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

Good day, and thank you for standing by. Welcome to the Half Year 2024 International Airlines Group Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Luis Gallego, CEO. Please go ahead.

Thank you very much. Good morning, and welcome to the IAG half year report. Today, I'm joined by Nicholas Cadbury, CFO; as well as members of the IAG Management Committee. Today, we are reporting a strong performance in the first half with profit of just over EUR 1.3 billion, an increase of EUR 49 million compared to a very strong performance last year. And this is because we are delivering on our strategy. We continue to see a strong demand for travel in our core markets of North America, Latin America and intra-Europe, which has delivered a positive unit revenue of 2.9% in the half. Our brands are doing well being leaders in their markets. And our ongoing transformation program is driving customer operational and cost improvements across the portfolio, particularly at BA. We are delivering on our promise of significant free cash flow generation. And as a result, our balance sheet continues to get stronger. At this point, I will also highlight our decision to withdraw from the Air Europa acquisition process. We decided that it was not in the best interest of our shareholders to continue. And we will, therefore, continue to grow our presence in Madrid, so the hub can develop as a rival to Europe's largest hub. So our confidence in our strategy and business model remains strong, which means that we are now delivering on our commitment to our shareholders. We are starting our dividends with an interim payment of EUR 0.03 per share. Our disciplined capital allocation framework offers opportunities for further distribution of excess cash in the future. This slide is a reminder of our strategic imperatives: to invest in our core, grow our capital-light businesses such as Loyalty, and to maintain a strong and sustainable foundation for the group. This will help to deliver our medium-term margins, returns and leverage targets. It also highlights our view that this is a high-quality business, not just a best-in-class airline business. I will now pass you on to Nicholas.

Thank you, Luis, and good morning, everyone. I'm pleased to share with you our financial results for the first half of 2024. The first slide, this slide shows that we delivered a strong performance across our key metrics in the first half of the year, despite some challenges in the operating environment. Our capacity increased by 7.5% year-on-year, in line with our guidance, driven by network expansion and fleet renewal. Our passenger unit revenue grew by 2.9%, reflecting improvements in both our yields that increased by 1.8% and our load factor that reached 85%, up 0.9 percentage points versus last year. Our nonfuel unit cost improved by 1.8%, and we hold to our previous guidance to be slightly up on last year for the full year. And our fuel CASK was flat as we benefit from our hedging strategy and our more efficient new aircraft. So we delivered a strong first half of the year with operating profits before exceptional items of EUR 1.3 billion, and our operating margin for the first half was nearly 9%. Our leverage net debt to EBITDA ratio improved to 1.1x, down from 0.6 from December '23, as we generated strong free cash flow and benefited from seasonal working capital inflows from forward bookings. The solid performance in the first half demonstrates the strength of our business model and our strategy in a dynamic market. Now let's look at the performance of our operating companies in more detail. Aer Lingus faced a challenging first half with profit of EUR 9 million as it was affected by the competitive pressure from U.S. carriers into Dublin as well as the impact of industrial action by its pilots at the end of the half. Both of these factors will impact the third quarter as well. British Airways delivered a strong revenue performance in the half, and its operating profit improved by GBP 59 million and its operating margin increased by 0.5 percentage points to 8.2%. BA benefited from its transformational initiatives, which partly offset inflation and investments in its operational resilience and customer experience. Just for interest, British Airways figures show the restatement both in the current year and in the base year from the transfer of BA Holidays to IAG Loyalty. BA Holidays accounted in H1 2024 were GBP 374 million worth of revenue and GBP 33 million of profit. Iberia delivered EUR 362 million of profit in the half, driven by its strong performance in its core Latin America and European markets. The operating profit from the core airline business increased versus the same period last year, and its margin was broadly similar. This is a good performance in the context of a 17% increase in capacity, which we'd expect to continue to mature next year. Iberia's third-party business had lower results than previous year, in particular, reflecting the loss of 8 operating licenses by Iberia handling. We expect the performance of these handling third-party businesses to improve through the rest of the year. Iberia's net fuel CASK also reflected the reduction in costs associated with the third-party businesses, together with the benefit of the capacity growth. Vueling had a strong revenue performance, with unit revenue growing by 2.6% on the back of capacity growth of 1.4% . The airline delivered an operating result of EUR 97 million, building on the strong performance from last year. IAG Loyalty also had a good performance with operating results of GBP 193 million, up GBP 23 million year-on-year. Its margins during the year were 18%. This is diluted by the inclusion of BA Holidays both in 2024 and 2023 figures. If we were to exclude BA Holidays, IAG Loyalty's margin standalone would be 22%, in line with last year's margins. Now let's look at our regional performance in more detail. Overall, we saw strong demand in the second quarter, reflecting the strength of our brands and customer profile, driving higher revenue and positive unit revenue across most of our core markets. This is despite the fact that April's performance reflected the negative impact of the timing of Easter this year. North America is our large and most profitable market, accounting for 31% of capacity. Our unit revenue in the market improved by 2% in the quarter, on top of the 6% capacity growth, as we benefited from our strong network position and our joint business. We particularly saw robust demand in both premium and premium economy cabins. Europe was again one of the best performing markets, which is our second largest market, accounting for 25% of our capacity. Unit revenue increased by 1% in the second quarter, on top of capacity growth of 6%, as we leveraged our leading position in our key European hubs and our low-cost airlines. Latin America and the Caribbean is our third largest market in terms of capacity to around 20%. Our group's ASKs in the region grew by 17% in the second quarter, and our PRASK increased by just 5% due to the -- sorry, decline by 5% due to the new capacities maturity. For us, this represents a strong performance and is in line with our expectations. As we've mentioned before, growing our presence on this market is a key priority for our peer strategy, and this performance is significantly above 2019 levels. Africa, Middle East and South Asia accounts for 12% of our capacity. We slightly cut capacity in the region, down 0.6%, to adjust our presence in some of the markets that are still showing weak demand due to the ongoing geopolitical situation. Asia Pacific is our smallest market, accounting for only 4% of our capacity. It was where we were adding relatively the most capacity in the second quarter, up 32%, although we are still only half the capacity we had in 2019. Unit revenue decreased by 14%, as we increased our presence in the market and faced weak demand in China. Overall, we delivered a good performance, particularly in our core markets, illustrating the benefit of our balanced and diversified portfolio and demonstrating our ability to capture the growth opportunities and to mitigate the risks in the different markets. Looking into our results at a net profit level. We delivered profit after tax and exceptional items of EUR 905 million. There are 3 things I would like to highlight here. First, our finance costs decreased by nearly EUR 100 million in the half, mainly due to the lower gross debt resulting from the early repayment last year of expensive government guaranteed debt that we raised through the pandemic. At the same time, our finance income increased by EUR 20 million, mainly due to the higher interest rates we were seeing in the period. Secondly, we've recognized an exceptional tax credit of EUR 135 million, which related to the revocation of a Royal Decree in Spain that limited the tax deductibility of some losses for fiscal year 2016 to 2023. And thirdly, as Luis has mentioned before, we've decided to withdraw from the Air Europa acquisition process. Therefore, we've had to reflect this with a provision of an exceptional charge of EUR 50 million corresponding to the breakup fee. This slide shows our nonfuel cost performance in more detail. Our total nonfuel CASK increased by 1.8% in the first half of the year compared to the same period last year. The increase in employee unit cost was mainly driven by the timing of last year's wage agreements, which mostly affected the first quarter. This cost performance was also reflected our investments in our operations and fleet, which we expect to generate long-term benefits in terms of customer satisfaction, operational resilience and environmental sustainability. We continue working on our transformation initiatives that are helping us to mitigate the inflationary pressures and deliver cost savings. As I mentioned earlier, we're on track to deliver our full year guidance of a slight increase in our nonfuel CASK year-on-year. This slide shows that we are a business that generates significant free cash flow. You can see the free cash flow generation of EUR 3.2 billion after investing EUR 1.4 billion in CapEx in the first half of the year, driven by a strong operating profit and our positive working capital. Positive movement in working capital principally relates to the normal seasonal inflow of leisure bookings ahead of the peak summer travel period. We are confident that we will generate significant cash flow in the full year as we did last year, as our business continues to deliver a strong performance and as we execute on our strategy and our long-term targets. This slide shows our complete cash flow that generated EUR 2.9 billion of cash inflow for the first half of the year. You can see the EUR 3.2 billion free cash flow from the previous slide. And if we include the results of our finance activities, you get to the net free cash flow of EUR 2.8 billion. A point to note to the analysts here is that we have split out the repayment of operating lease liabilities here, which were EUR 466 million in the first half. Now let's look at our balance sheet performance in more detail. This slide shows the evolution of our net debt and liquidity position. Our finance position remains strong with a reduction in both net debt and leverage, both against the same period last year and against December 2023. Our net debt decreased EUR 1.8 billion to EUR 6.4 billion versus December, and our leverage improved 0.6x to 1.1x, well below our target of 1.8x. Our total liquidity increased by EUR 1.5 billion to EUR 13.2 billion, again, due to the increase in cash. We also refinanced and expanded our group revolving credit facility to $3 billion, up from $1.7 billion. And we also canceled the expensive GBP 2 million UKEF-backed facilities. So we have a strong financial position and a well-balanced debt maturity profile with no material nonaircraft debt repayments in the year, and we have canceled our more expensive facilities that we have not used. We remain committed to maintaining our balance sheet strength and our investment-grade credit rating. On this slide, you can see our CapEx guidance for the year and the next couple of years. This slide shows an updated presentation as we have now removed ETS from CapEx to make it consistent with the other airlines, and it is now disclosed in other assets and within operating cash flow. Also we now expect to take delivery of 20 new aircraft this year compared to the 21 we expected in March. So our gross CapEx expenditure for the year is now expected to be around EUR 3.3 billion, excluding the ETS purchases. As you can see in the chart, we expect our average for the next 2 years to be around EUR 4 billion. This has moved since our Capital Market Day last December and reflects the delay of some aircraft deliveries in 2027. As a reminder, our fleet expenditure is broadly 2/3 of our annual capital expenditure and reflects the rebuilding and renewal of our fleet over the period to a more efficient aircraft. To finish with my presentation, I'd like to just remind you about the way we think about capital allocation. Our capital allocation framework is designed to support our profitable growth and, ultimately, our sustainable shareholder returns. Our first priority is to maintain our balance sheet strength, the net -- target net debt to EBITDA of less than 1.8 through the cycle. This is a proxy for investment-grade credit rating. Currently, it stands well below at 1.1x. Our second priority is to invest in our core business with a focus on rebuilding our fleet, improving our customer experience and enhancing our digital capabilities and our sustainability. And lastly, we have a commitment to a sustainable dividend. And as Luis mentioned, we are pleased to have announced the payment of an interim dividend. Historically, we have done this at the third quarter results after our summer season, and we will likely return to this cadence in the future. But this reflects our confidence in the future of the business. And finally, we will return excess cash to our shareholders if we don't find attractive inorganic growth opportunities that are value accretive and strategically aligned with our vision, objectives and strategy. And on that point, I will leave you now back to Luis.

Thank you, Nicholas. I briefly referred to this earlier, but I would like to remind you of the key parts of our strategy. Firstly, we are strengthening the core of our business, to grow our portfolio of global leadership positions in our core market and to strengthen our world-class brands in those markets. Secondly, we are targeting capital-light earnings growth mainly through IAG Loyalty. And thirdly, we are working to ensure that the business has a strong and sustainable long-term future. Our goal is to maximize returns to shareholders, balancing all of our stakeholder needs in the process. The key near-term drivers to deliver the margin and return targets are set out on this slide. Fundamentally, our transformation program underpins all aspects of improvement across all of our businesses. Specifically, we are aiming to improve British Airways to drive higher customer satisfaction and financial performance through a better network and operations, customer proposition and commercial platform. Secondly, we are leveraging our structurally more profitable Spanish businesses with the aim to deliver over EUR 1.5 billion of profit. And thirdly, to grow our Loyalty business, which has a structurally higher growth margins, cash flow and returns that our other operating companies. So I will now take you through each of our strategic imperatives. The first imperative is to strengthen our global leadership positions. On this slide, we are highlighting the attractiveness of our portfolio of 3 core markets of North America, Latin America and intra-Europe, and our strong positions in each of these markets. Obviously, we also supply to markets such as Asia, Africa and the Middle East, but as Nicholas mentioned earlier, they are much smaller part of our network. Our main growth opportunity in those markets is through our global partnerships, such as with Qatar Airways. On this slide, we have given you some details of specific developments in those core markets. I will go through each of them. But of note, [indiscernible] BA and Iberia's strategy of adding frequencies in their Transatlantic network. The introduction of the first A321 Xtra Long Range at Iberia later this year to enhance their North American connectivity and Vueling's focus on consolidating its routes from Barcelona to significant destinations. Our people are critical to our success. We benefit from our strong brands, helping to attract talents who then play a significant role in delivering our transformation. And we have hired 7,000 people across the group this year to help us to do that. These people are helping to deliver better operations, punctuality and customer service across our airlines as well as in our other businesses. We are also working to secure long-term mutually beneficial agreements with our union groups, which are now in place at most of our airlines. Specifically, we are pleased to have now reached a multiyear agreement with Aer Lingus pilots and remain in discussions with Vueling's pilots. Our priority this year was to improve our operational performance with the biggest opportunity at British Airways. Our investment has delivered some good improvement, so far. BA has achieved a 15 percentage point increase in on-time performance in the first half, as they implemented their new Heathrow operating model as well as investment in technology that enables better decision-making and efficiency. In the meantime, Iberia and Vueling continued to be among the most punctual airlines in the world. However, there are still challenges, particularly from external factors. I will call out ATC in particular, with recent data from EUROCONTROL showing that a 30% increase in air traffic flow management delays in June. And July has been worse, with ATC capacity and staffing problems causing over half of these delays. This is affecting all airlines, despite ATC fees rising to record levels, up 15% in the last 3 years. Fixing ATC issues is not only good for the consumer, but also for reducing carbon emissions. We are investing in making our customer experience with our airlines better through better products on board, high-quality customer service delivery from our colleagues and by using technology to enhance the customer journey. Aer Lingus has implemented a precheck at its U.S. airports as well as refreshed lounges at San Francisco, Chicago and Boston. British Airways is making further progress with its Club Suite rollout, now at 61% of the Heathrow long-haul fleet. Iberia has a number of ongoing improvements, such as fast track in Madrid, a new baggage friendly overhead bins on their A320s. And Vueling is investing in digital for efficiency -- for efficient and effective results, for example, for this disruption self-service and through digital virtual assistance. Our Loyalty business continues to grow well. They issued over 23% more Avios than in the prior year and increased their number of active customers by 13%. As Nicholas highlighted earlier, this business now includes BA Holidays, which we have moved from British Airways. Within this, we'll have significant value to why the Loyalty as both a source of earning and [ burning ] Avios. And we will invest to ensure it can benefit from an increasingly attractive holidays market linked to our strong group brand. Our main focus in our net 0 plan is to secure sufficient sustainable aviation fuel to be able to deliver our targets. During this year, we have signed agreements with a number of suppliers, including 12, as we mentioned earlier this year, but more recently also with Repsol, EcoCeres and ST1. The Repsol deal is the largest purchase of SAF in Spain so far and will be used by all IAG airlines flying from Spanish airports. Moving on to our outlook for the remainder of 2024. We remain positive. Demand remains strong across our core markets. Capacity guidance remains at around 7% increase for full year 2024 and up 7% in the third quarter. And our nonfuel cost unit guidance is also the same, increasing slightly this year. So to summarize, we are confident in the long-term future of this business. This is helped by the imbalance between continuous strong demand in our markets and supply side constraints for the medium term. Our transformation program is going well and is helping us to achieve our margin returns and balance sheet targets. And I'm very pleased that we have now resumed paying dividends, demonstrating our confidence in the strategy and business model. We remain committed to disciplined capital allocation and distributing excess cash to shareholders. And on that note, I will open the call to questions.

[Operator Instructions] And the first question comes from the line of Alex Irving from Bernstein.

Two for me, please. First of all, shame as to the end of the Air Europa deal, but what do you think stopped this? Especially when the commission signed up on Lufthansa-ITA, it concluded that indirect connections provided adequate competition on routes where they would otherwise be dominant. Was that not possible here? Or did something else prevent the acquisition? Second, you mentioned excess cash return to shareholders, if no inorganic opportunities exist. Big if it is doing quite a lot of work in that sentence. What would any future deal have to offer to be better than either organic investment or giving cash back to investors, please?

Thank you. About the first question, I don't comment on other deals, but I can talk about the Air Europa deal. And to be honest, we have worked very closely with the [ casting ] to put forward a very generous and ambitious remedy package. I think that the package addresses all the competition concerns. We proposed to transfer 52% of Air Europa's frequencies in 2023 to 2 strong remedy takers. But unfortunately, this hasn't been enough. And for that reason, we consider that above that, the deal doesn't make sense for the group, and that's the reason we are abandoning the deal. Not because we don't believe in the deal. I think, as we said, it was going to be a very good deal for Madrid hub and for Spain. That is because from our point of view, with these conditions, it doesn't make sense to generate value for the group. And about the second question, Nicholas?

Yes, just about kind of excess cash, the question was around about. The way we think about this is we have the priorities in terms of our capital allocation. We want to maintain our strong balance sheet. Hopefully, we've got to a good place on that. Overall, we want to keep below 1.8x leverage. We actually want to have some headroom to that as well because we're quite understanding we're in a volatile sector overall as well, and we've got to a good place on that as well. I guess, when we think about returning cash to shareholders with the several triggers we look at, we think about what the coverage leverage and the headroom is to that. We think about what the outlook is, which looks good at the moment. And we look at what the alternatives use for those overall. So it's not just one thing we look at. It's a number of things that we're -- we decided. The Board decided we're in a good place on those things at the moment. And therefore, we started we're paying a dividend, which we're pleased to doing. And all I can say is that we'll just continue to review that position for the rest of the year before we make any further decisions.

And the next question comes from the line of Jaime Rowbotham from Deutsche Bank.

And congrats on the strong performance. Two questions from me, please. First, a predictable one. A number of your peers have called out some level of softer pricing looking out into Q3. What does IAG see now, please? And perhaps, you could give us there on book load factors for August and September. Second one, the Capital Markets Day guidance was -- last year was for an average gross CapEx for the 3 years to 2026 of EUR 4.5 billion. It's about EUR 13.5 billion in total. Looking at Slide 15, that's now come down to EUR 11.3 billion. I know there are some moving parts, but the main deltas lowering the fleet CapEx for the OEM delivery delays. Does this make it harder to achieve the medium-term ambitions on Slide 5, do you think, because those -- it's pleasing to see you haven't had to change?

Okay. So about the first question, bookings for Q3 are at 81% of our expectations, which is in line with the forecast that we have in place. So strong bookings in our main markets, North Atlantic, Latin America and Europe. It's true that we see some weakness in China and Asia. But for us, those are markets where we don't have a lot of presence. So we continue seeing a strong demand. And even what we can see for the Q4 that the levels are around 32% are okay. So the second question?

Yes. So the second question, I think, was about relating to the reduction in CapEx. Some of the cost is reduced because of the ETSs that we're going through there as well. And we were spending a roundabout GBP 200 million of cash this year on ETSs. So that's gone into other assets. The rest of it is, you're right, in terms of there's been some slippage in some aircraft, and the question was does it impact your -- our targets overall. I don't think so. I think we're going to be on sort of a level playing field. So all of our other competitors are going to be experiencing exactly the same as this. I think there's not just one OEM manufacturer that is slipping at, at the moment. And it's both on narrow-body and wide-body across the industry. I think I see we're relatively well placed. We've had one aircraft delayed this year, but it's purely kind of gone from kind of November into February overall. There's been a general slippage of narrow-body by about 3 months across the board. The largest shift has been in 2026, where we've had some of the larger widebody have slipped into 2027. But actually, as you know, constrained supply market didn't kind of help and kind of makes it a kind of a well-managed sector.

And the next question comes from the line of Muneeba Kayani from Bank of America.

So first question, just following up on the demand side. So your yields in 2Q were up 2%, which is the best amongst the European airlines. Why do you think you've outperformed the sector, both from a long-haul and short-haul side? Any kind of differences in terms of your customer base, geographies that you would point out here? And then secondly, on unit costs in 2Q were basically flat year-on-year. You've kept your full year guidance. Just if you could help us understand the moving parts and then phasing in 3Q and 4Q, please?

Okay. I will take the first question. I think the geographies where we operate are helping. The customer base also is helping, strong markets and also all the transformation initiatives that we are doing. As you know, we have started a transformation program in 2020. We have initiatives in revenues, and we have initiatives in cost. And we see now that they are delivering. So I think those are the reasons of the performance. Maybe Nicholas, you want to comment.

Yes. I think -- also, I think just particularly in British Airways, we've seen a good performance, particularly as you've got -- you've seen our OTPs improve as well, and that's kind of helped our kind of yield management as well. And there's been less cancellations, and that's kind of helped drive that kind of yields as well overall. Just on your second questions in terms of unit cost, you're right. We always call that our unit costs in Q1 were going to be high because we were anniversary-ing the employee -- timing of employee deals last year. And you'll see the employment and fuel CASK should improve as we go through the year. What you'll see the kind of the opposite of that are actually we're investing more in the business. You'll see some of the other cost lines going away. So we're still holding with our kind of guidance of up slightly. Most people have got that up kind of close to kind of a 2% increase in non-fuel CASK.

And maybe to give a bit of color on the yield developments, building on what Luis was referring to with regard to the geographies, in particular, Latin America demand has been building strongly. You've seen that with a 17% capacity increase. We have had just a slight 3% decrease in yields. And you can see that also if we look for instance at the corporate markets in those flows, we've seen for the first time that our corporate revenues in Q2 from -- to Latin America has been ahead of 2019, which is the first time that it happens since demonstrating the resilience of demand over there. This is Marco speaking from...

On your comment on corporate, actually, is that a driver for the overall performance? Is that a bigger driver of your revenue base do you think? And where are you on corporate this year?

In corporate, I think business travel continued to recover, but at different rates across our airlines and regions. So for example, in BA, we are still in volumes around 65% and revenues around 80%. We compare with what we have in 2019. It's true that, still, BA hasn't recovered the capacity that we had in 2019. Iberia, for example, the volume is around 90% and the revenues are above the revenues that they had in 2019, with an increase in capacity if you compare with the situation they had in 2019. And Aer Lingus, volumes are close to 100% and revenues, 95%. So different performance, but good recovery in general. I don't know, Sean, if you want to...

Yes. I think if I look at sort of Q2, in particular, business volumes in the IAG -- on the North Atlantic were up about 13% year-on-year. So I think that really helped get a better mix of traffic across the network. And that helped us drive load factors up as well by 1 point to about 88%. I think what we see in terms of -- there's another kind of factor that we're navigating through is that although what we see through corporate channels is that 65%, when we look at purpose of travel through all channels, it's a little bit higher. So we think the volumes of people traveling for business are probably up to above 70 and revenue more like 85 because we do see traffic that used to book through a business channel, some of that now is booking through our direct channels. So generally speaking, steady improvement and steady growth and particularly across the North Atlantic routes.

And the next question comes from the line of Savi Syth from Raymond James.

My first question, I was curious in terms of network. If you could talk about where you're still looking to restore the network and the likely growth profiles for the different brands over the next kind of year or two. And secondly, just on the balance sheet. I appreciate the leverage target, but I was wondering if you could talk about your views on what levels of liquidity you want to maintain as well.

Okay. About the first question, I think in all the markets, we have recovered the situation that we have in 2019. Even we are above that. Asia, we're still -- we are recovering. I think BA have recovered half of the capacity, more or less that they have in 2019. And Iberia, they are still not flying there, and they are going to start flying to Japan again in October. So I think that's the -- all the area we are below the capacity we have in 2019. So maybe Sean, Marco?

Yes. I think if I look at Asia Pacific, it's probably some different kind of levels of performance, depending on what part of it you look at. North Asia has been a challenge. And we see demand out of markets like China are well below the amount of capacity that we have in the market. But then if we look at Southeast Asia, it's performing very well. And in fact, our confidence in Southeast Asia is leading to us adding Kuala Lumpur back into the network in winter. And we're launching Bangkok from Gatwick. If we look at the North Atlantic, again, we've increased frequency to markets that we've been maturing like San Diego that's gone to double daily this summer. I think new routes that we have launched in recent years, like Cincinnati and Pittsburgh, are performing well. So we would look out for opportunities, both to increase frequency and maybe to add some new markets to the map in the coming years. I think we're well served at British Airways across all of our short-haul network. We've more or less restored all of the designations and frequencies pretty completely there.

And in the case of Iberia, as you saw, we are already growing 14% this year, and that is meaning a 17% increase versus 2019. The main regions of growth comparing to that starting point have been both Latin America, where just this year, we're increasing 17%, and North America where we have also a double-digit growth versus 2019 as well as the domestic traffic in particular to the islands. Now if you look at the perspective of further growth of opportunities -- opportunity growth, you can see that with the arrival of the XLR, as you know, we are going to be a launch customer, that will allow us also to reach further new destinations and also to expand frequencies on destinations that we currently serve. The first long-haul destinations that will be served with the XLR will be Boston and Washington. And if that opens, we have up to 8 XLRs that will be delivered to Iberia between the end of this year and next year. So that will open further opportunities to reach secondary destinations in our long-haul network.

If we see Vueling, H1, we are 6% above capacity we had in 2019. We have markets in different stages of development. In some, we are consolidating. In other ones, we are looking to unlock growth to increase our position.

Lynne?

Yes. And from an earnings perspective, so you'll be aware, there is the issue of the passenger cap at Dublin Airport, which overall constrains growth. Now that we've got the pilot deal done, that brings structural changes that are useful for the company and for expansion in that regard. We've got a narrow body pay scale now. So we're engaging with Luis and Nicholas on the possibilities of XLRs, with the overall passenger cap might need adjustments also on the network. So we're working through our options now.

And just a follow-up question on that. IAG is still considering what to do with the XLR, to your follow-up question. So just on the second question, just in terms of the balance sheet liquidity, we've kind of always aimed for kind of 20%, 25% of kind of cash percentage of revenue that we want to hold. We're holding in excess of that at the moment. Things we think about, we've got a step-up in CapEx next year. And although we've got no significant non-aircraft debt to pay this year and, pleasingly, no pension to repay this year, we have got some debt, some in the 2025 and 2026 to pay, but a roundabout 20%, 25%.

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

If I could just start my first one on Madrid. I was just curious, is there anything you can do now maybe aggressively that you wouldn't do before? I'm assuming you don't really care about the fact that you've effectively invested EUR 150 million in Air Europa. And maybe linked to that, do you intend to keep 20%? And then, Lynne, nice picture on getting the XLR there. Just wondering if Aer Lingus, maybe you're looking at any strategic changes or capacity adjustments. Given the capacity coming into Dublin, I assume not given those caps. Can we just sort of ride this through? And maybe what are you seeing your competitors planning for Dublin in particular on Transatlantic?

Okay. So about the first question, I think to have break-up fee in this type of operation is normal because this operation can happen or not. We know that since the beginning that this operation was going to require remedies. That's the reason we have offered a very generous package of remedies. Unfortunately, the conditions that are required are above the conditions that we consider that makes sense for the shareholders. So we are going to pay the break-up fee as usual. And we are going to maintain the 20% that we have in the company. We don't have plans to sell that 20% in the short term. In parallel, Iberia this year, they are growing 14% in ASKs. So the organic growth of Iberia is something that is happening, in any case. And if you see, for example, the second quarter, the growth in ASKs in Iberia to Latin America was close to 24%. So we are investing in Iberia because we believe in Madrid hub. The inorganic growth was a way to accelerate this growth and to put Madrid in the first division of the hubs. But because we don't do this operation, that doesn't mean that Madrid is not going to be there. It's going to take longer. I think it's a pity that we have missed this opportunity, but we will continue investing in Iberia and the development of the company in Madrid. Lynne, the second one, please?

I'll take the second one, yes. So we -- the Aer Lingus financial was also lagging in the other OpCos in the group. And this year, we've had 2 particular headwinds. The growth in competitor capacity, there's been a 20% increase in competitor growth into Dublin this year. And that's just having an impact on near-term yields and volumes. And then, of course, the pilot strike right in the middle of the peak summer. So as we look at the network where the passenger cap does, I think, restrict the ability for us and others to grow, which you can see, is a positive or a negative, depending on how you look at it. We've got -- we're looking at our network and looking at how we can adapt. Some of this is aimed at trying to reduce some of the seasonality. So for example, we've introduced Las Vegas in winter because we do have more seasonality now than we had before COVID. And we're looking at the transformation plan benefits and see what that unlocks in terms of revenues and costs that will give us the confidence to develop the network further. And then as I mentioned earlier, I think the XLRs, now that we've got passenger cap, would be good for Aer Lingus, and that would bring new opportunities for us.

And the next question comes from the line of Miguel Gonzalez Toquero from JB Capital.

I got two. The first on working capital, I see that the level of deferred revenue are more than EUR 2.5 billion higher than last year. Is it related to an increase in areas? Or -- and would you have said these levels could hold up well? And is this something structural? Or will you see a risk that this could imply a higher than you saw in the coming quarters? And secondly, I know you don't provide a guidance for a year. But after the bid this quarter and the visibility you have to pay on bookings, maybe you could give us an indication of how you see consensus for the year, which I believe stands about EUR 3.5 billion you think you committed.

Yes. Just on the working capital, actually, the working capital inflow is about the same as it was last year. We had EUR 2.3 billion inflow this year, and it was EUR 2.3 billion last year. So it's exactly the same. So it's just about -- it's generally just taking forward bookings ahead of the summer period across all of our airlines overall -- so airline tickets overall. And as I said in the script, you'd expect that to partly and mostly unwind as you go through the year. So you get hopefully change them into EBITDA and unwind through the year. Just in terms of -- I think the second question was on consensus over the year. Consensus is a roundabout EUR 3.5 billion, EUR 3.6 billion for the year.

And the next question comes from the line of Ruairi Cullinane, RBC Capital Markets.

The first question is, has your experience with Air Europa deemed your appetite for M&A generally? And then secondly, a lot of questions on the relatively encouraging unit revenue trends. Are you worried this could attract competitor capacity into the winter season? For example, carriers in the Americas perhaps pivoting growth towards the North and South Atlantic?

Okay. About the first one, the M&A appetite, we are a platform. We want to consolidate the industry because we consider it is good for the customers. And it would also to have a strong group that can compete globally. But also we are a very rational group that we don't do things that we consider don't make sense. So we will continue exploring opportunities, if those opportunities make the group stronger. You have seen the strong results that we are delivering. So if we do things, are going to do things that make us even stronger. So it's -- you don't have a lot of companies that, in some way, can help to the results of the group, but we are always analyzing opportunities. We set, for example, previously that we were analyzing TAP in parallel to the Air Europa operation. And it's something that we are going to analyze the new conditions from the new government. And if the proposal makes sense, maybe it's something that can be interesting for us because, in the same way, we have a dual-hub strategy in the North with Dublin and London. We consider that a dual-hub strategy in the South with Lisbon, and Madrid can be optimal for the group. But we don't have any urgency to do M&A. We only do M&A if we consider that we improve the group results.

And in terms of concern about competitors coming into the market, yes, we are always concerned. That's why we've got our investment programs. So we're investing in our fleet to get our frequencies up. We're investing in our products, in all of our airlines, in our IT and just to kind of improve the kind of competitiveness of our aircraft. That is why we're so focused on getting kind of our cost base -- close on our cost base as well to make sure we're competitive as well. So yes, we're always concerned. What we're actually seeing at the moment there, look -- if you look at the North Atlantic, actually, if you can see in winter bookings at the moment and actually, that's fairly flat. There's no growth coming across the Atlantic at the moment, overall. I think if you look at the U.S. airlines, I think they're trying to grow their capacity into other routes at the moment overall, particularly as they've seen their cost base go up quite significantly with their pilot deals. It's kind of more expensive to fly this way. So as long as we're focused on doing what we can do, investing, improving our products to make it more competitive.

The next question comes from the line of Conor Dwyer from Morgan Stanley.

First question is on the Loyalty business. Obviously, the revenue growth there is quite high at the moment. I'm just wondering how you're thinking about that as a kind of steady state business over the next kind of 3 to 5 years as that matures. And the second question is on British Airways. Obviously, a decent performance this year. And I'm wondering how much of that basically is due to basically very strong market conditions on the North Atlantic and how much is relating to the ongoing transformation. And if I think about kind of the next 2 to 3 years, as more planes come in, the products is invested in, how do you think about that in terms of the size of the structural change in the business over that period versus this year?

Adam Daniels here on the Avios question and the Loyalty question. Yes, so we have -- we are growing double digits in terms of our revenue and collection. We expect that to continue, to be honest, for some time to come. It's -- we've been growing at about that level for the last 2 or 3 years. We expect that to continue for the next few years as well. So we are very much in a growth mode. And we see customers increasingly collect the currency and are using it as well. So we think there's a lot more opportunity here. We're signing up some more partners very soon, and we think we can keep that level of growth going.

Yes, in relation to BA, I think the performance is very encouraging, considering the fact that corporate revenue is impacted in 2019 level. So I think what it demonstrated is that we've been able to pivot the model to really serve effectively the leisure markets. And I think the work we do with Loyalty and the work we're doing with BA Holidays is really increasing our penetration and relevance there. I think also we've made very good progress on our operational transformation, but I think there's more to come. We had a 15-point improvement in on-time punctuality, a big reduction in cancellations. But I do think that we're in probably the middle phases of driving a full transformation there. We have the Heathrow operating model only rolled out since April. Some of our digital tools are still to come. And I think there's a lot more potential upside that we'll be tapping into on both our operational performance and customer experience looking forward. If I think about customer, with 69% of our fleet have got the Club World Suite, that's really driving a step change in Net Promoter Scores. And as we move that towards full embodiment, I think we will begin to drive a product advantage against a lot of our peers. On top of that, we're doing things like our lounge refresh. I think what's very exciting as well is the potential of our digital transformation. We are rebuilding a new version of both our app and our dot-com experience. We'll start to roll that out towards the end of the year. And I think revenue conversion and digital experience will be significantly enhanced. Finally, what I would say is we will be taking more delivery of long-haul aircraft. And right now, we have probably a little bit of an imbalance between having a little bit too much short haul and a little bit or too little long haul compared to what we would have had historically. As we begin to restore that balance and take delivery of aircraft over the next couple of years, we'll rebuild the long-haul network. I think it's more productive, it's more efficient, and it also gives us a better balance of seasonality. So I think there's a lot of structural levers of improvement that will come in the years to come.

And the next question comes from the line of Harry Gowers from JPMorgan.

I've got two questions, if I can. The first one is a bit of a follow-up on some of the questions asked already. Your leverage target through cycle is 1.8x. You'll probably be a fair bit below that level this year. So I was just wondering if you have a floor in your mind in terms of where you might want to try and hold the leverage out and any return of the excess cash to shareholders. Would you want to go below 1x net debt to EBITDA, for example? And then second question, obviously, again, your network peers have had weaker performance this year on the pricing front, but have also suffered from some more acute issues. So firstly, do you think you've benefited at all in terms of picking up any incremental traffic because of strikes at your peers? And then on a similar trend, any benefits at all from the issues that your partners at American have seen on the revenue and distribution side? Have you seen any incremental benefit from that?

Yes. Just on the leverage, yes, as you said, we've got a target to be below 1.8x. We're at 1.1 to the half year. You'd expect that to increase as you go through the second half, as your working capital unwinds overall. We don't have a set target. As I said, we kind of -- we have -- we look at what the leverage is, we look at what the outlook is and we look at alternative uses all the time. So it's not one specific trigger we have overall. We'd always try and keep some headroom to the 1.8 because, as I said, we're in a volatile industry, but that -- we have to look at those other three things at the same time before we kind of decide what the distribution is. Do you want to get it?

Very good. I think the American distribution changes were primarily, I think, an issue in the domestic revenue performance. So we haven't seen a material impact across our joint venture from the strategy or the changes. .

And the next question comes from the line of Andrew Lobbenberg from Barclays.

Can I ask a question about fleet? Sean seems keen on having some long-haul planes. Lynne wants them, too. And yes, you're very clear that the deliveries are being delayed, and the 777s aren't coming quickly, nor the 787. And with the abandoning of Air Europa, you're using a big slug of 787 that would have come into the group as well. So do you think you need to do anything to try and source used wide bodies or take some leases to try and deliver the wide-body metal that you want for the network? And then my second question would be around your Spanish portfolio of brands. Now you've previously said that you would expect to restructure the portfolio of brands after the Europa deal completed, but that's obviously not happening now. But what is going with the Spanish -- what is going on with the Spanish portfolio? Are you thinking about expanding label into short haul as you previously mentioned as a possibility? Are you going to be ready to grow Vueling? Are you happy with the relationship with Iberia Express?

Just to answer about the aircraft. We've got kind of 19 deliveries this year. So we've got pretty good. We've got probably 20, 25 deliveries next year, actually. So we actually were quite comfortable, particularly in the next couple of years in terms of where our deliveries are. What we're having to do in terms of the deferrals in '26 to '27 is we're actually just kind of extending some of the life of our -- some of our larger aircraft, the 777s, which are really well -- good performing aircraft, actually. So it's -- that will help overall. So actually, we don't think we have to do too much. We'll always look there. We'll always be kind of tactical in terms of looking at opportunities if there are there -- if we think they are there, though, Andrew.

And about the Spanish portfolio of brands, yes, you're right, we were waiting to Air Europa to see if we needed to rethink about the number of brands that we were operating in Spain. Now that Air Europa is not going to happen, we will review the situation that we have. But in principle, we are going to continue developing label. You know that we are in the middle of the process of obtaining the AOC for the long haul. The AOC for the short haul is still something that we are concerning. We have opportunities to develop Vueling if they can have the right cost structure that is needed to develop the company. And Iberia and Iberia Express, they are trying to reach an agreement to develop further Iberia Express. And it's something that maybe I don't know, Marco, you want to comment about the agreement.

It's simply that the conversations are proceeding. But as long as no agreement is reached, Iberia Express will not grow. So at the moment, we have freezed the growth of Iberia Express until the moment that an agreement would be reached.

And from our side, as we said, we are working to get the cost base right, and this doesn't mean just pilot. This is about the whole transformation plan. So we are working to get the cost base right and to be able to unlock growth.

But to your question, Andrew, the good thing is that we have good brands, we have different AOCs, and we have different opportunities to develop the business in Spain. That is a business that is working very well. And we said that the objective is to generate EUR 1.5 billion in those businesses without the Air Europa operation. Last year, we were close to that. And this year, things are working well. So we are not worried. What we see here is an opportunity.

And the next question comes from the line of Sathish Sivakumar from Citi.

I've got two questions here. So maybe firstly on IAG Cargo, given what we are hearing from the other airlines and as well as from the freight news that strong Q4 is expected. How should we think about year-on-year progression into H2 on Cargo? I appreciate that you have little exposure -- very little exposure to Asia. But just given -- do you expect to be flattish on Cargo revenue for the full year basis? Any color on that would be helpful. And then the second one, yes, thanks for the color on the booking for quarter 3. How does it actually compare Iberia versus BA on the booking curve? Any color on that would be helpful as well.

I didn't hear the second question. You must repeat that. So just to -- yes, just in terms of Cargo, we've kind of expect the continuation of the performance we've seen in the first half. So we're seeing -- actually, yield is looking okay. Unfortunately, that's due to the kind of issues that we're having in the Middle East overall. And then you're seeing, as you said, we're less exposed to Asia at the moment. And because we can't fly over Russia, actually, we're having to carry more fuel on the planes. We are flying to Asia as well, which means you could fly even less cargo overall. So that is affecting our kind of tonnage that we kind of carry and expect to carry into the second half of the year. Sorry, I missed the second.

Sorry. We didn't understand the second question. Would you please repeat?

On the booking curve, you talked about 80% -- around 80% booked for quarter 3. I just wanted to understand how does that compare Iberia versus BA.

I think it's very similar in Iberia. BA, what is different is Vueling because they have a different profile. But when you see the held position of Iberia, British Airways and Aer Lingus, it is very similar to the numbers that I gave you for the group.

So Vueling is slightly different, up from 80%, yes?

Yes. Vueling just because their profile of selling is totally different.

We have our own set now of Q3.

Yes, to a shorter-term, bookings are...

Narrow bookings, yes.

Got it. And then maybe just a quick follow-up on the Cargo. Should we expect flattish Cargo revenues year-on-year given some rebound in second half?

Yes. Similar trends to the first half.

The next question comes from the line of Guilherme Sampaio from CaixaBank.

Three from me. The first one on NDC. So you've mentioned that you've not particularly benefited from the issues that American Airlines has faced. But had any of these issues changed your approach even slightly to the progression of NDC, their need to have the inventories available in all channel? And second one, in terms of the Air Europa state, what's the rationale for the maintenance of the state at this stage?

What's the rationale, sorry?

For the 20%.

What is the maintenance stake in Air Europa at this point?

Okay. The first question about the NDC, I think we continue with our strategy. I think in the case of American Airlines, from my point of view, the strategy was the right one because it was similar to what we did some years ago. It was more a problem of implementation, and they are trying to fix that. So we are advancing in the NDC channel because we consider this is the future, and it's something that we have been improving in the recent years. And about the 20% of Air Europa, yes, we have 20% of the company. To be honest, we don't have plans in the short term to sell that stake. It is something that is a financial investment that we have in the company, and we will consider in the future what we do with that.

And the next question comes from the line of Gerald Khoo from Liberum.

Two, if I can. I was just wondering on unit revenue, obviously, a good performance. But I was just wondering how much of that improvement came from mix rather than outright price. I think you talked about premium and premium economy remaining strong. How much of a contribution did that make? And secondly, in the statement, you talked quite a bit about digital developments across the various airlines. I was just wondering whether you could talk about the pros and cons of centralizing that sort of development work at IAG or taking solutions developed at one airline and use it in another. It doesn't -- I get the impression that each of the airlines are kind of doing their own thing on the digital side.

I've done a calculation of how much comes through mix, actually, so I can't comment. That's probably a little bit of benefit. You've seen particularly strength across the North and South Atlantic overall on that as well. But we've also been helped -- we've had very strong AJB. So that -- for that, that kind of indicates you get less payments into the AJB. And also you've also -- we've also -- because we've had less compensation from EU 261 as well, which kind of benefits your overall kind of yields as well.

I think just in BA leisure demand, I think, has kept pace with capacity. And I think we've had better mix as a result of corporate recovery in the AJB. We also saw very strong short-haul premium mix over the course of the quarter, which we have a variable ability to flex capacity in that segment. So I think there has been better mix. But also, I think demand across the leisure segments and the core products has been robust as well.

And about the second question, the digital development and the coordination in the group, we have been talking about the transformation program. And the transformation program, a big part of the transformation is linked to innovation, digital development and artificial intelligence. So at group level, we have defined the areas where we consider, for example, innovation, artificial intelligence can help to improve the delivery of the different airlines. We do things locally, but with the coordination from the top in order not to repeat things and in order to learn from the good things we are doing in the different places. So that's the model that we always have in the group. We don't do things if we don't consider that we don't add value to the different airlines. But we learn from each other about the things we are doing. And we have, for example, champions in the customer area or we have others that they are leading the maintenance area or procurement, et cetera.

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

Maybe it's probably more for Nicholas, two questions. Comments about the outlook in terms of generating significant free cash flow. And then you talk about, obviously, the unwind of the working capital. So maybe just you can give a bit more color there or even what consensus is or something like that. And second one, in terms of the divi, well done on resumption of the dividend. Is there -- or when would the Board make some sort of comment or decision in terms of a policy per se? Because I know in the past, it used to be something like 20% or something of the net profit or something like that.

Good question. Yes, so just in terms of free cash flow, we said we're confident making significant. Last year, we made about EUR 1.3 billion of free cash flow. And you can see consensus in terms of -- it's a little bit higher than where it was last year as well. So again, kind of confident of replicating, if not doing a little bit better than last year overall. Just in terms of the policy, I don't think -- actually, if you go back in the history, we don't actually -- what we said is a sustainable dividend rather than actually quoting a policy of payment ratio overall. And I think that's kind of a sensible thing to do as well. So our key thing is to make sure we can deliver a sustainable dividend year after year for you overall. So that's been our policy, yes.

The next question comes from the line of Jarrod Castle from UBS.

You've probably spoken quite a bit around kind of the yield environment, but I'm just thinking a bit more about next year. It seems like the consumer pressure started on the low end, coming more towards the top end, comment from luxury goods company this week from Marriott, including the U.S., they pointed out. So is there some delayed effect thinking about next year that, especially on your premium leisure, the consumer is going to get hit? And are you concerned with that also just given U.K. government increasing -- well, putting on VAT on school fees, et cetera? So just any thoughts whether or not potentially next year is the year where you see the softening that some of the others have seen. And then just secondly, can you actually quantify the impact from some of the strikes the Aer Lingus saw? And then just kind of broad brush terms in terms of the deal itself in terms of productivity and rate.

Okay. About the first question, we are looking at the market very carefully since a long time ago because this question about -- if this about after COVID that is going to end is here for almost a couple of years. So -- and what we always answer is that we don't see that weakness coming. So now with the visibility that we have for the Q3 and the Q4, we don't see this weakness in our main markets, North Atlantic, Latin America and Intra-Europe. But it's something that we are looking at it in case something happens. But for the time being, I don't know, Sean, if you want to comment what you see in British Airways, for example.

Yes. I think if you've kind of indexed this back to 2019, I think we should be expecting in a typical cycle to see demand growth and capacity growth. And I think if you kind of look at this over the medium term, I think they're pretty much aligned with historic averages. So I don't think there's an oversupply issue in the market. And I think capacity has barely kept up with demand growth in the last 5 years, albeit that we've had some big increases in capacity over the last couple of years coming out of COVID. I think the pros and cons in terms of the economic outlook, as you say, one is interest rate cuts and the savings ratio in the U.K. could give support to consumer spending. And as Luis said, there's other clouds that you always look out in the horizon for. But we're not seeing, I think, anything in the medium-term booking environments that suggest a slowdown.

I think, as well, while interest rates remain relatively high, those who've got money and can travel, I think, unfortunately are doing -- rather doing okay. And we're not seeing -- we've got a good insight into spend through credit card relationships as well. And actually, the one sector that's holding up is travel. We're definitely not complacent there. We are keeping an eye on it. And in terms of Iberia, I think it comes back to -- I think it's more of a structural play overall as you're seeing how the South America, the North, Spain...

Yes. We do see that Madrid is emerging as a destination that structurally is having more traffic from Latin America also because of flows of people that are either moving or moving businesses to Madrid is sort of considered. I think we have shared in the past as the new Miami in this respect. And we do see all indexes in terms of flows and tourists, but also business activities that are increasing therefore. So we do see structural improvements in demand there that support also our capacity growth. And in fact, the results of our yield environment in those capacity growth tends to confirm.

And if you think you also will look, we keep an eye on them as well as the list. I think we expect to see people, those with less income flying, but I still see demand.

Yes. We had a very strong H1. So if you asked, it increased 2.6%. So for now, we are seeing strong demand.

Yes. Definitely not complacent there. Keeping an eye on that.

So I take the Aer Lingus question on the disruption on the [indiscernible]. So the disruption itself, we estimate cost of EUR 55 million direct costs. So that's spread over quarter 2 and quarter 3. It was June and July where we had some industrial action. And if we look at the pay deals, there's two key differences relative to what we've been discussing with the pilots at the end of last year. First thing is it's now a 4-year deal and not a 3-year deal. And there's a small amount of unconsolidated pay that has now become consolidated, 1.5%. But importantly, what that gives for the company is two key bits of structural change. The first one, I've already mentioned, and that's a new pay scale or a cap on the pay scale that applies to all narrow-body flying. And that not only gives us the confidence to look at more narrow body. The XLR is Transatlantic. But it also means we get more productivity for the pilots who are flying between Europe, so they can do European flights and then they can do Transatlantic flights. And that productivity benefit is going to be very useful to us in the future. And the second piece of the deal is that we move what we call the crew agreement, which was a -- it gives the pilots lifestyle improvements and more time off in the summer and shorter days. And it was something they asked for several years ago, but it did come out with quite significant productivity costs. We put it around 7% productivity. So we're flat unwinding. That gives us an opportunity as well as we look at better unit costs into the future.

As there are no further questions, I would like to hand back to Luis Gallego for any closing remarks.

Okay. So thank you very much, everybody, for being here today. We are happy that we have presented a strong package of results. And I hope we can have a small break this summer. Thank you very much. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.