International Consolidated Airlines Group S.A. (IAG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Half Year 2020 International Consolidated Airlines Group Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, 31st of July 2020. And I would now like to hand the conference over to your first speaker today, Antonio Vázquez, the Chairman of IAG. Please go ahead, sir.

All right, good morning. This is Antonio Vázquez. Welcome to the results presentation of IAG. I will give you a few words of introduction before handing over to Willie. This has been certainly the worst quarterly results in our history, and COVID-19 has been the worst event to have affected the aviation industry. This morning, we announced a planned capital increase of up to EUR 2.75 billion, which the management team will take you through. This will be my last results meeting as IAG Chairman. Following a very thorough and robust succession planning, I intend to chair the Board for the remainder of 2020 and then retire early in January. After 9 years as Chairman of IAG and 2 years before as the CEO and Chairman of Iberia, it is time to hand over the reins. The new Chairman will be Javier Ferrán, currently a nonexecutive director of IAG and also Chairman of Diageo. Javier and I have worked together over the last year, and I have every confidence that he is the right person to take the group forward. It has been for me a privilege to have led the IAG Board since the group was formed from the merger of British Airways and Iberia in January 2011, and I'm fully confident that our previous achievements put us in a very good position to face the industry's current crisis. Before I hand over to the management, I would like to thank Willie for all the year, who has been leading the management team, and specifically for delaying his retirement to enable the IAG management team to remain in their roles to deal with the initial impacts of the COVID-19 crisis. I look forward to welcoming Luis Gallego as the CEO from September. His proven track record in transforming business and his great leadership will certainly drive the group to a new era. With that in mind and -- I will hand over to Willie. Thank you.

Thank you, Antonio. And good morning, everybody. And allow me to take this opportunity to thank Antonio for the job he has done as Chairman of IAG and in supporting me in my role as the Chief Executive since we created IAG. I very much appreciate his support and his guidance and thank him for everything he has done and congratulate him on an excellent career. It's clear that we went into this crisis in a strong position both strategically and financially. However, the COVID-19 events have caused substantial damage and losses for the global industry and for us within the industry, with today our first half pre-exceptional operating loss that we reported of EUR 1.9 billion. We acted quickly to offset the negative impacts of the downturn. We've taken all responsible actions to bolster our liquidity and to protect the long-term future of the business. Like most in the industry now and, I think, consistent with the latest forecasts, we believe it will take probably until 2023 or 2024 or at least 2023 before we see passenger demand recover to 2019 levels. We have a clear path for returning to service. We're clear in terms of what we need to do to rightsize the business and to restructure the airlines to do what's right as that demand gradually returns. And based on our current capacity planning scenario, we would reach breakeven in terms of net cash flows from operating activities during the fourth quarter of this year. And as the Chairman has said, in addition to all of the actions we've taken to date, we are proposing a capital increase of up to EUR 2.75 billion, which will further strengthen our financial and strategic position. So if we look at this proposed increase. We believe it will improve our resilience. It's fully supported by our largest shareholder, Qatar Airways, and it will allow us to strengthen our balance sheet and reduce leverage. It clearly enhances our liquidity and helps us to withstand a prolonged, extended downturn in air travel. And we've sized this increase on a commercial downside case looking at a stretched recovery that Steve will take you through later on. It will give us additional flexibility, provide us the opportunity to take advantages of any opportunities that present themselves as the demand recovers and enable us to continue to invest to improve the performance of the business and exploit any new innovation. Important to remind you, and I think this is where we have an excellent track record, that we will selectively distribute capital to the operating companies based on our clearly defined capital allocation disciplines. And this will enable us to focus on long-term value drivers for the airline as we come through this crisis. So this is all designed to help us to capitalize on our strengths and to enable us not just to survive this immediate downturn, but more importantly, to ensure that we have a business that's fit for purpose as we come out of this crisis. We have a successful and proven business model. You've seen this chart many times before. We believe we have a portfolio of world-class brands and operations. We have leadership positions in key markets. And we have a common platform, an integrated platform, that we continue to build up that delivers significant synergies to the operating companies. Our airlines give an unrivaled customer proposition. They have a clear track record of efficiency and innovation, and we look at pursuing sustainable value-accretive growth, and all of it underpinned by our continuing commitment to environmental sustainability. And if you look at our track record in terms of consolidation since IAG was formed in 2001: the excellent acquisition of bmi to strengthen our position at Heathrow, Vueling in 2013, Aer Lingus in 2015, the slot acquisition from Monarch in 2017; and then more importantly, where we explored an option to acquire Norwegian and, having investigated it, walked away when we were clear that we could not generate the value that shareholders would expect. So we are not driven to consolidate. We will only consolidate where we believe that, that consolidation will make sense for our shareholders. And that is the case with Air Europa, where the strategic argument remained strong and the synergies remained very encouraging. We've also helped in consolidation through the creation of joint businesses. And while our industry is prevented from genuine cross-border consolidation, we have been able to pursue a number of attractive joint businesses: starting with the exploitation of the transatlantic joint business which we signed in October 2010; the creation of the Siberian joint business with JAL in 2012; Finnair's addition in 2013 to both the transatlantic and then in 2014 to the Siberian one; a Qatar joint business in 2016; and most recently, a joint business with China Southern in China. And all of this, don't forget, helped to deliver synergies that went well in excess of the targeted synergies for the business, achieving EUR 860 million of annual synergies by 2015 through the BA-Iberia merger. We have a track record of delivering strong and improving profitability, with targeted margins of between 12% and 15%, and those targets remain relevant for the business going forward. And I know Luis will have an opportunity to comment on that later on. ROIC target, our initial target of 12% changed in 2016 to 15%. And again, we believe that these are relevant to the medium-term targets for the business. So we have a strong track record. Delivering on those targets helped to improve our financial position as we went into this crisis, with our adjusted net debt-to-EBITDA at very respectable levels, as you can see from the chart on the left-hand side. And very important, as we've stressed throughout this crisis, our cash position was absolutely critical. So entering into the crisis above our cash targets, which is a policy of holding 20% of -- traditionally we look at the trailing 12 months revenue. So in 2019, in December 2019, we had 26% of trailing 12 months revenue in cash terms, with additional facilities bringing total liquidity at 34%. So we believe this is an important buffer. It's clearly stood the test of time and enabled us to take the actions that have been required in the short term and most importantly to continue to put us in a position where our liquidity remains healthy today. And we've been pleased to fulfill the ambition that we expressed when we created IAG to reward our shareholders. And we believe that this is a fundamental principle and a requirement of any business to ensure that shareholders get rewarded for the money, the capital that they invest in the business. And we have a strong track record. And I know that the Board and management remain absolutely committed to reintroducing dividend payments at the right time for the business going forward. And we will not walk away from our commitments on environmental performance. We've led the industry in tackling climate change. Our actions through this crisis reinforce that some of the painful measures that we've had to take will help us to achieve these carbon efficiency targets. And we believe it's absolutely critical that we in the industry and the industry collectively demonstrate our commitment to addressing the environmental impact of aviation and to do everything we can. So our targets are ambitious, getting to net 0 by 2050, fully aligned with government's ambition and fully committed to achieving those targets despite the crisis that we're going through at the moment. I'll now hand over to Steve to take you through the formal results presentation and will talk to you later on.

Thanks, Willie. Good morning, everyone. I'll now take you through the half 1 results and also our response to COVID-19. We thought it would be useful to set the context for the results, so to do that, we borrowed 2 slides from IATA. The slide on -- the graph on the left shows passenger demand since the year 2000. And as you can see, as -- lots of people like to use the word "unprecedented," but this truly is an unprecedented event. You will have to squint to see the global financial crisis or SARS or many of the other crises that we've faced since 2000, but you won't need to do any squinting to see the COVID-19 event, so these really are unprecedented times. The graph on the right shows that airlines registered in Europe have also been very heavily impacted. Only Asia Pacific has had a greater impact. And I think for Europe this is partly due to the modest level of domestic flying and the higher level of flying across international boundaries. And hence, government restrictions and travel advisories can have a disproportionate effect. So that's the context. Let's turn to the numbers. In quarter 2, you'll see that passenger revenue was down 96.7%. It's at EUR 198 million. That's consistent with the ASK reduction of about 95%. You'll see that cargo revenue has actually been strong in the quarter and actually recorded a record level of revenue despite volumes being down about 37.5%. And so overall revenue was down 89%. If we look at the costs. Despite all of the hard work that we've done on costs and continue to do on costs, not just temporary but restructuring the cost base, at the moment, our costs reduced about 63.5%. So all in all, for Q2, we generated a pre-exceptional operating loss of EUR 1,365 million. And if we add that to the minus EUR 535 million in Q1, we get a half year of -- pre-exceptional operating loss of EUR 1.9 billion. And so that's pre-exceptional. So let's turn and talk about the exceptional charges. Three items in the exceptional charges for the first half, you'll recall, I believe, that at the Q1 results I took you through in quite a lot of detail the nature of the fuel over-hedging loss, which at the time was at EUR 1,325 million. And we explained that actually that over-hedging loss could actually increase when we mark to market our excess hedge book at the end of April using the latest forward curve. At that point, it looked like the hedge loss could go up as high as EUR 1.5 billion. There have been 3 factors that have moved that number during the course of quarter 2. The actual commodity price has increased, which is actually helpful in this scenario. The ramp-up of our capacity has been slower, which means we've had to de-designate more hedges. And the FX rates have been somewhat favorable. So overall, that EUR 1,325 million at the end of Q1 has come down to EUR 1,269 million for the half year. We also do hedge some of our overseas currencies for revenue purposes, and we are over-hedged on some of those and so we've had to take an over-hedge loss of EUR 38 million in the half as well. And so overall, our over-hedging losses -- or over-hedging charge in half 1 is EUR 1,307 million. In Q2, as we trialed in the Q1 results, we did decide to impair the 32 747-400 aircraft that we have. That's the entire fleet, remaining fleet. We also impaired the entire remaining fleet of the A340-600s as well and a number of other aircraft, so all in all, impairing those aircraft and the related inventory has led to an impairment charge of EUR 808 million. And finally, in terms of exceptional charges in the first half, as you know, we received a notice of intent to fine from the Information Commissioner's Office in July 2019 for the sum of GBP 183 million. We've now booked a provision for what we expect the outcome to be, which is a provision of GBP 20 million. So moving on from the exceptional charges, let's turn to debt and liquidity. As you'll see, since March, our debt has increased by EUR 2 billion, up to EUR 16.5 billion. Some of the key items in there are clearly we have received loans in Spain for both Vueling and Iberia that are backed by the Spanish government under the ICO program. That was about EUR 1 billion of loans. As you know, we also tapped the commercial paper program in the U.K., the CCFF, for EUR 0.3 billion as well. And we have taken in aircraft deliveries, which have also added to the debt. So overall, gross debt has increased EUR 2 billion. Cash has reduced EUR 0.9 billion, and hence net debt has gone up EUR 2.9 billion. Net debt-to-EBITDA is 4.2x. If I look at cash. The cash position is EUR 6 billion at the end of June, which represents 24% of 2019 revenues. We came into the year at 26%, so I think we've done a very good job maintaining the cash position. And similarly, liquidity is at EUR 8.1 billion, as Willie mentioned earlier, which represents 32% of 2019 revenues. We came into 2020 at 34%, so we continued to maintain a strong liquidity position despite the challenges of Q2. Liquidity is a nice lead-in to the response to COVID-19 because a lot of our focus has been how to optimize liquidity during the course of the crisis. The way we've looked at this exercise is to break it into a number of work streams, and we've just given you an overview of those work streams on this slide. Clearly, operating cost reductions are key, reducing the level of the fixed cost, restructuring the business and also reducing capacity to the optimal level. Clearly, reducing CapEx to the minimum is key. Reducing fleet deliveries and fleet delivery payments has been a big exercise. I'll take you through more of that in a moment. Working capital management, increasing the focus on this to make sure we maintain the cash position and also all the other activities to bolster liquidity, mainly treasury activities but other activities on top of that. I'll now take you through a slide on each of those work streams to give you a bit more of a flavor of what we've been doing. If we turn to operating cost cash burn. At Q1, we said for April and May the regular flying program would have had an operating cost cash burn of EUR 440 million, and we'd -- we're confident we've reduced that to EUR 200 million for April and May. Actually, for quarter 2, we've reduced that down to EUR 193 million, so we overachieved on what we were attempting to do, but we did say we were not content with EUR 200 million. We're showing EUR 205 million here because one of the key characteristics of Q2 has been a very strong cargo demand. We've run 1,800, nearly 1,900 additional rotations that are cargo-driven, and we hadn't factored in the operating costs related to those flights when we came up with our estimates for April and May. I must add just for clarity these numbers do not net off the cargo revenue. These are purely cost numbers. The revenue sits outside of these numbers. So we think it was very worthwhile incurring those additional operating costs to generate that additional cargo revenue. If we look to the months of July and August. Once again, we would have expected to have a regular flying program cost of about EUR 455 million. We think we will, post our management actions, have a cash burn of about EUR 205 million per week during those 2 months. And it's worth highlighting the fact that all of these numbers are per week rather than per month. So EUR 205 million, pretty much the same as Q2, but do bear in mind our planning scenario at the moment is to fly 10 points more capacity in these months than we did in Q2. So we think that's an improvement in performance. Once again, these are not static pictures. We continue to work on how to minimize the operating cost cash burn. Move to the next slide, let's talk about capital expenditure. And what we presented at Capital Markets Day in November 2019 was for the 3 years '20, '21 and '22 a CapEx bill at a gross level of EUR 14.2 billion. Due to our discussions, negotiations and contracting with the OEMs and also looking internally at the nonfleet CapEx, we've now reduced that to EUR 7 billion across the 3 years. So we've gone from an average of EUR 4.8 million (sic) [ EUR 4.8 billion ] per annum to about EUR 2.3 million (sic) [ EUR 2.3 billion ] per annum. We think that's a significant improvement. What's changed since we spoke at the end of Q1 is those positions are now contracted with the OEMs rather than under discussion, so that's good progress. The other thing I'm pleased to say is we indicated at the quarter 1 results that we had about half of the fleet CapEx covered by committed financing at that time, and we were still working at committing and covering the fleet CapEx costs of 2020 fully. And I'm pleased to say we've now done that, so there will not be a cash drain on the business in 2020 due to the aircraft deliveries. So I think that's good progress there. Once again, all of this continues to move, but I think that's good progress. If we look at the next slide. It shows you the fleet delivery program. This is consistent with what we said at Q1, albeit it's now contracted. Secondly, we've now firmed up the impairments that I touched on earlier. And thirdly, we continue to have the fleet flexibility related to the leases expiring both this year and in the next 2 years, and it's still our intention to go ahead and let 20 of the leases expire and not be renewed. So that's CapEx. Let's turn to working capital management. Two things to focus on, I don't know if you recall, but when we went through the full year results in the end of February, I did mention then I was a little disappointed with our level of receivables at the end of December. I thought they were too high. I think the team has done a very good job over the last 6 months to drive the receivables down to the lowest level possible and to get the cash in. And we've seen really good progress there and that particularly helps our liquidity in Q1. The other area we've clearly been thinking and putting a lot of focus on has been the deferred revenue, including the sales in advance of carriage. And as you can see, that's come down only EUR 862 million. So the level of working capital unwind there has been minimized quite effectively. We haven't put the split here between what relates to the loyalty program and what relates to sales in advance of carriage, but what I would say is the loyalty program has been relatively stable. And most of that reduction, most of that working capital unwind has been in relation to sales in advance of carriage. But given the amount of drop in revenue given the -- and therefore the reduced bookings and also given the level of refunds, for that to have only unwound by EUR 862 million, I think is a good outcome. If we then turn to liquidity. Again as I said, the liquidity at the end of June is EUR 8.1 billion, EUR 2.1 billion of facilities and EUR 6 billion of cash. As I say, we've entered into the CCFF and the ICO loans during the course of Q2. We also entered into some bridge facilities in order to finance aircraft as well. After June, so subsequent to the EUR 8.1 billion, we've had 2 other significant developments which will improve our liquidity further. One of them is signing the deals with American Express. And so we will be receiving payments of GBP 750 million in due course. And also, we had 5 aircraft that we'd received by the 30th of June which we needed to complete the financing on, and we've successfully completed those in July. In fact, we've actually received the cash in at the end of July, and that's for $400 million. We've had to be patient with the sale and leaseback market because at certain points the market was very dysfunctional. And some of the rates being offered by lessors were particularly unattractive, so we've had to be patient and wait for the right moment to go back into the market to finance these aircraft. And I'm very comfortable with the rates we've achieved on those aircraft. So that takes you through what -- the half 1 results at a high level and also takes you through some of the actions we've been taking to optimize liquidity during half 1. I'll now hand you over to Luis Gallego to talk about positioning IAG for the future.

Thanks, Steve. And good morning, everyone. As Willie mentioned at the beginning of the presentation, IAG has a proven and successful business model, and we have delivered strong profitability and strong returns during all these years. Also it's important that we have arrived to this crisis in a strong financial position. We have a unique structure. We have weekly meetings with the 6 opco CEOs and 6 IAG senior managers, and we share best practices and we make decisions in the best interest of the overall group. I think this has been very helpful in all of these crises. Our portfolio of brands diversifies our exposure to our individual markets, countries and customer segments. And this is an opportunity to participate in the early recovery of the domestic short haul and leisure demand, as currently we are seeing in Iberia and Vueling. We can also leverage our consolidation track record and our global leadership position in Europe and North Atlantic and Latin America routes to take advantage of any dislocations in the sector in the aftermath of this crisis. We also have strategic and operational freedom because, unlike our major European competitors, we don't have constraints by the government. So we can make acquisitions. We are able to pay dividends to the shareholders. We already have, as you know, a very competitive cost structure, which we are sure we can improve further with the restructuring process that we have across the group over the coming months and into 2021. And also, we are working very hard improving our innovation capabilities, which are going to be critical as demand recovers and competition intensifies coming out of the crisis. Talking about the customers. The biggest challenge that we have for the airline industry now is to get people booking and flying again. Customers need to be able to book with confidence, knowing that they can get their money back should their flights be canceled. And they need to be confident that they will be safe when traveling by air, both on the ground and in the air. I'm not going to cover all these measures that you have in the slide, but we have a lot of examples of what the group airlines are doing to encourage customers to make bookings and to demonstrate that they will be safe from COVID-19 and they will enjoy their experience when traveling. This is especially important because we don't intend to close off seats to booking, and we need to operate flights with high utilization in order to maximize positive cash flow as we return the operations to normal. Pre travel, we are using promotions in order to tempt leisure travelers. We are allowing date changes without penalty. And we have partnered also with insurance companies to provide travel cover in case you contract COVID-19 or are disrupted due to the reimposition of border restrictions while traveling. Each airline has several videos that you can see in the different websites which demonstrates what to expect at the airport and when you are onboard the aircraft. At the airport, we encourage minimal contact with the staff by using self-service check-in and self-boarding gates and contactless security as much as possible. There will be also temperature screenings on departure and on arrivals. All staff and passengers must wear face coverings at all times at the airport and in the air. All aircraft are clean and sanitized each night as well as in between the flights and so on. These are only just examples. There are plenty of other detailed procedures that we do in order to protect the health and safety of all our passengers. If we talk about the demand recovery. We see early signs of demand recovery, especially in the domestic and in the short haul. We have seen customer bookings rise since the middle of May, as the chart that you can see shows. This slide shows weekly booking trends for all the airlines in the group since March as a proportion of last year's levels. They are based on passenger volumes and you have examples. So for example, in domestic Spain that is the 11th largest domestic air travel market in the world, and you can see the recovery that we are having there. With exception of long-haul bookings, they have risen each week, with some recent leveling off. Domestic Spain, as I said before, has the strongest recovery, with bookings currently running on 50% of last year's levels. 24% of our passengers last year were on domestic flights, but only 7% of RPKs were there. Other short-haul bookings are currently running at around 30% of last year's rates. International short haul represents for us 25% of the total RPK traffic. However, it's true that there has been a slight flattening in the domestic and short-haul bookings in the last 2 weeks due to the increase in new COVID-19 cases in Spain. And we are also mindful of the U.K.'s decision on 26th of July to reimpose a 14-day quarantine period for arrivals from Spain. Long-haul bookings are still the weakest, running around 20% of last year's rates. And there has not been an improvement since mid-June, reflecting the problems that we are having in the U.S. and Latin America markets. Moving to the next slide. We are reviewing the capacity for the rest of the summer season and the upcoming winter season on a weekly basis. This slide is a picture that we can have -- on 28th of July and shows monthly capacity as a proportion of 2019 through to the end of the year and then annually for 2021 and 2022. We have reduced the capacity by 95% in the second quarter. We currently plan 75% reduction for the third quarter. It's true that we are going to increase the capacity from minus 85% in July to minus 62% by September, but it's still very slow. And we estimate that the fourth quarter, we will be around minus 46%. So the total passenger capacity for 2020 is expected to be minus 59%, which is worse than what we expected last May that was around 50%. And as I said before, this is mainly due to the U.K. 14-day quarantine period that we have right now and the slow return on U.S. and other long-haul routes. We are considering a slow return to service. In that way, we can maximize the load factors and boost the cash for the group. And what we are trying to ensure is that each flight that we do is cash positive. We have and -- the aim to be operating cash flow positive by the end of 2020, but for sure, this depends on a lot of factors relating to COVID and also the customer that favors bookings. If we talk about the sizing of the business for the future. All the airlines in the group are planning for significant downsizing over the next 2 years and starting now and continuing next winter. In this chart, you can see some of the changes that they are planning to make in terms of the networks, the fleet and the people. It is difficult to have specific capacity plans beyond 2020, but we know that air travel demand will be significantly lower over the next 2 years than it was in 2019. We will try to protect as many jobs as possible, but in the short term, we will have to make significant cuts once the various governments' furloughs and wage support schemes come to an end. Aer Lingus, for example, has already returned 6 wet leases -- wet-leased aircraft to lessors and expect to have at least 9 aircraft on the ground at the end of 2020. They are currently working also on a reduction in the head count of 250 people. And they will be also working in pilot salary reduction and outsourcing the catering operations. British Airways proposal are very well known in the U.K. It has made an agreement with BALPA, with the pilots union, that is currently being in a ballot. It plans to reduce annual employee costs by around 24% by 2022, and that could involve over 9,000 redundancies. BA has already decided to exit its Boeing 747 fleet with early retirement of the remaining 30 aircraft as well around 8 Airbus 318s and 6 Boeing 777s for up to 2 years until long-haul demand returns. Iberia is retiring their 340-600s, and also they are grounding 19 other aircraft as of the end of this year. We are expecting in Iberia to benefit from the current ERTE government scheme, that it will end in September but there is a possible extension of some support until the end of 2020. Once ERTE is finalized, Iberia, we will have to decide with what labor actions are we going to follow. LEVEL, as you know, we only maintain the operation in Barcelona, and we have closed operations in Vienna, Amsterdam. And also, Paris is subject to consultation. So the idea is to maintain Barcelona operation and to see the development of the demand there. Vueling is in a similar situation to Iberia in terms of the ERTE program. They plan to keep 48 320 aircraft grounded until the end of 2020, with most of them returning to operation in 2021. All these restructuring plans are still in the current -- in the consultation stage with the labor unions in the different operators. For sure, we will keep you updated with the progress of the restructuring in the future quarterly results meetings and possible -- and possibly, sorry, at a future Capital Markets Day. We don't expect to have a Capital Markets Day this November, but it will be more likely in early 2021. And finally, about the Air Europa operation. We assure that this acquisition has a strategic and financial value for the group. So despite the challenging operating environment, we remain committed to take advantage of consolidation opportunities. And we are negotiating to find a way to do this transaction in this difficult environment but, for sure, in different conditions than the ones were agreed last November. And with that, I hand over to Willie.

Thank you, Luis. I'm going to let Steve take you through the proposed capital raise, and then I will come back and wrap it up before we take your questions. Steve?

Thanks, Willie. Yes, in terms of the proposed capital increase, as Willie has already covered, we're looking to increase up to EUR 2.75 billion our equity position. There's a general meeting scheduled now, where we will seek shareholder approval, on the 8th of September. I'm pleased to say in regards to the rights issue that Qatar, our largest shareholder with 25.1%, has irrevocably committed to support the capital increase. And for the remaining 74.9%, we have fully underwritten the capital raise on a standby basis. We think that's a worthwhile exercise to undertake given the time scale is from the 31st of July to the general meeting. Markets are volatile at the moment, and this gives us a commitment to funding the full amount irrespective of share price movements, which is helpful. I'm pleased to say the directors have committed to take up in full or in part their entitlements under the capital increase. And it's our current expectation that we will then launch soon after the general meeting, which would be on the 10th of September. If we turn to the next slide. As I think Willie has touched on already, the purpose of this raise is to strengthen the balance sheet by reducing leverage and also to enhancing liquidity. And this would give us more resilience to withstand a prolonged downturn in the industry, and it would give us confidence going through that process. As Willie alluded to, it's been sized on a downside case, and I'll take you through that a bit more in a moment. The raise also provides us strategic flexibility and the ability to further develop the group. And it is worth noting, as we've put on this slide, that this money is being raised at the IAG level, and we will continue to exercise capital discipline as we look to use those funds. We will only use it where we think there is valid returns on that money. If we turn a bit more to the sizing of the exercise. The principles we've employed in coming up with the sizing is to ensure that we have sufficient liquidity to withstand a prolonged downturn in the air travel industry. And how we arrived at that, well, as Willie alluded to earlier, we have run with the principle of having 20% of revenue as a cash holding at any point in time. And so what we came -- what we did was we produced a commercial downside case which looked out for 2 years. That commercial downside case was based on numerous different assumptions. It assumes that ASKs will be down 66% in 2020. They will be down 35% in 2021. Those are both versus 2019 figures. We've made assumptions as to how markets will ramp up in a pessimistic scenario both on a regional basis. So we've looked at North America. We've looked at South America on separate bases, and we've looked at the other regions too. We've considered what we think the fleet financing environment will be like and the other mitigating cost actions. And so all of those factors and assumptions go into a commercial downside case. We've then projected what we think the cash could look like in that severe scenario. We found a trough point. And then we've solved from that trough point back to 20% of the next 12 months revenues as a cash holding, and that's how we've sized it. We think that then gives us the resilience and the liquidity to withstand a prolonged downturn. We also think this is the right time to do this in terms of where markets are and the degree of uncertainty, so the right time and the right sizing. The other factors in our view were it also helps re-equitize the balance sheet and offsets pretty much all of the debt that we've incurred since the advent of COVID-19. So that's some of the principles and some of the working that we've done in order to size and think through the timing of the capital raise. And with that, I will hand you back to Willie for final conclusions.

Thanks, Steve. So just to remind you, we came into this in a strong position. Clearly the crisis has been damaging to the industry and to IAG as part of the industry, with the results that we're announcing today. We acted fast. We took all responsible actions to address and mitigate the negative impacts. We've bolstered liquidity, and we're clearly very focused on protecting the long-term future of the business. We don't expect demand at a passenger level to recover for a number of years, and hence we're resizing and restructuring the airlines within the group to ensure that we have the right structures and size in place as that demand gradually returns. And as we've mentioned on a couple of occasions now through this presentation, based on our current capacity planning scenario, we would reach breakeven in terms of net cash flows from operating activities during the fourth quarter of this year. And we believe it's appropriate now that, in addition to all of the actions we have taken to date, we'll propose this capital increase of up to EUR 2.75 billion to our shareholders to further strengthen our financial and strategic position. So on that, I'm going to hand back to the operator, who will now manage your question session. And we'll try and get through as many of your questions as possible. Thank you.

[Operator Instructions] Your first question comes from the line of Savi Syth from Raymond James.

Luis, I apologize if I missed this in your comments, but first question is I was wondering what you expect from a capacity standpoint across the various airlines in the second half and more importantly, in the resizing that you outlined on Slide 31, what the different airlines will be resized to if it's similar or if you expect something different based on maybe business and international taking longer to recover. And then maybe, Steve, just the American Express extension. Wondering how much of that was related to kind of the repurchase of miles and when we might start to see dilution of that and the length of the extension.

Thank you. So we're not going to give a breakdown by individual airline, but I think, if we look as we go through this year, as Luis said in his presentation, 74% down in Q3 versus 2019 and 46% down in Q4. But what is important is, as you alluded in your question, the businesses are very different. So if I look at Vueling, about 1/3 of their capacity is in domestic markets, 2/3 intra-European and North Africa. And then you turn to British Airways, where less than 2% of capacity is in domestic, a very small U.K. domestic market. It's about 18% intra-Europe, which leaves about 80% in long-haul international. And as Luis set out in his presentation, our expectation, supported by what it is we're seeing in the market, is that you see recovery in domestic markets first, followed by recovery in short-haul international, in our case intra-European, and then followed by long-haul international flying. So the capacity for each of the airlines will reflect the nature of their particular network structure, which is very different for all of the airlines. And as Steve mentioned, the view is that the recovery in Latin America will lag North America, and North America lags the rest of the network. So you will expect, as a result of that, to see different levels of capacity growth in the different airlines. Steve, on Amex, please?

Yes. On the Amex, it's an 8-year deal. As I say, there's GBP 750 million in terms of payments we're receiving in due course, a significant element of that related to a prepayment as it were on miles. We're not giving the full details on that, but it was a significant element of it. But also, there was a one-off payment at the outset which was also significant too.

All right. And when do you expect that to show up generally from an earnings standpoint?

So as Steve mentioned, the cash comes into the business after we finalize all of the details of the agreement, which will probably be August, September. And then the -- that translates then into the profitability and the loyalty system over the next couple of years.

That's right. The treatment will be different for the different elements of the payment.

The next question comes from the line of Daniel Roeska from Bernstein.

Starting with your guided operating cash flow for July and August and looking out maybe a little bit more into the second half. How does that cash burn change when support programs like labor furloughs and the ERTE kind of end? Or traffic charge postponements run, how does that change when that runs out? Secondly, you're scrapping a bunch of the older aircraft, many of which are still owned. You're taking the new aircraft that are coming in on leases. How does that change your kind of percentage of leased aircraft over the next 2 to 3 years? And how are you thinking about the balance, which you previously targeted about roughly half and half? So kind of the leased/owned question kind of into the next couple of years. And lastly, could you talk a little bit about what you're seeing and expecting in terms of business demand? Also thinking about next year, it kind of seems from your guidance that you're expecting business travel to recover almost to previous levels by '22, '23. And are there any medium-term actions you're considering like reconfigurations in the fleet?

Okay. Allow me to address those, the first one certainly. So in terms of the cash operating costs, as Luis pointed out, we're availing of income support schemes where they exist in Ireland, U.K. and Spain. But given that those schemes are temporary, we are putting restructuring measures in place. So Luis took you through some of the details of that. So in British Airways, for example, we are expecting, I think, about 1,400 people to leave the business by today under a voluntary redundancy scheme. So we have voluntary redundancy schemes in place. We have restructuring in place. So as we unwind these income support schemes, they will be replaced by restructuring and employment costs in the airline. Steve, on the aircraft leases?

Yes. It's a good question, Daniel, on the aircraft financing. As I alluded to earlier, we have had some success in the sale and leaseback market in recent weeks. The EETC market, amongst others, hasn't effectively properly opened yet. So it's difficult to be too categoric as to how we're going to finance the aircraft deliveries in 2021, 2022, because we need to see how the markets open. If the markets are fully open, then we will continue to use the principles that we've outlined in previous Capital Markets Day. We'll look at the nature of the aircraft we're purchasing. Is it niche? Is it core? How long we think we're going to hold these aircraft and then determine what's the right way to finance the aircraft. So assuming the markets are open, we won't divert from the principles we've previously adopted, but at the moment, I think we still need to see the markets properly open. And I don't think the EETC market is quite there yet.

And on passenger traffic, let me comment. And then I'll ask Luis if he wants to give his view. So you've heard what we said earlier: domestic markets recover first; then short haul, in effect intra-European; then long-haul international. And then in terms of customer segments, we believe it's leisure recovering ahead of business. And like we saw in 2009 with the global financial crisis, we think there is structural change in the business. And it's important always to separate business travel from premium travel because not all customers that travel in the premium cabins are traveling on business. But that we would see business travel lag in terms of recovery. So it will be leisure markets recovering ahead of business markets, and that's clearly evidenced. Now if that leads to structural change, which we believe it will, you will see that then reflected in how we configure our aircraft, but we're not changing any of the configuration of the aircraft. But it was a factor in the decision to retire the 747s in British Airways, which as you know are in a high-premium configuration. So we are expecting a change in the structure of the business market going forward. Luis, do you want to give a view?

Yes. I think what you said, I think what we see is that when the markets are open, we've seen a recovery of the demand very fast, to be honest. We have seen that in Spain, in Balearic Islands and in Canary Islands markets. Now as I said before, we have a delay because of the issue of the quarantine, but it looks like the leisure market recovers fast when there are no restrictions. It's true that we need to see in the future what's going to be the behavior of the business travelers, but we expect also a recovery as in other previous crises. I'm talking about the aircraft, in our case, for example, in Iberia. If we look to the consumption of the 340s and we compare with the 350s, the fuel consumption, we are going to have a reduction of around 35%. So it's something that is bet for the future. And also it will help us to achieve the environment objectives that we have established at the group level.

Willie, all the best to you.

Thanks very much.

Your next question comes from the line of Stephen Furlong from Davy.

Can I ask about Air Europa? Assuming -- when do you think, with the regulatory process, that deal happens or it opens? Is it H1 next year? Just interested on your time frame for that. And secondly, I just want to ask, Willie, in terms of the whole -- the industry, in terms of recapitalizations that happen. I mean I see this morning, let's pick out one, but Air France talking about EUR 14.2 billion of liquidity. It just seems to me there's almost some overcapitalization where there's government support, and I just want your opinion on that.

Thanks, Stephen. Happy to do that. Let me just comment on Air Europa. And then I'll ask Luis to comment on that because he's the person directly responsible for us. And on the regulatory side, our view was that it would be addressed in Q4 of this year, but it clearly requires us to reach a formal agreement on the acquisition. And as I said, we believe the strategic case remains very strong. But Luis, do you want to give more detail?

In terms of the approval from competition, what you said, we consider that we can have the approval if we close a deal before the end of the year. I think it's important that -- what I said before, that we believe in the strategic rationale of this deal. The good thing of this group is that, as we are in a solid position, we can think in the medium term and in the future. And we consider that this is an operation for the future of the group, for the future of Iberia, for the future of Madrid hub. So if we can close a deal, that it makes sense for us, the idea is to try to close these transactions before the end of the year.

Thanks, Luis. And Stephen, your question is a great one. Liquidity is very important, but what you do with it is even more important. And quite honestly, without being too disrespectful to Air France, we've seen little evidence of them restructuring their business to reflect what has historically happened, never mind what we believe is going to happen in the future. Now I know Ben is a very different leader, but our view is that the industry has structurally changed. I gave some figures in relation to BA just to put it into context in some of the media interviews I did. In Q4 2001, post the tragic events of 9/11, BA lost GBP 187 million in the quarter. First quarter of 2009, in the depth of the global financial crisis, BA lost GBP 309 million. In the second quarter of this year, in the depth of this crisis, BA's operating loss was GBP 711 million. And nobody questions the fact that 2001 and 2009 led to permanent structural change and required structural response. Anybody who believes that this is just a temporary crisis and can be resolved through temporary measures is misguided. So we are focused on our liquidity, but more importantly, we're focused on restructuring the business to ensure that we're in the right shape for the future. I worry for some of the others in the industry who are looking at strong liquidity and are not responding to the structural change that will be necessary. And I think it will be interesting to see the rate at which some of those companies burn through their cash as we go through the rest of this year and through, I'm thinking of, 2021 and 2022. So I'll watch with interest from a distance, but that's my view, Stephen, for what it's worth.

Willie, all the best, by the way.

Thanks.

Your next question comes from the line of Neil Glynn from Crédit Suisse.

If I could ask 3 questions, please. The first one, on the rights issue. The Qatar Airways Board seats are new. Just interested in your view. Does this suggest a greater level of influence over IAG's strategy from Qatar in the future and potentially a deeper cooperation as a result? And second question, on the Amex deal. It's obviously a new type of transaction, at least certainly the size. And it sheds some more light perhaps on IAG's loyalty value. Just interested in your view as to whether this might make it easier to use IAG loyalty to raise capital, theoretically if needed, like some of the U.S. carriers have done. And then a third question, clearly there's been a huge amount of focus on the labor side of your cost base going forward. And you've obviously updated fleet plans today. But could you please outline your thoughts on how meaningfully can you renegotiate other supplier deals to try to reset unit costs lower beyond the pandemic?

Okay. Thanks, Neil. In relation to Qatar, I'm delighted that they're so supportive of the capital raise. And I think it's important for you to look at the quality of the 2 representatives that they have nominated, Giles Agutter and Robin Phillips. I've known Giles for many years. He's an aviation professional. He's an excellent, excellent guy. We've worked with him for a number of years. These are quality nominations to the Board of IAG and represent a -- I think, an excellent addition in terms of the skills and backgrounds of the 2 people. So I don't think it signals anything other than Qatar's support for our business and their desire to see the strength and depth of the Board members of IAG enhanced by the representatives that they put forward. Steve, on loyalty?

Yes. With regards to loyalty, it's been interesting to watch how the loyalty business has performed in the first half, which has been pretty well actually given all of the challenges. It continues to be a great asset. And we have obviously explored all thoughts, when we've been looking at liquidity, as to how best to leverage that asset. Our view is the Amex deal is the right way to do this. I don't think, at this stage, securing borrowings off of our holding in Avios would be a sensible way forward. We think it's a key strategic asset for us, and I think the Amex deal is a smart way to increase liquidity without affecting our position with regards to it. In terms of supplier deals, to your third question. We've looked through all of our critical suppliers to ensure, one, that nothing falls over and we don't have an issue as we restart. In terms of can we go further with some of the deals with the suppliers, absolutely. And you won't be surprised to know that we have detailed procurement plans for every category of spending that we have. I think one of the areas that we will look to focus on probably more than we have done in the past will be to increase the variability of the costs in the contracts. So one of the things that we'll be focusing on over the next year or 2 is increasing the level of variability of unit costs because, if you work on the basis of will we get any second spikes, will there be more volatility and capacity, then I think that variability becomes more important. I don't know, Luis, whether you had any comments you wanted to make on suppliers.

No. I think that you have explained very well, Steve. As we said before, we need to adjust the company or the different companies to the demand that we are expecting in the following years. And for sure, the labor cost is an important cost if we look to our fixed costs, but we need to continue working also in the rest of fixed costs that we have also to reduce in order to adjust our cost base to the demand that we are expecting.

Great. And enjoy your retirement, Willie.

Thank you.

Your next question comes from the line of James Hollins from BNP Paribas.

Willie, this feels like a Frank Sinatra farewell tour, but I wish you all the best once again. Three for me, please, and the first is on coming back on Air Europa. I think the media talked about you paying about 50% of the original EUR 1 billion. I'm just wondering 2 things on that: one, whether you should really be paying anything for it; and secondly, if you're more likely to get full approval, given the COVID pandemic. Clearly, when it was first announced, I think there was talk of a lot of remedies. Secondly, on LEVEL, it looks like you're going down to just 2 aircraft. Should we assume that LEVEL brand is not one for the long term? And then finally, it looks like you've done a deal with BALPA, so great news there. I was wondering if you can update. Clearly, Unite have made some relatively absurd comments about what you should and shouldn't be doing. Do you think that -- things like the equity raise, plus some of that data you gave on losses versus 9/11 and GFC, do you think there's any chance that you make some progress with Unite over the coming months? Or should we expect a long-term issue there?

Thank you. I can assure you this is the last time you will hear from me, but to answer your questions. On Air Europa, I think Luis has given comments, so I'll let him address that. And then I'll address with Steve the other 2 questions. So Luis, do you want to talk about Air Europa?

Yes. I think that the figure that you told is something that appears in the media. We are in the middle of our negotiations, so until we don't reach an agreement and in case we reach an agreement -- we haven't closed any price. What we are sure is that this deal will provide value to this group. And that's the reason we need to find the price that we are ready to pay considering that the medium- and long-term value that this company is going to provide in one of the -- of our main markets, that is the traffic between Europe and Latin America. So we will inform you as soon as we close -- if we close the deal. And for sure, we will do it with a price that we consider is interesting for the group.

Okay. In relation to LEVEL, we intend to continue to operate at Barcelona. So it is with more than 2 aircraft. I think the LEVEL brand is very strong in Barcelona, has worked very well for us. I -- but I think what we've done in relation to LEVEL demonstrates, as you know, we're clearly focused on the businesses achieving the targets that we've set. And where they don't achieve these, then we're not going to put good money after that. And I think that demonstrates yet again the capital discipline that we have. So the management at LEVEL Europe, as it was called Anisec, based in Austria, we're clear that they couldn't see a viable path to recovery and to achieve the targets that we have for the business. And therefore, their recommendation was that the business could not be rescued. As Luis mentioned, in France, we're in the process of consultation in relation to LEVEL Paris. But the Barcelona business has been viable and has delivered good returns and has a clear and viable path to achieve the targets that we've set for the business. And then restructuring in BA, I'm always optimistic. There's no reason why we can't reach agreement. I think the trade union Unite entered into this crisis with the view that this was just a temporary downturn, that they believed that we could get through this by making some short-term measures, which everybody is prepared to do. But I think they've been completely out of touch with the reality of the situation given the scale of the challenge we face. And that's why I think it is helpful to go back and remember what happened in 2001, and everybody talks about it. But to just put it into context, the scale of the challenge then and to remind people what happened in 2009 and put that into context. Because that -- in my 41 years in this industry, 2001 was a very deep and challenging crisis for the industry. 2009 was even worse. And I said that at the time, if you go back and read what I said about the global financial crisis, I said it was worse than 2001. This is worse by any measure and by many times anything we've seen previously, and therefore it requires serious structural action. And we're determined at IAG. But more importantly, the management team in all -- teams in all of the operating companies are determined. So they know what needs to be done. They're determined to do it. And I have full confidence that they will achieve all of the objectives that they have set for themselves, and we share those objectives. We believe they're doing the right thing, and we have confidence that they will deliver.

41 years now, well done, Willie, and best of luck.