Introduction Antonio Vzquez Romero Chairman, Company Hi. Good - - PDF document

FY2019 Earnings

Friday, 28th February 2020

FY2019 Earnings Friday, 28th February 2020 2

Introduction

Antonio Vázquez Romero

Chairman, Company

• Hi. Good morning everybody and very welcome to the IAG result presentation. I am glad to

be here with the top management in IAG and the Senior Independent Director Alberto Terol. So thank you for coming all of you. As far as the 2019 result is concerned, the board is extremely happy with a strong set of results for both the full year and the last quarter. Even though the second half of the year has not been easy in terms of we had the industrial action and some other disruptions

• around. In fairness, the Q4 result has been a record in terms of absolute operating margin

and operating profit. As far as the shareholder return is concerned, we have announced an interim dividend of – with the occasion of the third quarter result of 14.5 euro cents per share and I am pleased to announce that the Board is recommending a final dividend of 17 euro cents per share. So that makes a total dividend for 2019 of 31.5 euro cents, which is slightly higher than the 31 cents in respect to 2018. This demonstrates the Board’s confidence in the IAG’s financial result, financial strength, strategy and outlook, especially in the face of the uncertainty that, you know, this – on travel demand that this coronavirus is causing right now and representing right now. In view of the management plan to acquire Air Europa later in 2020, the Board has decided not to recommend additional return to shareholders at this stage. Including the final dividend, we will have returned a total of 4.4 billion to shareholders since 2015. I understand that these kind of meetings are to talk about the numbers and not to talk about the feelings but I have to share with you a kind of feeling today because formally it is a last presentation of result of IAG by Willie. Willie will retire almost in one month and I want to share with you my point of view – my feelings right now. And since we last started working together – and the point in time, I’m talking about nine/ten years ago, you know, we were trying to merge two companies in a not very easy situation, so we were putting together two big restructuring plans. And so it seems this point in time, until now, that we have in front of us one of the top leaders in the airline industry and one of the most solid groups in the airline industry, it has been a long journey. And Willie and I, we have been working together for many, many years right now and of course we did not agree always but – which is very healthy by the way, and but I can tell you that we have been having all the time a full consensus on putting always on top of everything the interest of the company and the

• shareholder. And that I [inaudible] the glue which has been making us work together very

efficiently, very well. I am really grateful for this year. Integrity, leadership, the determination, ambition, commitment, that’s kind – Willie’s attributes, we are – will be forever in the foundation of IAG. So I – really, thank you very much Willie for having working with you such a long time and I think we will never forget you. Thank you. I want to welcome formally Luis as our – as CEO, which will be formally in one month from now and Luis will take over from Willie. With a whole life in aviation, I think the

FY2019 Earnings Friday, 28th February 2020 3 transformation of Iberia has been a business case which a lot of our competitors have been trying to copy but never anybody has been able to match. And I think it’s with the skills of – personal and professional skills of Luis and exceptional leadership of Luis and the wonderful experience that has been Luis working together with Willie for these may years, we have a wonderful ingredient to be successful in the future and for you to be successful in the future. So Luis has full support of the Board and I hope you all will be extremely happy with the performance of the company and the leadership of Luis. So I’ll just hand over to the management team led by Willie Walsh with a presentation to go back to the numbers. Thank you.

2019 Highlights

Willie Walsh

Chief Executive Officer Thank you, Antonio. It’s good that we’ve finally agreed on something. So ladies and gentlemen, I’m not going to spend too much time by way of introduction because the Chairman has actually covered a number of the points I was going to make but I do just want to highlight a couple of issues because clearly there’ll be a lot of distraction given what’s going in the current environment but I think reflecting back on 2009 it’s important to realise that we did actually make a lot of progress on the key strategic objectives for the group and we have continued to invest in the right areas of the business. We’ve looked for opportunities to consolidate and Air Europa I believe will be a fantastic acquisition by IAG. We’re working on that and hopefully we’ll be able to close that deal off in the second half of this year. We’ve invested in the product as we said we would and the response from customers has been really positive to that and we will continue to do that through the coming years. And it’s not just in BA. I know there’s been a real focus on what BA has been doing but it’s right across the group. And I think what’s particularly pleasing for us is we’re seeing these investments are being rewarded in terms of the improvement in our net promoter score, which as you know is one of the key metrics that we use. We balance all

• f our investments decisions against the impact that they will have on NPS and we’re seeing

real positive momentum particularly at British Airways and at Vueling who did an exceptional job in 2019 responding to the challenges of air traffic control in Europe. And it’s important to point out 2018 was the worst year on record for ATC. 2019 was the second worst year on

• record. So you know, we went into 2019 hoping that it wouldn’t be any worse than it was in

2018, we saw a slight improvement but it was still the second worst year on record for air traffic control. Our leadership position in our key markets continues to be strengthened. We added 4% capacity but we saw traffic increase by 5.6% and you can see North America by 3.6%, Latin America 15.6%, intra-Europe combination of domestic and our EU flying of 3.8% and Asia 5.5%. Number of new routes by all of the airlines, and again these are designed to strengthen the network to ensure that we have leadership particularly on the North Atlantic and on the South Atlantic and we continue to invest in our common platform. This year and last year but this year in particular, strong emphasis on what we’re doing to ensure that not

• nly are we financially sustainable but environmentally sustainable and we launched, as you

FY2019 Earnings Friday, 28th February 2020 4 know, last year our flight path to net zero by 2050 and I’m really pleased to see that that initiative has been picked up by others. Investment in new aircraft, I continue to be astounded by the fuel performance of these new

• aircrafts. Yeah, so the A350-1000 in BA, 900 in Iberia, these are making really significant

improvements in fuel burn, fuel efficiency and therefore carbon efficiency. And the A321neo LR, which Aer Lingus has introduced on the transatlantic showing about a 22-23% improvement in fuel burn versus the 757. So the unit cost performance of these aircraft are absolutely excellent and we’re making really good progress under the leadership of our new CIO John who’s here today on IAG tech. So you know, good solid investments in the foundations of the business and making good progress. Which led to, I think, a good set of results in 2019. Though the operating profit, as you know, was slightly down, the margins slightly down, that’s largely due to the disruption that we encountered through the year which we have highlighted to you separately. We saw fuel headwinds in terms of our costs of €738 million, passenger unit revenue and our non-fuel unit cost developed exactly as they said they

• would. So you know, it was a positive set of results. We had a very strong fourth quarter

performance as the Chairman has said with a return on invested capital just slightly below our 15% target at 14.7%. Would’ve been above 15% if we hadn’t had the disrupting. And on carbon, on our carbon efficiency metric, we improved by 1.9%. So that’s ahead of our annual target of 1.5% improvement. And as the Chairman has said, we continue to make returns to

• ur shareholders too reward them for the confidence that they have shown.

These are just a quick snapshot of the key metrics that we’ve mentioned before but I think good strong performance by all of the airlines in the group and a strong performance for IAG. I’m going to hand over to Steve, who’s going to take you through the details of the financial performance and then I’ll come back to make a few comments at the end.

Financial Results

Steve Gunning

Chief Financial Officer Good morning. So let’s talk through the financial results. As Willie rightly said, strong

• perating profit for the full year. 200 million down. For the first time in four years, we’ve

actually had an FX benefit this year rather than an FX hit. So 67 million FX favourable for the year, so if you did a constant currency, we’re down 267 million. We think these are strong results, as I say, because a fuel bill was up €738 million. Cleary there was significant strike and disruption in the year. And one matter that we haven’t touched on already was it was a challenging economic and demand environment in 2019 compared to, say, 2018. And that brings us down to look at traffic and capacity. As you know, we went into 2019 looking to reduce – looking to grow our capacity by 6% but because we could see the demand environment was weaker, we’ve been cutting capacity throughout the year and we finished growing capacity only 4%. So we took a third of our planned capacity growth out and the BA strike accounted for about 0.4 of that capacity reduction. What I’m pleased to say is albeit we grew slightly less than we intended, our seat factor benefited and we finished the year with a record seat factor of 84.6%. So good numbers and good seat factor.

FY2019 Earnings Friday, 28th February 2020 5 If I look at passenger unit revenue, clearly what we did on capacity helped support and maintain the unit revenue and as Willie’s just said, we came in on guidance in terms of the passenger unit revenue only being slightly down at half a point. In a couple of slides, I’ll take you through some more detail as to what the passenger unit revenue has done by region. In terms of total unit revenue, you’ve basically had a trade-off, really. Iberia MRO and BA Holidays have had very, very strong years and Cargo has had a very challenging year. I think we’ve outperformed the market in terms of Cargo but it has been a challenging year. So those two have largely offset and hence why the total unit revenue is very similar to the passenger unit revenue performance. If I look at non-fuel unit costs, if I look at the airline CASK at constant currency, we’ve improved the position by about 0.9%, which once again evidences our strong cost control. And if I look at our total unit costs, you can see then the fuel bill coming through there and so total unit costs were up 1.4% rather than down. So that’s the shape of the full year numbers, let’s have a quick look at the shape of the Q4 numbers. Similar kind of pattern. Record operating profit for Q4 of 765 million. That’s impressive given the fact the fuel bill was up 103 million. We had an even bigger FX benefit in Q4 of 79 million, so that was offsetting a large part of the fuel bill. The other factor that I think is worth considering in Q4 is we still had some degree of hangover and uncertainty related to the BA pilot strike in September. So record operating profit for Q4. Capacity down at 1.9% for the quarter, on guidance. We guided to that figure. And once again, a very strong seat factor. Seat factor in Q4 was at 84.3%. If I turn for the passenger unit revenue, very similar figures to the full-year number being down -0.4%. But in terms of total unit revenue, more adverse than the full year. Actually, the Cargo Q4 performance was more challenging than the full year picture. If I look at non-fuel unit costs, -1.7% for the airlines at constant currency aided by some key customer compensation – sorry, key supplier compensation in Q4 but even if you strip that

• ut, we’re still a good one point better than the prior year. And in terms of total unit cost,

actual total unit costs down in Q4 because the impact of the 2018 fuel hedging starts to reduce and so you’re cycling off an easier base. So strong Q4 numbers. Let’s talk a little bit more about passenger revenue. Overall, I would call this a mixed regional performance for Q4. We’ve basically got all of the regions except North America and Domestic showing RASK improvement compared to Q3 and you’ll see in all the regions expect North America have lower ASK growth in Q4 than compared to Q3. Now I’ll quickly take you through each of the regions. If I look at Domestic, we still grew quite a lot there. 8% ASK growth in the quarter. Clearly that can have some dilutive effect

• n yield. In addition to that, Vueling, which makes up over 50% of our Domestic ASKs was

impacted by disruption particularly in Catalonia and some unrest there. If I look to Europe, I think Europe, a much better RASK performance in Q4 than Q3. Basically, it was down 1.1 points of RASK in Q3, up 1.7 in Q4. Much better performance helped by capacity reductions.

FY2019 Earnings Friday, 28th February 2020 6 If I look at the opcos, Vueling and Iberia performed well on Q4 in terms of Europe. BA still had some hangover from the strike and as I say, in addition, if I look at the countries that most improved, the Spain market and Germany market were particularly strong. The weaker performers were Italy, France and the UK. If I turn to Asia Pacific, over 90% of our ASKs are on British Airways and the key performer in Asia Pacific for the improved performance that we’ve seen there was Tokyo. It was good underlying performance and that was further aided by the Rugby World Cup. And this was good performance both into Narita and into Haneda. And as you know, Iberia also flies into Narita as well, which also had a strong performance. So Asia Pac, very strong performance for the quarter. If I look at AMESA, once again also a strong performance. 90% plus of the ASKs are for BA. And the two standout areas there were India, particularly Delhi and Mumbai. Clearly, I think we’re still getting some benefit from the demise of JET and also Riyadh was a very strong performer in Q4. Not surprisingly with the ARAMCO IPO. If I look at LACAR, LACAR is improved considerably. Still negative RASK but much better than we’ve seen in previous quarters. And interestingly enough, the story in LACAR has moved on. You know, we’ve spent most of the year talking about Argentina and Brazil. Actually, those positions have stabilised. In fact, Brazil was one of the most positive performers in Q4 for the region. The real story now in LACAR in Q4 was with regards to

• Chile. And due to the political unrest there, really saw a drop off in the RASK performance

and we remain cautious about that market. Bearing in mind that we have three airlines flying into Chile, both BA, Iberia and LEVEL. And then if I look at the North Atlantic, so North America, as you can see, probably the area most affected by the BA strike in Q4. So the vast majority of that RASK decline in North America was in October and primarily related to uncertainty and therefore poor booking levels for British Airways. I was pleased to see in November and December you could see the RASK starting to improve once certainty started to return to the market and we’d reached resolution

• n the strike.

So that’s a quick run through of the unit revenue performances. Let’s turn our focus to costs. As I say, for Q4 cost performance very strong at 1.7. If I run down through each one of them, employee costs have been flattered a little bit because we’ve made lower bonus provisions in Q4 this year than in previous years. So there is some flattering in terms of the numbers there. In terms of supplier costs, I’ve mentioned a couple of significant credits we’ve had from key suppliers but there’s been good underlying supplier cost performance as well, particularly in engineering. If I look at the ownership cost up 4.2%, no surprise there, this is – in an IFRS 6 world this is all depreciation of aircraft and as we continue to renew the fleet, we see those ownership costs coming up. But on the – at the same time, when we see the ownership cost coming up, we also see benefits in terms of fuel efficiency and we’ve added a little box to the left there to show the sort of rolling fuel efficiency improvement that we’re seeing. That 1.6% is for the 12 months rolling. You’ll be pleased to know the numbers pretty similar for Q4 as well. And in terms of a Q4, you can see our fuel unit costs up 2.4%. As I touched on earlier the fuel bill was higher.

FY2019 Earnings Friday, 28th February 2020 7 If I look at where we are from the hedging perspective, we’ve gone into 2020 about 90% hedged for the full year. About a quarter of that position is in collars and about three- quarters of it is in swaps. And we’ve run a scenario here. We keep changing this and as you know, this week has been a particularly volatile week, so we re-ran the numbers last night and with our current hedging profile, we think the fuel bill will be 5.9 billion for this year using a 490 dollars per metric tonne jet price and dollar to euro exchange rate of 1.09. If I turn to Return on Invested Capital, as Willie’s already alluded to, our RoIC for the year was 14.7%. it’s a very strong performance. If you look at the individual opcos, still Aer Lingus way out ahead at 22%. You have Iberia and BA in the 14s and you have Vueling a bit lower at 13% Return on Invested Capital. Still a decent return on invested capital, slightly impacted by some of the challenges with regards to disruption. But overall, a really strong Return on Invested Capital figure. If we hadn’t had the strike as Willie alluded to, we’d have been over the 15% target. In terms of performance at operating profits, just a health warning on these. These numbers are not at constant currency. These numbers are outturn exchange. And basically, what you’re seeing here is, you know, the impact of the higher fuel prices and the slightly harder economic demand environment, meaning each of the opcos have delivered an operating result slightly lower than the previous year. But if I just make a few comments on each one: In terms of Aer Lingus, other comments in the year, which I think are interesting, is one we’ve had impact through aircraft delays. We were expecting four A321LRs for the summer

• f 2019, we’ve got one in August. That level of disruption does mean we are going to sub
• ptimise your performance. If I look at BA, clearly the story over and above the weak

economic demand, has been the strike. If I look at Iberia, half one was a tough period for the business, much stronger performance in half two. And if I look at Vueling, you know, clearly affected by the ATC challenges that we’ve already alluded to and other disruption. But

• verall, slightly off of last year but given the overall context, as we say, a strong

performance. I’ll turn now to earnings per share. As you can see, our operating profit was off 200 million year on year but if you look at the profit before tax, we’re pretty much level. 2964, plays

• 2947. The thing that’s propped up the profit before tax in 2019 is this net currency
• retranslations. When we put all of this – through IFRS 16, put all of this dollar denominated

debt on our balance sheet, we took out economic hedges to cover that and we mark to market those at the end of each period and it so happens that in this period we’ve had a significant credit. If you remember, we had a significant credit at the end of the half year as well. So overall, our profit after tax was slightly down at 1.4% but our earnings per share up 1.7 and that’s because our share count is down. Two factors behind that. We did a buyback in 2018, so the share count is down because of that, and secondly we redeemed the convertible this year which also reduced the share count. Last slide from me, which is talking about leverage. And what you can see is gross debt up about 1.5 billion, primarily due to aircraft deliveries. We took 45 new aircraft his year, which is a staggering number. You can see cash very strong, up nearly half a billion at 6.7 billion at the end of the year. Very strong cash position. And as you can see, net debt to EBITDA, slightly up, 0.2 turns up at 1.4 but well within our 1.8. I would expect the net debt to EBITDA

FY2019 Earnings Friday, 28th February 2020 8 to go up at the year end. You know, it’s particularly strong at the half year because the cash position tends to build in the first half of the year and then come off in the second half of the

• year. And so we’d expect the cash to be building during Q1 of this year. So very, very
• strong. I think it’s worth just reflecting at the moment on those strong numbers and it

reminds me somewhat of the capital markets day presentation where we said, you know, we’ve done a lot to restructure our business and take, you know, real underlying cost out of the business, hence why our profitability is strong and sustainable. We also said we had a very strong balance sheet, and we do. Our leverage is low and very high cash position as

• well. And we said that positioned us very well because if we went into choppy waters, two

things would be good. One, we’d be very resilient, and two, we’d be in a good place to exploit opportunities that come along. I didn’t realise when I said that the choppy waters would come quite this quickly but they have done so. So we’re in a very good position going into these slightly uncertain times with a high-cash position. Thank you.

Outlook

Willie Walsh

Chief Executive Officer

• Yeah. Thanks Steve. So turning to the outlook and I’m hoping that you’ve all had a chance

to read this. I’m not going to read this word for word but maybe I’ll just make a few

• comments. It is clear that the industry and we as part of the industry is being affected as a

result of the weaker demand as a result of the coronavirus. Initially we saw this in China and it’s had a knock-on effect into other parts of our network in Asia Pac, which as you know, represents just over, 8.2% of our total capacity. We responded quickly. I think we were one

• f the first to announce route cancellations at the end of January. We had taken measures at

that point to reassign some of the capacity that we’re taking out on to other parts of the network where we saw demand continuing to be strong. That’s both in the case of BA and Iberia. Since Monday, we’ve seen a significant change in Italy with the announcement of the measures taken by the Italian government within a number of cities in the north of Italy and that has led to a very strong fall off in demand in Italy and it’s also impacting on some other European markets. So we have taken a lot of capacity out of the Italian market during the month of March. Some of that has been announced already, some of that is being actioned as we speak. So we’ll be making adjustments to the schedule for all of the airlines. So we’re seeing this across the group and we will look at some potential capacity adjustments on other parts of the short-haul network as well. In addition to that, we had witnessed some weakness in the business channel, business sales channel, so not – shouldn’t just read that as premium cabin, it’s both premium and non-premium, particularly with the cancellation of a number of large scale events and corporates introducing restrictive travel policies. The net impact of all of this at the moment is that we will reduce our growth target, which was around 3% ASK growth for 2020, down to 2%. And just to give you a rough example or rough indication, about a third of that is on long-haul and two-thirds of that is on short-haul. So that’s as we sit here today. The adjustments that we’ve made to the long-haul network are out to the end of June. So we’ve cancelled China until mid-April in the case of BA, the

FY2019 Earnings Friday, 28th February 2020 9 end of April in the case of Iberia, but we have reallocated capacity to other destinations out to the end of June. The adjustments that we’re making to the short-haul networks are to the end of March. Now, people have asked me, you know, to give a bit of flavour as to what we were seeing. If we were doing this last Friday, you know, I think we would have given you guidance and we would’ve been clearer in terms of what we were seeing because the situation in Asia had appeared to stabilise by last Friday. We had clearly seen a strong fall in demand but it had stabilised and we’d adjusted capacity to reflect that and I think we would have been very comfortable at that stage with what we were seeing. There has been a big change since Monday on Italy. So we need to see how that impacts over a period of time. I would expect it to follow a similar pattern to what we’ve seen in Asia but it’s far too early for us to call and for that reason, it’s impossible for us to give you accurate profit guidance. So at this stage, we clearly can’t give you any details but we will update you as soon as we can see patterns and trends that we would be comfortable with. Underlying, I think, the investment case in IAG remains very strong. You know, we have clearly demonstrated that this is a group that delivers what we promise. I think that has set us apart from a number of our competitors. Our structure is unique and just seeing the benefit of that now with our ability to respond quickly, move capacity around, take capacity

• ut, have the flexibility within the fleet that we have ensured as we’ve grown the business
• ver the last few years. And all of this is designed to ensure that we can be financially

sustainable through the cycle. We go into this particular downturn in a very strong position. Our balance sheet, as Steve has said, our cash position is very strong. And more importantly, we know what to do. You know, we know what levers we can pull. We know how quickly we can operate them and we’re doing that. So you should expect us to continue to take initiatives to adjust the capacity to match the underlying demand that we’re seeing to move capacity around and that’s the flexibility that we have and that’s all designed so ensure that we can maximise our profitability in the current year and going forward. But importantly to ensure that we are in a position to respond strongly when the recovery takes place and it is very much a when rather than an if. So you know, we don’t want to do anything that would jeopardise our ability to respond positively when we see that recovery. The progress that we’ve made, you know, is going to continue. We have a very disciplined approach to the allocation of capital. I think that’s been one of the strengths of the group and that is something that we’re proud of and will continue. Our companies, the operating companies, very focused on ensuring their brands are strong and they have strong

• perational performance. And that again was delivered very well in 2019. We’re leading with

consolidation in the industry. We believe that we’ll see a lot of consolidation this year and it’s the form of consolidation we like to see and that’s that the weak are going to disappear. You know, it’s clear that there are a number of airlines that went into 2020 in a very weak

• position. What we’re seeing at the moment is going to, I think, accelerate the demise of a

number of the weaker carriers in the industry. So we will see consolidation in 2020. That will be in the form of failure. I don’t think there’s anybody out there that would be interested in acquiring any of these weak and failing airlines. I expect them to disappear. The demand that does exist there will be provided by the strong carriers including ourself. Our cost efficiency has, you know, continued to be a real focus and that will continue under Luis. He’s

FY2019 Earnings Friday, 28th February 2020 10 absolutely committed to the targets that we’ve set, which is to target a 1% CAGR improvement in our non-fuel unit costs. It’s not going to be 1% every year. I need to stress that because there will be some years when it will be less than that and there will be some years when it will be significantly greater than that. And at the heart of all this, you know, we have a dynamic and creative culture and that’s going to definitely benefit us through this

• period. And all of this underpinned by our commitment to ensure that we have an

environmental sustainability alongside our financial sustainability. That’s become more important and will be equally important – if not of greater importance as we go forward. Everybody, you know, the Chairman, Steve, me, Andrew – everybody. We’re going to talk about this to remind you what we’ve done. And we’ve shown our commitment and our confidence by the Board approving the final dividend for 2019 of €c17 at

• ur board meeting yesterday, subject to shareholder approval at our AGM. And you can see
• ur cash priorities there. We’ll reinvest in the business where that investment will generate a

creative growth. We are committed to maintaining and sustaining an ordinary dividend, we will pursue opportunities for inorganic growth and we’ve demonstrated our absolute discipline in relation to that. We’ve turned down opportunities where we didn’t believe there was value there and we’ve pursued aggressively opportunities where we could see real value. And the acquisitions we have made, I believe, have been fantastic. And then any surplus cash that we have we will return to shareholders. To remind you about the letter of intent with Boeing, it continues to be in place. It is a letter

• f intent. We’re following carefully the recertification of the aircraft. We’re in close contact

with regulators and with Boeing management, as you’d expect, and our intention is that once the aircraft has returned to service we will look for shareholder approvals. We will not look for shareholder approval until the aircraft is back in service. Personally, I think this is going to be a great aircraft. You know, we need competition both in the narrow body and in the wide body field. Both of the manufacturers have challenges at the moment, but I believe Boeing will address these issues and the recertification which has been incredibly thorough will allay any concerns that people have in relation to this aircraft. So I think it’s a great

• ption that we have. It puts us in a strong position as we move forward and we will continue

to update you in relation to that if and when there are developments. Very pleased to see that the investments we’re making, as I said earlier, are proving to be affective and that’s demonstrated by the improvement in our net promotor score. 9.5 point improvement in 2019 to 25.8. It’s not what we want to be. We have a target to get higher to 33 but you can see that the measures we’re taking will take a bit of time. Significant investment in the BA Club World product, feedback from customers is very positive. We’ll have 33% of the fleet in the new configuration by the end of this year. More than half the fleet by 2021. We’re not going to pause or delay the reconfiguration of the aircraft. This is the right thing to do and we’re going to continue with that investment. Indeed, if we have an

• pportunity to accelerate that, we will. So there is a real commitment to this. It’s proving to

be as positive, if not slightly more positive than we thought it would be. As I said, it’s not just in British Airways, all of the airlines are making investments. Aer Lingus are very focused

• n developing Dublin as an affective transatlantic hub and that requires additional

infrastructure to be provided by Dublin airport but there’s a good relationship between Aer Lingus and Dublin. Aer Lingus has invested in its hard product on the ground and indeed will

FY2019 Earnings Friday, 28th February 2020 11 be making some announcements in relation to the in-flight projects with the Iberia long-haul business class in the near future as well. And Vueling did an exceptional job in 2019. As I said, the second worst year on record but to be able to improve their on-time performance by 7 points demonstrates that they took the right decisions at the beginning of the year and that’s reflected not just in their on-time performance but in the customer satisfaction scores as well. And we will continue to be the thought leaders when it comes to environmental

• issues. We led the industry by announcing our commitment to net zero by 2050. Really

pleased to see others follow. We need the industry to respond positively on the issue of the

• environment. This isn’t going to be, you know, a competition issue between one airline and
• another. This is an industry requirement. And the more airlines that are on board and the

more airlines that talk about their environmental credibilities the better for the industry. So I’m really pleased others are committed to this as well and I expect more and more airlines to do so. We’ve embedded management incentives in our plans for 2020 to ensure that we’re driving the right behaviour. So in addition to looking at the impact of investment in our net promoter score, we also looked at all investments in the context of what does this do for our environmental performance. So we’ve got a completely joined up thinking when it comes to financial and environmental and customer sustainability. And you’ve seen the pathway to achieve these targets. It’s a credible pathway that, you know, we are absolutely committed to, including investment in new aircraft, investment in sustainable biofuels, investment in new technology and recognising that we’re going to have to pay more through carbon offsetting to ensure that we can get to net zero. So this is going to be a cost that everybody in the industry is going to bear and that cost clearly we expect to see carbon prices increase as we go through our path to 2050. Now you will recall that we introduced the permitted maximum notice in February of last year. We were pleased that we were able to withdraw that in January of this year and we keep this situation in relation to our non-EU shareholding under review. This has nothing to do with

• Brexit. I know some people confused it and mixed it with Brexit. As you know, this was in
• ur bylaws, in our articles when we created IAG. So just reflects the fact that we have to

satisfy governments around the world around the ownership structure of our airlines. So we’ll keep this under review and we – it’s important for me to note and it’s in the presentation here that the Board is authorised to re-impose the permitted maximum at any time if necessary. But the situation, as I said, will be kept under regular review by the board. On Brexit. You know, it’s done, I believe. I read in the paper it was done. You know, so there will be some negotiations. I remain convinced, actually, that we will see a comprehensive transport agreement. I know from close engagement with EU officials and UK

• fficials that this is what they want to see. It won’t be exactly the same as has existed when

the UK was part of the EU but I believe we will see a comprehensive air transport agreement. We have, as you know, submitted our plans to the national regulators in Spain, Ireland, France and Austria and The Commission have been notified about the remedial actions that we will take. Important to note that the UK government has not asked us to take any remedial measures in terms of ownership and control. And we’ll continue to make progress’s, you know, I think the opportunity to acquire Air Europa, as I said, is fantastic. That is subject to regulatory approval. We hope that we can

FY2019 Earnings Friday, 28th February 2020 12 progress that in the second half of this year. We will continue to invest in new aircraft and new products. Really pleased to see a new partner with IAG loyalty, Barclays. That’s going to be, I think, a fantastic initiative for IAG loyalty. We’ve continued to invest in our network strength and our position in the key channels that we have and that again will be enhanced by the acquisition of Air Europa and we’ll consolidate the growth that we’ve seen in the intra- European market. And we have commitments, as I said, to improve our environmental performance, targeting 87.6 grams of CO2 per passenger kilometre in 2020. That – it’s going to require work to get there, partly facilitated by the investment we’re making in these new aircraft, which as I said, are producing fantastic results. Now I’ve included a couple of other slides and I’m just going to comment on Luis in a moment but, you know, if I was to sort of wrap this all up and say, you know, what do I think, I would say that, you know, our unique structure is really going to demonstrate value now. It’s at a time like this when we can prove to you that IAG has the ability to adapt, to withstand, to address anything that gets thrown at us. We have the advantage of having that flexibility that I don’t think others have. We have the ability to make decisions quickly and implement those decisions quickly. We don’t waste a lot of time debating them because, to be honest, we’ve gone through all of this before, we’ve all seen it before, so we’ve learned from the

• experience. You know, it’s easy to forget some of the challenges we’ve gone through but we

know what to do in a time like this and we know how to respond and you should expect us to continue to do that. We will continue to look for opportunities to pursue consolidation where that makes sense, where that is positive for our shareholders. As I said, I expect to see quite a bit of failure in the industry this year, not just within Europe but globally and that will give us opportunities to expand to fill the gaps that are left there. We will continue to lead on the environment because leadership is required. We will continue to focus on our cost

• performance. We’re proud of it. It’s a positive thing to do. We’re always looking for

initiatives to see how we can do better and I know Luis is absolutely committed to doing that. All of this supported by a strong performance in 2019 and pleased to say that’s reinforced by

• ur confidence and the Board’s confidence to say that we are continuing to return cash to

shareholders given the commitment that they’ve made and the support that we’ve received from our shareholders over the years. And finally, you can see a big smiling Luis Gallego there at the top. Delighted to be taking

• ver. Even with coronavirus, he’s still smiling. I think the thing I would say here is, you

know, first, for the benefit of the people who don’t know Luis, we’ve included a couple of charts in the online presentation so you can see what his financial performance was in Iberia. I’ve talked about it, you know, before, so I’m not going to labour on it. But he is, I think, one

• f the exceptional leaders in our industry. He’s demonstrated leadership capabilities through

what he’s achieved in Iberia. And it’s not just a financial transformation. You know, some people focus on that. It’s a, you know, total transformation. The brands, the culture, the atmosphere, the engagement. At every level, in Iberia, you’ve seen it transformed and I know Luis will continue to do that. Significantly, he’s had the opportunity to pick a number of the new players here. So delighted Marco is here, Marco Sansavini who’s taking over at Vueling and Javier who’s taking over – he’s in the second row here – at Iberia. When Luis and I sat down to consider who should replace him at Iberia, we had the same names on the list and the same person at the top of the list. You know, so Javier was our number one

FY2019 Earnings Friday, 28th February 2020 13

• choice. We’re delighted that he’s agreed to do that. When we looked then at replacing Javier

at Vueling, we had the same names on the list and the same person at the top of the list. So you know, unfortunately we do think alike. So… And then of course, you know, really sorry to see Drew leave the business. I think Drew has had, you know, a fantastic influence on the business and has done a great job but again, replacing Drew and – Adam Daniels we announced yesterday will take over. We say Avios there but we’ve actually rebranded quietly Avios as IAG Loyalty and it was just too long a name to put on the chart there. So Adam, who was the commercial director at Avios, is now the CEO of IAG Loyalty. So you know, these are people that have been chosen by Luis and clearly he also had significant input he knew that Steve would be appointed as the Group CFO with Enrique’s

• retirement. He was involved in the selection of Alastair at strategy and involved in the

selection of John at IAG tech. So you know, we have a very strong team here, completely dedicated to continuing to deliver in the way that we have in the past and I’ve absolutely no doubt to my mind given the experience around that table, given what all of these people have gone through, the knowledge they’ve had of previous challenges that we face that we’re in very safe hands and that we will respond in a very positive way to the challenge that we face as a result of the coronavirus today. So you’re in safe, very capable and very exciting hands with Luis and the new team. I’m looking forward to the next months. Still fully engaged, I assure you but on the 26th March at midnight I’m handing in the keys and at that stage on 27th I’ll be, you know, wandering around London looking for somebody to have a drink with. But stay out of my way unless you want some trouble. I think on that, maybe Steve, if you want to re-join me here and we’ll start taking some

• questions. Andrew, if you want to moderate it. I don’t know, do we have a couple of – yes,

so we have a couple of microphones. David and Andrew will.

Q&A

Andrew Light (IAG): Yeah, and can I add, just maximum of two questions, please, and if you want to ask more, then you can do so towards the end of the session. Thanks. James? James Hollins (Exane): Good morning. It’s James Hollins from Exane. I think I speak for everyone Willie when I say a fond good riddance from us all. Two questions. Just on level. My colleague here – or peer, competitor, whatever James is, noticed there’s no CEO of LEVEL at the moment. Just wondering if you could talk about the performance of that or potential growth rate through this year and obviously leadership. The second one was on Air Europa, whether the current market might lead to a review of the price and potentially of the deal. Willie Walsh: So with LEVEL, Fernando Candela has done a fundamental review. He’s, you know, a fantastic guy and his track record is great. So what we asked him to do is go back and start again and just challenge us as to whether the model works and then challenge us as to whether our application to the model works and what he has done is he’s confirmed what we believed was true. That the model does work. He questioned some of how we went about doing LEVEL and I think his observations were fair. If you remember, we launched LEVEL earlier than we had expected to, so we did, if you like, rush it to market because we wanted to get into Barcelona ahead of one of our competitors. So the first year of operation in Barcelona was fantastic, largely benefited by a very strong performance of Buenos Aires and

FY2019 Earnings Friday, 28th February 2020 14 we redirected a lot of capacity into Buenos Aires. That probably flattered us in a way and hid some of the underlying issues that we didn’t need to address at that stage because the revenue performance was so strong. With the devaluation of the currency in Argentina, it did then put the operation under a bit of stress and he’s looked at some of the things we did – that he – you know, that he said if you were to do it again you wouldn’t do this. So we had – the commercial model wasn’t right. You know, we were selling on different platforms. We weren’t able to fully exploit ancillary sales. So there were a number of issues there that he is now correcting. I think the other issue was Paris has been a disappointment. The market has not responded in the same way in Paris as it did to Barcelona with stimulating new and additional demand. So the performance in Paris is under review. So he’s convinced the model works, he’s correcting some of the mistakes that he believes we made in terms of the application towards that model and I think we’re in very capable hands with Fernando with

• LEVEL. So we’ve – we had planned to add capacity to Paris this year. We’re not going to do

that now. So that capacity is being redirected to Barcelona and we’re looking at – we’re reviewing – we’re continuing to review the performance of the Paris operation. Then your second question was… James Hollins: Air Europa. Willie Walsh: Yeah, sorry, Air Europa. No, we remain committed to it to be honest with you and, you know, it is subject to competition approval. We will address those issues that arise from that but I think this – the case for consolidation is very, very strong and you know, we’re – we want to have a stronger position at the Madrid hub and this is a fantastic

• pportunity to do that and create, you know, a real international hub, not just say as Luis has

talked about it in the past, you know, a hub for Latin America but a hub for the global network and we’ll better – we’re better placed to do that through the acquisition of Air Europa, so we remain committed to that acquisition. Alex Paterson (Peel Hunt): Good morning. It’s Alex Patterson from Peel Hunt. Two questions please. Firstly, just obviously the current environment with coronavirus, demand being weak for Asia Pac, you responded and now Europe, it may spread to other areas, we will see. How will you – other than cutting capacity, efficiency savings and so on, how will you respond? Do you expect to adjust fares? Do you think that if this follows the path in Europe as it seems to have done or was doing in Asia Pac that it will be temporary and you would therefore, if you bring fares down, put them back up again? You know, what do you see? And then the second question is just out of interest in your time at IAG, is there anything that you wish you had done differently or something that you would’ve liked to do that you’ve not been able to? Willie Walsh: Yeah. I think that our thinking at this stage is that we’re – we would expect to see a similar pattern in European to what we’ve seen in Asia Pac. We are reviewing all of our commercial policies. We may not do things exactly as you would expect because we’ve learned from what we did in the past. You know, we did things back in 2001/2008 that we thought were right but then having reviewed them afterwards realised that we could’ve done it better. So you know, I’ve talked about this previously.

FY2019 Earnings Friday, 28th February 2020 15 In 2008, we took a lot of capacity out. You know, we combined flights, absolute sense. You know, we kicked that book’s capacity reduction but what we then found is with the recovery in demand, we had no seats to sell at the higher prices. So in revenue terms and in profit terms, it was sub-optimal. So having learned from that experience, we’re not going to repeat the mistakes that we made so we’ll do it in a different way. And I’m not going to explain all the commercial initiatives that we’re going to take but some of them may appear to be counter-intuitive at this stage. But you know, that’s based on the learning that we’ve had in similar situations in the past. So as I said, what we had seen in Asia Pac and had we been doing this last Friday, you know, we would have been saying, you know, yes, we’ve seen demand fall, we’ve adjusted capacity to that demand, the market has adjusted capacity to that demand, the demand appears to have stabilised at a lower level and, you know, that certainly was the trends. We looked at this very carefully over the last few days. So you know, this time last week, that’s the message you would’ve got, you know, that it seems to have stabilised and that it will recover then in due course as, you know, production in China starts up again, businesses start travelling as we see the fall off in the number of cases being announced. So I’m expecting to see a similar pattern. But I’m not an expert in this but certainly this is the type of pattern that we’ve witnessed in the pats. So I don’t think that we’re witnessing anything that’s different today. So you know, one of the stats that we looked at which gave us some degree of comfort, we looked at calls to one of our call centres

• ver the first three days, so this would’ve been Tuesday, Wednesday and Thursday of last

week. So if you remember it was the Northern Italy issues were highlighted, I think, on the Monday. A number of government issued travel advisories on Monday corrected them on Monday

• evening. So we got a lot of calls, as you would expect, on Tuesday, Wednesday and
• Thursday. It peeked – if you look at Ireland in particular, it peeked on the Wednesday and I

think triggered by talks of the cancellation of the Ireland-Italy rugby match. So you know, about a third of the calls we received on Wednesday related to Coronavirus. Customers either wanting to cancel flights, looking at options to change their flights or looking for advice. It then dropped off significantly on the Thursday. You know, so I think we’re seeing consumers respond to the media focus that exists. So you know, there’s certainly data that we’re looking at that gives us reasons to be – I don’t know what word you’d use here, confident maybe, that the patterns that we’re likely to see, you know, will be similar to what we have seen. But as I said, it’s just far too early for us to be in a position to be able to give you accurate guidance at this stage. So and that’s the reason – you know, we’d love to be able to do that and we’ve debated it. You know, we just can’t give you actually guidance – and I think we’d be misleading you if I said we could give you accurate guidance at this stage. We’ll watch this pattern over the next few weeks and clearly we’ll update you as appropriate when we have information that we think will be of value to you. And in terms of do I regret – the only thing I regret is I regret not recruiting John three years ago. I think he’s made a fantastic change both to the culture and to the capability of our Tech. So you know, I’m really pleased with what John has done and I’m very excited about what you’re going to see from John and the team going forward in relation to our IT and digital capabilities in the business.

FY2019 Earnings Friday, 28th February 2020 16 Stephen Furlong (Davy): Hi. Stephen Furlong from Davy. Yeah, I just want to ask, Willie, in terms of IAG today, the fixed/variable cost nature of the business compared to if you go back to the BA group into the financial crisis, maybe just qualitatively talk about that. I think people would be interested in that. Thank you. Willie Walsh: Yes. So you know, if you look at it, our employee costs are 23% of our cost

• base. So if I look at full year 2019, fuel is 27%. So, if you were to take things like fuel

handling and en-route charges, which are, you know, you could say are directly related to the

• peration of the aircraft, that's 50% of our cost base. So clearly, you know, when we don't
• perate the aircraft, you know, these are costs that we generally can avoid and we need to be

careful because you know, what we saw and if you remember in 2001, because of the nature

• f economic regulation for airports and air traffic control providers, you know, they recover it

in future years if they don't get their revenues in the year that it happens. But you know that that's just a very, very rough example of what you do. And then within our employee costs, we clearly have flexibility within the labour contracts that we have, and they vary across the group. So, the immediate action that we've taken, as you would expect, is we've now postponed any future recruitment, it requires sign off by the CEO in each of the operating airlines, if they are to recruit people. What we want to do is be careful that you know, we're not going to put at risk our ability to respond when the market recovers. But we think that's a sensible measure and we'd prefer to be, you know, operating on the side of caution at this stage. We have a number of initiatives. You know, there is pent up demand for part-time work, for unpaid leave. You know, so these are things that we don't normally facilitate at this time of the year. So, we'll be able to do things. So, these - these are all sort of, I would call these business as usual routine initiatives that we will apply very quickly in relation to, you know, what it is we're seeing. So, we're taking a view, as I said, on long-haul through to the end of June on short-haul. At this stage, it's through to the end of March until we can see the patterns that give us, you know, some evidence to make a longer - when I say longer-term decision in relation to capacity for April, May and June. But, you know, we do have a lot of flexibility in the cost base. And then you look at aircraft, you know, we will have a number of aircraft in our fleet that are fully depreciated. We have a

• and that's you know, that's both wide-body and narrow-body. We have aircraft that are

coming off lease. We were looking at taking additional leased aircraft this year that we now won't take into the business. We're committing to taking all of the aircraft that we have

• purchased. We don't see any reason to change that. So, you know, these are - I would

describe as the measures that you would expect us to take both centrally and in each of the

• perating companies as well.

Any discretionary spend we will adjust. We will postpone some investments until later on in the year or maybe into next year. We're not going to postpone any key investments and products you know, where we can see the opportunity to make progress there. So, as I said, we remain fully committed to the reconfiguration of the BA business class product on our long-haul. And I think that's absolutely the right decision for the business. Andrew Lobbenberg (HSBC): Hi, it's Andrew Lobbenberg from HSBC. Willie, to give you an invitation to have a little chat. Talk to us about the third runway and how you feel about the

FY2019 Earnings Friday, 28th February 2020 17

• that. Just a little farewell gift. And a second one, talk to us about the relationship with

Qatar, please. Because you moved heaven and earth to get the European ownership up, and he goes and buys some more doesn't he? And at the same time, somehow, you've got him to kiss and make up with the Americans. So that's remarkable. Yes. Tell us about those, and we'll miss you. Willie Walsh: Yes. So, on the third runway, I have to be honest, it didn't come as a surprise to me. And I had a unique experience yesterday when one of the lawyers came to me and said, "We gave you the wrong advice" because they told me that that case would - would not

• win. So, it's always nice when you get an apology from a lawyer. And it wasn't - it wasn't

Chris by the way. Yes, it's not a - you still pay them. So, I wasn't - and I'm not surprised that the government has said that they're not going to appeal it. I think that's the right decision by the

• government. Equally, I'm not surprised that Heathrow's decided they will appeal.

I'm now calling on the CAA to stop Heathrow spending money on the third runway. And okay

• look, if Heathrow wants to spend money on the third runway, let them, but don't allow them

to pass that cost onto us because I believe the chances of a third runway being built are significantly reduced as a result of the decision yesterday. In effect, they've got to go back to square one and start off again. And even if they do, I think the - the challenge on the environmental front is still significant. And they have no way, absolutely no way on earth of meeting the cost challenge. So, you know, I've been saying that for some time. I think I've been absolutely consistent that I didn't believe they could do it either on environmental grounds or on cost grounds and my view on that hasn't changed. And in relation to Qatar, yes, I'm really pleased the relationship between Qatar and American has improved significantly. And as you know, they've announced that they're re-engaging on commercial initiatives with code-share. I think that's a that's a very positive development. It didn't in any way interfere with our relationship with American on the one hand, and with Qatar on the other. What was very helpful was that being in the middle, we were able to bring the two sides a little bit closer together, and I think that's a positive development for us and also a positive development for oneworld. And I have to say; I'm really pleased with the way American is responding to the challenges that they are facing. But the recent announcement of a closer relationship with Alaskan, I believe, is very positive. We've had a longstanding relationship with Alaska on the West Coast, with British Airways, and we see opportunities for Air Lingus there as well. So, these two initiatives are very significant initiatives. And, you know, they - they've invested in IAG because they believe that it's an excellent investment. And so, you know I can't comment on how people make investment decisions, but it did come as a surprise to me. We had no advance knowledge of that decision. We were advised the night before it was publicly

• announced. But that was, I think after they had formally advised the CNMV in Spain that

they'd made the acquisition. It was a courtesy message to us that they would be making an announcement at 7 o'clock the following morning. So, you know, I know the Chairman and Luis will have engagement with Qatar after I leave, and I have no doubt that that will continue to be a positive engagement.

FY2019 Earnings Friday, 28th February 2020 18 Jarrod Castle (UBS): Good morning. Firstly, thanks, Willie, for your decade at IAG and thanks from the analyst community. I think we've all found you, you know, honest, insightful, even if you haven't had the answers at times. So, I always thought, you know, the company was in excellent hands. Thanks very much. Coming on to that then, Luis, I mean, I guess it's early days. The strategy was given in

• November. Are there any areas where you could or would tweak? Or is it just exactly as is?

And then secondly, just kind of just coming on to the cost control, I guess you've decreased your capacity down to 2%. What's the natural run rate, I guess, of capacity growth that you require in order to bring down ex-fuel unit costs? Or is this a year where you know, the minus

• ne isn't a minus one? Thanks.

Willie Walsh: I think, you know, where we're seeing growth at the moment - and we clearly have brought our growth down, so as Steve said, you know, 4% last year when we sort of, targeted it. In fact, if we go back when we're doing the business planning process, we were looking at about just over 7% growth. We then took a decision as IAG that that was too high and, you know, took a central decision to moderate that down a bit to 5.9%, which is the figure we gave you this time last year for 2019. We did make at that time you know, a strong comment that we would look to moderate that further as we went through the year. Now, I think this time round we have responded to what people have said, that maybe we should go the other way where we - we have a lower growth target and look to improve on that if we see opportunity rather than announcing a higher growth target and look to reduce

• it. And that's exactly what we did. So, you know, we were looking at this year at around a

little over 3, maybe towards 3.5, 3.2, 3.5%. We've taken that down now to 2. I suspect as we stand here, it's likely to be below 2. But then you know that may go up in the - you know, if we were talking here, maybe in September, we'd be looking at opportunities and putting, you know, capacity in to respond to underlying demand, and particularly in an environment where I think a number of airlines will have disappeared at that stage. You know, the natural level of growth for IAG, I think is probably in the order of 5%. You know, if I look at the combination of the group where, you know, we have, if you like, the traditional legacy airlines and then the value airline, Aer Lingus in the middle and then low

• cost. You know, Aer Lingus clearly has opportunities to pursue very strong growth on the

transatlantic, performance there continues to be impressive. And with the availability of the 321LR and then the XLRs, you know, I think what that can do to the network and the hub at Dublin will facilitate a strong transatlantic growth opportunity for them and less so on the short-haul. But, you know, if you look at the combination of the airlines in the group and particularly with the acquisition of Air Europa, that's where I believe it rests. And at that level, I don't see any issue with the business being able to pursue that 1% non-fuel unit cost CAGR reduction. You know, I know, Luis - I'm going to do the talking today because he'll be doing it from now on, so I'm not going to hog the stage. But, you know, I know he's committed to that. But you know, if I were looking at the next 10 years, I would be very comfortable that we can achieve those sorts of targets. Carolina Dores (Morgan Stanley): Carolina Dores from Morgan Stanley. I have - well, two

• questions. First for Steve, in terms of liquidity, fully agree that 6.6 billion of cash, it's good

FY2019 Earnings Friday, 28th February 2020 19 liquidity, but you also have 4 billion of payables that expire in 30 days. So, in a stress scenario, I guess are you looking today to increase your overdraft limits? And how much is that? My second question is if either your financing or your - or the credit lines that you have for the hedging have financial covenants and which are they? Steve Gunning: Okay. In terms of liquidity, as you rightly say, we're very comfortable with the level of cash we have and as you see from the accounts, we - we were sitting on about 6.6 at the end of the year and due to the natural cycle, that continues to increase over time. So, the cash position is good. We have revolving credit facilities. So, we have $1.3 billion revolving credit facility as well. And you're absolutely right. We have the ability to take out additional credit lines as well. So, we're very, very comfortable with the liquidity position we have. With regards to covenants, we're in a strong place. You know, what the Treasury team have done over the last few years is make sure that the guarantees, etc., that we provide and the covenants we provide are pretty minimal, to be honest. So, I think we're in a pretty strong place. Willie Walsh: Yes. I think if you look at the rest of the industry, you know, if you look at all

• f our financial metrics, our cash relative to revenue, what we're holding, you know, I see

competitors there with less than 10% of cash relative to revenue. You know, there's going to be a number of airlines in significant stress in the very near future. We're in a very strong position, and our cash balances, our ability to raise additional cash if necessary, the lines of credit we have available to us, the measures that we can take, you know, internally to conserve and generate cash, you know, all of these things are things that we will focus on, as you would expect us to do. So, you know, as Steve says it's nice when you hear a CFO saying he's comfortable with the cash position, you know, but I'm sure, you know, the business will look at how we can generate additional cash as well and we can. If we need it, we can, and there's others out there who can't. Rishika Savjani (Barclays Capital): Hi. Good morning. It's Rishika from Barclays. Just

• ne question from me. On the transatlantic in the competitive environment, particularly in

the premium cabins, I believe, you know, a few of the other joint ventures are adding quite a bit of new premium capacity, new products. You, of course, have your own product rollout as

• well. So, can you just maybe give us an idea as to how you're seeing those dynamics play
• ut? Thank you.

Willie Walsh: Yes, I think transatlantic - transatlantic business has been good. You know, the number of competitors have been increasing their aircraft gauge with premium seats, but the underlying market, you know, has been - has been okay. I think what we would comment on is - going into this year, we've seen very strong leisure demand. And leisure is not just in the non-premium that's in both premium and non-premium. As you know, when we give you details of who travels in our premium cabins. It's not all business. And in fact, you know, some of our business in the economy cabin as well. So, yes, the competitive environment is strong in the transatlantic, but the underlying dynamics of the market remain very strong. So, I think the - the product investment that we're making is absolutely right. You know, we know our product has lagged some of our

FY2019 Earnings Friday, 28th February 2020 20 competitors, but then again, our competitors have only just managed to get to a situation where they've got a competitive product in the market. Our new product is superior to that as well. So, I think the measures and steps we're taking will put us in a good place on the transatlantic, which will continue to be, you know, a key market for us. But yes, I think it's fair to say we're seeing strong competition, particularly from the likes of United and Delta. So, these are good, sensible, what I would call rational competitors in the market. So, I have no issue with that. You know, I think that dynamic is a good dynamic to have of the markets, and it works very well for us. Muneeba Kayani (BoAML): Muneeba Kayani from Bank of America. Two questions, please. Firstly, on summer bookings, typically at this time of the year. What visibility do you have into the summer, and what are you seeing currently? So, if you can just compare that? And then secondly, on loyalty, you shared some numbers at the capital markets day. How did you - how did 2019 end up? What does the Barclays partnership mean for the - for the loyalty business? So, any colour there would be great. Willie Walsh: Yes, on summer bookings, it varies by the airline. So, as you would expect, the lead time with bookings with the likes of Vueling is, you know, significantly different to British Airways. So, what we had seen was a normal pattern. And in fact, I would say normal pattern on Europe. So therefore, if I look at the four airlines - however many we have now. - five operating within the European environment. Up until the 23rd of February, it was tracking, as you would expect. You know, so it was in line with what we would have seen historically in line with our plans. It then deviated from that on the 24th of February, and that's the bit that we're watching as a moment. So, it does vary - BA would have more bookings into the summer than Vueling would have which tends to have a much shorter booking window, but up to the 23rd of February, you know, what we were seeing within Europe was very much in line with what we would have expected to see. We didn't - we didn't notice any change in trends or behaviours that would cause us to say there's something different going on here. You'll always get variation as a result of events happening, but it did change on the - on the 24th of February. That's when we saw it deviate and that's the bit that we - you know, we're monitoring at the moment. So, when do we see that stabilised? And then when do we see that recover? And we've no visibility on that at the moment. So that's why, you know, I go back to what I said. We just cannot give you accurate guidance in relation to the performance this year based on what we've seen over the last four or five days and until we see trends there that we're comfortable with, you know, I can't really give you any more information than that. Steve Gunning: [Inaudible] loyalty. Willie Walsh: And loyalty, sorry - do you want to - Steve Gunning: Yes. In terms of how loyalty finished the year, very much as expected. So, you know, across all of our numbers, you know, we very much - we're on guidance, and so loyalty finished the way we expected it to. Barclays Premiers? Willie Walsh: Yes. I think Barclays - and we've got a number of initiatives in the pipeline

• there. You know, we're very excited about the - you know, the quality of partnership and the

commitment that they have to jointly exploiting the market opportunities that are there. So,

FY2019 Earnings Friday, 28th February 2020 21 you know, we've got a very good relationship with Amex. We've had very strong engagement from MasterCard, for example, recently. Their CEO has been in to see me three or four times in the last 12 months. They're mad keen to do business with us. So, this is an area where I think there's great opportunity for the business and people, you know - the likes of partners like Barclays and others, I can't name them all that we're talking to at the moment. I think these are quality partners that are completely aligned to our

• bjectives in relation to this segment of the market. So, you know, this is an opportunity for

us going forward. Neil Glynn (Credit Suisse): Neil Glynn from Credit Suisse, if I could ask two questions. Maybe the first on short-haul following on from some of the other questions. I guess the Tenerife Hotel situation certainly brings to mind that Easter is clearly fast-approaching. I know it's difficult to guide, and I'm not asking for guidance, but can you give us any kind of sense as to have bookings to the Canary Islands, for example, stopped? Or have they just slowed down quite significantly at this point? And then more from a long-haul perspective. Clearly, we're all trying to figure things out. But one key structural difference versus SARS or even the global financial crisis, for that matter, is the joint ventures that you have with American, JAL, Qatar Airways. To what extent does that make this time quite different for you in terms of how you manage capacity and revenue and how much do those help in reality? Willie Walsh: Yes, on short-haul, surprisingly, we haven't seen what you would have expected to see on Tenerife. In fact, we've monitored that one. That's - it's been unusual. You know, Milan, very, very noticeable both in terms of the, you know, the number of people that have bookings to travel and then the number of people that turn up on the day to travel. So, you know, we've seen a - and this is one of the things we monitor. You know, the no- show rate as well as the booking rate. Tenerife - we were surprised when we looked at this yesterday. You know, I think we had two flights to Tenerife from Gatwick yesterday. Both of them were full. So, it's not a consistent pattern of behaviour. And I think it probably differentiates by, you know, the customer segment as well. So, these are things that, you know, we're monitoring. I couldn't say it's exactly the same on all parts of the network because it's not. But what is very noticeable, you know, Italy is a standout in terms of the way demand has fallen. And as you would expect, that's led by Milan, but quickly followed by - I think altogether BA flies to about 15 Italian destinations between City, Gatwick and Heathrow. But it's been led by Milan but impacting on all of the airports in Italy. And the same is - it's a similar pattern with the - with the other airlines. And the joint venture - yes, the joint venture does make a difference because, you know, clearly being able to talk to your partner and coordinate activity is definitely an advantage in a situation like this where, you know, capacity adjustments can be made in a collaborative way because we have approval to talk to one another both in terms of pricing and capacity. We've not made any adjustments to the transatlantic network at this stage, nor have we made adjustments to the Middle East, but you know, if we were to do that, we have the

• ption of discussing that with our partners. So, I think it does make a difference. And, you

FY2019 Earnings Friday, 28th February 2020 22 know, it's definitely a help in an environment like this to be able to have those discussions with an immunised partner. Jaime Rowbotham (Deutsche Bank): Thanks. Jaime Rowbotham from Deutsche Bank, two from me. One for Willie, one for Steve. Willie, I think most major airlines that are in rude financial health like yourselves would be looking to make the most of a crisis. And I just wondered what IAG can do to make the most of this particular crisis? You seem to allude to the fact that you won't be buying back shares despite the fall in the share price. You might not be buying any of the many airlines that would be knocking on your door looking for financial help. So, what can you do? And then, Steve, it's another one on cash. This time on cash conversion. So, €1.4 billion of cash on your levered free cash flow definition. I don't know if you can share what that number would look like if we knocked off the operating lease payments. More importantly, I appreciate guidance goes out the window, certainly on EBITDA, but at the capital markets day that 1.4 was going to go to 2.1 on average over the next three years. Putting the EBITDA bit to one side, which was going to provide some of the growth, I think - I think some more was going to come from pensions down, partly offset by CapEx up a bit. Is that sort of, still the direction of travel do you think on cash conversion putting the EBITDA starting point to one side? Thanks. Willie Walsh: You know, look, I wouldn't like to be quoted as somebody who is trying to take advantage of a situation where, you know, this is - this is clearly tragic for a lot of people. So, you know, we need to be careful here. Our focus is on doing what's right for our business in the current - you know, just absolutely focusing on IAG. So, what can we do in this environment to make ourselves more robust? We're not looking at

• pportunities outside of that. Right now, we're focused on doing the right things to ensure

that our position remains strong, and if possible that we strengthen it. And we've learned from past experience, you know, airlines that can go into a crisis in a strong position don't always come out of it in a strong position, you know, because they've wasted their strength as they've gone through. They haven't taken the action that they should have taken because of their strong position going in. We're not going to make that

• mistake. You know, I look back to what happened in 2001. You know, a number of airlines

actually went into that crisis in a strong and healthy position but sat there waiting for everybody else to fall over, and just saw their own position deteriorate. We want to take measures to strengthen our position. So, we're looking at how we can make

• urselves stronger. And then let's talk about the opportunities when everybody gets through

this particular crisis and we can focus on that. But I've absolutely no doubt that you know, there are airlines out there that just can't survive this. And, you know, I feel sorry for some

• f them. Others I don't. Like, I can have no sympathy for the likes of Flybe, you know, in an

environment like this. You know, that's a business model that doesn't work with shareholders that have suddenly cottoned on that they've bought a dog. And you know, the idea that the British government is going to bail them out in this environment I think is madness. So, you know, I have no hesitation in saying that I don't see governments coming to the rescue of weak airlines. They don't need to. There are plenty of airlines out there that are in a healthy position who will provide the capacity that's required.

FY2019 Earnings Friday, 28th February 2020 23 Steve Gunning: In terms of guidance on cash, I'm not going to give you guidance on cash. I mean, if I could point you to two or three sort of signals of confidence - you know, we've announced the final dividend today. You've heard Willie say, you know, we're not looking to not take the aircraft deliveries that we've got on the books, and we're not looking to stop you know, product investment where it's going to make a material difference to our NPS. So, if you're looking for some sort of signals of confidence, I would point you to those three points, but I wouldn't get into more detail in terms of specific guidance on cash. Malte Schulz (Commerzbank): Malte from Commerzbank. Two questions from my side. First of all, do you see if this crisis would spread a little bit more into the summer, is there any under-served region or anywhere where you could redeploy capacity where you don't fly at the moment or don't fly enough at the moment? And just to safeguard the slots in Heathrow, do you have to keep up a certain capacity to not lose them to competitors? Because probably any airline would love to jump at the opportunity to steal some of your Heathrow slots. And the final one would be - the second question would be a little bit this being the split of business and leisure travel. I think I understood that you see significantly more impact on business demand in all cabins, which I would also regard as normally and probably the higher-yielding traffic. So, did you see a significant hit on yields or is that an indicator for Q1? Willie Walsh: So, in terms of redeploying capacity, I think there's - there is some

• pportunity, but I wouldn't describe that as a lot of opportunity until we witness what else
• happens. So, as I said, I think, you know, over the coming weeks and months, you're going

to see a number of airlines disappear, which will provide us with opportunity. In terms of slots, there is discussion for an alleviation on the 80/20 slot rule at an industry

• level. And I know that there's been a dialogue between IATA and regulators around that.

The timing of this coincides with the change in seasons. So, we have capacity up to March and we have capacity after March. So, the slot issue is not a concern for us at the moment. We've lots of capability to adjust within the slot rules, as they - as they apply at the moment. But I suspect given that this is being experienced by everybody in the industry, you know - which is different maybe to what we've seen previously, where it impacted on some airlines more than others. You know, I saw easyJet comment this morning, for example, and I can

• nly imagine that what we're seeing and what easyJet is seeing is similar to what Ryanair is

seeing and everybody else. So, I think this is a different environment to maybe what we've seen before. So, slots, I don't see that as being a concern. And what I said about the business channel. So, you know, as I said, it's not just premium. It's not a premium issue because business doesn't just travel in - in the premium cabins. And we look at that as a sales channel. So, it impacts onboth. It's not always the highest deal that - because as you know, in many cases, this is discounted. So, you know, it's - we're not going to give you any more detail because clearly, we want to analyse this as we go forward. But again, we've experienced this previously. So, it's not - it's not something new that we've seen. We saw this in 2001. We saw it in 2008. We've seen it at other times as well. So, we have a reasonable understanding as to how this impacts on yield and on the booking patterns. So, you know, other than that, as I said, we'll just wait to see how these trends develop over the next few weeks.

FY2019 Earnings Friday, 28th February 2020 24 Moderator: Any more? Okay, thanks Willie, Steve. Thanks for your questions and for coming along today. We'll speak again on May 7 when we have our first-quarter results. Thank you. Willie Walsh: Just to say, I'm going to miss you guys. [Inaudible] so I can heckle from the back or something, but if I don't get the opportunity to say it to you personally, can I just thank you for the interactions that I've had with you over the past 15 years or more. And wish you all well, and, you know, hopefully, I'll continue - well, I will continue to watch the developments in the industry with interest, but I'm going to be around for the next four weeks as I said, so I'm not gone yet. So - I think one of the funniest things that's happened is one of the newspapers has been on to us about writing my obituary. You know, and they said that they want to get ahead. You know, they want to have it on file for me, you know, I'm leaving the industry. I'm not planning on leaving the planet. But thank you very much, everybody and - Moderator: Well done. [END OF TRANSCRIPT]