IAG Results Presentation Willie Walsh Chief Executive Officer, IAG - - PDF document

Q3 2019 Earnings

Thursday, 31 October 2019

Q3 2019 Earnings Thursday, 31 October 2019 2

IAG Results Presentation

Willie Walsh

Chief Executive Officer, IAG Thank you very much and good morning everyone. Thank you for joining us. As you can see, these are good underlying results. The quarter was negatively affected by the BALPA pilot strike at British Airways. Our operating profit of €1.425 billion, that’s a margin of 19.5%. The impact of the strikes and disruption in the third quarter is €155 million. You remember on the 26th September we indicated a total of €215 million impact for full year; so, €155 million of that has affected the third quarter, and the balance €60 million will be in the fourth quarter. We continue to have very strong RoIC performance with the last four quarters equating to about 14.8%; and we’ve continued with our generous cash returns. I’m pleased to say the board of IAG yesterday approved an interim dividend of €0.145 per share which will be payable in December. Our guidance for full year 2019 remains unchanged from the guidance we gave you on the 26th September. Our fourth quarter capacity growth will now be 1.9%, and that will give us a full year capacity growth of 4%. So, to take you through the details of the financial results, I'm going to hand over now to Steve Gunning. Steve, over to you.

Financial Results

Steve Gunning

Chief Financial Officer, IAG Thanks, Willie. Good morning. We turn to slide five. As Willie said, the operating profit of €1.425 billion, that’s €105 million down year-on-year. As Willie said, €155 million of the deterioration is a consequence of the strike and disruption and the slight softening we saw in Vueling in Q3. It’s also despite an increase in the fuel bill of €136 million in the quarter, and clearly there’s been a little bit of FX help going the other way of about €41 million. So, that’s the operating profit. If you look at ASKs, we originally guided you to 5.2% ASK growth for Q3 when we were doing the half one results. Actually, our ASK growth for the quarter has only been 2.8%, so 2.4 points of ASK decline compared to previous guidance. 1.5 points of that relates specifically to the BA strike; so not really a surprise there, but that explains the deterioration. We then look at passenger unit revenue. It’s down 1.1% at constant currency. I’ll take you through a slide in a moment on that to get under the skin and give you some colour as to what’s going on passenger unit revenue. But if you look at total unit revenue, it’s also down 1.1% and that probably masks two offsetting factors. You’ve got the cargo business in a challenging environment at the moment. Global trade seems to be slowing and across the air

Q3 2019 Earnings Thursday, 31 October 2019 3 freight industry, we are seeing reduced amount; so, air cargo for us in Q3, the revenue is down 7%. Offsetting that, we are seeing good performance in BA Holidays and the Iberia third-party MRO business and third-party handling business. So, those two are largely offsetting one another and hence, while total unit revenue looks pretty much the same as passenger unit revenue on a performance. In terms of non-fuel unit costs, they’re up 1.1%, clearly impacted by the disruption and the strikes, not only because that increases our costs, but it’s also reduced our ASKs. If you strip

• ut the non-ASK-driven businesses in our group, such as BA Holidays and Iberia MRO, which

I’ve just alluded to on the revenue side, actually our non-fuel unit costs are largely flat. If you look at total unit costs, you can see they’re up 1.9%; and that’s factoring in the fuel bill as well as the non-fuel unit costs. What we’re seeing with fuel is that, although the commodity price is down, the net impact of our hedging year-on-year is up and, hence, it’s increased our costs. As I said earlier, the overall fuel bill year on year is €136 million higher. Those are the sort of highlights. Let me turn to the next slide which will give you a bit of a feel as to what’s going on with unit revenues in the quarter. As you can see, we’ve termed this as mixed revenue performance. There’s various different things going on in different

• regions. Overall, as I said, ASKs are up 2.8% and RASK was down 1.1%.

Domestic I’ll quickly take you through each of the regions and give you a flavour of it. Domestics: 87%

• f the domestic ASKs relate to Vueling and Iberia, and what we’re seeing there is strong

revenue growth again in Q3. You're not seeing the dramatic RASK improvement that we saw in Q2, simply because we’re now cycling over the resident discounts that were introduced last

• year. So, still strong revenue growth, but not quite the same level of RASK improvement that

you saw in Q2. Europe In terms of Europe, you see that RASK performance is similar to the Q2 performance, but off a lower ASK growth. One of the reasons for that is last year, 2018, Q3 Europe performance was particularly strong. We were seeing RASK performance last year up 4.5% on 6% ASK growth, and that was largely driven by BA and Vueling last year. If I look at Iberia and Aer Lingus, their performance in Q3 has been very similar to that as

• Q2. In terms of Vueling and BA, we’re seeing some degree of softening, partly attributable to

some of the disruption that we’ve seen in the quarter. Furthermore, when we gave you the re-guidance on the 26th September, we talked about we saw some softening happening in Vueling demand. And consistent with that, France and Italy seem to be the routes in particular that are softening there. Asia Pacific and AMESA If I turn to Asia Pacific, bear in mind 91% of the ASKs for this region relate to British Airways. And so, the strike and disruption impacts will have a significantly distorting effect on Asia

• Pacific. As you can see, the RASK is -3.7% compared to up 1.9% in Q2.

Q3 2019 Earnings Thursday, 31 October 2019 4 Factors over and above the strike impacting Asia Pacific are, one, Hong Kong. Hong Kong is clearly going through a period of unrest, as we know, and we’re seeing a RASK decline in Hong Kong, low double digits. So, we’re certainly seeing that come through on that route. The other development in Asia Pacific that’s coming through is with regards to mainland China, particularly Beijing where we’re seeing a lot of competitor capacity coming in. When we look at Africa, Middle East and South Asia, once again 90% of the ASKs in this region relate to British Airways and so the strike will have had an impact there. But other factors that we’re seeing in that region are post the Nigerian election, at the end of Q1, we saw a sort of uptick in performance in Nigeria in Q2 because there was some pent-up

• demand. Clearly that’s come off of there in Q3.

In terms of the Middle East, the timing of Eid compared to the school holidays has had an adverse impact, and we’ve also mentioned to you that we did divert capacity away from South Africa into India with the demise of Jet. That’s come through. But when you bring so much capacity across in a quick period of time, you will see some degree of RASK decline, and that’s what we’ve seen in AMESA. Latin America and North America With regard to Latin America and the Caribbean, a slight improvement on the RASK from Q2. In terms of Argentina and Brazil, both are showing some improvement in Q3. Argentina is not a structural change. We just saw a small bubble of increased demand ahead of the elections in Argentina. We would expect some deterioration the other side of that as a

• consequence. In terms of Brazil, more positive comment: we actually do see some signs of

improvement in Brazil, which is encouraging. If we look at the non-Argentina and non-Brazil part of this region, actually we’re still seeing double-digit revenue growth across the board and a strong performance. Last, but by no means least, North Atlantic, once again BA is 68% of the ASKs there, so the strike impact will have had a noticeable impact in this region. It’s the first time we’ve seen North America reduce ASKs since 2013. If you look at the non-BA element of the North Atlantic, you’ll actually see the RASK is up broadly 2% on ASK growth up about 3%. And that’s particularly driven by Aer Lingus performing well and Iberia performing solidly. So, North Atlantic, we’re not seeing an underlined deterioration. We did see clearly some strike impact in North America. That gives you a bit of a flavour into what’s going on across the regions from a revenue perspective. 3Q 2019 Non-Fuel Unit Cost Performance If we turn to slide seven, I’ll talk about non-fuel unit costs. As I said, they’re up 1.1%, but if we strip out the non-ASK-driven businesses, we’re up 0.2% on an adjusted basis. Quickly running through these, in terms of employee costs two drivers for improvement. One is productivity improvements overall across the group, particularly in Iberia and Aer Lingus; but also, the cost per head has improved. Now, this is not a structural change, but as we indicated when we re-guided, we have released the BA bonus provision in the quarter, and as a consequence that benefit is coming through in these numbers.

Q3 2019 Earnings Thursday, 31 October 2019 5 If we look on the supplier line, the non-fuel unit costs for supplier are up 2.4%, basically driven by BA and Iberia. For BA, the impact was strike and disruption, so compensation costs, etc., coming through. And also, for BA it’s the growth in the BA Holidays cost base which corresponds to the growth in the revenue. With Iberia, you’re seeing the engineering costs up largely related to the third-party MRO business. In terms of ownership in this IFRS 16 world, the ownership costs are depreciation costs coming through on the aircraft and we’ve had a number of new aircraft deliveries in the quarter or in the year which are affecting the quarter’s cost. As we turn to fuel, as I alluded to earlier, commodity price is actually down. It’s down from about 700 jet $/MT to about 618 $/MT for the quarter, but actually it’s the impact of the hedging that’s driving up the unit costs. Fuel Scenario A few more details on fuel if you turn to the next slide, I have several comments on this. Firstly, you can see that our fuel bill for 2019, we estimate will come out at €6 billion. That’s very slightly down on what we guided before; but to be honest, before we were rounding up to €6.1 billion and on this one we’re rounding down to €6.0 billion. We’re 96% hedged for the rest of the year, so the fuel bill should not move a great deal based on commodity price. As you can see with the detailed chart that we’ve shown you here, which is basically

• verlaying a 630 jet price and a 1.10 dollar-to-euro exchange rate onto our hedge book to

give you a feel for what we’ll see in 2020. What you can see there is we’ll have gone from a fuel headwind that we’ve experienced in 2019 to a fuel tailwind in 2020, and we are currently 71% hedged for 2020. RoIC Resilient As I go to the next slide, as Willie alluded to in his summary at the beginning, it’s been a strong quarter from a margin perspective at 19.5%, despite some of the challenges we’ve faced in the quarter with fuel and disruption. That’s also meant that the return on invested capital is very close to our 15% target, and so we’re pleased to see that resilience coming through in the business. As you can see, all four of our major airlines are performing strongly in the quarter. Leverage Stable and Strong Cash Position As I turn to the next page, slide ten, in terms of leverage and cash, you can see that our net debt to EBITDA is at 1.2 times. That’s consistent with where we were in December. Our cash is at a very healthy €7.8 billion. It was at €8.0 billion at the half year. A number of things have been happening on the cash front during the quarter. Clearly, we did our debut bond issuance which raised €1 billion. We actually redeemed our 2022 convertible which was about €0.5 billion. And we also, as Willie alluded to earlier, paid a final and special dividend during the quarter as well. So, strong cash position and strong leverage. Beneficial New Pension Agreements As we go to the next slide, it’s worthy of note that last Friday we put out an RNS to say that we’ve concluded our triannual evaluation for the NAPS pension scheme. Just to take you through a few of the highlights, the deficit, the actuarial deficit, came down from €2.8 billion to €2.4 billion. We had been, up to this point, been paying off up to 2027 a fixed contribution

Q3 2019 Earnings Thursday, 31 October 2019 6

• f £300 million per annum plus a cash sweep of up to £150 million per annum as well. To be

frank, in the previous two or three years, we’d always paid out about £150 million, so we’ve basically been paying out £450 million every year. What we’ve done under the new agreement is gone from £350 million plus £150 million to £450 million fixed. Those payments go out to 2023 rather than 2027. Other developments in this agreement is, as you will know, there were protections in the last agreement for the trustees which said if we paid out the dividend higher than 35% of profit after tax, then we needed to make other benefits or hand over other benefits to the trustees. We’ve now increased that level from 35% to 50% which gives us more flexibility in moving cash up from British Airways into the group company. Also, we were very keen as part of this agreement to introduce overfunding protection

• mechanism. So, as this scheme matures and now is closed to future accrual, comes in to

land, we wanted to make sure that we didn’t make payments into the scheme that were ultimately unnecessary. So, under this mechanism, when we get to a 97% funding level, we then start making payments into escrow rather than straight into the scheme. And when we reach 100% funding, we cease paying whilst the formal valuation is carried out. Last but not least with regards to NAPS, as we’ve indicated before in the annual report, and accounts, etc., there was a £250 million contingent liability that we knew we were going to have to pay, either to APS, the older scheme, or to NAPS, the scheme we’ve just been talking

• about. We were very keen it went across to NAPS because that was a scheme with a very

significant deficit. And as part of this arrangement with NAPS and also our discussions with APS, I’m pleased to say that £250 million will go into the NAPS scheme. Just one comment with regard to APS: no real change from what we’ve updated before, which is we have reached agreement with the trustees. The trustees are seeking court approval, and that process is ongoing, and we would hope to hear about that during quarter four. So, good progress on the pension arrangements compared to where we were. I think that’s it in terms of the financial summary. I’ll now hand back to Willie.

Outlook

Willie Walsh

Chief Executive Officer, IAG Decelerating Capacity Growth Throughout 2019 Thank you, Steve. As you can see from the next chart, we’ve continued to decelerate the capacity growth as we’ve gone through the year with fourth quarter capacity growth plans now at 1.9%. That’s a significant reduction from previous guidance and giving us a full-year capacity growth of 4%. So, consistent with what we said at the beginning of the year; if we saw the opportunity to trim capacity, we would do so and you can see the capacity plans for all of the airlines on the chart. Guidance Unchanged for FY2019 from the 26 September Update Finally, before taking your questions, just to reiterate that our guidance remains unchanged from the guidance we gave you on the 26th September update. So, at current fuel prices and

Q3 2019 Earnings Thursday, 31 October 2019 7 exchange rates, IAG expects its 2019 operating profit before exceptional items to be €215 million lower than 2018 pro forma, which was €3.485 billion. Passenger unit revenue is expected to be slightly down at constant currency, and non-fuel unit costs are expected to improve at constant currency. I’ll hand back now to the operator and we can start taking your calls.

Q&A

Operator: Thank you, ladies and gentlemen. We’ll now begin the question and answer

• session. As a reminder, please ask no more than two questions. To ask a question, please

press star and one on your telephone keypad. If you wish to cancel, please press the hash

• key. Once again, it’s star and one. We will take our first question from the line of Daniel

Roeska from Bernstein Research. Please, go ahead. Daniel Roeska (Bernstein Research): Thank you and good morning, everybody. I have to questions then, one on LATAM and the Delta move. Could you comment a little bit how this changes your view on joint venture prospects to South America and generally how you would view the South American market with the Delta LATAM JV in place and your competitive position vis a vis that? Secondly, could you update us on the current level of non-European ownership, and maybe any chance or any thoughts about how to address the permitted maximum and what’s the timeframe for that? Thanks. Willie Walsh: Thank you. I suppose I should start by complimenting Delta on their move to acquire a 20% stake in LATAM which for them I think was a very good strategic move. As you know, our close partner, Qatar, has a 10% stake in LATAM and we continue to have a good relationship with LATAM. But this clearly does potentially change the nature of that

• relationship. Like others, we were disappointed when the Chilean courts refused permission

for our joint venture with LATAM to Chile. We did have or do have approval to Brazil; but clearly, having approval in one country and not in another does create logistical challenges to see how that could operate. So, we continue to have discussions with LATAM in relation to that. The market is an important segment for us. We have a lot of direct services and that’s one of the strengths of IAG, particularly the Iberia network with the direct distribution that we have into Latin America, and it remains an important focus market for us. So, we will give you some updates at Capital Markets Day on Friday week in relation to that. On your second question, nothing new to say. Again, we may well – in fact, we will have some comments to make when we talk to you on Friday week at our Capital Markets Day presentation. Operator: Thank you. Our next question comes from the line of Savi Syth from Raymond James. Savi Syth (Raymond James): Hey, good morning. Just I know you don’t necessarily like to break out premium, but we’ve heard some commentary from the US carriers as well as Air France on softness on the premium cabin and premium demand. I was wondering if you can provide any colour on what you're seeing there from a corporate and premium basis.

Q3 2019 Earnings Thursday, 31 October 2019 8 Just second, on the cargo side, any colour on if there’s any change in trend of if there’s any change in strategy in response to the softness there? Thanks. Willie Walsh: We don’t split out premium, but just to comment, our premium traffic continues to be very much in line with our plans. Corporate traffic is good. We’re not seeing any change in trends as we’ve gone through the year. I’m not sure what others are saying, and I haven’t had the chance to look at the specific comments from Air France KLM, but we’re not seeing anything that would cause us to highlight a change in the performance or in

• trends. They’re very much as we would have expected.

On cargo, I think with the cargo, our cargo is seeing a continual structural disconnect between the supply of capacity and the demand. We have been talking about this for many

• years. And in fact, if you go back to when Steve was running the cargo business, he took the

decision – what was that, Steve, four years ago maybe? – probably even a bit longer to get

• ut of dedicated freighters and to rely solely on belly hold cargo space because we were

seeing a structural change at that stage. So, we’re, I would argue, performing better than the industry in terms of our performance. Although our cargo revenues are down, I think they’re ahead of we’re the industry would be. And that’s largely because of the decisions we took strategically a number of years ago and our focus on premium air freight rather than the traditional bulk air freight. So, our business, like all air freight, is being challenged by the combination of excess capacity and weaker demand, but I think we’re performing better than the industry. And it reflects the strategic focus of our cargo people. Savi Syth: Got it. Thank you. Operator: Thank you. Our next question comes from the line of Jarrod Castle from UBS. Your line is open. Jarrod Castle (UBS): Thank you and good morning. Can you give an update on thinking around Thomas Cook slots, please? Secondly, I don't know if you can say anything, but

• bviously 1.9% capacity growth in Q4 for this winter quarter, should we be thinking about a

lower number on Q1, just given the base effect? Thanks. Willie Walsh: Thanks, Jarrod, good morning. In relation to Thomas Cook, we’ve expressed an interest in a very limited number of slots at Gatwick. The general slot portfolio that Thomas Cook held at Gatwick wasn’t that particularly attractive. And with the exception of some limited slots, we have no interest in any of the residual assets or activities of the Thomas Cook group. As you will expect me to say, I think you're going to have to wait until tomorrow week for an update on capacity plans for 2020 and beyond. The one thing I would say, and we’ve been saying this now for some time, is that given that we have seen softening macroeconomic conditions in 2019 and we’ve adjusted our capacity to reflect that, we’ve been very clear that we do have the ability to adjust capacity quickly. We still see growth opportunities next year, so you should expect us to give you ASK growth figures for 2020 and beyond, but it’s clearly not going to be anywhere close to the guidance we would have given at capital markets last year. But we will update you tomorrow week. Jarrod Castle: Thanks very much.

Q3 2019 Earnings Thursday, 31 October 2019 9 Operator: Thank you. Our next question comes from the line of James Hollins from Exane. Please, go ahead. James Hollins (Exane): Hi, good morning, just one for me actually. I’m just wondering if you could give us an update on the BA pilot strikes. I think, Willie, you were quoted this morning as saying the fact that they’ve not called for more is a good sign. Maybe just say is that a good sign, where are we and if you're a betting man, does this get dealt with positively quite soon? Thanks. Willie Walsh: Thanks, James. I don’t think I gave any quote this morning, but I am confident that this will be resolved. I know the team at British Airways are very much focused and engaged fully in resolving the issue and I am very confident that we will see a resolution in the very near future. James Hollins: Thanks very much. Operator: Thank you. Our next question comes from the line of Neil Glynn from Credit Suisse. Neil Glynn (Credit Suisse): Good morning, if I could also ask two questions, please. The first one, on your property, IT and other cost line, I appreciate you report multiple things in there, but it’s flat year-on-year. I’m just looking towards understanding how we should think about spending on IT, on maintenance and system upgrades versus the rationalisation of suppliers you’ve talked about in the past, if it’s possible to give colour on that, because it is down 5% year-on-year on a per ASK basis. Then, second question of the North Atlantic, obviously the underlying performance suffered from European point of sale dominance or overweightness in the third quarter. Should the change in mix US versus European point of sale have a meaningful impact on the fourth quarter unit revenue trends on the North Atlantic? Thank you. Willie Walsh: Thanks, Neil. In relation to IT, we continue to invest. In fact, our IT spend going forward will show an increase. We have a new CIO in place. His initial comments to us were that, in fact, he thinks we’ve got opportunities to reduce spend in some areas and use that to invest and, where possible, accelerate some of the structural change that we’re

• making. But going forward, we will see a further investment in IT infrastructure as we

continue with our planned moves, as most people are doing, to hybrid-cloud technology. So, we may give you some feel for that on Friday week when we update you on our plan. On North Atlantic, no, I don’t expect any issues in relation to the North Atlantic in Q4. Our assessment of transatlantic is good. We see good demand, good corporate activity, good premium activity. It was clearly impacted in the third quarter by the British Airways pilot

• strike. But, as Steve mentioned in his update, the Aer Lingus performance in the third

quarter was particularly encouraging and just reinforces the strategic decision to acquire Aer Lingus and to continue to invest in their transatlantic growth which has proven to be very attractive for us. You should expect that to continue going forward as Aer Lingus takes delivery of more A321s, A330s and beyond that, the A321 XLR. So, transatlantic is good. We see opportunities to expand the network, and we may have some news in relation to that. So, that would apply to BA, Aer Lingus and to Iberia, so it’s clearly an area that is continuing to perform well for us.

Q3 2019 Earnings Thursday, 31 October 2019 10 Operator: Thank you. Our next question comes from the line of Andrew Lobbenberg from

• HSBC. Your line is open.

Andrew Lobbenberg (HSBC): Hi there. Again, there’s the risk you’ll want to delay discussing it until next week, but can you tell us anything about what’s happening at LEVEL where I think there was a change of leadership? Are we going to see that set up as an AOC

• r as a specific company? Where are we going with that?

Then a second question relating to the ongoing CMA, the Competition and Markets Authority review of the North Atlantic and the JV between you guys and American, there was something in the press saying that the CMA expected to report by December. Do you know if that’s still

• n track, given that the transfer from the EU to them was all predicated on Brexit having

happened anyway? So, have you got any colour as to what plays out there? Willie Walsh: To be honest, Andrew, no, we don’t have any more colour than you have in relation to that. So, that CMA activity continues. I’m not clear and certainly our competition lawyers are not clear at this stage as to whether there will be an update in December. They have asked for information as we’ve gone through the year, and we continue to supply them with information, but I have no update that I can give you. We’ll just wait for them to issue their findings or to issue an update. On LEVEL, yes, we will clearly say a little bit more about that on Friday week. We appointed Fernando Candela as the CEO. Fernando has got a great record in low-cost, having established Iberia Express as probably one of the best low costs. Certainly, in terms of a low- cost subsidiary of an airline, Iberia Express is a fantastic success story, and he’s now in charge of LEVEL. We’ve given him – I think he’s there six weeks now, so he’s pulling his plans together for that, and we’ll give you some more flavour around that when we talk to you on Friday week. Andrew Lobbenberg: Okay, thanks. Operator: Thank you. Our next question comes from the line of Jaime Rowbotham from Deutsche Bank. Jaime Rowbotham (Deutsche Bank): Morning, just one from me: there’s been some kind

• f interlining agreement between jetBlue and Norwegian; and at the same time, I think

Norwegian do seem to be making some progress with their turnaround. Have either of those thing surprised you, and does it impact how you're thinking about the ambitions of LEVEL in the long-haul market? Thanks. Willie Walsh: No, neither of those developments surprise us. As you know, we interline with jetBlue through Aer Lingus. We’ve got a long-established and very successful and constructive relationship with jetBlue from an Aer Lingus point of view. We know the team very well there. Robin and Steve – the CFO Steve Priest, are both ex-BA people, so we know jetBlue very well. It’s a good business and clearly have ambitions, but we work with them through Aer Lingus and we will continue to do that. So, I wasn’t surprised. It’s fairly limited in terms of their interlining with Norwegian given the Norwegian network into North America. And we continue to wish Norwegian well. They’ve done what they needed to do, which is what we said they would have to start significantly reducing growth and in many cases, cutting capacity if they were to improve the financial performance. They’re clearly not

Q3 2019 Earnings Thursday, 31 October 2019 11

• ut of the woods yet, and I think they still have a long way to go. But their initial measures

are what you would’ve expected and I hope they continue to turn the business around. But no surprises in either jetBlue or Norwegian in what they’re doing. Jaime Rowbotham: Okay, thanks. Operator: Thank you. Our next question comes from the line of Damian Brewer from the Royal Bank of Canada. Please, go ahead. Damian Brewer (Royal Bank of Canada): Good morning, two from me. First of all, I know you don’t like pulling this out, but could you maybe elaborate a little bit more given that the 787 issues still seem to be ongoing, we’ve had further delays to the 321 LRs, what the sort of direct impact that has been on your profitability? Very wary of other CEO comments on aerospace companies’ requirement to pick up the bill for this rather than their own airline

• shareholders. So, could you tell us a little bit more what that has been both directly, but also

maybe indirectly on the need to rent an aircraft, but also reducing your flexibility to respond to events in markets like Hong Kong? Then, just secondly, with Norwegian out of the Irish market effectively for transatlantic, could you give us a little bit of feel about what the Q4 is starting to look like on Aer Lingus across the Atlantic, please? Willie Walsh: Thanks, Damian. Yes, as you know, we are disappointed with the issues with regard to Rolls Royce engines on the 787s. As we’ve previously indicated, we can’t share with you the commercial agreements that we’ve reached with Rolls to compensate us because they are confidential, but the financial impact is not the issue. It’s very much as you’ve said. It’s the customer impact and it’s the impact on the flexibility that we have. We are seeing an

• improvement. So, I think Rolls are certainly delivering better to what they had previously

indicated, but there’s still work to do there. On the 321, we spent a lot of time with Airbus. It’s very clear that the 321 Hamburg issues at Airbus are going to take some time to fix, so we are anticipating delays on deliveries to 321s and we’ve now replanned our network, particularly in regard to the Aer Lingus transatlantic, to reflect planned 321 LR delays, which we see continuing through 2020 and 2021 and maybe into the early part of 2022. So, it’s disappointing, but I suppose the good news is we’ve got a better sense of the extent

• f these delays. We also have a better understanding as to what Airbus is doing to address

them, and we’ve got greater confidence in the Airbus plan to actually resolve the issues. I spent some time with the Airbus team a couple of weeks ago and Guillaume Faury, I think, gave me the best and clearest undertaking that I’ve had for some time in relation to what Airbus are doing there. With Norwegian out of the Irish market, I have to be honest, it hasn’t really changed

• anything. It’s what we see with this low-cost and very much with what we’ve seen with

LEVEL; it tends to stimulate additional market demand. And when Norwegian went in with the prices they went in with, which were clearly unsustainable from a profitability point of view, they stimulated some new demand. But it’s at a very low price and that demand doesn’t continue to exist if these artificially low fares are removed from the market.

Q3 2019 Earnings Thursday, 31 October 2019 12 So, I don’t anticipate any impact, positive or negative, on Norwegian’s departure from the Irish market. It wasn’t really impacting on Aer Lingus at all, and I think the evidence of that was the continuing strong performance of Aer Lingus through the period of competition with Norwegian in the Irish Market. Damian Brewer: Thank you very much. Operator: Thank you. Our next question comes from the line of Malte Schulz from

• Commerzbank. Your line is open.

Malte Schulz (Commerzbank): Hi, also two questions from my side. Maybe, can you give us a little update on how do you see particularly LEVEL in France and Italy developing over the past month, or it's a little bit over a month now since profit warning, just to get some more colour of if you see any recovery trends there? Second of all, you said on transatlantic, also Aer Lingus and Iberia are quite strong. How much of these strong results where that they just took over parts of BA’s passengers in the strike and how much was organic improvement? Willie Walsh: Thank you. No, I think all the evidence is that it was organic improvement, very limited transfer of customers from BA to Aer Lingus, and no evidence of transfer from BA to Iberia. So, it’s organic improvement. On the issue that we highlighted back in September on LEVEL and Vueling particularly in France and Italy, it’s as we had expected. As you can see, we’ve held our guidance to what we had given you on the 26th September, which should indicate to you that we’re seeing it very much in line with what we had predicted at that stage. So, Steve mentioned earlier that it’s principally weakness in France and Italy, and that has continued to be the case. So, we’ve not seen a change in the trends that we had identified, which I had mentioned, really became evident in maybe the end of the second week in September. It was pretty much at the end of the second week in September when we were seeing this change in activity. So, the volumes are okay, but it’s at a significant yield discount. So, it’s not so much a volume issue as a yield issue, and it is very much related to the low-cost segment and is very much related to France and Italy. Malte Schulz: Thank you. Operator: Thank you. Our next question comes from the line of Johannes Braun from

• Mainfirst. Your line is open.

Johannes Braun (Mainfirst): Yes, hi, good morning. Thank you, and just one for me on Thomas Cook insolvency. To what extent does BA Holidays benefit from the insolvency? Was there a strong uptick in bookings recently? Also, on a bigger picture, would you expand BA Holidays in the medium-term to seize opportunities in the tour operating market on the back

• f the demise of Thomas Cook? So, what’s the potential there?

Willie Walsh: Yes, I think it’s fair. We did see – I would say it was a little uptick in business at BA Holidays, as you would expect at the premium end, and yes, we do see an opportunity with BA Holidays to continue to expand the business. It’s a business that’s been doing very well in recent years and I think both the network and the quality, particularly focused on premium, but not solely focused on premium. But we did see an uptick in the premium

Q3 2019 Earnings Thursday, 31 October 2019 13 holiday end that BA Holidays picked up after the demise of Thomas Cook and we would expect that to continue into 2020 and beyond. Johannes Braun: Just as a follow-up, would an expansion of BA Holidays also involve a change in the business model of BA Holidays? I’m thinking about taking commitments for hotel capacities and all that? Willie Walsh: No, we’re not looking at a change in the business model. We think the business model is right and appropriate for BA Holidays in an IAG context. We do see an

• pportunity for BA Holidays to work more with the other airlines in the group as well, so that’s

an opportunity for us. It is principally working with BA, but we do see an opportunity for BA Holidays to work and we are doing some work with Aer Lingus and BA Holidays. We think the business model is right and we’re not looking to change it in light of the demise of Thomas Cook. Johannes Braun: Thank you. Operator: Thank you. Our final question comes from the line of Mark Simpson from

• Goodbody. Please, go ahead.

Mark Simpson (Goodbody): Yes, good morning, two questions. The unit costs on staff looked good in the quarter. I’m just wondering if you can say where the main wins were coming from. Then, just circling back on your comments with regards of Vueling initially in France, other low-cost carriers say they haven’t seen this. Is this an issue you think which is specific to Vueling, or do you think that it’s a broader market issue? Willie Walsh: Clearly, we think it’s a broader market issue; but if others aren’t seeing it, maybe we’re wrong, but certainly the indications we have it’s a broader market issue. I think you’ve got to look at the Vueling network as well. Some of the particular weakness we saw there was in the domestic market in Italy, so we’ve been cutting capacity there. It may be that there was some Barcelona impact in it as well, given that they would serve France and Italy to Barcelona. But it’s very clear that the areas that they’re seeing this is in relation to France and Italy. I’ll hand over to Steve just to go back over what he said on the employee unit cost. Steve Gunning: In terms of the employee cost, we look at it in two lenses: the productivity levels and the cost per head. As I touched on earlier, it was primarily Iberia and Aer Lingus that were showing good productivity improvement. In terms of BA and Vueling, slightly impacted by disruption, so actually, productivity was slightly dampened down. Net overall, it was an improvement, but driven primarily by Iberia and Aer Lingus. Then, in terms of cost per head, the big movement in the quarter was as a result of the BA bonus provision being

• released. Clearly, that’s not structural change; that’s just a one-off coming through.

Mark Simpson: In terms of Capital Markets Day, will you be giving us a bit more on the structural shifts occurring on that front? Steve Gunning: Yes, we will touch on that at Capital Markets Day next week. Willie Walsh: Okay. Can I thank everybody for joining us on the call. We look forward to seeing you all on Friday week at Waterside for our Capital Markets Day presentation. [END OF TRANSCRIPT]