results q3 2021

Results Q3 2021

Friday, 5th November 2021

Results Q3 2021 Friday, 5th November 2021

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Luis Gallego

Chief Executive Officer, International Airlines Group

Good morning everyone and welcome to IAG’s Third Quarter 2021 Results Call. I’m joined

today by Steve Gunning, our CFO, and our opco CEOs Lynne Embleton, Sean Doyle, Javier

Sanchez-Prieto, Marco Sansavini and Adam Daniels.

This morning we reported a pre-exceptional operating loss of €485 million. Even though we

are not satisfied, as you can imagine, we made a loss, but this third quarter loss was less

than half operating losses of over €1 billion in the previous two quarters this year. For the

first time since the beginning of the pandemic, operating cash flow was positive as a result of

the reduced operating loss and strong forward bookings. We operated a more meaningful

level of capacity in the quarter, at around 43% of 2019, which was more than double the

level of operations in the first half of the year and enabled by a gradual loosening of travel

restrictions in Europe, especially in Spain.

Liquidity in terms of cash and undrawn facilities is higher than it has ever been, standing at

€12.1 billion pro forma as of the end of October, including the £1 billion UKEF facility for BA

that was announced earlier this week.

In terms of the outlook, we expect the operating loss to narrow further in the fourth quarter,

driven by a higher level of capacity, around 60% of 2019 levels, and a significant recovering

in demand that we have seen since the announcement of looser travel restrictions in the UK,

US and elsewhere. For the full year, we expect a pre-exceptional operating loss of

approximately €3 billion, and we expect to continue to restore capacity throughout the winter

and into next summer as pent-up demand recovers, both leisure and corporate. At the same

time, the Group is implementing a number of initiatives to transform our business for the long

term, some of which we will talk about in this presentation today.

In this next slide we summarise the situation at each of our operating companies. All of

them, they have made financial progress during the quarter and all of our airlines are focused

on restoring their networks as pent-up demand is unlocked.

Aer Lingus has been the most challenged as a result of the tougher travel restrictions in

Ireland, which only started to be relaxed from mid-July. Nevertheless, it reduced its

operating loss compared to previous quarters. Aer Lingus’ focus is now on the launch of its

long-haul Manchester base in October and negotiating new employee agreements from when

government furlough support ends next year.

British Airways significantly reduced its operating loss in the quarter. It is focused on

restoring as much as 90% of its normal capacity by next summer. BA is also negotiating to

develop a competitive platform for the Group’s London Gatwick operation.

Iberia generated a positive operating result in the quarter, mainly because it was able to

operate more of its normal capacity than BA due to facing far fewer travel restrictions on its

routes. It is leveraging the Madrid hub to boost connectivity, particularly in domestic and

Latin American routes.


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Regarding the situation with Air Europa, we have submitted a package of remedies to the

European Commission last week and we await the outcome of its Phase II process by 4th

January 2022.

Vueling managed to break-even in the quarter. It flew the most capacity and generated the

highest load factor in the Group. It has been capitalising on the strength of the domestic

Spanish market. Having won the competition for the state aid remedy slots of Air France at

Paris Orly, Vueling has started operating 32 new routes there earlier this week.

And, finally, IAG Loyalty. It had its best quarter since 2019, with continued growth in

customer acquisition, profitability and cash generation for the benefit of the whole Group.

Before I hand over to Steve, I will give you also an update on our climate change strategy,

which is particularly topical given the UK hosting COP26 this week. Both BA and IAG are

actively supporting this event. IAG continues to lead the global aviation industry towards net

zero emissions by 2050. You know that we were the first airline group worldwide to commit

to this goal two years ago. In 2020, Oneworld became the first global alliance of airlines and,

so far, the only alliance to commit to net zero. IATA committed to net zero at its recent

annual general meeting in October this year.

The next major milestone for global aviation is to seek a net zero commitment from ICAO at

its general Assembly in October 2022. This will align all aviation governing bodies in the

world to the net zero objective. We have also made progress on attaining our commitment to

at least 10% of our fuel requirements in the power of sustainable aviation fuel by 2030 by

obtaining similar commitments from the World Economic Forum, the Oneworld alliance and

the UK government. The UK has also committed to provide £180 million in funding to support

the development of sustainable aviation fuel plants in the UK.

As well as leading the industry in developing and seeking commitments to climate change

targets, we are also innovating and investing in solutions, such as Velocys’ SAF plant in the

UK, ZeroAvia’s hydrogen-propulsion project and Mosaic Materials carbon capture technology,

which we have shown in the previous Capital Markets Day. We will provide an update of

these projects and investments at future investor and analyst events.

And now, I will hand over to Steve for the financial presentation. But before that, as you

know, Steve has decided to leave the Group, and I am very sorry to see him go. He has done

a great job during all these years, but he will be here with us and fully engaged until March

2022, after the 2021-year results. So, please, Steve.

Steve Gunning

Chief Financial Officer, International Airlines Group

Thanks Luis. Good morning, everybody. I’ll now take you through the key points on the Q3

financial results. So turning to slide seven, overall our quarter three results showed a marked

improvement in performance, and it appears that Q3 represents an inflection point for the

Group as it stopped burning cash from its operations and began to generate it.


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Well, this slide shows some of the key performance metrics for the business. So if we start

with the top left graph, we doubled the capacity we operated in Q3 compared to Q2, so it was

43% of 2019 levels, compared to 22% of 2019 levels in Q2, and our planes were 17% fuller

on average. It was a significant increase in volumes compared to the first six months of the

year, albeit still below 2019 levels. During Q3, a number of our key markets continued to be

constrained by government travel restrictions, particularly the US, which was closed for

European and UK travellers during the quarter, and Ireland, which didn’t relax its ban on non-

essential travel until the 19th July. The UK removed this restriction at the end of Q2, but even

then there was a larger number of countries included on the UK’s red list and the stringent

traffic-light system remained in place, as did complex and expensive testing requirements.

These restrictions were not overhauled before quarter three was ended.

If you turn now to the top right and look at the operating result. In Q3 we more than half the

losses we reported in the previous quarters; the Q3 loss was minus €485 million. It’s also

worth noting that the EBITDA was broadly neutral for the quarter at minus €8 million.

On the bottom left, touching on debt. Gross debt has increased €4.3 billion compared to the

end of December 2020 to just under €20 billion. This is due largely to the liquidity-raising

actions we’ve mentioned in previous quarters, such as the IAG unsecured bond, the IAG

convertible and the €2 billion UKEF loan facility for BA.

Net debt has risen €2.6 billion in the first nine months to €12.4 billion. However, the

increase, compared to the position at the end of June, was only an increase of €250 million,

and this was primarily due to the retranslation of US dollar debt. In fact, the net cash flow

from operating activities in the quarter was actually positive for the first time since the

pandemic ensued, and it was positive to the tune of €219 million.

On the bottom right, turning to liquidity, you can see that the impact of the liquidity actions

we have taken in the chart, which for September included the addition of the BA

sustainability-linked EETC, which was for $785 million. Additionally, just a few days ago we

announced that British Airways had reached an agreement for a five-year credit facility,

partially guaranteed by the UK Export Finance, of £1 billion, which has further bolstered

liquidity. All of these actions, together with the positive evolution of our recent operating

performance, has increased our total liquidity position to €12.1 billion at the end of October.

That’s the highest level of liquidity that we’ve ever had and represents 47% of 2019

revenues.

If we now move to slide eight, we can look at the operating result. On this slide, we have

provided two comparators, but I will primarily focus on v2y, i.e., compared with Q3 2019,

because I think it’s more meaningful. I also reference the progression from the previous

quarter, i.e., quarter two 2021. Compared to the same quarter in 2019, capacity was down

57%, but in absolute terms we doubled the level of ASKs we operated in Q3 compared to Q2.

This increased capacity drove the quarter-on-quarter revenue increase of €1.3 billion.

Despite the increase in capacity, it was good to see the passenger unit revenues were

materially better in Q3, although still 29% below 2019 levels.

If we look at the Cargo business, during Q3 air cargo industry volumes continued to exceed

pre-pandemic levels, driven by the strong demand in North America and Europe. We saw a

similar performance in Q2. Demand for air cargo continues to be boosted by disruption in


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supply chains, including port congestion and container shortages in sea freight. Cargo

continued to play an important role in the passenger business again this quarter, allowing us

to operate long-haul passenger routes to North America and Asia thanks to cargo demand,

which offset lower passenger-load factors. Cargo revenue was up 51% compared to Q3 2019.

The quarter’s revenue of €405 million represented a record third quarter. Whilst we operated

a smaller number of cargo-only flights, the lower number was offset by additional co-

sponsored passenger and cargo flights.

Turning to other revenue, this increased significantly in the quarter, both compared to last

year and the previous quarter, driven mainly by the very good performance of BA holidays as

pent-up demand materialised into bookings and by IAG Loyalty, that has continued to be

resilient throughout the pandemic.

If we look at costs, the overall costs increased quarter-on-quarter as we ramped up capacity,

as you would expect. Employee costs continued benefitting from the restructuring

undertaken in 2020 and the different government job support schemes, although to a lesser

extent than previous quarters as we brought back capacity. Whilst the overall increase in fuel

costs was driven by the higher capacity we operated in Q3, fuel unit costs were down 22%

compared to Q2. This reduction was due to two factors. Firstly, the level of profit realised on

fuel hedging instruments matched against the Q3 fuel consumption, and, two, there were far

less cargo-only flights in Q3. Just by way of note, cargo-only flights contribute to the fuel bill

but not the number of ASKs, and hence have an adverse impact on fuel unit costs.

Turning to supplier costs, they increased 62% compared to the increase in capacity of 108%.

The increase in depreciation was simply due to a number of aircraft deliveries.

In terms of exceptional items, the exceptional credit in the quarter consisted of two items.

First, as in previous quarters, we had a fuel overhedging credit of €13 million because of

increased fuel prices, and, secondly, there was reversal of €20 million of impairment of four

Vueling aircraft, which we are now going to need to operate to meet the additional Orly slots

that Vueling has recently won.

Turning now to slide nine, we’ll look at the performance of the airline operating companies.

These numbers provide evidence for what we’ve seen and what we’ve said in previous results

meeting, that there is a strong pent-up demand for air travel and people will fly when

government restrictions are lifted, and this additional flying clearly leads to an improved

financial performance. This can be seen particularly for the performance of our Spanish

airlines, with Iberia making an operating profit in the quarter and Vueling reaching

breakeven.

If I look at each of the operating companies in turn. Iberia’s performance swung from an

operating loss of €144 million in Q2 to an operating profit of €20 million in Q3. Domestic

demand in Spain remained strong during the summer, following the cancellation of the state

of alarm on May 9th. Likewise, non-Spanish resident, fully-vaccinated US citizens were

allowed to enter Spain from May 21st following the relaxation of EU restrictions. Also,

premium leisure has been strong, especially in the Spanish domestic and Central American

long-haul markets.


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In terms of Vueling, the turnaround in Vueling’s performance was also notable, moving from

an operating loss of €99 million in Q2 to breakeven in Q3. During the summer, Vueling took

advantage of relaxation in restrictions in the Spanish domestic market that began in May,

despite the Delta variant outbreak that had a significant impact in July, by reorientating its

network towards domestic flying. Indeed, Spain domestic capacity for Vueling was at 112%

of 2019 levels during Q3. Vueling was also able to adjust its costs to the level of activity,

which further helped the result.

The lifting of the restrictions impact in British Airways and Aer Lingus has been slower, and

hence their recovery lagged the Spanish airlines in the Group. That said, both companies

improved their performance. Whilst Aer Lingus has experienced the most onerous restrictions

of all of our home markets, the ban on non-essential travel in the Republic of Ireland was

finally lifted on July 19th. Aer Lingus was able to operate a capacity level that was 165%

greater than Q2; as a result, they saw a material improvement in passenger revenue and, for

the first time since the beginning of the pandemic, it was significantly higher than the Cargo

revenue generated in the quarter. As a result, the pre-exceptional operating loss and margin

improved compared to the previous quarter.

In terms of British Airways, Q3 performance reflects the UK travel restrictions, in effect,

during the quarter. The ban on non-essential travel was lifted in May, which had a beneficial

impact on the quarter’s performance. We also welcomed the changes made by the UK

government to the traffic-light system – the reduction of the number of countries included in

the red list down from 47 to seven – and other significant changes. But these only came into

effect from October onwards, and hence many of these easements were too late to have a

positive impact on the third quarter results. We’ve highlighted the passenger revenue

performance on the slide because not only was it up on Q2, but it was also ahead of the

Cargo number for the first time.

To conclude, this slide shows that there is pent-up demand, and when travel restrictions allow

us to satisfy that demand our financial performance improves markedly.

We now turn to liquidity on slide 10. The environment in Q3 remained uncertain due to new

variants of the virus and many travel restrictions remaining in place in our core markets. As

a consequence, we continued focusing on strengthening our liquidity position. We think the

list of successful transactions on the right-hand side of the slide continues to demonstrate our

good access to capital markets. The main transaction completed in Q3 was a $785 million

EETC for British Airways, $100 million of which has been drawn. Subsequent to Q3, we

finalised an additional £1 billion committed five-year credit facility for British Airways with the

UK Export Finance department. I’d stress, this facility remains undrawn. As I said earlier,

our total liquidity position at the end of October is higher than it’s ever been at €12.1 billion.

We now turn to look at debt levels, slide 11. As I mentioned at the beginning of the

presentation, net debt was broadly unchanged compared to the end of Q2 if we exclude the

foreign exchange movements. In terms of gross debt, the asset-related liabilities increased

about €170 million due to the addition of fleet, two A320s from British Airways, and some

small other financing transactions. The cash balance was broadly flat quarter-on-quarter, a

marked improvement from previous quarters; in fact, as mentioned earlier, the net cash flow

from operating activities was positive in Q3 because EBITDA was broadly neutral and overall


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working capital movements were positive. We expect EBITDA to be significantly positive in

Q4.

It’s also worth mentioning that CAPEX in the nine months to September was only €0.5 billion,

and our current estimate is that full-year CAPEX for 2021 will be about €1.3 billion. This

compares to our previous guidance of about €1.7 billion and is primarily due to aircraft

delays, but we’ve brought it down by €400 million. There is still potential for further aircraft

delays, which was reduce the 2021 CAPEX guidance further. Any delays to the original 2021

CAPEX guidance will have the effect of increasing 2022 CAPEX. We’re not providing CAPEX

guidance for 2022 at this point as there’s still uncertainty around the delivery schedule and

our capacity needs as the business recovers. But, as a reminder, we haven’t cancelled any

deliveries during the pandemic, only rescheduled the aircraft.

Also, we are planning for a major restoration of our network the summer next year, so you

can assume that we would take delivery of as many aircraft as possible to satisfy the pent-up

demand that we continue to see. We will also start to make some meaningful PDP payments

in 2022 as well.

Moving on now to slide 12 and fuel. Looking ahead, we’re no longer over-hedged, therefore

we’ve included some information in this slide regarding our current hedging position for the

next five quarters. Our current level of hedging is 70% of consumption for Q4 and we’re

estimating we’ve got about 40% coverage for next year. The scenario we’ve used is based on

$700 per metric ton and a 1.17 Cable rate. As you can see, the blended prices range

between $650 million – sorry $615 per metric ton to $680 per metric ton, based on this

scenario.

Overall, just to conclude, as I said at the beginning of my slides, we seemed to have passed

through an inflection point in Q3; we’ve stopped burning cash and began to generate it. We

expect the improvement to continue in Q4, where we expect EBITDA to improve and be

significantly positive.

I’ll now hand back to Luis.

Luis Gallego

Chief Executive Officer, International Airlines Group

Thanks Steve. Next we have a few slides on developments at each operating company. As I

said before, all the opco CEOs are on the call, so you are free to ask them questions on

specific initiatives in the Q&A session.

First, we’ll start with Aer Lingus. Aer Lingus is focused on restoring its North Atlantic network

to half its normal operation this winter with the lifting of the ban on entry to the US from 8th

November, and then going to over 90% next summer on routes from Ireland. It launched its

Manchester subsidiary on 20th October, with the inauguration of flights to Barbados. Services

to New York and Orlando will be going in December, and a service to Boston is planned for

next year. The Shannon cabin crew base has been shut as part of its ongoing restructuring.

Aer Lingus continues to negotiate new employee agreements for after Ireland’s government

furlough scheme ends in April 2022. A structural change agreement has been reached with

the pilots and talks are ongoing with other employees’ groups.


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BA is also focused on restoring all of its North Atlantic network and almost all of its North

Atlantic capacity by the third quarter of next year, as well as capitalising on the strength of

premium leisure currently. However, it will not be able to restore all of its long-haul network

because of likely travel restrictions continuing for longer in the Asia-Pacific region. BA is also

working on options to develop a competitive platform with a lower cost base for its short-haul

operations at Gatwick for next summer. BA long-haul operations at Gatwick is not going to

be affected in any case for this development.

BA has agreement for a lower-cost operation with its pilots, but it still requires agreement

from other employee groups, and the plan, as you know, is to retain the British Airways brand

name at Gatwick. For the rest of BA, all employees on furlough have returned or are in the

process of returning in order to prepare for a ramp-up of operations to next summer. Hiring

of additional cabin and ground crew is also taking place in order to prepare for next summer.

BA has sufficient pilots, although there will be a significant amount of training required.

Iberia. Iberia continues to operate at much higher capacity levels than BA and Aer Lingus

because of the fewer travel restrictions in the domestic, EU and Latin American markets, and

Iberia is also flying more than most competitors in all regions that it serves. It has been

successful at leveraging its Madrid hub to capture connecting traffic to Latin America and

domestic destinations from the rest of Europe. Iberia is now focused on restoring its North

American network fully and 85% of its Latin American network by next summer. Both Iberia

and Vueling have benefitted from an effective ERTE Force Majeure government furlough

scheme in Spain since the start of the pandemic. When the scheme ends in February 2022,

Iberia plans to bring back employees from furlough in preparation for a ramp-up to around

90% of 2019 capacity by the summer.

And Vueling. Vueling is also making use of the ERTE furlough scheme until next February in

preparation for a full operation next summer. Most of Vueling’s recent growth has been in the

domestic market, but recovery is now switching to the rest of Europe from this winter.

Vueling’s main focus currently is on expanding its Paris Orly base by around 50%, starting

this week.

As you know, as part of the remedy for receiving state aid, Air France had to release 18 daily

peak-time slots at the airport. Vueling made the most attractive proposal, as assessed by the

European Commission, and, as a result, Vueling will increase its relevance at Orly by

becoming the number two operator after Air France, and ahead of easyJet and Transavia.

Vueling is increasing the size of the Orly operation from nine to 13 aircraft, of which eight will

be based at Orly. The route network from Orly is being expanded from 22 routes previously,

mainly to Spain and Italy, to 54 routes, including 32 new destinations throughout Europe and

thus increasing Vueling’s European presence.

Finally, I would like to take this opportunity to congratulate Marco and the team at Vueling for

winning the Best European Low-Cost Airline Skytrax award in September for the first time.

IAG Loyalty continues to be profitable and cash-generative, and it has been throughout the

pandemic. September was its best ever month for Avios collection by customers through

non-airline partners, and the relaunch of BA’s co-branded American Express card has

attracted 17% more customers than before the pandemic. Vueling’s co-branded card with


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CaixaBank in Spain was also launched successfully, as has Avios’ new partnership with BP in

the UK.

We continue to see more and more evidence of pent-up demand when travel restrictions are

lifted. We have been showing this booking chart in every quarter since early in the pandemic.

This one is from 31st October. They indicate a significant increase in bookings since we last

presented this slide as of 25th July. As you can see, long-haul bookings have seen the most

significant increase, rising from around 50% of 2019 levels in July to over 90% in the last few

weeks. Long-haul strength reflect multiple announcements of the loosening of travel

restrictions, including the expansion of the UK’s green list of countries in June, the EU

relaxing restrictions for US travellers in July, simplification of the UK’s traffic-light system, the

UK’s allowance of fully-vaccinated US travellers in September, the US relaxation

announcement in September and the UK’s elimination of red countries and hotel quarantine in

October.

Bookings on North American routes were almost at 100% of 2019 levels last week, and

bookings on Latin American and Caribbean routes were well over 100%. Long-haul strength

is being driven not only by North American travel, but also by winter sun destinations and

newly reopening large markets, such as Argentina, India and South Africa, which are large

markets for leisure and VFR demand, especially in the winter.

International short haul has also strengthened since July, rising from 50% to 70% of 2019

levels. And Spanish domestic bookings intakes have continued strongly, rising to well over

100% of 2019 levels in August and currently running at around 90%. Overall, intakes are

currently averaging 80% of 2019 levels compared to 60% in July.

And as we can see in slide 20, we continue to be confident about the outlook for long haul

revenue, especially as travel restrictions start to be relaxed around the world. Long haul has

been the main contributor to passenger revenue for BA and Iberia despite travel restrictions

in place. For each airline, these charts shows the revenue contribution from North America,

other long haul and short haul by month since July 2020.

Long haul accounted for around 60% of passenger revenue in the third quarter for both BA

and Iberia, including 30% for BA and 10% for Iberia on North American routes. Short haul

revenue for both airlines contributed 40% of the total in the third quarter. As we saw in the

winter months of the last year and earlier this year, long haul is even more important

contributor in the winter, especially for BA because of leisure travellers seeking for winter

sun.

VFR traffic on long haul routes such as the Latin America, India and West Africa has also

proven more resilient in winter months. These charts show revenue up to September 2021,

in other words, before the opening up of the US in November and some Latin American

markets such as Argentina in October.

I would expect total long-haul contribution to revenue, and therefore, profitability to become

even more important as we move into the winter months and as other long haul markets

reopen such as South Africa. The overall advantages of long haul over short haul are

significant cargo revenue, as Steve explained before, and premium revenue, especially

premium leisure.


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And in the next slide, you have some detail of our premium revenue performance. This slide

shows premium leisure and premium business revenue as a proportion of 2019 levels for BA

and Iberia by month since April 2020. By September, BA’s premium leisure revenue had

reached over 40% of its 2019 level, while Iberia had reached 80%. Even though not on this

slide, we now have an update for October that shows BA’s premium leisure revenue

increasing further to 47%.

Premium leisure is currently exceeding 100% of the 2019 level for BA on Caribbean routes

and for Iberia on domestic routes, the two best performing route areas. European and

Central American routes were also quite strong from premium leisure. Premium leisure on

North American routes have only reached 30% for both airlines, but I will expect this

proportion to grow substantially after the reopening of Canada in September and when the US

reopens on 8th November.

Premium business revenue show early signs of recovery in the third quarter, rising from

almost nothing to 15% of pre-pandemic levels for BA and to 40% for Iberia by September.

Our corporate bookings intake have continued to increase since the end of the quarter, and

we expect this to increase meaningfully as offices reopen and government restrictions are

relaxed, especially in the US from next week. The banking and the finance sector has been

particularly strong recently, especially with the reopen of the US.

Next slide. As we have already mentioned, our operating companies are focused on restoring

a significant proportion of their pre-pandemic route networks by next summer. For the Group

as a whole, the most important route network is to North America, which represented around

30% of total Group capacity before the pandemic. We are currently planning to restore

around 100% of North American capacity by the third quarter compared to around 60% this

winter and only 30% in the recent third quarter.

The number of routes we operated to North America will increase from 23 in the third quarter

to 49 this winter and 60 next summer, the same number as in summer 2019. Aer Lingus will

operate more than 100% of 2019 levels but this reflects also the New Manchester base. The

network in Ireland will be around 93% of 2019 levels by next summer. Iberia will operate

105% of 2019 capacity because of the introduction of new routes to Dallas and Washington

D.C. BA will operate 96% of 2019 capacity. They will not arrive to 100% mainly because of

the absence of some routes from Gatwick.

About the planned capacity. For the fourth quarter this year, we are planning an overall

capacity of around 60% of 2019 levels. In terms of absolute ASKs, the level of capacity in the

fourth quarter will be more than 20% higher than the ASKs in the third quarter. The largest

step-up in capacity will be in December when we plan to operate 70% of the pre-pandemic

levels.

By next summer, the Group will be operating as much as 90% of normal capacity, although

this, for sure, will be subject to further planning, training and hiring of crews. We will provide

an update of our 2022 capacity plans at the full year results at the end of February.

And now the outlook. We are experiencing a clear recovery in demand as travel restrictions

has been removed. It started with a fewer restrictions, testing and quarantine requirements

on domestic and at short-haul routes in the summer plus selected long-haul routes such as


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the Caribbean. On Monday, 8th November, the US will finally reopen up to EU, UK and other

nationals as long as they are fully vaccinated and have a lateral flow test within three days of

departures.

This will be a very important day for IAG, given our position as the largest airline group

operating on the North Atlantic. But it's not just the US and Canada being important markets

that are reopening. Other large markets that are reopening include Argentina and Brazil,

which are important to Iberia; and India, South Africa and Singapore, which are important to

British Airways. Most long-haul markets in Asia Pacific are likely to take longer to reopen due

to a stricter quarantine requirements.

Our focus on restoring our networks to meet significant pent-up demand. We plan to operate

around 60% of normal capacity in the fourth quarter, with Iberia and Vueling operating at

around 75%, BA at 55% and Aer Lingus at 40%. We still expect to be loss-making in the

fourth quarter but at a lesser rate than in the third quarter and we expect to be EBITDA

positive.

Consequently, we expect to report pre-exceptional operating loss of approximately €3 billion

for the full year. And for the next year, we are very confident we can return to profitability

based on our current plans and assuming there are no further negative developments in

relation to COVID and travel restrictions.

And finally, the conclusions. First of all, we continue to lead the aviation industry's effort to

make flying sustainable. Even though we are not satisfied making a loss in the third quarter,

it was a significant improvement on previous quarter, and as Steve said before, an inflection

point.

And operating cash flow in the quarter was positive for the first time since the beginning of

the pandemic. Liquidity of €12.1 billion pro forma as of the end of October is stronger than

ever. The evidence of strong pent-up demand continues every time travel restrictions are

relaxed, the latest being on UK and US routes, two of the Group's largest markets in which we

are only just starting to reopen.

As a result, we are planning to increase capacity to as much as 90% by next summer with the

North Atlantic as much as 100%. At the same time as restoring our route networks and

capacity, we're taking multiple initiatives to transform our business so that we can emerge

from COVID stronger and more competitive than pre-pandemic.

And now, we are ready for the Q&A.

Q&A

Operator: Thank you. As a reminder, to ask a question, you would need to press star one on

your telephone. To withdraw your question, press the pound hash key. To ensure everyone

has the opportunity to ask a question today, please limit yourselves to just two questions.

Please also ensure that you are close to your microphone and not on loudspeaker. This will

help with ensuring that you’re audio is clear and your question is understood. Thank you.

Your first question today comes from the line of Savi Syth from Raymond James. Please go

ahead. Your line is open.


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Savi Syth (Raymond James): Good morning, everyone. And Steve, I echo Luis’ comments,

disappointed to see you go, but best wishes there. Just on the first kind of question around –

appreciate the colour around the North Atlantic kind of capacity restoration. Could you

provide kind of a similar view on your short haul network? And I'm a little surprised that

LATAM is not – is only getting to 85%, and I wonder if that's kind of related to maybe kind of

your view on South America. And then, for my second question. Just as it – as you

commented that you could maybe restore it as much 90% by next summer, is it fair to

assume we should think of kind of getting to 2019 non-fuel unit cost by then? Thank you.

Luis Gallego: Okay. Thank you. I think as we explained before, the US reopening is

working very well, and I think we are very optimistic. New booking rates have increased by

167% since the announcement. And new bookings to North Atlantic are now close to 100%

of the bookings that we have in 2019. So having said that, as you say, we have other

important markets for us. And Latin America, we still have some restrictions there. But what

we see also is where we can fly, there is a lot of pent-up demand. VFR traffic is working very

well. And as soon that we don't have more restrictions, we will put more capacity there.

Also, it's important how the competition is performing there. You know that LATAM and

Avianca, they are in Chapter 11. And also the situation of other competitors is weak. So

Iberia, I think they are doing very well trying to capture market share in these circumstances.

About the short haul, I think we are, again, coming back to the network that we have in

2019. Vueling is doing an extraordinary job there, competing with the other low-cost carriers

and also taking all the opportunities that they have. And we explained before the Orly

opportunities where Vueling is going to be the second most important operator.

So we are very optimistic because what we see is in all the markets we have the right

vehicles and we have the right cost structure to compete and even to be a stronger capturing

market share.

Steve Gunning: Just picking up on the unit cost question, albeit, we're not giving capacity

guidance for 2022. As we say, we've got the ability to get up to 100% on the North Atlantic

next year. But overall for the business, we won't be at the same level of capacity as we were

in 2019 next year partly due to the amount of aircraft we have and partly due to the fact that

some of the regions of the world will still need to undergo further recovery.

So if I look at Asia Pacific, for example, it's one of the regions that's still lagging behind in

terms of travel restrictions and getting on top of the virus and the way it's developing. So I

wouldn't expect us to be back at fuel unit cost or non-fuel unit cost performance that we saw

in 2019 next year.

But I think the thing for us that's very exciting is that the North Atlantic booking levels are

very strong and we can get to a 100% of capacity next year, and clearly that market has

been a key driver of our profitability in the past.

Savi Syth: Helpful. Thank you.

Operator: Thank you. And your next question comes from the line of Stephen Furlong from

Davy Research. Please go ahead. Your line is open.

Stephen Furlong (Davy Research): Yes. Good morning. Just two questions from me. Air

Europa, you might just – obviously we’re waiting on the EU decision on 4th January. Could


13

you might just reiterate your – the strategic rationale for that business and presumably still

holds from, when you look at it first in 2019.

And the second question, very helpful in terms of the transatlantic that it would be back to

circa 100% of 2019 levels. And could you just talk about where you see the competitor set

for next summer? Whether you expect that to be back broadly to 2019 levels or not? Thank

you very much.

Luis Gallego: Okay. So, at Air Europa, as you know, we’ve submitted a remedy package to

the Commission and they are analysing right now. I think we are in the middle of a

conversation with three parties, the Spanish government, Globalia, the owner of Air Europa,

and also the competition authorities.

We always said that if we can find a place that is good for all of us, we will do the deal. And if

not, we don't do the deal, as we have done in other occasions when we have deals that we

consider didn’t make sense for us.

So to be honest, today, I am less optimistic than I was before. But we are working hard and

Iberia people also they are trying to close this agreement, because I think it has an important

strategic value for the Group, and not only for the Group, for Madrid hub.

If Spain and Madrid wants to have a hub to compete with the strongest hubs in Europe, a

consolidation is needed. And that’s the reason I think this operation is critical also to develop

Madrid hub and to fly not only to South America but to have 360 degrees hub.

And about the transatlantic, I think that not all the airlines are going to back to 90% – 100%

of the capacity that they have in 2019. So several airlines have reduced their capacity or

they left the market. I think it's unlikely they will come back near where they were in 2019,

like Norwegian or Virgin Atlantic. And I think we are going to have an opportunity there.

Also, high fuel prices usually bring discipline to the industry about pricing and capacity, but I

am sure that Sean you can give more colour about this.

Sean Doyle: Yeah. I think if you look at the London market in particular, Norwegian were

about 8% of the market and that capacity won’t be reinstated fully. And I think if you look at

generally the shape over summer that we see in published schedules that shows capacity

contracting over next summer, albeit, I think that that was the scale as you get into Q3, but

certainly Q2, Q3, I think you see less premium and non-premium seats at the minute based

on what people have published in and out of the London market.

Stephen Furlong: Very helpful. Thank you.

Operator: Thank you. And your next question comes from the line of Alex Irving from

Bernstein. Please go ahead. Your line is open.

Alex Irving (Bernstein): Hi. Good morning, gentlemen. So first, you mentioned that you

started generating cash, operating cash flows again in Q3. In that context, just on working

capital movements into the recovery, please. Conscious you've had working capital inflows

since the start of 2020. How much risk is there to that reversing as the environment

returning to normal? Is there anything that would indicate the BPOs and DSOs is being

materially different pre and post-crisis?


14

And then second on Vueling, just kind of looking at your route map here when you’re

expanding the size of Orly, a lot of the new routes are in the Northern Europe, so UK,

Germany, Nordics. Does this signal the start of a network extension further into Europe or

you’re thinking about Vueling’s future growth as more focussed principally on routes in and

out of Spain and the markets you've been in historically? Thank you.

Steve Gunning: On the first question on the working capital. No, I'm not expecting

significant working capital reversals. We've seen in Q3 the business starting to ramp-up.

And so, you will have seen trade receivables grow, trade payables grow, etc. So I'm not

expecting that to reverse. Clearly, one of the benefits of the airline industry is as bookings

start to grow, you bring cash into the business ahead of the actual departures. So, no, I

wouldn't expect the sort of headwind on working capital.

Furthermore, as I mentioned on the presentation, we're no longer over-hedged. So the

outflow due to the sort of over-hedged position is also pretty much over now at the end of Q3

as well, which will be helpful. So no, I see that the positive cash generation continuing into

2022.

Luis Gallego: Then on the second question, Marco, you can.

Marco Sansavini: Yeah. In terms of the Vueling expansion in Orly that responds specifically

to the fact that Orly was a market that was with a slot constrained limiting the number of

destinations it was able to offer. So the opportunity of having these slots open up the

opportunity for us to serve destinations, and in fact, are not served by anybody but they have

significant potential. And therefore, we will find the opportunity for us to serve them as a

lone carriers.

That doesn't respond therefore with a view that is a general expansion of Vueling. It's more

specifically related to the Orly opportunity of these 18 slots. Now said so, it's true that also

through the pandemic, we spotted similar opportunities in the north of Europe, in particular,

in the areas where the Norwegian was withdrawing, like for instance, the Danish flows to

Spain.

So there are a number of opportunities that are emerging in this COVID context that are yet

also pushing and expanding the network of Vueling beyond the original footprint. But we just

do it as opportunities emerge.

Alex Irving: Great. Thank you very much.

Operator: Thank you. Your next question comes from the line of James Hollins from Exane

BNP Paribas. Please go ahead. Your line is open.

James Hollins (Exane BNP Paribas): Buenos. Two for me. First on staff levels. It looks

like you maintained around 50,000, 51,000 through this year. Just wondering against the

66,000-ish you had before COVID, what's the right number as you ramp-up closer to 90%,

maybe 100% the latter end of next year? Maybe just run us through a number, if you can, as

well as what recruiting needs to be done and actually the cost of UK furlough ending? That

was one question.

The second is on Heathrow charges. I’m just wondering what the next steps were on that to

try to limit the impact of the CAA proposals, and is the £29.50 or 34% increase for 2022 now

locked in or is that still negotiable? Thank you.


15

Luis Gallego: I think on the staff levels, as I’ve said in my presentation, we will need to hire

people for next summer in the case of BA, Sean has launched a process to hire cabin crew.

And maybe, Sean, you can explain more about that where we are.

Sean Doyle: Yeah. We’re looking to rebuild book on the cabin crew at British Airways, so

we’re looking at circa between 4,000 to 5,000 more people coming in and that’s a process

that we’ve kicked off already, and that supports the expansion that we planned. So that

process is ongoing.

In terms of Heathrow, do you want –

Luis Gallego: No, you answer.

Steve Gunning: Yeah, in terms of Heathrow, I think the £29.50 was an interim sort of

position that the CAA published that has not been adopted yet. We wouldn't support that

position because you're looking at an airport that is already 44% higher than most of its

European peers. And even with that CAA position, increasing charges by another 54%, we

think it doesn't make sense and it doesn't stack up when you look at the building blocks that

would shape an appropriate price point through the consultation.

So I think what we'll carry on is the H7 consultation process. And our view is if you look at

the H7 process and look at the way that should take shape, the prices should definitely not go

up next year. And that if you look at both the volumes, the OpEx, the revenues and the cost

of capital, there's a very strong case that prices should fall over the regulatory period and

that's the case that we will continue to make. But that price point hasn't been published or

adopted yet.

James Hollins: Okay. Thanks a lot.

Operator: Thank you. Your next question comes from the line of Muneeba Kayani from Bank

of America. Please go ahead. Your line is open.

Muneeba Kayani (Bank of America Merrill Lynch): Good morning. So first question is

around kind of what sort of fares are you seeing in your bookings right now across long haul,

short haul, international and domestic? And we've heard from some of LCCs that fares are

strong during holiday periods and then drop off during off-peak. Clearly, there's less

seasonality for your business. So if you could talk about what sort of fares you’re seeing on

your current bookings?

And then secondly, going back to the question earlier on transatlantic and competition next

year. What have you seen so far with jetBlue starting flying? And just generally, how are

you thinking about competition from kind of narrow-body on transatlantic as the – as demand

returns? Thank you.

Luis Gallego: About the – the first question about the bookings, and how we see the yields.

Okay. If we see the evolution in the last week of the booking intakes, we see that in North

America, we are close to 100% if we compare to 2019. LACAR, we are close to 120%. And

the problem – the main problem is the rest of the world, because as I said before, we still

have some restrictions mainly to fly to Asia. So rest of the world is around 70%. So on

average, we are close to 90% of the bookings that we had in 2019.


16

And as you have seen in the presentation, passenger revenue in the third quarter declined

10% versus third quarter of 2019. Load factor also declined by minus 18%. So the output of

that is the passenger revenue per ASK declined by 29%. So what we are seeing now is that

we are having an improvement and the load factor is improving and we consider that we are

going to have more possibilities in some way to do the traditional revenue management.

About the second question, jetBlue, as I said before, I think we are going to have an

opportunity in the North Atlantic because some competitors are going to be weaker. It's true

that we have, for example, jetBlue with a new model, but we have that model in the Group.

Aer Lingus, you know that they have started flying from Manchester, also with the A321 Long

Range.

And Iberia also, they will fly in the future. When we see the size of the operation of jetBlue,

to be honest, we consider that it’s not going to be a threat for us, but maybe Sean you can

expand on that.

Sean Doyle: Yeah. I think if you look at jetBlue coming into the market, it’s four services

using A321LRs. There are about 135 seats on each plane. I think when you look at the

broader context of the market next year, you still see capacity contraction in and out of

London both on premium seats and non-premium seats. So against that context, I think at a

macro level, it's not something that we see as being a big variable in the revenue or the unit

revenue development.

And it's kind of out of Boston and out of JFK. We think it'll primarily serve the US point of

sale with that A321LR operation.

Steve Gunning: Just adding to the point on yields. What we are seeing is very strong

booking levels. We've talked about the current intakes for North America are pretty much

100% levels that we saw for 2019. We're also seeing in other regions, such as LACAR, Latin

America at 117%. So given the strong level of booking intakes at the moment and the fact

that I think there will be some degree of capacity constraint next summer, I think there will

be sort of strong pricing opportunities for next year. And we are seeing that in some of the

held RASK positions that we have already. So we do expect there to be a positive

development on RASK looking forward.

Muneeba Kayani: Thank you.

Operator: Thank you. And your next question comes from the line of Neil Glynn from Credit

Suisse. Please go ahead. Your line is open.

Neil Glynn (Credit Suisse): Well, good morning, everybody. I'll also ask two please. And

Steve, you've actually just touched on the first question I was going to ask there, possibly.

But I was just interested in your view, to what extent is there a risk that some parts of the

transatlantic market prioritise cash flow contribution by maximising volume next summer,

given obviously the cash starvation over the last 18 months or so? Does the early yield

management that you're observing across the market suggests that that isn't a material risk?

I just note obviously you guys are focusing on full transatlantic capacity restoration. United is

obviously planning a record schedule. And I'm sure others may well follow similarly from a

capacity perspective.


17

And then the second question on the Spanish labour situation. I guess going back to the

post-GFC era, we had a multiyear stand-off between Iberia and its pilots, in particular, which

resulted in very heavy capacity cuts until a deal was ultimately agreed after Vueling was

purchased. With the ERTE running until February, how do you think about the risk of

something comparable arising again, and how do you avoid that and secure a future labour

deal pretty soon after that ERTE ends? Thank you.

Steve Gunning: On the first question, I think it's an interesting point. I think one of the

things we’re trying to manage very carefully in terms of our inventory is to not sell all of it too

quickly in terms of seeing how the pricing develops. The other thing that sort of is different

for IAG than most of the North Atlantic operators is the amount of premium mix that we have

over the North Atlantic.

So I'm sure Sean can talk to this more eloquently than I, but I think that's one of the reasons

why I would expect yields to hold up better and recover better because of our strong

premium mix. Sean, I don’t know if –

Sean Doyle: Yeah. I think look, it's early stages in terms of the amount of revenue held in

the flights. But at the minute we're seeing revenue held ahead of capacity on the North

Atlantic over the summer, and I think that's driven by strong pent-up demand. Also, what we

are seeing is premium leisure intakes have been ahead of 2019 over the last three weeks

since the North Atlantic opened up. So that’s the booking trend and that's very encouraging.

We're seeing corporates book as well and that corporate trend begins to increase week on

week. We’re looking at both the UK and the US end of the North Atlantic routes we see the

bookings increase from the corporate segment. And what's interesting about the corporate

segment is they're booking more into premium cabins than non-premium. In fact, the mix of

premium travel, the corporates are booking is higher than it was in 2019.

So I think all of those three trends are encouraging about, one, the level of pent-up demand,

and, two, I think the early evolution of the RASK over summer in both premium and non-

premium is encouraging.

Luis Gallego: I think about the second question about the situation in Spain, Iberia, maybe

Javier you can explain.

Javier Sánchez-Prieto: Yeah, sure. Thank you, Luis. Well, at the end of the day, just to

give a bit of context on the furlough scheme and the staff evolution. First of all, we need to

acknowledge that when the pandemic started, in Iberia in particular, we have like 1,600

people on temporary contracts. So that was another lever that we used to adapt our

capacity. And then, of course, we needed to put the rest of the people under the furlough

scheme.

So just – this is just as a context, because as Luis was saying before, what we are expecting

is to recover near to 90% of our capacity over summer and the current furlough scheme,

force majeure ends at the end of February. So from February onwards, our base plan is

actually to recover – to start recovering the capacity and to start to recover the people from

the furlough scheme. That is the base plan.

As you were suggesting, there is, for whatever reason, I don't know, a delay or something

like that, we need to also remember that the furlough scheme force majeure is something


18

that was put in place by the government for the pandemic. But there is a furlough scheme

for production needs or for economic needs that we can also put in place. It's relatively easy

to put that mechanism in place. You need to have an agreement with the unions. We have

had a continuous dialogue with the unions, and in the case, the force majeure scheme is not

valid anymore and for whatever reason, we need to adjust our capacity and our staff further,

we will use that other furlough scheme that is available under the Spanish labour law.

Neil Glynn: Thanks, Javier. I guess the assumption underlying the question was partially

that you'll look towards perhaps replicating what's being achieved at British Airways on unit

labour costs resets lower? But maybe that isn’t quite your top ambition.

Javier Sánchez-Prieto: Well, at the end of the day, if we think about it, the starting point

for Iberia was pretty good, as said, seven years and after the restructuring took place in –

back in 2013 and ‘14. And over the course of this period, also as Luis has said, we have been

also in agreement with the unions taking some specific measures. So we understand that by

the end of the pandemic, we could have a unitary cost also for a start that will be slightly

better than it was before.

Neil Glynn: Great. Thank you, all.

Luis Gallego: That's important, Javier, because I think maybe we need to explain a little bit

better, because the situation of the airlines was different at the beginning of the pandemic.

So I think what we needed to do in the different places also because we had different support

schemes from the government. We needed to do different things. So in the case of Iberia,

during the last seven years, they have reduced the labour costs around – they cut around

35%. So they arrived to this crisis with new collective bargaining agreements and with a

competitive cost base.

It's true that they need to do more because we are going to have the uncertainty and the

pressure of the yields in the future, mainly linked to the corporate traffic. But in this period,

Iberia, they have reduced the size in 2,400 people. So it's a 13% headcount reduction. And I

think in Vueling, Vueling reduced around 300 people.

So I think all of the different operating companies, they have done different things to be more

competitive at the end of this crisis.

Operator: Thank you. Your next question comes from the line of Jarrod Castle from UBS.

Please go ahead. Your line is open.

Jarrod Castle (UBS): Thank you. I think, Steve, you mentioned positive cash flow

continuing. You've got over €12 billion now of liquidity. And assuming you've reached or

close to peak debt levels, just in terms of de-gearing profile, are you happy to do this now

through internally generated funds or you want to de-gear quicker through maybe a hybrid or

equity issuance at some point?

And then just secondly, obviously you've got Aer Lingus flying the A321LRs at Manchester. I

mean, are you thinking any differently now about potential Max orders further down the line?

Thanks.

Steve Gunning: Okay. Hi, Jarrod. Thanks. In terms of equity issuances, no plans for that

at the moment. As you rightly say, the liquidity is very, very strong at the moment which

puts us in a good place. It's going to be interesting to see how fast the recovery is during


19

2022, but what we're seeing at the moment is it does seem to be accelerating which is

encouraging.

Clearly, as you know, when we went into the pandemic, our 2019 EBITDA was €5.5 billion.

So we're a heavily cash-generative business and I expect us to return to being heavily cash-

generative. So there is the ability to naturally delever. So the speed of recovery is

interesting.

If you look at our debt maturity profile, there's no significant spikes. I think there's a big

increase in 2026 but that's quite a way away. And then the other question or factor that you

sort of throw into the pot when you’re answering that question is how necessary is it for you

to get to an investment grade credit rating? And as I’ve mentioned on previous calls, BA

didn’t get to investment grade till 2016, IAG not till 2019. And quite frankly, we've shown

this throughout the pandemic. We can finance the business in terms of aircraft deliveries,

even through the pandemic. So we'd be able to finance aircraft deliveries through asset-

backed financing.

So no plans for an equity issuance at the moment. It'll be interesting to see how fast the

business recovers. And I think we're in a very strong position, given our liquidity.

Luis Gallego: Steve, the second one was about the Max orders.

Steve Gunning: Yeah, in terms of the Max orders, clearly, we took the letter of intent out

with Boeing mid-2019. It seems a long time ago now. Clearly, we will – as we look out into

the sort of 24s, 25s, we are going to need some additional short haul aircraft. We think it's

important to have strong competition between Airbus and Boeing. And we think the Max is a

very good aircraft. So clearly, it's one of the things in our sights as we go through processes

to determine what’s the right fleet composition going forward.

Jarrod Castle: Okay. Thanks very much.

Operator: Thank you. Your next question comes from the line of Carolina Dores from

Morgan Stanley. Please go ahead. Your line is open.

Carolina Dores (Morgan Stanley): Hi. Good morning. Two quick questions. I think in BA

reaching 90% of capacity in the summer, I guess, what is the – if you could update on your

thoughts on the Gatwick strategy on short haul? And specifically, on short haul, the – your

thoughts on transatlantic was super helpful. I guess, how do you see capacity and

competition on intra-European travel into summer 2022? Thank you.

Luis Gallego: Okay. About the Gatwick, in Gatwick, what we have clear is that we cannot

continue with a model that we've had in the past because in the last ten years, only in one of

them we made a profit. So we need a different model because also competition is going to be

tough. So BA, Sean is trying to reach an agreement to develop an efficient platform there

and to create a new AOC with the BA brand. Sean can explain now better than me, but they

have reached an agreement with the pilots and they have supported the agreement. And

now they are closing the agreement with the cabin crew, and you will continue.

Sean Doyle: Yeah. I think we're close to finalising our crewing agreements with cabin crew.

We're working on our ground staff, and also we're in the final stages of negotiation with

Gatwick Airport. So I think that will come to a conclusion in the coming weeks. As Luis said,


20

I think what we wanted need at Gatwick is a flexible operation and a competitive cost base to

compete what’s in primarily a point-to-point leisure market.

And we will have a platform that will enable us to do that going forward, and that would lead

to restoration of services at Gatwick and to a better competitive platform if we conclude in the

coming weeks.

Luis Gallego: And about the short-haul landscape. So if we can develop this new company

in Gatwick, and Gatwick, I am sure we will have there the profitability levels that we have in

other low-cost in the Group. For example, Iberia Express, you know that they are doing an

extraordinary job in Madrid. And also Vueling, they are – you can explain better than me

Marco. But they are coming back, as I said, before to the capacity that we had in 2019.

They have the right cost structure and they are competing well with the – even with the ultra-

low-cost carriers. Marco, you can explain.

Marco Sansavini: Yeah. So the scenario that we see for 2022 is one where there are some

operators that are increasing and developing, but others that are coming back. And that

generates a number of opportunities that we're really targeting at the moment. I mentioned

one at Orly, of course. But also in Northern Europe, also I mentioned the one related in

Norwegian.

So I think that the total industry capacity at the moment, if we look at the pre-indicators that

we have might be close to what it was in 2019, but a very significant – with a very significant

shift between operators that are going to gain ground and others that are going to reduce.

Carolina Dores: Thank you.

Operator: Thank you. Your next question comes from the line of Jaime Rowbotham from

Deutsche Bank. Please go ahead. Your line is open.

Jaime Rowbotham (Deutsche Bank): Morning, everyone. I have four, I'm afraid. I'll try

and go quickly. Steve, no one can accuse you of leaving the Group underfunded. €12 billion

of liquidity is an awfully big number. With that in mind, what was the specific rationale

behind taking the additional £1 billion UKEF facility at BA, please? Just interested in how and

why that came about.

Second, when you return to 100% capacity on the transatlantic, will the mix of the offering be

a bit different in terms of cabin class due to fleet and configuration changes?

Third, good to see Vueling back to breakeven. Obviously, however competitors, Transavia,

Eurowings were quite profitable in Q3. Are there any aspects of the Vueling recovery that

prevents it keeping up in this particular quarter?

And finally, it was just the answers to Savi’s question on non-fuel unit costs that I found

interesting. I appreciate you won't be back to full utilisation or full productivity next year, but

does not some of the cost restructuring you've done in particular at BA give you a fighting

chance of a return to close to pre-crisis levels? Thanks very much.

Steve Gunning: Maybe if I take the first and the last, and then I'll leave Luis to allocate the

other two. In terms of – firstly, thank you. I'm not leaving the Group underfunded. I'm

pleased to hear that, so thank you. What was the rationale for it? Clearly, with these kinds

of transactions, they take quite a longer time. They have a quite a long gestation period.


21

If you recall, throughout the summer, there was a lot of concern and worry about new

variants and how the variants were developing. And also, it wasn't clear how quickly the

travel restrictions were going to be lifted. As I said in my presentation earlier, most of the big

removals of the travel restrictions haven't happened in Q3. That happened sort of effective in

Q4.

So because of those dynamics and those uncertainties, I think it was right to put more

liquidity in place. And although – we're in a very sort of positive mindset now. We think the

business is accelerating and we can see booking levels good and we can see real momentum.

We also have to plan and be cautious of the potential downside. So if there's some new twist

with the virus, etc., I'd rather be sitting there with more liquidity than be underfunded.

So clearly, we have the opportunity to review the situation maybe in the summer of next year

and decide what we want to do. And the benefit – if I pick on the UKEF transaction, the

benefit of that transaction is we can terminate that at any point, at no charge. So if we come

to the conclusion that we don't need it in the future and we don't need that level of liquidity,

we have the option of terminating it. So I think for all of those reasons, it gives us good

protection in a downside scenario. And we've got the flexibility to remove it if we don't need

it.

In terms of non-fuel unit costs, as you rightly say, there's a lot of good work that's been done

and is being done to improve the cost base. And clearly, that will come through, particularly

as we start to ramp-up capacity. I think at the heart of your question is, just how much

capacity will we overall be flying in 2022? And clearly, we're not guiding that at the moment.

But clearly, we're on a road to improve our non-fuel unit costs. We've touched on some of

the headwinds with regards to the likes of some of the airport charges, but there's a lot of

transformation work being done at the same time.

I think it would be premature for us, particularly because we don't know what the capacity

will be for next year yet to try and give a sort of predictor as what we think non-fuel unit

costs performance will be next year.

Luis Gallego: Okay. About your question about the fleet, I would say that the early

retirement of BA’s – of the 747 of BA, they had the most premium seats. And because of

that, we have a reduction in long haul premium seats by 33% if we compare to the minus

22% that we are going to reduce in the long haul non-premium seats.

So the 350-1000 and the 777-300 that are going to replace the 747, they have around 25-

30% fewer premium seats. So I think IAG will have around 15% fewer long haul premium

class seats. And I think that's going to be consistent with the expected decline in business

traffic.

In any case, what we want to have is the flexibility to flex up in case we see that the

corporate demand comes stronger. But also one important thing that we always say and

explain is that the profitability of the premium economy class in some situations, it's even

better that the profitability of the business class. Maybe Sean, if you want to explain that –

Sean Doyle: Yeah. I think that you're going to see three developments in the configurations

of our long haul aircraft. One is a chunk of the reduction that you would see in premium

seats will come from the rationalisation of first class. So you'll have more planes with eight


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first class cabins than 14. And some planes actually won't have first class because there's a

number of markets that don't have the level of demand for that product. And that in turn will

actually fund I think the redevelopment of the business class cabin through the

implementation of the Club World suite, which is a very high standard product. But we will be

taking less of a reduction in Club World seats than we will in first class.

At the same time, you'll see an increase in premium economy configurations onboard all our

aircraft. We'll be aiming for cabin configurations of over 40 compared to maybe 28 to 30

previously. And that’s important because, one, it’s very profitable in terms of profit per

square foot occupied. And two, it’s a very high growth opportunity for us in terms of the

premium leisure market.

So I think the configurations work well, considering the shift in demand. But then we have

flexibility from ‘24, ‘25 onwards in terms of how we configure future deliveries. And that

gives us an opportunity to think about the way premium leisure, corporates and other trends

are emerging and make some calls then.

Marco Sansavini: And maybe to comment on the Vueling element in terms of profitability, I

think looking at the Vueling results, you have to consider, they are two very different

components there. It’s the domestic traffic and it’s the international traffic. Clearly, domestic

traffic has been the first one to recuperate and that's given very, very strong results

throughout the recuperation, as Steve mentioned, as from 9th May, when the state of alarm

was lifted.

So we could have decided then, if we can just focus on the domestic and certainly that would

have led to say stronger result. Nevertheless, we saw through the crisis, opportunities that

led for instance to the [inaudible] to the 42 new routes that we opened in international

markets that were related to the fact that where competitors that were giving us space or

leaving the space in the market.

Of course, that is an investment and clearly there are restrictions that we have lived through

during the summer in international markets, in particular, if you look at the UK or Italy, have

impacted that. So when you compare operators, you need also to consider what is the weight

of these two different businesses, the domestic or international, consider that for Vueling,

55% of our Q3 capacity was international.

So it’s an investment that we made because we believe that we have the right cost structure

to pursue that in the long run when these markets will completely pent up and recuperate.

Jaime Rowbotham: Very helpful answers. Thanks, guys.

Operator: Thank you. And your next question comes from the line of Andrew Lobbenberg

from HSBC. Please go ahead. Your line is open.

Andrew Lobbenberg (HSBC): Hi there. Can I ask back on the new plan for Gatwick and on

the issue of timing really? I mean I appreciate the bookings are coming much, much later

than they normally do, but at what stage do you start getting anxious about how long it's

going to take to set up a completely new AOC and get it out in the market for summer ‘22?

And partly that question revolves or gets linked to what on earth is going to happen with the

slot rules towards summer ‘22 in the UK? So I mean, how soon do you need to get this set


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up before you're kind of terrified about putting your slots at risk or indeed the commercial

viability of it if it’s too late?

And then a second question, somewhat simple really, you and indeed all your peers are

infusing about the strength of booking trends at the moment. But just for a better colour

maybe, to what extent what are the load factors at the moment for the next couple of

quarters? Thanks.

Luis Gallego: Okay. I think that, Sean, you can answer the first one.

Sean Doyle: Yeah. On Gatwick, look, I think we'd be looking to publish our commercial

schedule for summer when you get towards the end of November that’s the time when people

finalise slots and that's the time when you really begin to go on sale for the promotional

periods over Christmas. So that's the time line we're aiming for. We have been working a

number of streams in parallel alongside our negotiations. So we're confident that we will

have a robust plan to get ready for next summer.

Luis Gallego: Okay. And I think about the load factors that you say, what we see now is the

outbound load factors on 8th November, around 100% of most of the routes and premium

load factors for November-December are building very strong and are ahead of the ones that

we have in 2019. And for summer ‘22, travel is led mainly by UK point-of-sale, and we see a

strong demand for leisure destinations.

I don’t know, Sean, if you want to add anything else also about that?

Sean Doyle: Yeah. I think if you look even at December now, North Atlantic load factors are

very strong and we see revenue begin to converge more in line with capacity, which is very

different to what we've seen in previous certain months during COVID. And if we look ahead

at premium intakes, I spoke about the RASK position being favourable looking forward. I

think the premium cabin for premium leisure and corporates is very encouraging in terms of

near-term trends relative to capacity and we think that that begins to gain further momentum

as we open up on the 8th of November.

I spoke earlier about the fact that corporates are booking more in premium, the non-premium

as well, which is a better mix than we saw in 2019. And every week, we see that trend

continue.

Andrew Lobbenberg: Thanks. I got to say that wasn't really the question I was groping for.

I was trying to understand you've got this positive evidence which you reiterated and thank

you. But on how much evidence is that? That's kind of what I was groping for. How many –

the book load factor is X percent, it’s Y percent. So Q4 is X percent to Q1. That's kind of

what I was asking.

Luis Gallego: Okay. That – we are not providing that information, so.

Andrew Lobbenberg: Evidently. Thank you.

Operator: Thank you. We will now take our final question. And the final question comes

from the line of Alex Paterson from Peel Hunt. Please go ahead. Your line is open.

Alex Paterson (Peel Hunt): Good morning, everyone. Can I ask two questions and a

reminder, please? Firstly, your – the emphasis on leisure is a bit greater than it has been


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before and business a little bit less. Do you think you need to do anything on the holiday side

there to help stimulate demand for leisure or would you just carry on as you have done?

And then the second question is, in the UK, the CAA is looking at use of client or passenger

funds and whether that should go into escrow and so on. Do you know when that's likely to

conclude? And if it did conclude in that way, would there be any changes that you needed to

make? And the reminder is I think you quantified the operating cash flow in Q3, but I didn't

write it down. Could you just say what that was again, please?

Steve Gunning: Alex, I'll take the one – that last one. The net cash flow from operating

activities in Q3 was €219 million. That was the figure. EBITDA was minus €8 million in the

quarter.

Sean Doyle: In relation to holidays, we have a very strong holidays business here in the UK,

BA Holidays. It's the sixth biggest tour operator in the UK market and that's been a very

important lever in terms of driving the premium leisure market.

The other thing we have been doing is obviously positioning our network to serve the

destinations that work for that segment. In fact, we flew to more premium leisure – not

premium, but leisure destinations on short haul this summer than we did in 2019. And that's

something that we continue to plan dynamically. And when we were talking about the

strength of premium leisure bookings, we see Orlando, we see Las Vegas, we see South

Africa, the Indian Ocean, the Caribbean, they are some of the strongest performers on our

network at the minute, and we continue to build capacity into those markets in a very

responsive and flexible way.

In relation to the CAA and customer funds in escrow, I’m not aware of an imminent decision

on that. So I think we kind of provide further detail. But at the minute, we’re not aware of a

pending decision.

Alex Paterson: Thank you.

Operator: Thank you. I will now hand the call back for closing remarks.

Luis Gallego: Okay. So thank you very much, everybody, for being here today. I hope that

next time we can do this event face-to-face finally. I think the most important takeaways

what Steve said that Q3 has been the inflection quarter for us. We have positive operating

cash flow for the first time since the beginning of the pandemic.

We have reduced our operating loss in more than half. And all these we have done with one

of our main markets closed. So the opening of the North Atlantic in the – on 8th November, is

going to be crucial for us. And now the bookings that we see make us very optimistic about

the future.

And now I think for the first time we are thinking about how we can fly the capacity that we

expect to fly during the summer and we are not talking about how many aircrafts we ground.

So I think it’s an important point of inflection, I am sure. And we hope that from now on, we

are going to talk about more positive numbers. So thank you very much, everybody and see

you next time.

[END OF TRANSCRIPT]

results q3 2021

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