IAG 3rd Quarter Results 2019

Strategic overview

On July 26, Aer Lingus took delivery of its first Airbus A321neo LR aircraft which operated its inaugural flight from Dublin to Hartford, Connecticut on 2 August. The A321neo LR is the most cost efficient long-range narrow body aircraft and is fitted with a total of 184 seats in business and economy cabins.

On July 27, British Airways received its first Airbus A350-1000 aircraft, which features the airline's new business class seat. The Club Suite offers direct-aisle access, a suite door for greater privacy and flatbed seats in a 1-2-1 configuration. In total, British Airways will take delivery of 18 Airbus A350s, with four of the new aircraft joining the fleet before the end of 2019.

On October 10, IAG announced its commitment to achieving net zero carbon emissions by 2050 becoming the first airline group worldwide to back this ambitious goal. In addition, British Airways will offset carbon emissions for all its UK domestic flights from 2020 by investing in verified carbon reduction projects equivalent to the carbon emissions it creates for domestic flights. These include solar energy projects, forestation programmes and tree planting in South America, Africa and Asia. IAG will also invest $400 million in sustainable aviation fuel in the next 20 years. British Airways is partnering with specialised company Velocys to build Europe's first plant that will turn household waste destined for landfill into sustainable fuel which produces 70 per cent less CO₂ emissions than fossil fuel.

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 debt with the associated right of use assets (ROU). 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 to reflect the estimated impact of 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 nine months 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 for the nine months was at similar levels to the previous year.

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 nine months, the net impact of translation was €4 million adverse.

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 €8 million for the period, increasing revenues by €255 million and costs by €263 million.

The net impact of translation and transaction exchange for the Group was €12 million adverse.

Capacity

In the first nine months of 2019, IAG capacity, measured in available seat kilometres (ASKs), was higher by 4.7 per cent, with increases across all regions. Iberia increased its capacity primarily through additional frequencies on its Latin and North American routes, in particular Mexico, Chile and New York and in Asia Pacific with additional frequencies to Tokyo. Vueling increased its capacity primarily through additional frequencies across its domestic market, with Balearic and Canary Islands performing well throughout 2019. Aer Lingus growth is driven primarily by the North Atlantic with a new route to Minneapolis added in July 2019 and deployment of the A321neo LR to Connecticut. British Airways increased capacity through additional frequencies, primarily in Latin America and the Caribbean, together with new destinations including flights to Charleston, Pittsburgh, Islamabad and Osaka from London Heathrow. LEVEL longhaul capacity growth reflected the impact of the launch of LEVEL France in July 2018 and a new route from Barcelona to JFK in July 2019. In addition, LEVEL launched shorthaul bases in Vienna in July 2018 and in Amsterdam in April 2019.

Revenue

Passenger revenue increased 5.3 per cent versus last year. Passenger unit revenue (passenger revenue per ASK) was down 0.5 per cent at constant currency ('ccy') from lower yields (passenger revenue/revenue passenger kilometre), with passenger load factor higher by 0.8 points at 84.7 per cent. Passenger unit revenues rose in the Domestic, AMESA (Africa Middle East and South Asia) and North America regions, and fell in Europe, Asia Pacific and LACAR (Latin America and the Caribbean). In the nine months to September 30, 2019 the Group carried over 90 million passengers, up 4.9 per cent versus last year.

Cargo revenue decreased 2.6 per cent, which represented a decrease of 5.0 per cent at constant currency, reflecting the weak market conditions seen in air freight and global trade.

Other revenue was up 18.4 per cent, excluding currency impacts up 15.6 per cent. Other revenue rose from higher BA Holidays revenue and from Iberia's third-party maintenance business.

Costs

Employee costs increased 3.5 per cent compared to last year. On a unit basis and at ccy, employee unit costs improved 1.4 per cent with salary awards, primarily inflation-linked, more than offset by efficiency initiatives achieved across the Group, the closure of the British Airways NAPS pension scheme to future accrual on March 31, 2018 and the impact of the BALPA industrial action on employee bonuses. The average number of employees was 2.3 per cent higher than 2018, reflecting the growth in capacity, with productivity, measured as ASKs per average manpower equivalent, up 2.3 per cent for the Group.

Fuel costs increased 16.1 per cent, with fuel unit costs up 6.9 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 7.1 per cent and on a unit basis at ccy were up 1.3 per cent on the previous year, including the additional costs incurred to drive higher other revenue in British Airways and Iberia.

Ownership costs increased 5.1 per cent on the previous year, with the number of aircraft in service growing from 575 to 601. Ownership costs on a unit basis and at ccy were 0.5 per cent higher than in 2018.

Overall non-fuel unit costs at ccy were up 0.4 per cent versus a year ago, impacted by disruption and strike action in quarter 3, together with the additional costs incurred to grow Iberia's MRO and BA Holidays' revenues.

Operating profit

Operating profit for the nine months was €2,520 million before exceptional items, a decrease of €250 million from last year. Results in the third quarter were impacted by cancellations relating to industrial action by BALPA pilots and by other disruption, with an adverse impact of €155 million.

Exceptional items

There were no exceptional items in the nine months. 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 €94 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 period were €251 million in 2019, compared with €369 million (2018 statutory: €121 million) in 2018. The change was primarily from the net retranslation of debt and hedging instruments, resulting in a credit of €93 million in 2019, compared with a charge of €6 million in the previous year.

The tax charge for the period was €455 million before exceptional items, with an effective tax rate for the Group of 20.0 per cent (2018: 17.2 per cent).

The profit after tax for the nine months was €1,814 million (2018 pro forma: €2,474 million after exceptional items, 2018 statutory: €2,514 million after exceptional items), a decrease of €660 million versus last year, principally driven by the net impact in 2018 of the reduction in pension liabilities associated with the closure of the British Airways NAPS pension scheme to future accrual and restructuring costs.

Cash and leverage

The Group's cash position of €7,838 million was €915 million higher than September 30, 2018. Net debt at the end of the period, including the debt associated with right of use assets, was €6.2 billion and net debt to EBITDA was 1.2 times.