IAG 1st Quarter Results

FINANCIAL REVIEW

Strategic overview

IAG announced that it did not intend to make an offer for Norwegian Air Shuttle ASA and consequently sold its 3.93 per cent shareholding.

 

IAG placed an order for 18 Boeing 777-9 aircraft, plus 24 options, for British Airways, to replace 14 Boeing 747-400 and four Boeing 777-200 between 2022 and 2025. Each aircraft will be fitted with 325 seats in four cabins.

 

British Airways will move to a new location in Terminal 8 at John F. Kennedy airport and is investing in the new terminal with American Airlines as part of a significant reinvestment by the Port Authority of New York and New Jersey. Changes will include additional aircraft stands, enhanced state-of-the-art baggage systems, new lounges, premium check-in areas and upgraded concessions.

 

British Airways unveiled its new Club Suite which will feature direct-aisle access, a suite door and flat-bed seats in a 1-2-1 configuration. The new 56-seat Club World cabin will be launched on the airline's first A350 aircraft in July 2019 which also will also feature the latest World Traveller Plus cabin.

 

LEVEL announced Amsterdam Schipol as its second European shorthaul base, and flights started on April 6, 2019. Three Airbus A321 aircraft are based at Schiphol, with four A321 aircraft already based in Vienna.

 

Basis of preparation

The Group has adopted the new accounting standard IFRS 16 'Leases' from January 1, 2019, and has used the modified retrospective transition approach. IFRS 16 eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model. On the Balance sheet, obligations to make future payments under leases, previously classified as operating leases, are recognised as right of use assets (ROU) with the associated debt. In the Income statement, the operating lease costs are replaced with depreciation (within operating expenditure) and lease interest expense (within non-operating expenditure). For further information see pages 170 to 171 of the 2018 Annual Report and Accounts.

 

The following review is against a pro forma basis for 2018, which provides a consistent basis for comparison with 2019 results. Pro forma results for 2018 are the Group's statutory results with an adjustment for IFRS 16 from January 1, 2018, and have been prepared using the same assumptions used for the IFRS 16 transition adjustment at January 1, 2019 (set out in note 33 of IAG's 2018 Annual Report and Accounts) adjusted for any new aircraft leases entered into during 2018 and using the incremental borrowing rates at January 1, 2019. The IFRS 16 adjustments for aircraft lease liabilities are based on US dollar exchange rates at the transition date.

 

Principal risks and uncertainties

The Group has continued to maintain and operate its structure and processes to identify, assess and manage risks. The principal risks and uncertainties affecting the Group, detailed on pages 30 to 36 of the 2018 Annual Report and Accounts, remain relevant.

 

Operating and market environment

Average commodity fuel prices for the quarter were slightly lower than in the same period last year, although effective fuel prices were higher than in 2018, principally due to hedging profits in 2018 not repeated in 2019 and the strengthening of the US dollar.

 

The US dollar was stronger against both the euro and pound sterling, whilst the average euro to pound sterling exchange rate was at similar levels to quarter one 2018.

 

IAG's results are impacted by exchange rates used for the translation of British Airways' and Avios' financial results from sterling to the Group's reporting currency of euro. For the three months, the net impact of translation was €2 million favourable.

 

From a transactional perspective, the Group's financial performance is impacted by fluctuations in exchange rates, primarily from the US dollar, euro and pound sterling. The Group generates a surplus in most currencies in which it does business, except for the US dollar, as capital expenditure, debt repayments and fuel purchases typically create a deficit. The Group hedges a portion of its transaction exposures. The net transaction impact on operating profit was adverse by €63 million for the period, increasing revenues by €46 million and costs by €109 million.

 

The net impact of translation and transaction exchange for the Group was €61 million adverse.

 

Capacity

In the first three months of 2019, IAG capacity, measured in available seat kilometres (ASKs) was higher by 6.1 per cent, with increases across all regions. The increases were mainly driven by Iberia, up 11.1 per cent on the previous year, the expansion of LEVEL shorthaul and longhaul and Aer Lingus, up 14.2 per cent.  Vueling and British Airways also increased capacity over the previous year, up 4.0 per cent and 1.5 per cent respectively. Passenger load factor rose 0.2 points to 80.7 per cent. The Group carried 24,382 thousand passengers during the quarter, an increase of 6.2 per cent versus last year.

 

 

Revenue

Passenger revenue rose 5.2 per cent from the previous year. Passenger unit revenue (passenger revenue per ASK) decreased 1.4 per cent at constant currency ('ccy'), due to lower yields (passenger revenue per revenue passenger kilometre), with a small offset from the increase in passenger load factor. The decrease in passenger unit revenue was due in part to Easter being later than in 2018, particularly impacting leisure travel, together with market capacity and increased average stage length.

 

Cargo revenue was 0.4 per cent lower than in 2018 and 2.5 per cent down at constant currency, impacted by market conditions in the Asia Pacific region, partially offset by volume. Cargo carried, measured in cargo tonne kilometres (CTKs), rose by 2.6 per cent, with yields at ccy down 5.0 per cent on 2018.

 

Other revenue increased by 19.9 per cent and by 16.3 per cent at ccy, mainly driven by increased revenues from Iberia's third party maintenance business and higher revenue at BA Holidays.

 

Costs

Employee costs increased 4.3 per cent compared to last year. On a unit basis and at ccy, employee unit costs improved 1.9 per cent with salary awards, primarily inflation-linked, more than offset by efficiency initiatives achieved across the Group and the closure of the British Airways NAPS pension scheme to future accrual on March 31, 2018. The average number of employees was 2.4 per cent higher than 2018, reflecting the growth in capacity, with productivity, measured as ASKs per average manpower equivalent, up 3.6 per cent for the Group.

 

Fuel costs increased 22.8 per cent, with fuel unit costs up 11.1 per cent at ccy from higher average fuel prices net of hedging, mainly due to hedging profits in 2018 not repeated in 2019. The introduction of new fleet continued to drive efficiencies.

 

Supplier costs increased by 8.6 per cent, although on a unit basis at ccy were broadly flat on the previous year.

 

Ownership costs increased 6.2 per cent on the previous year, with the number of aircraft in service growing from 551 to 582. Ownership costs on a unit basis and at ccy were broadly in line with 2018.

 

Overall non-fuel unit costs at ccy were down 0.6 per cent versus a year ago, with the impact of growth and efficiency measures across the Group more than offsetting price increases and the additional costs incurred to grow Iberia's MRO and BA Holidays' revenues.

 

Operating profit

The Group's operating profit for the period was €135 million, a decrease of €205 million versus 2018, and down €144 million at ccy, driven mainly by fuel headwinds, market capacity impacting yield and the timing of Easter.

 

Exceptional items

There were no exceptional items in the quarter. In 2018, the Group recognised an exceptional gain of €678 million, due to the closure of British Airways' NAPS and BARP pension schemes, and an exceptional charge of €39 million related to the continuation of British Airways' transformation initiatives.

 

Net non-operating costs, taxation and profit after tax

The Group's net non-operating costs for the quarter were €49 million in 2019, compared with €118 million in 2018. The change was primarily from the net retranslation of debt and hedging instruments, resulting in a credit of €70 million in 2019, compared with €21 million in the previous year.

 

The tax charge for the period was €16 million before exceptional items, with an effective tax rate for the Group of 19 per cent (2018: 16 per cent). The rate in 2018 was impacted by the recognition of withholding tax on the closure of the British Airways NAPS pension scheme.

 

The profit after tax for the quarter was €70 million (2018: €775 million after exceptional items), a decrease of €705 million versus last year, principally driven by the reduction in pension liabilities in 2018 associated with the closure of the British Airways NAPS pension scheme to future accrual.

 

Cash and leverage

The Group's cash position of €7,481 million was broadly in line with March 31, 2018. Net debt at the end of the quarter, including the debt associated with right of use assets, was €5.2 billion and net debt to EBITDA was 1.0 times.