Full Year 2019 Guidance Update Call Thursday, 26 th September 2019 - - PDF document

Full Year 2019 Guidance Update Call

Thursday, 26th September 2019

International Airlines Group Update Call Thursday, 26th September 2019 2

Willie Walsh

Chief Executive Officer, International Airlines Group Overview Summary Thank you and good morning. Thank you for joining us on the call. I hope by now, you have had an opportunity to read the statement that we issued earlier this morning. But just to summarise, the industrial action by BALPA, British Airline’s Pilot Association, led to the initial cancellation of 4,521 flights over a period of seven days. So, although the strikes were scheduled for three days, the 9th, 10th and 27th, the strikes also impacted the days before and

• after. So, in effect, it was impacting schedules on the 8th, 9th, 10th and 11th of September, the

26th, 27th and 28th of September. Subsequently, 2,196 flights were reinstated which left 2,325 flights cancelled. And in addition, British Airways introduced a flexible commercial policy on an additional 4,070 flights which enabled customers to rebook or seek a refund on flights that were operating in or around the dates of the industrial action. We estimate that the net financial impact of the industrial action is €137 million. And in addition to this, BA also suffered some further disruption during the quarter, including the threatened strikes by Heathrow Airport employees, which was impacting both on the schedule and also on bookings. And we believe that the net financial impact of that was €33 million. We also then estimate that based on latest booking trends, and this is literally in the last week, that in our low-cost segments, and this is primarily Vueling and LEVEL, we are seeing adverse booking volumes and yields. And we estimate the financial impact of that is €45 million. So, at current fuel prices and exchange rates, IAG therefore expects its 2019 operating profit, before exceptional items, to be €215 million lower than the 2018 pro forma which was €3.485 billion. Passenger unit revenue is expected to be slightly down at constant currency compared to the flat guidance that we gave you previously. And non-fuel unit costs are expected to improve at constant currency, which is unchanged from previous guidance. Capacity measured in ASK in the fourth quarter is now expected to be about 2%, which is 1.2 points below previous guidance, and full year capacity growth is expected to be about 4%, compared to the 5% that we guided previously. Just for clarity, there have been no further formal talks between British Airways and BALPA on the pay-related issues and the airline’s offer of 11.5% over three years still stands. And as you know that has been accepted by the vast majority of BA employees by the unions representing about 90% of the employees. Clearly, any further industrial action will additionally impact on our full-year results for 2019. So, I would like to hand over now for questions. As the operator said, given the time constraints, if possible, we would like to limit it to two questions each please. And I now hand back to the operator.

International Airlines Group Update Call Thursday, 26th September 2019 3

Q&A

Gerald Castle (UBS): Thank you very much. Good morning, gentlemen. Just on the unit revenues being weaker, you say this is really due to the low-cost segment. But we have also seen comments, obviously, about 2.5 weeks ago from Air France, about Asia and North

• America. So, the first question is, is that still holding up relative to your previous

expectation? And then the second question, you have maintained your ex-fuel unit cost guidance in terms

• f improvement. But just given this disruption, etc., has that meant that it is slightly weaker

than expected or is this literally still in line, or even better than expected? Thank you. Willie Walsh: Okay, thank you. In relation to Asia, we previously indicated that we were seeing weakness in Hong Kong as everybody is – that is the only area where we have seen particular weakness. And that is part of the additional disruption that I highlighted in the ₤33 million, so that is definitely a factor that, I think, is impacting on all airlines. Outside of that, Asia is holding up well. On North America, we have clearly had some disruption to the schedule as a result of this industrial action on North America, but when we strip out that, the underlying performance continues to be as previously guided. On our costs, clearly, we are taking action to reduce costs and net off against the revenue impact of the industrial action, hence the reason we are guiding there to the net impact of ₤137 million. So, there is, behind that, cost action that British Airways has taken and that has enabled us to maintain our guidance in relation to our non-fuel unit cost, which is broadly the same as we have previously guided. Gerald Castle: Thanks, very much. Damian Brewer (Royal Bank of Canada): Good morning, everybody. So, first question. Just on saying the lower-cost segments are weak and you highlighted LEVEL and Vueling. Can you say a little bit more where that is across the board in all parts of those markets, where there is any particular markets? I am just quite curious why – clearly Aer Lingus has a very competitive low-price product. Is that still holding up? Then the second question, given the unresolved issues with BALPA at BA, could you confirm, given there might be some tension on the goodwill between BA and the pilots, whether you have sufficient pilots in BA to run the schedule without relying on overtime? And, if you do, given that the 2% growth you are seeing for Q4, does that reflect operating a full schedule? Thank you. Willie Walsh: Okay, thank you. Yeah, we have particularly highlighted with – LEVEL is a continuing issue in relation to Argentina, principally, although the Santiago bookings are lagging behind where we had expected them to be. But it is principally Argentina in Latin America, and then the French operation which we had expected to start improving, given the difficulties that a number of French carriers are experiencing. However, as we have seen, there tends to be French solutions to these problems and these airlines, which are effectively bankrupt, have continued to operate. So, I would expect that the French situation should improve over time, given what we expect to see happening there.

International Airlines Group Update Call Thursday, 26th September 2019 4 With Vueling, yes, it is across the board. It is particularly noticeable in October, less so in

• November. So, October, what we are seeing is weak volumes and yields. November volumes

are slightly better but yields are lower than expected, so it is principally, I would say, a yield issue, although October has some additional disruption which we are digging into. But the booking trends changed very noticeably in the last week and looking forward into October and November, we see yield pressure. And that is across the Vueling network. I should comment that Vueling has suffered some disruption as a result of ground-handling strikes at Barcelona and it clearly had some financial impact, and it does appear to be having some impact on bookings going forward. So, that could, potentially, improve, but the trend that we have seen in October and November is not what we had expected to see and, hence, the reason we have highlighted it. In relation to pilots, as I said previously, I have great respect for BA pilots. We do normally rely on an element of overtime which is part of the agreement, so that is an agreement that we have with BALPA and the pilots. But we do have enough pilots, without question, to

• perate the schedule. We are reducing capacity and, clearly, we will be reducing forecast

growth next year, which we will detail for you at Capital Markets Day. So, what we are doing now is reviewing the planned recruitment for pilots that was ongoing in British Airways. But as you have seen from recent events, there is no shortage of pilot availability, particularly in the UK market but, quite honestly, no shortage of pilot availability in the European market. And we are seeing that with all of the airlines as we look at recruitment for pilots. So, we will give further details where necessary and appropriate when we give our Q3 results, and again, at Capital Markets Day in November. Damian Brewer: Okay, thank you very much. Neil Glynn (Credit Suisse): Oh, good morning. If I could ask three quick ones, please? The first one, you have talked about taking out cost to mitigate industrial action. Just interested, can you actually identity specifically what areas of costs you are cutting? And whether these are temporary or they are structural in nature and likely to continue to help into 2020 and beyond? Second question, on the 1.2 percentage points capacity hair cut in the fourth quarter, is this all Vueling or LEVEL? Or is that also happening elsewhere across the group? Then the third question. Even though this seems to be Vueling and LEVEL oriented, the incremental weakness in demand, clearly, people are concerned about demand weakness seeping through into British Airways. What you said is helpful so far but is it possible to give us any additional colour in terms of how you are likely to mitigate any incremental risk through capacity measurements through the winter, at least, at this point? Willie Walsh: Yeah, thank you. I let you away with three questions and give you two

• answers. So, on the cost reduction, it is principally cost in the current year, so these are not
• structural. So, for example, there was bonus provision which has now being released because

we are clearly not going to be paying bonuses. So, that has helped to offset. We offset some

• f the impact of the revenue. On flights that were not operating, clearly, we did not have the

fuel cost, the direct operating costs associated with that. So, wherever possible, we took measures early on to save as much of the cost associated with flights that were going to be

International Airlines Group Update Call Thursday, 26th September 2019 5

• cancelled. So, it is a number of measures but I would not describe them as structural, Neil,

at this stage. Clearly, that is something that we are working on later, but the immediate cost reduction was very much related to activity in and around the flights that were impacted. On the capacity reduction, it is principally Vueling but, obviously, British Airways, because of some disruption as well as we are dialling back a little bit there, but it is principally Vueling adjusting their capacity. We spent a lot of time, Steve and I, with the British Airways commercial team, digging into the underlying trends because, clearly, we wanted to make sure that guidance we were giving you in relation to the financial impact of the strike was directly related to the strike. And we are satisfied, based on all of the work that we have done, that that is the case. We are not seeing any chance in behaviour at the BA side that is evident in the booking profiles or in the market feedback. So, clearly, bookings have been disrupted in British Airways by the industrial action, both for flights directly related to the dates of industrial

• action. But it also pre-dates around the industrial action. But when we dig into it, we are not

seeing any underlying issue. What we are doing, however, is like everybody and we have commented on this as we were doing roadshows over the last few weeks, that our view of the general economic environment is that it has softened. It is still positive, but we are looking at our capacity plans for 2020 and beyond and we will update you on that at Capital Markets Day. But, as I have said to a number of people, you should expect us to look at lower capacity growth in 2020 than we had previously guided at Capital Markets Day in November of last year. Neil Glynn: Thanks Willie. Mark Simpson (Goodbody): Yeah, thank you. Two questions. On Vueling where you talked about the booking trend change, I am just wondering whether that is Spanish

• riginating or traffic into Spain. And, obviously, we have had some benefits in the Spanish

resident subsidy. Is that fading? Is that part of that? Or is more in broader originating traffic into Spain, which is where the issue is? The other question, Vienna, obviously, LEVEL, you talked about Argentina being the key problem there. I wonder if you could just update us about the European product with regards

• LEVEL. I know that you are thinking about expanding Vienna, move some aircraft, or rather

allocate the aircraft elsewhere rather than Vienna. Can you just give us an idea of what is happening on that part of the business? Willie Walsh: Yeah, thank you. No, actually, Spain is not the issue at all. In fact, with Vueling, the main areas that we have seen are Italy, France, UK and these are into Barcelona, so the Spanish domestic market continues to be strong. So, we have not seen any evidence

• f issues in relation to Spanish domestic market, and that is consistent with what we are

seeing in Iberia as well. So, this is more a European issue for Vueling and it is very evident in Italy and France, in particular, so the Spanish market, domestic, is fine. No issues there that we can identity. On the Vienna, I have previously said Vienna is very competitive. A lot of growth in the market there. We have limited our exposure to the Vienna market. We had originally planned to grow but we have shifted capacity that was scheduled to go into Vienna into

International Airlines Group Update Call Thursday, 26th September 2019 6 Amsterdam, rather than Vienna, so our exposure to Vienna is limited. But it continues to be a very competitive market. So, the issue in relation to LEVEL that we have identified is the long haul part of LEVEL. It is not the short haul LEVEL which is relatively small, but, as you say, Vienna continues to be a very competitive market. Mark Simpson: Yeah, thanks. Daniel Roeska (Bernstein Research): Good morning, gentlemen. Maybe, if I could ask you the other way round, how you are thinking about 2020 right now? What makes you change your mind? Do you think there is any hope to be had for demand recovering? Are there any pockets in your network where you are still quite confident that actually in the next couple of months and 2020 will be performing as expected or better, into next year? We talked about the gloomy parts. Maybe, are there still segments that you are quite comfortable with? Thanks. Willie Walsh: Yeah, we are quite comfortable. As I said 2020, we expect to grow. The rate

• f growth is going to be slower than we previously expected. What is clear to us and must be

clear to everybody at the moment, we have seen a number of failures around Europe. Again, as we had expected to see and we believe that there will be further failure. So, I think, what you are seeing in the industry at the moment is a positive. We are seeing capacity coming

• ut through failures. Most airlines are moderating their capacity growth plans for the fourth

quarter of this year and into 2020, and certainly what we see at the moment is very

• encouraging. A number of airlines – weaker ones – are either disappearing or significantly

reducing their capacity. So, at this stage, we still expect 2020 to be a growth year for us but the level of growth that we will be pursuing will be lower than we had previously guided. But we will give you an update on that in November at Capital Markets Day, but no reason for us to be pessimistic about 2020. I think, the environment is just going to be slightly softer than we would have expected this time last year, when we were looking at 2020 plans back in 2018. But as I say, we will give you more colour on that when we present the capacity plans at Capital Markets Day, which I think is the 8th of November. Daniel Roeska: Thanks. Andrew Lobbenberg (HSBC): Morning. Can I ask about the ground-handling situation in Spain? Because I think, it is the Iberia ground-handling business that is facing the industrial action and I think, I am not sure, is it spreading Spain beyond Barcelona? So, how does that get closed out? How does it avoid impacting Iberia as well as Vueling? Then the second question which is a bit obvious, but have you guys got appetite to go for the Gatwick slots of Cook’s or are you happy having got the Monarch ones? Willie Walsh: In relation to Spain, the issue is the ground-handling strike in Barcelona. It has had very limited, if you like, ripple effect into other parts of Spain and it is involving one trade union. And it is difficult to describe it as industrial action because I think it is more complex than that but principally, it has impacted on Barcelona and it has principally impacted on Vueling at Barcelona. You may have seen Vueling has publicly stated that they are looking at options and may consider cancelling their contracts with their ground-handling

International Airlines Group Update Call Thursday, 26th September 2019 7

• supplier. But it is not impacting on the network across Spain; it is, principally, a Barcelona

issue. In relation to Gatwick, yes, if there are slots available, we will be looking at slot acquisitions; both through the normal way, the slot pool, but also if there is an opportunity to acquire some slots through the administration process, we will be looking at that. We are pleased with the performance of the slots that we acquired from Monarch and we clearly see Gatwick as an opportunity for us for growth purposes. So, that is something we will be looking at. Andrew Lobbenberg: Thank you. Francisco Rodriguez (Banco Sabadell): Yes, good morning. Well, I connected a little bit late, some minutes late, so sorry if you already commented about this. But I would like to know about the trends you are seeing, apart from Vueling and LEVEL and North Atlantic. Last time I checked, [inaudible also this softness coming into your business. Basically, [inaudible] know a little bit more about other trends, apart from the already Vueling and Level comment. Thank you. Willie Walsh: Okay, thank you. We did comment on that. So, just to repeat. Other than the areas that we had specifically identified, so Hong Kong for British Airways, and as previously identified Argentina which is impacting on all of the airlines operating there. But given the devaluation and the fact that LEVEL long haul operates in that price sensitive and price stimulated segment of the market, the devaluation in Argentina has impacted on bookings, ex-Argentina. Then on Vueling, as we commented on, it is the Vueling European network, excluding their domestic network in Spain. Outside of that, we are not seeing any trends that indicate any other changes in the market. But as I commented earlier, we did see a very noticeable change in the booking patterns in Vueling for October and November, with both volume and yield low in October and with yields low in November. Volume, actually, was looking okay but yield has definitely been lower than

• expected. So, they are the principal issues that we have mentioned.

Francisco Rodriguez: Sorry, just a follow-up question. This Vueling, I have heard the issue comes more from the European demand, so could this go into other airlines, like Iberia? Could be this something we can see in following quarters or…? Willie Walsh: We have not seen this and that is why we specifically identified what we have said in the statement, that is in the low-cost segments and it is principally Vueling and LEVEL. We have not seen that trend replicated in the other airlines. Francisco Rodriguez: Okay, thank you. Willie Walsh: Okay. Can I thank you for joining the call, and as I have mentioned earlier, we will give you further details and update when we release our third quarter results. Again, in terms of outlook for 2020, we will cover that off at the Capital Markets Day presentation on the 8th of November. But thank you for joining us this morning and goodbye. [END OF TRANSCRIPT]