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

Good morning, everybody, and welcome to the IAG Year-end Results. I'm Nicholas Cadbury, the Chief Financial Officer. And I'm joined by Luis Gallego. You may be ask why he's on screen and not here. Unfortunately, Luis has broken his leg. So he's sitting at home and making a speeding recovery though. So Luis is going to introduce the call today. I'll then go through the financials, and then I'll hand back to Luis to give a more in-depth, kind of around the strategy, and then we'll open up to Q&A. Luis, over to you.

Thank you very much, Nicholas. Good morning, everyone, and welcome to the IAG year-end results presentation. We are joined today by Nicholas and also by the IAG Management Committee. And as Nicholas said, I'm very sorry not to be there with you face to face, that I have a sports accident and I needed to have a leg surgery. It's clear that when you are 54 not all the sports are good, but lessons learned. So firstly, we would like to acknowledge the 1-year anniversary of the Russian invasion of Ukraine. Our thoughts today are with the people of Ukraine and we would like to express our best wishes and support. Moving on to our results. In 2022, there has been a strong recovery in demand following the removal of COVID-related travel restrictions particularly from Q3. To meet this demand, we had to restore almost 90% of our pre-pandemic capacity at the end of the year. And to drive this recovery, during the year we focused on strengthening our hubs. We quickly recovered operations in our main hub in Madrid, Barcelona and Dublin. And we were really focused on building operational resilience and operability at Heathrow, a hub that, as you know, we experienced the largest number of service challenges. We also took a 20% stake, equity stake in the Madrid based Air Europa. And we have now signed an agreement to acquire the remaining 80% subject to obtaining the necessary regulatory and other approvals. In 2022, we continue to invest in our customers, cost efficiency and sustainability targets, including the delivery of 27 new fuel and environmentally efficient aircraft, and we placed orders for a further 109 aircraft. I'm pleased to report that we also improved our carbon efficiency with our carbon intensity 7% better than it was in 2019. And as we have highlighted in previous presentations, we remain committed to generating long-term shareholder value and we are confident in returning to pre-pandemic levels of operating profit over the next few years. In 2022, we generated EUR 1.2 billion of operating profit before exceptional items, a huge improvement on the EUR 3 billion loss we reported last year. A strong demand, particularly for leisure travel, has enabled this rapid recovery in our financial performance. We saw good cash generation during the year that has driven a reduction in net debt and reinforced our strong liquidity position. This momentum has continued so far in 2023. We have seen a strong forward bookings, again, especially in leisure bookings, with business bookings remaining stable. We are mindful of the uncertainty in the macro environment that we are still in a very -- early in the year. However, we expect a further recovery in profitability this year, and expect to achieve operating profit of between EUR 1.8 billion and EUR 2.3 billion, including a seasonal operating loss of around EUR 200 million in the first quarter. This is based on current fuel and FX rates and assuming there is no deterioration in the economy. We also expect net debt to be broadly maintained at EUR 10.4 billion for our leverage ratio to continue to reduce in 2023. It is in our DNA to focus on disciplined capacity deployment and cost efficiency, and we will remain focused on doing so this year. Throughout IAG's history, we have been committed to generating long-term shareholder value to service our 4 key stakeholders: our customers; our employees; our investors; and the society. And we have a clear ambition and we are very confident of returning to our pre-COVID-19 levels of operating profit and further the strengthening our balance sheet. This, in turn, enable us to continue to serve our stakeholders in the future as we have done in the past. I am confident that is underpinned by a proven business model and investment case. And you can see here the IAG investment case that enable us to generate long-term value for our stakeholders, and it is add value to it as it has been in the past. We have a unique structure with 6 OpCo CEOs and 6 IAG senior members of the management meeting every week to share best practices, allocate capital and resources, and to make decisions in the best interest of the overall group. This was particularly invaluable during IAG's recovery. Our investment case is simple: We have a portfolio of world class brands that have leadership positions in major hub cities, and we allocate capital to the best returning opportunities across our portfolio. We have a competitive cost base and IAG's unique structure allow us to improve the efficiency of our airlines through sharing best practices and resources, our transformation programs and by driving innovation. We are also focused on securing our long-term future through our aviation leadership on sustainability. I will come back later to explain what we have done in 2022 in each of these areas to improve profitability and drive value. And now I will hand over to Nicholas, who will take you through our financial results in more detail.

Thank you, Luis. I'll now focus on the quarter 4, you've got in your earnings this morning in the full year results. And I'll try to go through this quite quickly as you already got the information already. So this slide summarizes our core financials. On the top of the chart, you can see the strong financial recovery that we saw in the summer continued into the fourth quarter in both capacity and in profit. On the bottom half of this slide, you can see that liquidity on the right remains very strong at EUR 14 billion. And the net debt reduced since last year end, which I'll go through in more detail later on in the presentation. This slide shows P&L for the IAG for the fourth quarter, and I'll talk about the comparisons versus 2019. The strong demand resulted in a significant recovery, with pre-exceptional operating profit reaching EUR 486 million. And despite not getting back to 100% capacity, we achieved operating margins of 7.6%. There is a lot of information on this slide for you peruse at your own leisure, but I just wanted to pick out some of the kind of key points. Firstly, revenue was up 3%. This was driven by the strong passenger unit revenue, up 16% and yields up 18%. Both BA and Iberia on their performance in the summer -- continued on their performance in the summer, with passenger unit revenues in quarter 4, increasing by more than 20%. Cargo revenue continued to perform well, although cargo demand and yields softened from previous peaks as supply chains around the world continued to normalize. Other revenue also increased by 3%, driven by the continued good performance from BA Holidays and IAG Loyalty. Fuel unit costs were up 37% due to commodity prices increasing and the strengthening of the U.S. dollar. The year-on-year commodity price -- spot price increased by 50%, although our hedging limited this year-on-year increase to 41%. Non-unit fuel costs increased by 20%, a CAGR of around about 6%. The main driver of the increase was our supplier unit costs, which were up 27% over the last 3 years. This is higher than the underlying run rate due to a number of factors that I'll just take you through. Firstly, about 1/4 of the increase was due to inflation, offset by our transformation efficiency program. Secondly, about 1/5 of this increase relates to the lower capacity flown. And thirdly, about 1/5 explained the growth -- is explained by the growth of non-airline businesses, such as IAG Loyalty and BA Holidays, which I mentioned earlier, had a record year. And lastly, there was a number of one-offs and nonrecurring costs, such as IT accounting adjustments and also the move into the new JFK terminal in New York. Employee unit costs increased by 13% compared to 2019. But in absolute terms were down compared to 2019, predominantly due to the lower capacity with most of the inflation offset by efficiencies. This slide shows the profitability for businesses for quarter 4. We had included -- we included in the details that we showed last time in the appendix overall. You can see that the profitable IAG performance was driven by British Airways and Iberia. And in particular, Iberia's profits were higher than those reported pre-pandemic with profits of EUR 18 million. British Airways showed strong recovery from last year, although profits were down compared to 2019, reflecting 20% lower capacity. Aer Lingus and Vueling are more seasonal businesses, with Aer Lingus reporting a small profit and Vueling a small loss, but both showing good performance in their unit revenue and non-unit fuel costs. Just turning to cash generation. Our cash position remains very strong, increasing almost EUR 1.7 billion during the year. Just going from left to right on this slide to point out a few highlights, the single biggest impact on our cash flow was, of course, our profit recovery, with EBITDA of EUR 3.3 billion during the year. We also had an inflow of deferred revenue of a little over EUR 1 billion, as we still see restoring capacity at good yields and maintain strong forward bookings. Other working capital and operating movements were also positive as we grew the business. Capital investment of EUR 3.9 billion was as we previously guided, and we financed all of our aircraft in the year. And lastly, we saw an inflow of just over -- a little over EUR 1 billion relating to the settlement of derivatives, which relates to the hedging of our primary U.S. dollar-denominated debt. This strong cash flow, together with our uncommitted facilities, improved our liquidity position further to EUR 14 billion at the end of December. We also have financing placed for all of our 25 aircraft delivered from our OEMs during 2022. And we extended our multi OpCo RFC (sic) [ RFC ] out for 1 year to 2025. This slide shows our net debt that reduced over the year by EUR 1.3 billion to EUR 10.4 million (sic) [ EUR 10.4 billion ]. In the last quarter, the reduction of EUR 700 million was driven partly by the continued strength of forward bookings and partly by foreign exchange, which saw a favorable movement of around about EUR 600 million. We expect the level of net debt to be broadly maintained by December 2023, and leverage ratios to continue to reduce in 2023 as we continue to improve our profitability. One of the key focuses is to balance -- improving our balance sheet strength and investing in our business. This slide details our CapEx and delivery of new aircraft last year and for 2023. The capital is in line with previous guidance, with a continued step-up in our investment program primarily but not exclusively due to our fleet, with CapEx of EUR 4 billion and 29 aircraft delivered -- deliveries expected in 2023. These new fuel-efficient aircrafts will help us make further progress towards customers, cost efficiencies and our sustainability targets. Turning to our debt maturity. This chart shows a year-on-year split of when our financial debt becomes due for repayment. You can see that over the next 3 years, with the level of cash and liquidity we have, that we have very good -- we're in a very good position to either refinance or repay the upcoming maturities. This slide shows our current fuel hedging position. We currently have around about 56% of our expected consumer consumption hedged for 2023. And at current fuel forward prices and spot foreign exchanging rates, our expected fuel bill for 2023 is expected to be around about EUR 8.1 billion overall. So in summary from the financials, we are pleased that the strong financial recovery that we saw in the summer continued into quarter 4, resulting in a significant profitability in the fourth quarter and for the full year, with all our businesses performing well and revenue metrics continuing to be positive in all of our airlines. We balanced investing in the business with strengthening our balance sheet with a EUR 1.3 billion reduction in our net debt and a strong focus on costs, giving us a very good flexibility over the next few years. I'll now hand back to Luis, who will give you a little bit more detail on the strategy, achievements this year. Luis?

Thank you very much, Nicholas. I assume you have seen that we have signed agreement with Globalia to acquire remaining 80% of Air Europa. The transaction is summarized on this slide. This agreement will enable Iberia Madrid hub to compete on equal footing with other European hubs and consolidate its position in the South Atlantic. I believe the rationale remains highly strategically compelling. We will share more details on this with you at Capital Markets Day event later this year. During 2022, we focused on restoring the networks of our world-class brands. This chart show market data and highlight all the main markets we serve have recovered from the beginning of the pandemic. This chart show how unit revenue, in red, and capacity, in blue, for the entire markets between Europe and these regions has changed since the first quarter of 2020. All of our main markets have seen demand recover strongly from their low points during 2020. While several capacity remains below pre-pandemic levels in all our main markets due to the strong demand, we have seen pricing recover faster, reaching and then exceeding pre-pandemic levels since summer 2022. Asia Pacific has seen the slowest recovery due to the COVID-related travel restrictions remaining in place longer. Although Asia Pacific is a relatively small market for us, we are optimistic for this region, given the recent easing of restrictions in particular in China. British Airways have recently announced the resumption of flights to Shanghai in April and Beijing in June this year. In the next few slides, in respect through how we are serving our customers, our people and our society. Firstly, looking at our customers. This slide shows how we have been increasing the breadth and depth of our airlines' network to serve our customers better. All our airlines have not only reopened routes that were closed during the pandemic but offer our customers new destinations that were not previously served. For example Iberia has opened new routes to Dallas and Washington, D.C. in the U.S., Vueling has opened 27 new destinations, including new airports in the Middle East and Africa, and British Airways has started flying to Portland. Looking to this year, Aer Lingus will be opening a new route to Cleveland, British Airways will be opening routes to Cincinnati, Aruba and Guyana, and Iberia will be increasing frequencies to some of its smaller, popular South American destinations. And this slide gives a flavor of the investment we have made for our customers in 2022, investments that we have long onboard and also on the ground. Aer Lingus has introduced a new charcoal seats and improved the food in its long-haul business class cabin. British Airways has continued to roll out its best-in-class Club Suite products, moved into a new terminal at JFK, New York and significantly improved the food in both short haul and long haul. Likewise, Iberia has introduced a new business class suite, upgraded its in-flight entertainment and made improvements on ground handling. And lastly, Vueling has continued to roll out digital products that make the airport experience as smooth as possible. This focus on investing in our customers' experience will, in turn, drive customer perception scores and long-term loyalty. And IAG Loyalty was a bright spot during the pandemic. Performance in 2022 continues its positive trend, reporting an operating profit of GBP 240 million in 2022, representing a record profit contribution to the group and a increase of over 30% on 2019. The infographic on the left, Loyalty flywheel, demonstrates the virtuous cycle that drives value for both our customers and the group. It is based on driving deeper customer engagement by investing in airlines and non-airline products and service for our customers. This year, we have continued to grow our customer base with American Express, introduced our co-branded card with -- card and allow customers to earn Avios points through Uber. This increased engagement translates into greater customer loyalty, higher financial returns, which then enables future investment in additional products and services, driving additional value growth for the group and our customers. Running on-time airline is one of the most important things our customers value and one of the main drivers of the customer NPS. As you know, last summer, the industry in Europe and North America faced a significant challenge, in rapidly ramping up operations after a period of low utilization following the removal of most travel restrictions. Despite these challenges, the operational performance of our Spanish airlines was particularly pleasing. Iberia has been recognized as the most punctual European airline last year, with Iberia Express ranked third and Vueling, fourth. The challenges were, however, particularly difficult for operations in Heathrow. Whilst we proactively focused on building operational stability and our operational performance improved through the summer, BA's on-time performance was not as good as we would have liked. We have a plan to build the next generation operations at British Airways, with the box on the bottom right giving some examples of the things we are focusing on. This includes investing in digital tools for our teams and our customers, redesigning processes and working with the airport on shared initiatives. We believe this will deliver the service that the customers value and deserve. Our people are central in our business and key to delivery for our customers. To get the business up and running again, we have recruited 7,400 colleagues in British Airways, and we are making good progress on recruiting another 4,300 (sic) [ 4,100 ] before the summer. [indiscernible] inflation have created pressures for both our people and our businesses. Therefore, the collective bargain agreements we reached with our people and the elected representatives have to balance support for both our people and ensuring that our business remains competitive in their respective marketplaces. We have closed agreements for 2022 with all our employees' groups, with the exception of 1 incoming group in Iberia Express. Some of these agreements are multiple year agreements and some agreements include links to the achievement of productivity and profit targets. Diversity and inclusion remains a core guiding principle of our business. And I am happy that the percentage of women in senior management positions in our business has increased to 34%, demonstrating continued progress towards our 40% target by 2025. We have also continued to invest in our people through new digital tools and ways of working that allow them to do their jobs better and more efficiently and serve our customers better. We continue to be a leader in the sustainability agenda for the aviation industry and we are on track to deliver our 2025 and 2030 climate targets. Our disclosure on our progress has been recognized by the Carbon Disclosure Project that awarded IAG with an A rating for its climate action and transparency. IAG was the only European airline group to receive this rating, and 1 of the 283 global companies out of 15,000 in all sectors. This place IAG in the top 3% of all the companies. There is a long way to go before reaching that still but we are focused. We have 192 new fuel-efficient aircraft deliveries in the next 5 years. Over 7,000 of our management have carbon-linked incentives. And we are achieving new partnerships for sustainable aviation fuel. We also saw our investment in ZeroAvia fly its first fly all commercial aircraft powered by hydrogen. We are mindful of the uncertainty over the global macro environment. However, so far in the last 5 weeks of 2023, we continue to see a strong forward bookings, particularly demand for leisure travel. It's true that leisure bookings remain stable. Over the past 5 weeks, forward bookings have fully recovered to 102% in terms of passenger numbers. All the geographies, you can see on this slide, have seen continued improvement with both forward booking passengers, volumes and revenues. And we will continue to restore capacity in 2023 and expect to be above 2019 levels by the fourth quarter. However, while Aer Lingus, Iberia and Vueling are expected to be above 2019 levels of capacity for 2023, BA will still be flying less capacity than they did in 2019, reflecting their retirement of a significant number of widebody aircraft during the pandemic. So to conclude, after a strong recovery in 2022, so far in 2023 we are seeing strong demand, especially in leisure. We expect a further recovery in profitability in 2023, but we are mindful of the macroeconomic uncertainties. We continue to progress towards our customer, cost efficiency and sustainability targets and expect a similar level of investment in 2023 as in 2022. We are committed to generate long-term shareholder value, and I'm confident of returning to pre-COVID-19 levels of operating profit over the next few years. And before your questions, this is going to be the last results presentation for Andrew Light. And I would like to thank Andrew for his hard work and his help during this year -- each year, sorry. We are now happy to take your questions.

We're now ready for Q&A and somewhere there are mics. All 12-member management committee at your disposal. [Operator Instructions]

Luis probably can't see. If you just want to give your name and company before you ask the question as well, that's all.

It's Jarrod Castle from UBS. Just on Air Europa, can you give a bit of color on the net debt levels that you might be taking on? And if you can't, can you tell us why you can't give it at this point in time, please? And then secondly, just I guess, another one for the CFO. What is the right level of gross cash on the balance sheet now when you look at the composition of the EUR 10.4 billion of net debt?

So the first question was about Air Europa. Air Europa has got a financial debt of about EUR 600 million on its balance sheet at the moment, which is mainly made up of Spanish government debt. We have -- it's got about 50 airplanes in its fleet. About 49 of those are operating lease at the moment. The kind of value of the leases that will be on the balance sheet will really depend on when the closing is and also the kind of the size of the fleet at the moment. So we'll kind of share a bit more detail of that later on, we'll have a little bit more detail on it overall. And in terms of the kind of cash on the balance sheet, I guess, at the moment as Finance Director you can never have enough cash on the balance sheet. But I think what we're trying to do is make sure that we can see through the next few years, particularly where we've got high capital expenditure as we're refleeting at the moment. Our kind of goal overall is to get back to kind of leverage that we had, kind of pre-pandemic, which is around about 1.8x overall, net debt overall. So that's where we're aiming for. The amount of debt that we've got kind of repayable over the next 3 years, as you saw on the slide earlier, is very manageable overall. We've got a bit more debt that's payable in 2026, so we're making sure that we've got enough cash on the balance sheet to make sure we can: one, afford our capital; but two, that we can refinance or pay down some of that debt when it comes in '26. So ideally, you kind of longer term, you hold about 20%, 25% of your cash on the balance sheet of revenue.

Neil Glynn from Air Control Tower Research. Two questions, please, if I may. The first one, you've touched on business travel demand or bookings stable. And when I think of that in combination with your guidance for 2023, which suggests up to 70% of 2019 EBIT recovery, it just makes me wonder in terms of how you think about the stage of recovery of EBIT towards those kind of 2019 levels, and what the gap is to get full recovery as you see it? Is business travel further recovering the missing link? Or is there more to add there? And then second question with respect to loyalty and MRO. We've seen -- it seems to be a building trend that other airlines are seeking to monetize those types of assets in some way. There's obviously progress in loyalty that we continue to hear about. But I'd love to hear your thoughts on what the best way to either monetize or maximize value from an IAG perspective there is in loyalty?

Luis, do you want to take that last question?

You can take the second one, and I'll take the first one, Nicholas, please.

I was just going to talk about the kind of -- in terms of business to business and the recovery of profitability and recovery. I mean we've always said that in the last few years, we said that we think business will get back to about 85% of where it was, pre-pandemic. Now it might do better than that. Some of the American airlines have seen better than that at the moment, so we could too. But that's our working assumption, that work from home will kind of have that sort of impact, let's hope it's better than that. But we do expect that leisure will outperform where it has gone that trend of people going to travel and we think will fill up that space from where we're kind of going forward overall -- fill up the capacity overall. But we think we're in a good position where we are. We're not quite back at full capacity in terms of the number of aircraft we have. So we think we're in a good position right now to maximize that kind of demand versus the yield. So I guess in terms of the stages we see, we've obviously had quite a lot of capacity coming back. We're expecting to sort of back to the nearly full capacity this year, probably full capacity the year after, and we'll probably get back to our full fleet size back into 2025 overall. We've got a transformation program, which will help offset our cost base overall. So we expect we're seeing quite a lot of significant cost base increases in 2019. But if you look at it on a CAGR basis, it's just not quite so dramatic. It's quite impressive, particularly on employment. But actually, over the next 3 years, we'll look, we'll see what we can do to see if we can smooth that cost base as I said we look forward to get back to profitability in the next few years.

And to add some flavor to the business channel bookings. They're happening around 65% by volume year-to-date, which is a similar level to the business volume that we have in the last quarter of the year. So we still see weakest sector like technology and pharmaceutical. But it's true that the -- on business channels that are the channels at the small and medium enterprises they use are the strongest. So BA is a little behind Iberia. In the last quarter, BA Corporate was 56% of 2019 in volume and 70% in revenue. And Iberia Corporate was 70% in volume and 86% in revenue. So I think we see some moderate, positive recovery in pharma in February. We hope it will continue during the year. But as Nicholas said, we consider -- our hypothesis is that we will have a comeback of business traffic of around 80%, 85% of the capacity that we have previously in 2019. Maybe, Nicholas, you can comment about loyalty and MRO, and to monetize those businesses.

With both of those, we think that's a good -- really big opportunities for our business, particularly loyalty. First time we've disclosed what the profitability is of loyalty. So hopefully, that's helpful going forward. So we think it's particularly important because it's relatively capital light in terms of you seeing big profitable growth overall. We put that flywheel in, which is kind of hopefully shows that as we invest in the business, as we invest in new products, we've launched Barclay cards, we've launched Uber this year. We've got a great business with American Express. As we can keep driving that, particularly while we're getting back to full capacity, while we're driving more customers into that system, into that flywheel, we think there's an awful lot of kind of growth still to come from it overall. It's not just kind of growth that drives in the loyalty, but it grows straight back into the -- particularly into British Airways and Iberia. So it's kind of that virtuous circle going forward. And we think that's best placed sitting with the IAG at the moment overall. MRO is a smaller part of the business for us overall. But actually, right now, whilst MRO -- maintenance has got a huge focus in the industry, particularly across supply chain, actually, we think it's quite a competitive advantage having it as part of IAG right now.

It's Andrew Lobbenberg from Barclays. Can I ask on the net debt -- forgive me, I was out of the market in the 3Q. But I think you significantly outperformed on the net debt performance in that last quarter. And obviously, you've explained the EUR 600 million gift on FX. But what else was there in terms of working cap that gave you such a surprise to give you the better performance? And thinking about the net debt of being flat this year, you've given us the CapEx -- the financing plans by aircraft. But just so we get a feel for it, what percentage of the CapEx will be sale and leasebacks? Because obviously those 350s (sic) [ A350s ] are quite expensive birds. And then if I can cheekily claim that as one question.

That's 2, that's 2. Definitely 2. .

As you will, go on then.

Can I answer those? So that just -- we'll get confused between things. So I'll take those. So just -- just in terms of sale leasebacks at the moment in the marketplace where we tend to do about 50-50, sale and leasebacks, financial lease. It will probably be a little bit higher on sale and leasebacks this year, probably about 55%, 60% on sale and leasebacks overall. In terms of the debt, I've never heard of FX as a gift that keeps giving, overall. If you actually look across the year, actually, on our net debt it has been, the FX has had a kind of EUR 500 million downside, or increased our debt overall. It's just in the quarter that it was a gift. So it's a 2-way gift, should I just say, overall. The reason we were ahead was, as I said earlier, actually, it was the better performance. We had stronger bookings in kind of going forward than we anticipated overall. And that has the benefit. There were high yields, and therefore, you get -- you got to get better deferred income coming into your kind of cash flow as well. We also had a program to try and improve our kind of working capital around our receivables and our payables over the last year as well. And that's kind of given us some benefit as well. So they were the kind of just 2 of the key things at this point.

That's brilliant. Can I just stay with you and just ask, in terms of the flat net debt guidance for the year ahead, what are you assuming for working cap? Because as you just described, you had a real big focus on working capital and hold that in. So is it fair to expect working capital inflows again next year? Or is that too much to hope for?

So as long as the business growing, you tend to have a kind of net positive working capital. And we're not quite back up to 100% of capacity next year. As long as we have a good Q1 in 2024, then you'd expect to have a small one. It won't be as big as the one we've just had, because this is much smaller increase in capacity year-on-year.

Muneeba Kayani from Bank of America. So first question on your guidance. Can you explain a bit on what's your assumption on unit costs for this year and give us the main line items on staff cost, supplier costs in there? And then just on loyalty, so great performance this year. How should we be thinking about that growth going forward? What potential do you see there?

Let's just talk about guidance. We would think we would seem to be really quite brave, I think, giving out guidance. Actually, I think we are the first European airline to give out guidance. I know the Americans are by quarter, but actually, we thought we were quite brave. So giving out too much detail, we're a bit kind of hesitant of in terms of -- so we're not going to break down unit costs. So I think if you look at where consensus is, most people have got unit costs up about 10% to 15% nonfuel unit costs up about 10% to 15% over the next year. So that's where we are on that. In terms of loyalty, you can see we've had a record-breaking year this year. So we're expecting Adam to keep driving that business going forward. It's had a very successful this year because partly because we signed on some of the new contracts as well. So I don't think you'll get such a large increase as well but are we expecting that to be a steady increase. I don't know, Adam, if you have anything you want to add?

We think there's great potential for this business, as Nicholas said earlier on. We still think that -- can we -- our objective is to grow double digit this year. We continue to believe that's possible. So we think the opportunity is significant going forward.

A follow-up, please, on the unit cost. So that number was versus 2019 and so year-on-year, kind of it would be down?

I think if you backwards apply that, I think it's about a 6% to 10% reduction, I think. I think that's where -- based on consensus.

To clarify, we are concerned that in 2023, we are going to be in the range between 10%, 15% higher unit cost that we have in 2019. That is a decrease if you compare with 2022 and it's around a CAGR of 3%.

James Hollins from BNP Paribas. Both my questions are for Sean. The first one is on the Heathrow slots. Perhaps run me through a couple of new stories recently and your thinking on, I guess, maintaining slots. One is your wet leasing plans. And also, what happens to the Flybe slots? That was question one. The second one was -- where are we on BA pilot deals? And do the sort of whopper pilot deals in the U.S. impact your negotiations with pilots on BA?

Sorry?

Sorry, Luis. You were...

No, I was going to say that you can respond on this. But the Flybe slot, you know that the Flybe was in the -- went into administration on 28th of February. So we have been working to try to recover this slot. And now we received the winter slot. Recently also, we received the approval to have the summer slots back. So what we are going to try to do now is to operate them. And that's the reason we are looking at alternatives to fly ourselves, or also to have others that can fly their slots for us. But Sean, please, you were going to expand.

Yes. I think the Flybe slots are at about 42 per week. So it's a small proportion of the wider slot portfolio we have. We've got the winter slots back and the summer slots back. They are available in the future for people to apply for due remedy, but their remedy would have to be operative on the basis of domestic upgradations to Manchester and Edinburgh. So we'll have to wait and see if somebody else comes and applies for it. But that process will take a while, and it wouldn't be actually exercisable for this summer. In relation to broader wet leasing, wet leasing is part of a lease where we're using to kind of rebuild the scale of capacity. Reintroduction for BA is quite significant. So I think we're taking between 4 to 6 planes over the summer to complement our core network of about 280. So I think when you put it in the context of the fleet we have, it's not unusual. But it is a transition or the arrangement for summer '23. In relation to pilots, we concluded a deal back in November. We have an anniversary coming up on the 1st of June. Those discussions are about to start, but I think it will be premature really to give any sense of where that would head. And we wouldn't obviously just look at what's happening in the U.S. I think we'd look at our own competition and deals that are done across the group and also what's happening in the European context.

Just wondering if you retain the Flybe slots, no one else wants to bother trying to replicate Flybe. Can you use them for different routes?

Yes. We can use them for across the network, yes, once they're not applied for by anybody else.

Including this summer?

We can use for this summer for different routes? Yes.

Alex Irving from Bernstein. Two for me, please. First of all, in the context of your discussion around shareholder value, there used to be a lot of talk about a 15% ROIC hurdle rate for investments. Is that still in place? And if not, what's replaced that, please? Secondly, also for Sean, regarding Heathrow for the summer, we had capacity caps in 2022 imposed by the airport. How confident are you that Heathrow is in a position to serve the amount of traffic you want to put on in this summer schedule?

Will I take the last question first? Maybe. Heathrow, if you look at our recruitment, and these are the variables we control, we've got about 7,400 people in BA at the end of December. That's up to about 9,100 at the end of February. So our recruitment actually begins to tail off in the next couple of months because we're getting the resources in the door and training that we need. So in terms of our operability, we're in a very good place, in a much, much better place than we were at this time last year. And we've done a lot of great process improvement to kind of speed up referencing and training. So we are seeing the benefits of that in the BA business. But if you look at [indiscernible] and the wider airport ecosystems, they will say that Airside pass issuance is now very close to what it was in 2019. So that's my barometer for how are the handlers, the caterers, the cleaners and the security staff doing. So I think there is sort of a training learning curve that resources would have to go through. But in terms of numbers of people in BA and in Heathrow, it's certainly tracking in the direction to support the summer that we need.

Go on, Luis.

Yes, please. Nicholas.

So just in terms of return on capital, yes, we still have return on capital hurdles in place. I think it's one of the probably the strengths coming into the company is, seeing actually how we monitor our capital allocation across the group. I think it gets real vigor everywhere, which has been really great to see. We'll probably come and talk about that and answer that question more specifically, Alex, in the Capital Market Day later this year.

It's Harry Gowers from JPMorgan. I've got 2, if I can. First one is just on the Q1 operating loss guidance that maybe seasonally pre-pandemic, IAG might have made a positive operating profit in Q1. So is it just a function of the lower capacity and lower business travel still relative to 2019? Or is there anything else at play? And second one, on Air Europa. Maybe some regulatory headaches around the deal last time? So presumably, you wouldn't have gone ahead if you weren't confident that you can get approval. Is that the case? And could there be any remedies that potentially come with it?

No, no, I was going to say about the outlook for Q1. We have a very positive start of 2023. And we still don't have the capacity that we have in 2019 in the first quarter. So that's one of the reasons that the unit costs are going to be higher. We have a very strong leisure demand that is helping. But as we said before, business traffic is still lagging behind. So those are the main reasons of the loss of EUR 200 million in the first quarter. And about competition approval for Air Europa. You now that we have started this process in November of 2019. We have tried to do the operation in different ways. Now we have closed an agreement with Air Europa. We need to start the competition approval process. We know that is going to be a long process. Last time when we have handled the deal, there was uncertainty in the market. We had Omicron and we weren't sure about the -- how it was going to be, the recovery of the industry. Now we see that things are coming back strong. And I think that we are going to have a similar approach, but with more certainty about the future. And I think we are going to work hard to try to close this deal within the next 18 months.

This Sathish from Citigroup. I got 2 questions here. Firstly, on the transformation program. If you could actually give some building blocks there, where are you going to expect the cost savings? Is it mainly on the staff or the supplier side? And when are we going to see the benefit come through? Is it in '24 or '25? And the second one is around the booking systems, basically. As we see this mix shift on the premium from leisure customers versus the business, obviously business comes in more close-in bookings, which would give you a better yield. How are you going to like manage the transition on your booking systems? Are you starting to update your systems to factor in that increase in leisure booking coming in on the premium segment?

Nicholas, please?

Yes. On the transformation, we're going to hold a Capital Markets Day this year. So we'll come give you a little bit more detail on that overall. I think what you'll see there, if you look at our kind of -- if you look at -- take an example of our employee CASK. The employee CASK was up around about 13% over the last 3 years. And we kind of -- in the script, we said that, that was all due to our capacity. So actually, you're seeing quite large kind of inflation going through labor actually. But we've been able to drive the efficiencies to offset that. So that's the kind of thing that we've been doing overall. It's a hard work. Every single line counts on the P&L. But we'll come back and talk a little bit more about it in the Capital Markets Day [indiscernible]. Booking system, do you want to talk about?

Yes. Just in terms of British Airways, I think -- yes, we are obviously amending our booking systems. If you look at the unit revenue in the fourth quarter, it was up 20%. And that accommodated strong leisure and the reduction in business traffic. So the mix has changed. And I think what you do is tend to kind of take earlier bookings in leisure markets to offset the fact that the business market within the month of travel doesn't come into the extent that it used to. And that's working very well. I think what I would say is the vast -- over 50% of BA's premium revenue has come from leisure, historically, that's growing. So that change happened actually after 2008 or '09 global financial crisis, where we have really played very strongly in premium leisure, and we continue to grow that segment. And loyalty and BA Holidays is helping. But also with leisure bookings, you do tend to have better materialization factors. And the book's direct, and you tend to have better ancillary opportunities. So I think the strength of leisure booking and the channels that we get it through gives us some incremental opportunity that we wouldn't have had if we had the mix back in 2019.

Jaime Rowbotham from Deutsche Bank. No one's talked about yield yet, so I'm going to give that a go. The yield premium versus 2019 narrowed a bit in Q4 relative to Q3. What drove that? And did those stronger-than-expected forward bookings that led to the nice working cap suggest that the premiums can widen again versus 2019 as we go into next summer? And then secondly, I guess linked to that, you've given a profit range. You've alluded to a CASK ex-fuel range of plus 10% to plus 15% versus 2019. Presumably, underpinning this EBIT guidance range, there's a yield range that you have in mind as well. So anything you can share there on the back of commenting on the current outlook, please?

I think -- about the first question about the deal. So if you wrap in the fourth quarter, it was 16% higher at the end of the fourth quarter of 2019. And you can compare that with 22% higher in the third quarter. So it's true that it's a little lower. But fourth quarter, in general, it's more dependent on business traffic than the third quarter. And it's also true that we still have more capacity in our more laser-focused OpCos, like Aer Lingus and Vueling. So we hope that as BA is going to recover the capacity, we are going to have an opportunity there. We need to take also into consideration that we have less premium seats in BA that we had before. During COVID, we grounded the 747, and we are not going to have the same premium capacity until we receive the new aircraft, and that can take several years.

On the guidance on -- I think we've given you the capacity, the profit range and the cost range. So if you give me a little bit of wiggle room just to not give you the yield, that would be appreciated overall as well. I think what we have -- we've also said that, that we expect to see a significant part of the profit increase happen in the first half of the year. Of course, we're seeing that strong yield, kind of, go right in there right now. We had a very strong yield in Q3, as Luis said. And Q4 is really a little bit more kind of uncertain really, kind of how business comes back. Lots of press in terms of uncertainty about the consumer environment out there. So we're probably a little bit more measured about what it looks like out there.

Conor Dwyer from Morgan Stanley. And just a follow-up on the employee unit costs. You attributed the higher 13% due to the lower level of capacity. I think it's reasonable to assume that once capacity does indeed return to 100%, you can get that back down. Or by the time you do indeed get to 100%, that inflation will have kicked that to more reasonably maybe mid-single digits ahead of 2019? And then on the corporate numbers that you've been kind of indicating, about 70% of pre-COVID levels there. That seems kind of flattish to what we saw in Q3. And I'm just kind of wondering if the assumption is 15% down structurally, what still kind of needs to happen for that number -- for that gap to be closed? We haven't had restrictions in place for most markets, except in Asia for quite some time at this point.

Okay. The labor cost, as you say, when we recover the capacity, we are going to improve the employee unit cost. It's true that we are closing agreements, that in an environment of high inflation, that we are mitigating this with productivity measures. And you get it that we have is when we recover 100% of the capacity that we have in 2019, employee cost is going to be similar to the employee cost that we have in 2019. That is a huge challenge in this current environment but that's the objective that we have.

The second question was about business-to-business and kind of what's coming back. I think it's about the kind of confidence you see in the underlying businesses overall. And you started to see every single month from May when the markets opened, you saw a steady recovery, month on month on month. I think when there was kind of in Q4, when there was quite a lot of press about the kind of consumer uncertainty, I think you kind of saw customers' budgets being tightened overall. And I think you saw that kind of flattening, and stability kind of happening overall. That continued into January. And actually, in the last few weeks, we've started seeing that kind of increase, coming back in sector by sector, as Sean said earlier. Actually, we see -- we've seen a stronger recovery already happening in Spain, already, compared to the U.K. as well. So I think it was just about confidence in the business coming back overall.

No questions? If you have that question, you can ask it. Okay, Alex.

Let me ask a very -- slightly technical one, please. During the pandemic when the deal for Air Europa was first called off, there was a break fee, if you think that was EUR 75 million that was deductible against any future deal for Air Europa. Is the EUR 400 million gross or net of that EUR 75 million, please?

All this process started in November 2019 with a deal for [ EUR 1 billion ]. After the pandemic, we changed the agreement. We closed an agreement for EUR 500 million. We broke that agreement. And because of that, we paid the breakup fee of EUR 75 million. And we said that we will consider that amount for the future. So you know that after that, we acquired 20% of the company for EUR 100 million. And now we have been negotiating the remaining 80%. But this negotiation is in a different context that we had before. Because as we are saying demand is very strong, business are recovering. Air Europa is more focused in leisure traffic. Leisure traffic is doing very well. So this EUR 400 million are additional to the amount that we paid in the past.

I'll also try a follow-up. Just with respect to the Air Europa transaction, obviously, TAP is on the menu for one carrier eventually. Does this mean that you have enough on your plate that there's no interest in TAP? Or how should we think about that?

I think several years ago, we tried to close our joint business agreement with LatAm, because we wanted to develop one very important market for us until the South Atlantic market. That deal was not possible, as you know very well, and we started the negotiations with Air Europa. We hope we can conclude this deal now. But this group has been always a platform for consolidation, and we believe that the industry, as we consolidate it, we are always looking at other alternatives. I'm not going to talk particularly about TAP but we are going to explore any option that can make the group stronger. And doing Air Europa operation, that deal has to still pass to do other possible M&A activity.

Right. It's Jarrod from UBS again. Probably the best visibility for the industry is from packaged holidays. So interested to hear about BA Holidays, how much of the summer season has been sold? And whether or not competition from easyJet and JetBlue are starting to hurt?

About 73% of the summer season. Bookings are very robust. I won't give specific guidance, but the unit revenue projections are positive. And in 2022 BA Holidays broke through the GBP 1 billion. So very strong business, high loyalty. I think 91% of people who used BA Holidays will say they will book again. And the experience in terms of Net Promoter Scores are very good as well. So what you're seeing in leisure, you're seeing in BA Holidays. And as I said, the January sale has been very, very strong.

It's Andrew Lobbenberg again from Barclays. Can I ask about fleet? The 777Xs, their arrival is unclear. That's probably polite to say. How does Sean plan to fly his people around? What are you planning to fill the gap given the uncertainty of the delivery time? I imagine you don't want to wet lease. That's expensive.

We've got -- Luis, go ahead.

No, no, I was still looking. You're going to answer.

We've got quite good delivery schedules. I think we kind of anticipated kind of right at the beginning of the year, some of the delays that were going to happen in the marketplace, actually. So we've got good deliveries into BA. We took 2 deliveries right at the year-end. We took 86 wide-body deliveries this year. And I think another 6 in the year -- wide-body deliveries next year, actually. So we'll be back up to a full kind of capacity by the end of 2025. Anything you want to add on that, Sean?

[indiscernible] ahead by '25 in terms of number of hulls compared to '19. So as Nicholas said, that factors in the latest profile of the 9X (sic) [ 777-9X ].

It's James Hollins again. Three for me, only joking. There is 2 though. CapEx in 2024, please? And then your capacity guidance for Q1 has gone up, I think all due to -- to a level capacity has exploded there in terms of guidance. Just wondering what's happening .

So CapEx. CapEx in 2024 is likely to be relatively the same as it is in 2023, overall, before it starts coming down and normalizing again, because if you remember, we delayed a lot of the CapEx from 2021, and that's been delayed over these 3 years overall. And as we're refleeting. So it's over those 3 years is where we get the kind of peak CapEx overall. You're right, levels had a good run. [ Fernando ], runs our level business overall, and it's had a very strong demand, particularly across the South Atlantic segment.

But having something to level -- the percentage in level is, we are considering a very reduced pace. So it's not very significant. So we are adding -- when you add 1 aircraft, it's -- you are adding 25% of the capacity.

Good day and good weekend.

Thank you, everybody. Thank you very much.