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

Good day, and thank you for standing by. Welcome to the Q3 2023 International Airlines Group Earnings Conference Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Mr. Luis Gallego, CEO. Please go ahead, sir.

Good morning, everyone, and welcome to the IAG 2023 Third Quarter Update. Today, as usual, I have the rest of the management committee here with me as well as the Investor Relations team. This has been another strong quarterly performance for IAG. We have delivered a record operating profit for the third quarter of EUR 1,745 million. Sustained demand across our network has driven significant positive revenue performance across all our airlines. The very good unit revenue trend from earlier this year has continued this quarter, up 25% compared to Q3 2019 and up 2.2% against a very strong third quarter in 2022. As we have said throughout the year, while leisure has been good, corporate demand continues to recover more slowly, particularly at British Airways, although this is less relevant for the third quarter. And cost performance was good. Non-fuel cost was 3.5% better than Q3 2022, including the negative impact of disruption. So as a result, we have delivered a group operating profit margin of over 20%, including very strong margin performance at Aer Lingus and at our Spanish airlines. The other main development in the quarter was that we took the opportunity to reduce our gross debt, repaying early the expenses GBP 2 billion UKEF loan that we have had to take out during COVID. As a consequence of this, we are pleased that S&P has upgraded both IAG and British Airways to Investment Grade. And overall, our continued strong performance means that we remain on track to deliver a year of a strong recovery in 2023 in terms of operating profit, margins and in particular, our balance sheet. And with that, I will pass you on to Nicholas.

Thank you, Luis, and good morning, everybody. I'll start with the profit bridge for quarter 3, highlighting both the drivers of the improvement in profit since the last year and then the results by each operating company. On the left, you can see that the increase in revenue has been the biggest driver, combining the increasing capacity with strong unit revenue growth. This was slightly offset by cargo revenue, where yields are still around 20% above the 2019 level, but a significant supply and demand imbalance remains across the freight market, which is reducing year-on-year profitability. Other revenue offset the decline in cargo revenue with good performances in our Loyalty, MRO and our BA Holiday businesses. Non-fuel and fuel costs reflected a higher level of flying activity. And you can see on the right that all of our airlines have significantly improved their profit year-on-year, which I will come back to later. This slide shows the key operational and finance metrics for the third quarter. And at the bottom of each box is the Q3 variance versus 2022. The 18% increase in group ASKs compared to Q3 2022 was driven by a recovery in all airlines, except for Vueling, where capacity was held broadly flat year-on-year as the company is making progress towards a sustainable labor agreement, which is pilots union -- with its pilot unions, but has not yet reached an agreement. Total capacity for the group compared to 2019 is around 96%. Passenger RASK was up 2.2% year-on-year in Q3, building on the strong demand we saw last summer. Fuel CASK was down 6.2% year-on-year, driven by lower commodity prices partially offset by hedging benefits last year. Non-fuel CASK for the third quarter was down 3.5% year-on-year. This included about a 1 percentage point of impact from higher disruption costs across the business, such as the U.K. NATS system outage in August, with the majority of these costs in British Airways. We've reiterated our guidance for the year of a reduction of between 6% and 10% compared to 2022 for our non-fuel CASK. And after taking into account the cost of disruption, we will be towards the lower end of this range. As a result of these revenue and cost metrics, we've delivered a record operating profit of EUR 1.7 billion and a margin of over 20% in Q3. Our net debt has reduced EUR 2.4 billion since the start of the year, and our leverage dropped to 1.4x, which is significantly lower than this time last year. Moving on to the summary of our operating units for the third quarter. You can see that all of our businesses have performed well, with all operating units reporting improved profit year-on-year. Aer Lingus on the left, had good capacity and rate growth, especially in North America, helping improve both its profits and margins compared to last year and a margin of 25.5%, ahead of the third quarter of 2019. British Airways profits increased EUR 205 million year-on-year to EUR 617 million with a margin of 15.3%. Whilst its unit revenue was broadly flat year-on-year, its capacity growth was the highest among our airlines, with good growth across the Atlantic and the recovery of capacity to the Far East to 50% of 2019. This, in turn, drove significant unit cost benefits. Iberia has built on the exceptional and record profits in the first half with another record profit in the third quarter, a significant capacity increase, coupled with a strong increase in unit revenue and a reduction in unit costs saw Iberia deliver another record and largest operating margin increase in all our airlines to 23.1% margin, and profits increased EUR 194 million to EUR 449 million. Vueling's capacity was slightly down compared to last year, although a strong unit revenue performance drove increased profit and the margin to 26.1%. And lastly, but certainly not least, our Loyalty business saw significant growth in revenue and profits. While its high margin declined slightly year-on-year, this is by design, as we invest to increase the attractiveness of our offering in order to drive higher engagement and higher profits in the future. Turning to recent trading. This slide shows the Q3 capacity and PRASK growth across all our regions compared to 2022. Despite a strong summer performance last year when PRASK increased 22% on 2019, PRASK increased again year-on-year in most of the regions we operate in, and in most cases on the back of significant increase in capacity as well. In North America, this performance largely reflects British Airways given its weight on this destination with the PRASK mainly driven by improvements in load factor. There was also a particularly strong performance from both Iberia and LEVEL. In South America, we saw positive PRASK growth on a 24% increase in capacity with the performance of Brazil a highlight. Europe saw particularly strong PRASK growth with BA, Iberia and Vueling performing well. And by country, Italy, France, Germany and Greece were standout performers. As mentioned previously, we are recovering our capacity to the Far East from a low base. Our balance sheet continues to strengthen. As I mentioned to you last quarter, we started to focus on reducing our gross debt. I'm particularly pleased that we've reduced our gross debt by almost EUR 2.4 billion compared to the end of Q2 and by EUR 3 billion since this time last year. This has been driven by the early repayment of British Airways GBP 2 billion U.K. Export Fund backed loan that was fully repaid in September and through the payment of the IAG EUR 500 million unsecured bond that matured in July. The UKEF backed loan had a floating rate of interest significantly higher than the interest rates we received on our cash. So the early repayment will bring down our net finance costs materially. As part of the UKEF repayment, British Airways also secured access to an additional GBP 1 billion facility which runs until 2028. This together with maintaining our cash balance year-on-year at EUR 9 billion despite the debt repayment, means our liquidity remains very high to around EUR 13 billion. This gives us great flexibility to invest with confidence and look for further liability management opportunities in the near future. Leverage has also fallen slightly to 1.4x compared to 1.6x at the end of Q2, driven by the improved operating performance. This deleveraging contributes to both -- contributed to both IAG and British Airways regaining their Investment Grade credit rating with S&P in September, which is another sign of the group's returning strength. As we've noted here in the slide, we continue to expect historic seasonal working capital trends to increase net debt by the year-end, but to level significantly below the EUR 10.4 billion that we reported at the end of 2022. We typically only show you this slide on -- of the maturity of our debt at the full year and the half year. However, given the pay down of the gross debt by BA and the payment of IAG, of the bond, we thought it would be useful to show you an updated version of this slide. As you can see, we now have a very manageable debt repayment schedule from 2025 out to 2029 and have removed the spike that we had in 2026. We also have very little maturing debt to repay next year. Moving on to our fuel hedging position. We are a little over 73% hedged for the fourth quarter and for Q1 next year. Once again, fuel has been volatile during the last quarter with the price of jet fuel coming close to year-to-year high since September. The U.S. dollar has also strengthened since this time last -- since the last time we presented results. Given we are close to the end of the year, we haven't given you a sensitivity as we've done in the past few quarters. Instead, based on recent forward jet fuel and spot foreign exchange rate, we expect fuel in the full year of 2023 to be approximately EUR 7.6 billion. And the last slide just shows for me -- it just shows our results of down to net profit after tax, including the operating profit of EUR 3 billion in the 9 months to date. I just wanted to just draw your attention to the fact that due to the raised interest rates, we are now starting to generate higher income on our cash balance, that you can see circled here. Finance income in the 9 months of this year was EUR 285 million, offsetting roughly 1/3 of our finance costs. Of this, finance income in the quarter was EUR 118 million. On that note, I will now pass you back to Luis.

Thank you, Nicholas. I will now spend a few minutes highlighting some of the key points relating to each of our main operating companies. Starting with Aer Lingus, who saw particularly strong demand in premium cabins across Atlantic with record load factors in the business cabin. They are naturally targeting the U.S. market with their network development, reopening [ shorthaul ], and starting a new route to Cleveland this year. And for the next year, they have announced a new route to Denver and are reopening Minneapolis. Operationally, they are experiencing many of the same ATC issues that U.K.-based airlines are, which is affecting their on-time performance. Moving on to British Airways. They too saw good North Atlantic demand, particularly in the premium leisure segment. Naturally, for the third quarter, Mediterranean routes were also very strong, and EuroFlyer continues to grow its network. BA's network plans focus on efficient expansion through frequencies and growth, and they announced last week that they are returning to Abu Dhabi next year. British Airways investing in stabilizing operations over the summer and made some progress. But the operating environment was consistently challenging, and as Nicholas has highlighted, the NATS system failure in [ London ] was a particular pain point. Next, Iberia is seeing a strong demand across all of its network and its corporate demand is much closer to getting back to pre-COVID levels. The Latin America network is seeing particularly good performance where Iberia is using its newer aircraft to serve those markets more efficiently through better aircraft utilization. Iberia has also maintained its high on-time performance and continues to be one of the world's most punctual airlines. Moving on to Vueling. It continues to see very good results from its strategic move to drive ancillary revenues and higher load factors, while capacity growth over the summer was more constrained. They have also benefited from lots of work over the past few years to improve operational performance, and OTP improved by 8 percentage points compared to Q3 2019. And overall, they have delivered a very good result in the quarter. And finally, IAG Loyalty continues to grow well with a record quarter for Avios issued and redeemed a 1.3 million customers joining IAG programs, another record for us. Their investment in the customer now includes the release of further Avios-only Flights as well as addition of Finnair's loyalty scheme to the business. Moving on to our outlook. We expect our capacity for the full year to be at 96% of 2019 levels, slightly lower than previously guided due to cancellation earlier this year. Our customer bookings for the fourth quarter are as expected and are currently around 75% of expected passenger revenue. This is typical for this time of the year. We remain particularly mindful of the [ wider ] uncertainties that could impact our customers, including macroeconomic and geopolitical challenges, such as the conflict in the Middle East. As Nicholas has already mentioned, our non-fuel unit cost guidance remains the same, of an improvement of 6% to 10% compared to last year, albeit all at the lower end of the range due to the impact of the disruption. At the current fuel prices and exchange rates and taking into account the 73% of hedging we currently have in place, the total fuel cost for the year would be EUR 6.6 billion. And we expect to generate positive sustainable free cash flow this year, and for the year net debt position to reflect the usual seasonal patterns for the fourth quarter. So in summary, this has been a very good quarter with a strong demand and improving revenue trends across all of our operating units delivering a record operating profit for IAG. Our strong cash generation has allowed us to continue to [ deliver ], and we took the opportunity to repay GBP 2 billion of expenses [ debt ] early, and we have now achieved Investment Grade status with S&P. Overall, we therefore expect that the full year will see a strong recovery in operating profit, margins and our financial strength. We look forward to welcoming you to our Capital Markets Day in a few weeks, where we will present IAG's strategy and objectives to deliver strong margins and returns for the medium and long term. And now we are open the call to questions.

[Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Sathish Sivakumar from Citi.

I've got 2 questions. So firstly, around the disruption cost in quarter 3, if you could give any color of [Technical Difficulty] [ directional result ] versus the last year, given the -- you can map impact that we had? If you can share any color on the disruption cost, that would be helpful. And the second one is around the BA Holidays. And how do the bookings look like into the next March or into Easter actually? And how does that come by versus, say, last year?

So you asked the disruption cost. So we just said it impacted our non-fuel CASK by about 1% year-on-year. If you do the maths on that, that's about a EUR 50 million increase year-on-year around that. As you know, it was quite a tough [Technical Difficulty] operationally, particularly in terms of the company's growth overall [Technical Difficulty], and that's just part of that as well. [Technical Difficulty] part of that. And the BA Holidays, just couldn't quite get the question on BA Holidays. Is that about forward bookings on trends?

Yes. I think BA Holidays continues to book probably in line with the capacity plans that we have next year. So I think the robustness that we saw this year, certainly in the early stages of the booking curve is consistent with what we're seeing next year. Now that said, we get into our sale periods as we head into Christmas and the New Year, and that's when you get the bulk of the bookings for '24 come in.

Yes. In the U.K., the majority comes in Q1 to the bookings. So that's what we're [ at ]. Yes.

That increase is actually from BA on the other sister airlines?

Yes, holidays is mainly from BA [Technical Difficulty].

No, sorry, on the disruption cost, the EUR 50 million increase year-on-year is mainly from BA, right?

The majority of it was from British Airways, but not only.

We are now going to proceed with our next questions, and the questions come from the line of James Hollins from BNP Paribas.

2, please. Just on business travel. I don't know if I missed it. Maybe you could put a number on BA volumes? I think you had talked about 61% last time we spoke. Maybe how that's tracking into the even more important period in October? And then secondly, I suspect you're going to say wait for the Capital Markets Day. Wondering if you could guide or give any thoughts on 2024 capacity year-on-year currently, those sorts related to delivery schedules, maintenance, et cetera? So any color would be great.

So about business travel, as we said, it's taking more time to recover. In the first quarter, we were in 65% of volume if we compare with -- sorry, 2019 and 74% in revenues. The second quarter, 60% in volumes and 69% in revenue. And in Q3 the volume was 64% of 2019 and revenue 74%. As we have said, we see a correlation between the business travel and the people returning to the office. There is also a difference in the rate of recovery between the different types of business trips and between regions. For example, the longhaul business trips of over 2 days have recovered faster than the recovery of shorthaul trips and overnight stays. All this has been offset by a stronger leisure. And the recent trends show that the business agencies bookings in the last 5 weeks are for IAG, 69% in volumes, sorry, and 78% in revenue. As I said, we have different rates across all our airlines. For example, in the last weeks, BA is around 64% in volume and 75% in revenue; Iberia, 86% in volume and 96% in revenue and Aer Lingus closer to 60% in volume and 72% in revenue. But in any case, we are pleased that -- to see that, as we said at the time of the Q2 results, business volume for BA has increased circa 10 points from the levels that we saw at the end of July. Second question was?

The second question was about capacity for 2024.

Okay. So we expect -- this year we expect capacity to be around 96% of 2019 level. We are going to -- all of the airlines of the group except BA will finish the year [ above ] 100% of the 2019 level. The main reason is BA retired during the COVID 747 fleet. Because of that, the longhaul capacity will only reach 2019 levels by 2025. And it's going to take even more time for the business class capacities that they will reach 2019 levels around 2026. So, I don't know, you want on to add more color to that?

Yes. No. I think our business class capacity would be down about 11% this year. We think it will then moderate back to 2019 levels by about 2026 when we start taking delivery at 777-9Xs. The other effect I suppose which is affecting ASKs as we report and as we're doing less Asia flying, and that means we're flying shorter sectors. So we also have a gauge like change because of the mix of traffic less Asia and more Middle East and North Atlantic.

But overall for next year, we expect to be 100% capacity, if not a little bit higher. But we'll give you a bit more detail on that later.

We are now going to proceed with our next question. And the questions come from the line of Savi Syth from Raymond James.

Could you talk a little bit more about some of the -- kind of the mitigation measures you're making with the GTF issues? And actually, just more broadly, what you're seeing on the maintenance cost side and how you're thinking about the magnitude of the headwind that can be in 2024? And then just also for my second question, just -- as you think about the business trends, just following up on the business commentary before, is there anything about kind of BA and Aer Lingus's network that means that they can't get to what you're seeing at Iberia? Or is it just more of a -- you think Iberia is more of a kind of leading indicator here?

The first question, the GTF issues. We have been working with Pratt & Whitney to identify the engines that are affected. We have 32 aircraft affected, 29 in Vueling and 3 in Iberia. But for us, this is less than 10% of our fleet that is over 360 -- 320 in the shorthaul. So this is going to have an impact for us for sure. We are working with Pratt & Whitney in order to reduce the effect that we are going to have in our case. The big impact is going to be in winter season of 2024. So it's not so relevant as for other airlines that they have the same type of engine. Maybe -- if you [indiscernible] [ add anything ]?

Yes. I think historically, corporate business traffic is a higher percentage of traffic we have across the North Atlantic than you would see maybe across the South Atlantic or Asia Pacific and the rest of the world. So with BAs waiting towards that market, I think that, that probably explains the slower recovery to an extent compared to what we see at Iberia. So I think -- that's one factor I think. Secondly, what we are seeing probably more out of London is probably a decline in day trips. That's beginning to recover, but that's something we see across the shorthaul network in terms of people traveling back on the same day. That's a sector which is started to recover.

A clarification on the maintenance. So beyond GTF, do you see kind of headwinds with some of the supply chain issues from a kind of cost perspective into 2024? Or is that not much of an issue?

No. I think the main challenge is going to be to bring aircraft from the market to try to restore the capacity that we plan to fly. But we are working with Pratt & Whitney in order not to have an impact in our cost.

We take our next question. And the questions come from the line of Jarrod Castle from UBS.

Just coming to Avios, 1.3 million members added. Can you just give us an update, what is the total membership? And just clarification, do you need to be an active member to be included in that number? And what's driving the additions at the moment, do you think? And then just interested to get any thoughts on -- I mean, again, maybe it's for the Capital Markets Day, but non-fuel or ex-fuel costs next year, given that -- it sounds like you're a little bit more cautious for this year, given disruptions -- hopefully, it's less disruption. And at the moment, it sounds like you're going to be adding low single-digit capacity. So directionally, maybe if you could just give some views there?

Yes. Just on the non-fuel cost into next year, we're not giving guidance into next year at the moment, Jarrod. But I think we're hoping that kind of inflation is going to subside from where it has been this year. We've got a little bit of capacity increase, which will help offset that as well, but we've also got our own transformation program. We're working hard as well. So we'll give more direction on that overall. Just in terms of the Avios questions, I'm not sure. I haven't got the number for that at the moment.

Maybe, Adam…

Adam can answer that.

Yes, sure. Happy to answer it, Jarrod. So in terms of the membership, certainly, we're pleased with the growth of the membership that we're seeing. That increase that you saw is members joining the program. We think that's because they're seeing the changes that we're making in terms of the redemptions -- the easy redemptions, the easier collection or partners that we've signed up. So we think that's what -- why what we're seeing. And we are seeing them turn into active members. So we -- the number of 1.3 million, we expect the majority of those to be active, and that's doing something within a 12-month period. So certainly pleased with what we've seen in that space.

We're now going to proceed with our next question and the questions come from the line of Ruairi Cullinane from RBC Capital Markets.

Yes. So, on Slide 9, you showed that longhaul routes are lagging in terms of year-on-year growth in passenger unit revenue. Would you just attribute to that capacity coming back in, or the prior year comps? I'd be interested to hear your thoughts. And secondly, some airline management teams have been quite vocal in scope for aircraft availability, keep capacity constrained to end the decade. I'd be interested to hear your yield effect outlook in this regard?

Yes. Just in terms of longhaul capacity, I think we still -- we think it was a good performance overall. I mean, if you look at North America versus 2019, we're up 6% overall versus 2022, we were up 22% in terms of ASK. So we think that was a strong performance overall. And if you look at South America, that's been -- [indiscernible] South America and to Europe for our businesses has been incredibly strong. So South America ASKs, it'd be up 24% overall -- just from Iberia and 24% for the group overall. So actually -- we still think actually it's been a very solid performance [ longhaul ], so we're pleased with that.

Yes. The aircraft availability -- all the aircraft that we have in our plan, in principle, they are going to be delivered. So we have the issue that we talked before about the GTF, but the impact for us is small. So yes, I think we are going to have a problem with the supply of aircraft and also we are going to have a problem with the maintenance and with some parts. But in our case, we continue with the plan that we have [ in ] our business plan.

I think in terms of the kind of guidance we've given, we've always been quite cautious in terms of our delivery plan actually. So we said at the beginning of the year, we'd have 30 aircraft delivered and we're still going to get 30 aircraft delivered this year actually. So I think we've been taking into account that when we've talked to you before. So, [ I don't think ] there's any change to our plans.

We are now going to proceed with our next question. And the question comes from the line of Alex Irving from Bernstein.