different economic strengths on both sides of the Atlantic. On the maintenance business, MRO business of Iberia on third parties, yes, it has been a high revenue figure for the first quarter. It is going to be kept high but gradually fading through the next three or four quarters. So we will see that figure becoming narrower basically into Q3 and Q4, although for the full year it is going to be probably above the full year of ’18. Johannes Braun (Mainfirst): Yes, hi. I just have one more general question left. On that delivery of unit revenue recovery in the remainder of the year that you expect, is this rather based on Q2, or is it more on the Q3 trend, or is it actually Q4 when capacity is cut down to that 3.7%? Willie Walsh: No, as we said, it is Q2/Q3. It is not so much Q4. You know, the change from what we had said previously is really the Q1 performance. It is always difficult, as Enrique said, to call Easter and the impact that that has, but it is principally as a result of the lower unit revenue performance versus our plan in the first quarter. For the rest of the year we are very comfortable with what we see, and it is very much in line with what we would expect to see going forwards. Johannes Braun: Okay, understood, thank you. And thank you, Enrique. Willie Walsh: I am going to let Enrique comment first, and then I want to make a short comment before we close. Enrique Dupuy: Yes, so this is, as you know, my last occasion to disclose quarterly results for IAG, and of course I have to say to all of you it has been a great pleasure to work with

• you. It has been always very positive interaction, very understandable, and I really have

enjoyed a lot. Of course, I have enjoyed more working here with the team on the IAG project; it has been a fantastic eight-and-a-half-year period. We have been really enjoying building up this fabulous project, this fabulous group of companies, which is probably at the very top of the range of the worldwide airline companies and groups. I have to mention a very specific issue about our value. So when people think about IAG, they think about Heathrow as maybe the main one of our more valuable assets. It is not

• such. It is not Heathrow: it is our team. I think basically we have the best management

team in the whole industry. And it is not the thin team; it is a very broad team. So in reality we are securing succession, which is going to be absolutely positive, absolutely valuable, and we will be ensuring the creation of additional value for the shareholders that we have and future shareholders that we will have.

IAG Q1 2019 Earnings Conference Call Friday, 10 May 2019 17 But again thank you, thank you very much for your help and contribution. Willie Walsh: Thanks, Enrique. I speak for everybody around the management team to thank you for your fantastic contribution and we will wish you well in your retirement, but we will continue to work you hard until 20th June when you retire. Enrique Dupuy: I am sure you would. Willie Walsh: Yeah, do not worry. I just want to make a personal statement because, as you know, I like to be upfront with everybody and need to tell you that I will be selling part of my shareholding, and this is to meet an outstanding financial obligation to my ex-wife. And I know any CEO selling shares attracts headlines and theories, but I want to be absolutely clear with you that this does not in any way reflect the view of the business looking forward or my

• wn wish to walk away from IAG. But owing to a combination of results and other issues,

principally the Norwegian situation, I have been deemed an insider for most of the last two years and have not been able to sell any shares, so I need to take advantage of this open period. As you know, I have not sold any shares in IAG until now. My shareholding is around two million shares, and I will be selling a portion of these shares to allow me to fulfil an

• utstanding financial obligation in respect to my divorce. We will make obviously a formal

announcement when the shares have been sold, but I thought it would be better that you hear it directly from me now rather than wait until after the event. So as I say, it is not something I want to do, in fact quite the opposite, but it is something I have to do. So on that very happy note, can I thank you all for joining the call and appreciate your support and we look forward to talking to you at our next results announcement. [END OF TRANSCRIPT]