International Consolidated Airlines Group S.A.

Good morning, everyone. Thank you for joining us. So before I hand over to Steve Gunning to take you through a more detailed presentation, just like to make a few opening comments. So I probably don't need to tell you guys that this is not a normal quarter. In fact, far from it. The House was evidenced by the fact that I'm presenting when I should be retired. So we are reporting an unusual quarterly pre-exceptional operating loss of 535 million euros compared to a profit last year of 135 million. I mentioned on the last call that the first two months, while slightly loss-making, were actually very similar to last year and in line with our plan, and that was despite the suspension of flights from China and the impact on flights around Asia due to the COVID-19. So all of the reduction in the operating results occurred in March. And that followed the introduction of significant government restrictions on travel. March ASKs were down 33.5%. Traffic in March was down over 50%. And in fact, most of that you will see was in the last three weeks of March. The operating results, most of that incurred by British Airways then followed by Iberia Aer Lingus and Vueling experienced a modest increase in its operating loss. And then we had an exceptional loss of 1.3 billion on fuel and foreign currency, which Steve will take you through the details of that. We've given you an update on liquidity today, both as of 31st of March and again, for your benefit, as of 30th of April, where we have 10 billion euros made up of cash, cash equivalents of 6.4 billion and undrawn facilities of 3.6 billion. And we are in discussions around additional facilities. We've taken a lot of action, as you would expect, in order to preserve cash. Our weekly cash operating costs have reduced to about 200 million euros from around 440 million euros in April and May. And we've also significantly adjusted our CAPEX and fleet deliveries, with deliveries expected to be reduced by 68 between 2020 and 2022. And Steve will give you some details in relation to that. So it's a highly uncertain environment in which we're operating. Passenger capacity in ASK terms will be down around 94, 95% in April and May. And we're only undertaking flights for essential travel for repatriation and cargo. And in fact, cargo demand is quite strong. And that reflects the significant reduction in passenger aircraft flying. So we've operated 422 dedicated cargo flights in April, and we expect to do more than that in May. We've carried over 2,000 tonnes of PPE, so we're doing quite a bit on the cargo front. Passenger capacity from June depends on the timing and the easing of the lockdown and restrictions. And as we have mentioned previously, we're expecting a substantially worse operating loss in the second quarter compared to the first quarter. But to be honest, it's impossible to give accurate guidance at this stage. So our current planning assumption, and I'll talk about it later on, is for a reduction in passenger capacity of about 50% in 2020. And then looking forward to sort of medium term, we don't expect passenger demand to recover to the 2019 levels before 2023 and just reinforces yet again the need for further group-wide restructuring. So I'll hand over to Steve who will take you through some of the details and then I'll come back to you in a few minutes.

Thanks Willie. Good morning. I'm going to take you through seven slides, two primarily on the Q1 numbers and then five slides on how we're facing up to the COVID-19 challenge. If I take you to slide five, as Willie's already alluded to, a significant loss in the quarter, $535 million, which is a $670 million swing on the position from last year where we were $135 million profits. $68 million of that is due to FX, but clearly the big story is the impact of COVID-19. And as Willie's alluded to, the first two months of the quarter were going pretty well. but it was March where we saw a significant deterioration in passenger demand because of the travel restrictions put in place. And this had an impact on also the no-show rates as well as the amount of capacity we were putting in the market. We reduced our March capacity by 33.5%. But for the quarter, overall, ASKs were down 10.5%, and seat factor was at 76.4%, which was 4.3 points down on last year. So this weakness in passenger demand and this reduction in capacity also had a significant hit in passenger unit revenues, which at constant currency were down 7.7%. But it would be fair to say that all of our revenue streams have been impacted during the quarter, but clearly the passenger stream affected the most. So overall total unit revenues at constant currency were down 6.5%. We'll turn to unit costs. In terms of non-fuel unit costs, the airline non-fuel unit costs at constant currency were up 10.2%. And this basically reflects the reality that the capacity came out so quickly, the cost reductions could not keep up with that. So you had an inefficient reduction in capacity because it came out so quickly. Clearly there's an FX hit, so our reported non-fuel unit costs are up actually 15%. Normal fuel costs, and we'll talk about fuel a bit more in a minute, normal fuel costs were slightly beneficial in the quarter, and so total unit costs were up 6% for the quarter of constant currency. So a very difficult quarter and one where two months of the quarter were reasonable and then the last month of the quarter very difficult because of the sudden contraction in the size of demand and therefore the size of the business. I said I'd talk a bit more about fuel. So we turn over to the next page, slide six. Two big things happening with fuel, clearly. With the reduction in capacity, our actual volume requirements for physical fuel have reduced greatly, and I'll touch on that more in a moment. And also the other factor that we've seen is the price of jet fuel reduced from being in the 600s at the start of the year to around spot that at the end of March was about 225. And what we've seen in April is it go as low as about 110. So the jet fuel price really come off an awful long way. Now, if you look at our income statement, you'll see two elements to the fuel bill for Q1, or in the Q1 numbers, should I say. First of all, you'll see an ordinary fuel cost of 1.2 billion, 1.209. And that relates to the physical fuel that we've purchased at the effective hedge price that we've paid for it. So this is business as usual. It's the physical fuel that we've purchased. We have hedging contracts against that physical fuel. And we combine those two, we've had a normal fuel bill of 1.2 billion. But what you'll also see in the Q1 numbers is an exceptional charge of 1.325. And this is the exceptional charge related to our over-hedged position for the rest of the year. Now, what we've had to do is come up with a planning scenario, and it's not a forecast, but we've come up with a planning scenario for the rest of the year as to how much flying we're going to do. And Willie will allude to this a bit more later on, but we've basically assumed our AS case for the year will be down 50%. Having established that planning scenario, we've then looked at our hedge position and determined how many hedges have we got that are in excess of our requirement of physical fuel. And we've taken those excess fuel hedges and then marked them to market at the end of March. So it's the full portfolio of fuel hedge positions for the year, what's excess to our requirements, and we then mark those to market and booked that in Q1. And that's the $1.3 billion. So those are the two components of the fuel price in the Q1 numbers. If we look out for the full year, once again, you'll have the same two elements, but for the full year position. So in terms of our ordinary cost fuel bill for 2020, if we base it on our planning scenario, we think the cost of the physical fuel and the related hedge positions will be about 2.9 billion euros. And then if we look at the latest prices, we did this as of the 1st of May, if we look at the latest forward curves for the excess hedging positions, we think that to market at 1.5. So our best estimate at the moment of the fuel bill for 2020 would be the 2.9 and the 1.5 combined, which would be 4.4 billion. So that's the position on fuel. I hope that made it clearer to you. Probably make one last point. The excess hedge position is a market to market position at the end of March. As those excess hedges unwind during the course of the year, it's at that point you will see a cash outflow taking place. So the 1.3 is primarily a book charge at the end of March, then you'll see the hedge positions unwind and that's when you'll see the cash outflow. Let's move on. Slide seven, we wanted to emphasize the fact that going into this crisis, so coming out of 2019, going into Q1, we were in rude health. Our cash position was very strong. Cash was a percentage of the last 12 months. Revenues was at 28%, and liquidity was at 38%, sorry, 26%. and 34%. During the course of the quarter, actually net debt has come down a little bit and our cash position has increased from 6.7 to 6.9. So during the course of Q1, we've managed to maintain our liquidity position and our cash position. It would be fair to say in the normal cycle of the business, we would normally have expected the cash position to have increased even more, but due to the lack of forward bookings, clearly that's not taking place. If we turn to the next slide, clearly our principal focus in the last few months has been maintaining our liquidity position. And what you see on slide eight is our position at the end of the year, 2019, our position at the end of the quarter, and our position at the end of April. And what you can see there is we've continued to grow the liquidity position up to 10 billion as of the end of April. And as you can see, within that 10 billion, 3.6 of it is... aircraft and undrawn general facilities, and 6.4 billion of it is cash. In terms of the management actions that sat behind this, as you know, we put out an R&S in March to say we'd extended the British Airways revolving credit facility. We've also, as Willie's alluded to earlier, availed ourselves of the UKCCFF facility to the tune of 0.3 billion. I think it's worth saying The scale of the facility available to us depends on the credit rating as of the 1st of March. And so as of the 1st of March, our credit rating qualified us for $300 million. So the size of the program available to a company is primarily based on your credit rating rather than the size of the company. One of the other things that we've done during the period is make our application to the ICO in Spain for a billion of term loans. And we wait final, final approval of that in the next few days. So those are some of the factors that have enabled us to build up the facility position and maintain the cash position. The last point that I would make on this is of those facilities that we've produced and put in place, the only one that we've drawn on is the CCFF for the tune of $300 million. If that's talking about liquidity, clearly one of the ways to protect liquidity is to reduce your cash outflow. And if we move to slide nine, we've tried to address this question that everybody asks, what about cash burn? And what you see on the slide here is our operating cash costs per week for April and May. Based on our regular flying program, based on our financial planning, we would have expected to have burned through cash of about 440 million euros per week during April and May. Due to the actions we've taken, including availing ourselves of the wage subsidy schemes in all of the countries that we operate in, in Spain, Ireland and the UK primarily, we've managed to bring that rate of cash cost down to 200 million. Clearly one of the primary factors behind that is reducing our capacity so the variable costs come out. So we've gone down from 440 to 200. It's important to emphasize the challenge with the cash burn metrics is always what's in, what's out. And just to be very clear, the items that are in here are items such as employee costs, fuel, and including the impact of the over-hedging contracts maturing, handling, landing fees, engineering and aircraft costs, property, IT, and other costs, selling costs, lease costs and interest costs. So pretty much all of the operating costs. What we haven't put in here is any revenue, including revenue from the cargo-only flights that we've been operating. So this is to give you a feel of the cash burn. Now, this slide seems to suggest a static picture. This isn't a static picture for us. We continue to work very hard to reduce the operating cash costs of the businesses in May and in the periods going forward. If operating cash costs is one of the outflows, if we turn to the next page, one of the other outflows of the business is capital expenditure. And what you'll see on slide 10 is starting off with what we said at Capital Markets Day. We guided you for 2020 that our gross capital expenditure would be 4.2 billion. Our current management expectations for CAPEX are down now at 3 billion. We've halved the non-fleet CAPEX expectations and we continue to work on that. We're not finished there. And we've also, through our discussions with the OEMs, brought down our expectations in terms of fleet CAPEX to 2.7 billion. And of that $2.7 billion, 91% of it we're highly confident or completely committed in terms of the financing for it. So 41% is committed financing and 50% of the capex we're highly confident. We've got the financing approved. We're just going through the papering exercises. So we have 9% of the 2.7 billion of fleet capex yet to be financed, which is about 240 million euros. And clearly the target for us as a business is to get that financed as well. So there will be no cash outflow for our fleet capex in 2020. And clearly we will continue to try to minimize our non-fleet capex. If that's looking primarily at 2020, if we turn to page 11, we can look out over the three years of the business plan that we presented to you at Capital Markets Day in early November, and it'll show you what we've done with fleet deliveries. So what we said at Capital Markets Day in November 2019 was we'd be taking 143 aircraft deliveries over the next three years. Our expectation now based on our discussions and negotiations with the OEMs is that would be down to 75 aircraft, so 68 aircraft reduction. So six aircraft out of 2020, 27 aircraft out of 2021, and 35 aircraft out of 2022. So significant reductions through those negotiations. and that's where our expectations sit at the moment. But in addition to changing the fleet deliveries, we have significant further flexibility in our fleet, which we've talked about in the past. So we will still look to finalise our retirement plans for our fleet. We've retired a few aircraft thus far, but we're still working through those plans at the moment. But just to remind you, our fleet at the moment has 31 747s, which are all owned. We have 15 A340s, nine of which are owned, and we have 45 7772s, 36 of which are owned. So there is some significant flexibility in our fleet from that perspective. And the other key statistic that we've shown you on here is the lease expires that take place in both 2021 and 2022. So 42 lease expires in 21 and 54 in 22. So very significant flexibility optionality that we have over fleet in the coming two or three years. So overall, we've made very significant progress in preserving the liquidity. We've brought the cash burn down significantly and continue to work on that. And we've done what I would think is a good job in minimizing the capex cash outflow for the year. At this point, I'll hand you back to Willy.

Thanks, Steve. If we look now at going back towards a return to service, it's clear that most of our aircraft are currently grounded. You will have seen photographs of aircraft parked all around Europe. We are operating a small fleet of aircraft. Our preference is to fly the new generation aircraft, 350s and 787s where possible, but we are also operating 787s and 8330s in addition to the narrow body fleet that we have. But we're trying to get the appropriate size aircraft for the limited passenger repatriation flights that we're doing and then get the right size aircraft for cargo only. Like other airlines, we will look at modifying a couple of our triple sevens. These are aircraft that will be reconfigured and therefore the seats will be coming out. So while they're doing that, we'll use those aircraft to carry cargo in the passenger cabin without the seats being installed. So we're adapting where possible to fulfill the cargo demands that exist. And as I said, that's quite robust at the moment. So we're planning for a meaningful return to service in July at the earliest. And clearly that depends on the easing of lockdowns and travel restrictions. We will adapt our operating procedures to ensure that our customers and our people will be properly protected in the new environment. We welcome the announcements from airports, and particularly Heathrow, about the introduction of temperature monitoring on departure and on arrival. We support that. We have also said we publicly support the wearing of face covering, whether that's a mask or a more informal mask. face covering and we will continue to work with regulators. We're in contact and active dialogue with a number of regulatory bodies and we're very confident that whatever regulations are put in place, it will enable a safe and organised return towards a more normal service. Our industry has had to adopt to many changes in regulations over the years and you've seen what we've been able to do and significant changes to security regulations are introduced so we're very confident that any new regulation that is introduced will facilitate operations for airlines and we will continue to actively support these initiatives. But at this stage as I said earlier on we don't expect the level of passenger demand that we saw in 2019 to recover before 2023 and that just reinforces the need for restructuring measures across the group. Now, some people have interpreted the announcement that we made in relation to British Airways as indicating that we're only looking at restructuring in British Airways. That is not the case. However, the UK Labour legislation has a specific framework that we must comply with. So in the first place, we are, as you know, availing of the coronavirus job retention scheme. There's nothing in that that prevents us from engaging in consultation on redundancies. And indeed, the Chancellor has made clear that normal employment laws continue to apply. But we have an obligation under the Trade Union Labour Relations Act of 1992 to collectively consult where redundancies may arise. And that is what we are doing. That requires us to serve a formal notice to the government, a form called the H01, and then send specific detail to employee representatives under Section 188 of the Act. The consultation must be with appropriate representatives. It must start in good time. It must be genuine. It must be meaningful. And it must be with a view to reaching agreement. And that's exactly what we're doing. So we're not going to provide any detail or commentary on the consultation. As I said, this is a legal obligation and we intend to fully comply with our obligations under the law. in the UK. We will equally do so where we're required to comply with legislation in Spain for Iberia and Welling and in Ireland where restructuring of Erlingus will be taking place as well. Now, Steve has mentioned our planning scenario and we've I'm very clear that this is a scenario because we do need to see more visibility on what the government restrictions on travel will be. But at this stage, we're looking at about a 50% cut in capacity in 2020 versus 2019. And we've tried to give you some visibility as to how we see that developing with Q2 down 90%. Q3 about 55%, Q4 down about 30%. And it's more or less the same across all of the airlines, you know, plus or minus 1%. So I think that's the best scenario we can give you at this stage. We will continue to look at that and modify it as the environment changes. And finally, if I just turn to the formal guidance, as we discussed, announced on the 28th of February, given the uncertainty on the impact and the duration of the COVID-19, were not currently providing profit guidance for 2020. Again, as we announced on the 28th of April, we expect operating loss before exceptional item in the second quarter to be significantly worse than in the first quarter, given the substantial decline in passenger capacity and traffic. And despite some relief on employee costs from government wage supports, and the various management actions that we have already taken. So, difficult environment. I'm very pleased with the actions that we've taken. We've got strong liquidity, but we have to be very careful in terms of how we operate the business during a period where we're effectively shut down from a passenger point of view and put ourselves in a position to recover in a sensible way complying with all regulations and I'm confident that we will be able to do that. We'll seek to take advantage of any cargo opportunity that exists in the short and medium term and we will continue to fulfil all of our legal obligations with regard to consultations with our people as we go through the necessary restructuring of the business to ensure that we respond not just to the immediate threats that we face but the long-term structural change that we believe is taking place and will take place in the industry. So I'm going to pause now and hand back to the operator, and we can start taking your questions.

Dear participants, if you wish to ask a question, please press star and 1 on your telephone keypad. Please make sure that you will ask only two questions per line. Thank you very much.

So we can start taking the questions now. The operator would like to invite the first person to ask.

The first question comes from . Please ask your question.

Oh, good morning, everybody. I'll take two then. So the first question, Willie, just with respect to your planning on resuming nearly half of normal service for the third quarter. Just interested in terms of how you think about this as stimulating passenger demand and cash from forward bookings in the third quarter and beyond versus an expectation that flying that level of capacity can actually generate either DA or contribution based on demand prospects. And then the second question, just with respect to labor cost reset, as you've touched on, clearly there's been a lot of focus on it. But post the global financial crisis, we obviously saw the intro of mixed fleet at BA and a big reset at Iberia. So, I'm interested in your view on can you convert the contracts that are retained after this process, can you convert those to modern standards that achieve major structural changes for employees remaining within the group? Thank you.

Thank you, Neil. In relation to the third quarter, actually one of the things that we've become very good at in the current environment is to assess the cash break-even and cash value of everything we're operating. And we're actually doing that – it's a bit strange at the moment because what we've seen is the passenger is now – it's the incremental cost of the passenger that we're looking at rather than traditionally, which was the incremental cost of the cargo. So the fact that we're seeing good, strong cargo demand has enabled us to operate passenger flights that without the cargo would be cash negative. So all of the flights that we're operating at the moment are positive from a cash point of view. And therefore, we have a very detailed matrix, if you like, that enables us to assess the cash contribution of any and all flying that we do. And we will apply that as we go through the third quarter. So I think all airlines are having to adapt to a different environment. In terms of pricing in the third quarter, it's still too early to call because, quite honestly, we're doing a lot of research in relation to consumer attitude towards flying and whether that attitude will be influenced by some pricing stimulation. We're not clear that that will be the case. So therefore you shouldn't expect us to sort of respond in a more traditional way to try and encourage passengers to fly because I think it may take a little bit of time before people become comfortable themselves with flying in this new environment. One of the things we do know is that we have seen quite a number of our customers volunteer to take a voucher as opposed to a refund and in fact, a number of them already transferring their bookings from, you know, April, May, and June into bookings in August, September. So we're looking at that pattern very closely as well to understand what we think the consumer behavior will be in the third quarter. And that's why we have to stress again that these are scenarios that we're looking at. It's not a plan. So what we will do is, based on that scenario, we'll look at what aircraft make sense to return back into service. As I said earlier, most of the aircraft are actually grounded, which means they're under a different maintenance regime. Most of them are parked away from our base, so we need to bring them back to base and do maintenance on them. So it's looking at these various inputs that will influence the final schedule that will operate in the third quarter. In relation to labor, as I said, particularly given the sensitivity of the issue and the obligations under the legal environment in the UK, would be inappropriate for me to comment because the final outcome of what it is we do in British Airways will be very much influenced by the consultation that we have with... representatives of the employees in BA. And I'm not going to prejudge those consultations, so we'll wait to see. We have to consult for a minimum of 45 days. That consultation period started last week, I think it was, so the 45-day period would finish around the middle of June. So while that consultation is ongoing, we're not going to be commenting on any aspects of it. I hope you'll understand it is a very sensitive issue, but there is a legal obligation to engage in good faith consultations and we want to give the representatives an opportunity to influence the outcome of our final plans.

Absolutely. Just to follow up actually on the first one, I'm just interested, do you expect meaningful recovery in corporate demand this year or do you think that's more of a 2021 thing as you make your own scenario analysis?

Yeah, we're in dialogue with a lot of corporates and with TMCs to get a view from them as to how we see that. And it's quite mixed. We've had feedback from some corporates that say they need to get going straight away. I'm sure all of us are used to, you know, dealing with Zoom or Teams. Quite honestly, it's crap. You know, so anybody who thinks that you can conduct normal business using these means – We know from experience you can't, and that's the feedback we're getting from a lot of people. So I think it's going to vary, but as I said, some corporates have said they want to get going as quickly as possible, and that will influence our scheduling plans. Some have said they will be taking a slow recovery, and there are others who have said that given the financial stress that they're facing themselves, they're unclear as to what it is they do. So I think it's going to be a mixed bag. But as we get closer to the third quarter, you know, going through May and June, I think we'll get a much better picture on that.

Understood. Many thanks.

Thank you. The next question comes from the line of Jared Castle. Please ask your question.

And I hope everyone's well on the call. Two kind of, I guess, more medium-term questions. Willie, you know, you kind of referred in the guidance slide to kind of long-term structural changes. I think, you know, during the GFC, you know, you didn't use those words. So I'm not saying people would disagree with that, but it would be interesting to get your views on how you see those long-term structural changes over the next few years. And then secondly, just in terms of state aid, you've tended to be very vocal about forms of state aid and anti-state aid. So just a question in terms of why, you know, in terms of enhancing balance sheets, et cetera, you didn't go towards the public markets. Thank you.

Thank you, Gerard. Yeah, I think the situation is very different to the global financial crisis. And The way we see this, it's a combination of the impact on the airline industry and how that will follow through structurally. So how many airlines are going to be in place? What size fleets will those airlines have? What the consumer demand will be? Whether consumer and corporate behavior has changed as a result of experiences? through this period, and the economic impact of the downturn, which is likely to be severe, the extent to which governments will be able to stimulate a recovery in economic demand. So there's a number of factors that are playing into this, which are very different to what we had seen during the global financial crisis. We all believe back in 2008 following the collapse of Lehman in September that there would be a shock, but that things would recover. The only question we had then was how long would it take to recover. We see this being quite different because of the layering of various different issues. And it's clear from everything we've seen that the period of recovery is going to take much longer than anything we had witnessed before. you know, that the fall we've witnessed is significantly greater than anything we've ever seen. So, you know, this is an unprecedented decline in demand for aviation. And, you know, it is an unprecedented situation in the way different governments have responded to the threat faced by the spread of the coronavirus. And we hope going forward that we see a coordinated approach To be honest, that's more of a hope than an expectation. For various reasons, we do see this as being significantly different to anything we've seen before. While we focused on liquidity, you guys will recognize that in boosting our liquidity, we're doing that through raising additional debt. You know, balance sheets in the airline industry are going to be very different when we come out of this than when we went into it. And that's why we think structural reform is going to be required on an industry basis, not just on an individual airline basis. And in relation to state aid, what I've always been opposed to is where inefficient failing companies receive bailouts from governments. It's been very clear that, you know, where airlines have been unwilling or unable to reform, they should not be bailed out by receiving government aid, by receiving free money. This is a different situation. You have excellent airlines who, through no fault of their own, are suffering a crisis. And I mean it's everybody. So I have no hesitation in saying, and I've said it publicly, that where general facilities are being made, that we will avail of those facilities if they make sense. I was very open in saying we would avail of all employee support programs that were being made available, and we're doing that in UK, Spain, and Ireland. And where general facilities, in other words, facilities that are made available to all companies, not to specific companies. My objection is to where it's specific to individuals and particularly where it's specific to failing businesses. Most of the companies that will receive support under the CCFF are good companies who through no fault of their own have encountered significant difficulties. So that's my position. It's no different. I've always held that view and I will continue to hold that view. So if If there are general facilities available and it makes sense for us to avail of them, we will do so. And clearly, we will disclose whatever it is we are doing.

Thank you. The next question comes from the line of James Holland. Please ask your question.

Good morning, William, Steve. The first question is for Steve. Just on your cash burn data, probably doing results on the same day as someone else, is that there's a fairly stark difference. Air France, KLM, talking about 80% reduction in their cash OPEX. Newer guys are at 55% reduction. I was wondering if Steve, you and your team have done any maths. I think as far as I see it, they've done on the same sort of KPIs, et cetera. I was wondering why Big difference would come. The only thing I can think of is social and tax deferrals. Maybe you're not receiving. Any thoughts would be great there. And the second, probably for Willie, is on Air Europa. I've seen some headlines that their owners have said they'll probably go bust without some sort of help and or M&A. Also, I've seen some headlines on you renegotiating. I was wondering if you could give an update on that. Thank you.

Okay, Steve, we'll take our first one, James.

Thanks, James. Good to hear that you're doing okay. In terms of the comparison, I haven't had the opportunity to do a detailed comparison with the Air France KLM numbers. I think a couple of things I'd be keen to look at, and as I said when I went through the slide, the challenge with cash burn is what's in, what's out. A couple of things. One is we have included the over hedging losses in these numbers. I don't know whether Air France, KLM have done so in theirs. Then potentially the difference in the way we finance our aircraft in terms of debt payments versus lease payments. We've put all of our lease costs into this. I don't know how that distinguishes between us and Air France. So I think there's a number of things that I suspect we've included that Air France haven't and vice versa. I think it's interesting to do the comparison, but at the end of the day, as I said with this slide, this is not a static situation. We'll be doing everything we can to further minimize those cash outflows in terms of the operating costs. So I suspect a chunk of it's in terms of the definitions I think places I would go and look at is the leases and the over-hedging losses in terms of the fuel. But until I've had a chance to fully scrutinize their numbers, that would be the comments I'd make at this point.

James, in relation to Aer Europa, we know that they are as challenged, maybe even more so than we are, and have been taking action to survive the crisis as it impacts on them. The deal still makes strategic sense to us. That is clear. However, we do need to understand whether The price adjustment mechanism that's in the agreement is relevant. And we've got to go through the competition process still. So there's still quite a bit to do in relation to Air Europa. And we'll keep that under review and let you know if there's any development. But there is a price adjustment mechanism in the agreement that we have with them. And there's still quite a bit of work to do on the competition front before we need to address whether the deal proceeds or not. So I don't think there's anything else I can add at this stage. But we are conscious of the fact that, you know, their business has been particularly stressed. I think they're effectively grounded as well through this period. I'm not sure they're taking in any revenues, and I'm not – I don't have visibility on the actions that they've taken to reduce their cash outflow. That is something that we will see, but I don't have visibility on that at this stage.

That's great. Thanks very much.

Thank you. The next question comes from the line of Carolina Dawes. Please ask your question. is open.

Hi, hello, can you hear me? Yes, go ahead. Yes, okay, apologies. I think, well, two questions. In terms of liquidity, do you think of any alternative of asset monetization? Could you think about, I don't know, Any agreement or deal that you can do with Avios, for example, is that in the cards? And my second question is, with the $10 billion liquidity, how long do you think you can go assuming full grounding without having to tap financial markets?

Thank you, Carolina. Avios is clearly a significant opportunity that is open to us. Maybe Steve, do you want to comment?

Yeah, no, there are a number of opportunities to us and potential sort of a pre-sale of Avios points is something that's been done in the past, is something we would consider in the future. So that's one of the plays we could go to if we wanted to raise further liquidity. But there are a number of different options for us. We haven't tapped into capital markets either. So you're right, that is an option play for us.

And, you know, we'll update you on liquidity. As we've said, at the moment, our focus is on conserving cash, adjusting the CapEx, and I think we've done an excellent job in relation to fleet. We clearly will be turning to how we maximize the cash inflow now through the third and fourth quarter of this year. And, you know, continuing with the negotiations that we've had with the a number of organisations to avail of additional facilities. So we are actively in discussions. But I think as you look at it today, the measures that we've taken since the outbreak of this coronavirus in strengthening the liquidity position of the business has been particularly positive and we will continue to work in that form. But I advise you if there's any additional measures that we will or have taken.

Carolina, any further questions from you?

No, no, I'm good, thank you.

Thank you very much. The next question comes from line of services. Please ask your question. your line is open. Savi, are you on mute? Savi, can you hear us?

I think we should move on.

Okay, perfect. Not a problem. The next question comes from Andrew Leubenberg. Please ask your question. It looks like Andrew discussed his question. The next question comes from the line of Daniel Royeska. Please ask your question. Daniel, can you hear us? Just give me a moment, please.

Okay.

Hello? Hello? Hello? Hello?

Who's that?

This is Daniel from Bernstein. Can you hear me?

Yeah, Daniel. Can you hear me?

Oh, perfect. Yes, here we go. Excellent.

This technology does not work.

There you go. Yeah. Well, there you go. So, two, if I may. Number one, on the fleet plan, you're not moving delivery of the long-haul aircraft in 2021 a lot. There's also less flex from the opportunities in that timeframe. is that is the long-haul fleet plan more a reflection of the inability to change the plan, the opportunity to retire some of the older ones, or kind of a conviction that long-haul travel will actually recover fairly quickly? And then just following on the cash borrowing question, you mentioned in the presentation that you're continuing to looking at kind of expanding your cost saving measures. Any view on where you would want to be kind of by the end of June if you continue really hard at it? You know, are you expanding that by a couple of percentage points from 55 upwards or is there still meaningful flex you would hope to gain by then?

Thanks. Thanks. In relation to fleet, it's a combination of factors actually. One comes as a surprise to know that given that a number of the aircraft are already financed from a cash point of view, it makes sense for us to take the aircraft because we will have paid pre-delivery payments. So when we take the aircraft and then put the financing in place, there's actually a cash benefit to us. So it's a reflection of a number of issues. It reflects the... The current fleet that we have, the need to replace that, the availability of the aircraft, the fit with some of the network plans that we have. So it's not a single issue. I would say that both Boeing and Airbus and the engine manufacturers, but, you know, given that most of this is direct discussion with Boeing and Airbus, have been very positive in their engagement with us. We've had great cooperation from both of them. I think it demonstrates the strategic nature of the relationship that we have with both of the major OEMs. But I think when we look at our fleet plan, we've seen a very significant shift in what the plan was when we announced it in November of last year to what it will be for 2021 and 22. And you do need to, as we had mentioned earlier, also factor in the flexibility we have with the existing fleet and with the leased aircraft that we have. In relation to cost savings, to be honest, we're going to do everything we can. So this is a very detailed analysis of every single aspect of the cost base to see what can be deferred, what can be eliminated, what can be reduced And we're not going to stop on that. You know, we're going back over everything. We get to a position and we try again. So as Steve said, it's not static. It's very dynamic. And we've got a lot of people in all of the airlines and here at the centre working to ensure that we can minimise the cash outflow as we go through this period. Steve, I don't know if you want to add to anything.

No, I think that's fair. You know, I... I think the static versus dynamic point is the key one.

Thanks, Daniel.

All right, bye.

Thank you. The next question comes from the line of Jamie Rotterbund. Please ask your question.

Jamie? Hi, Jamie.

Good to hear me.

Yeah, I can hear you, Jamie.

Oh, good, good. Okay, thanks. Yeah, so two quick ones from me. One's a revisit on an earlier topic. I appreciate you don't have a crystal ball and you can't speak for Air France KLM, but the scenarios of the two airlines for Q3, Air France KLM planning for capacity down 80%, IAG planning for capacity down 55%. I'm trying to work out if that is partly to do with some of the cash break even levels perhaps differing between the two companies as alluded to earlier versus differing views on when European borders sort of might reopen so just grateful for any additional observations you might want to make there and then secondly a puzzle for many analysts I think right now is thinking about post crisis balance sheets and financial leverage and You know, Steve, in the past you've talked about sort of 1.8 times net debt to EBITDA for a sort of comfortable investment grade. I was just wondering, obviously right now the focus is on having enough liquidity to not burn cash reserves to zero as a function of the crisis. But as you come out of it, do you think you'll have to reconsider, you know, naturally how much gross cash IAG has on the balance sheet to be prepared for any future crises? Thanks.

Thanks. Yeah, to be honest, I've no idea what France KLM are looking at. We don't have any conversations with them. And if I'm honest, we don't really spend much time looking at the decisions that they have taken to better understand them. We're spending quite a bit of time running through various different scenarios. One of the advantages we have is that we have four main operating airlines, and we task them all to independently come up with what they saw the recovery plan would be for 2021, sorry, 2020, 2021, 2022. So, you know, we did some work at the center as to what our view would be, but then individually we tasked them. And, you know, it was amazing how similar they were, not completely aligned. You know, there were differences, but one of the advantages we have with the group structure is to be able to get sort of, if you like, expert assessment and opinion internally without having to worry too much about what some of our competitors are doing. So one thing I will tell you is that the scenario I've outlined will not be what happens. And I'm sure the scenario that Air France has announced will not be what happens. That's what my crystal ball tells me. But it is a planning scenario which gives us input into some of the other decisions that we need to take, fleet being a critical part of that. And we'll continue to modify it. We've had different scenarios. If I go back to February, we were looking at an impact that was significantly less than this. During March, we had a scenario with recovery in May towards the end. Now we're talking about... towards the end of June and into July. So it's a very different environment. And you're right, you know, different companies will take input from various different sources. This is the best scenario that we can give. I'm not being critical of Air France, KLM. You know, their scenario will be based on information they have. But I don't think it's going to ultimately be a million miles away from what we all do. On the balance sheet, I think it's an excellent question and it's one that we've been spending quite a bit of time on. So maybe, Steve, do you want to give some brief comments on it?

Thanks, Molly. Jamie, you're absolutely right. Our immediate focus in the last couple of months has been the immediate challenge of liquidity and boosting the immediate position. But as you rightly say, and you don't need a crystal ball for this, the 1.8 net debt to EBITDA It's gonna be a while before we get back to that. So we are doing a lot of work looking at what the structure of the balance sheet would look like in the future. One of the things we also have to consider is, as we draw on some of these facilities, a lot of these facilities are short-term facilities, so how do we refinance those? In terms of your specific point, in terms of the amount of cash on the balance sheet, I think it's served us excellently well as we've come into this year to hold 26% of cash in terms of the last 12 months revenues. And I'm very keen to get us to continue at that level because even if we get through this shock for this year, there's no guarantees there won't be further shocks down the road. So to restore or maintain the liquidity position and to restore the cash balance is going to be very important for us. So we wouldn't move away from that sort of guidance of having 20% of last 12 month revenues up on the balance sheet because we need that resilience going forward. It's not enough for us to get through this year and go into next year. We need to be resilient in that. And that's a lot of the thinking that's going into working out how we restructure our balance sheet in the future.

Very good. Thanks, guys.

Thanks, Jake. Thank you. The next question comes from the line of Andrew Lobenbeck. Please ask your question.

Oh, hi. Try again. Can you hear me, guys? Yes, Andrew. Good morning. Good morning. Can I ask how you think about the future split of the business between business and leisure? Obviously, when we first went into the crisis, you were talking about continuing full scale ahead with the reconfiguration of the aircraft, of the AN, all that good stuff. As you think about what you will be doing in the future, are you going to be wanting to change the balance of premium against non-premium seats? And then separately, can I ask about Gatwick? Because there's been obviously some stuff in the press, and obviously you can't prejudice your talks with Labour. There's been some talk in the press about potentially pulling out of Gatwick, but surely the slot opportunity in Gatwick in control of the airport capacity in London is fundamental to the strategic position of IAG. So how are we meant to think about that prognosis for Gatwick?

Thanks, Andrew. I think you're right. One of the things we will have to look at is the – The business mix between premium and non-premium clearly post the global financial crisis, we did see a shift in that mix. The level of premium traffic did not recover to the level we witnessed. If we look at this on a global basis, prior to the global financial crisis, And, you know, that is an issue that I think we do have to better understand. It's coming at a point where we do have a lot of flexibility to adjust, if necessary, our premium, non-premium mix. And it's definitely going to influence issues like fleet selection and fleet configuration of new aircraft. in addition to decisions around the potential retirement of existing aircraft. So as you know, we have quite a bit of flexibility because of the different configurations of the existing fleet to make a quick adjustment to that in terms of which of any of the existing aircraft we decide to retire. So it's definitely a feature of our thinking. We haven't completed a detailed analysis of that But again, my crystal ball tells me that the mix is going to be different post this than to what we had seen before it. And in relation to Gatwick, yeah, obviously I don't want to say anything to prejudice the consultation. I'll give you a personal view, and it's a view that I've expressed, but it's nothing more than a view, and that is that I would like to see us continuing to have a presence at Gatwick. but that's just a personal opinion. It's not going to influence the consultation that we take place, but, you know, that consultation clearly is going to be a detailed and meaningful consultation with the representatives, and we'll see what happens through that, and that clearly will influence the decision that we ultimately take in relation to the restructuring of British Airways.

Thanks, Willick. Thank you. Dear participants, once again, if you wish to ask a question, please press star and one on your telephone keypad, and we will open your line. The next question comes through line of Savi Sif. Please ask your question. Savi, your line is open. Hi, could you hear me?

Hello? We've got you this time.

All right, great. Thank you. Good morning. Just actually a couple of follow-up questions, just for clarity. You know, On the financing side, I was wondering if you kind of can describe, you know, what opportunities are kind of available in the financing market today. And generally, maybe the priority between kind of sale-ease back versus X3 races versus other kind of opportunities that are out there. And just secondly, I realize things are fluid. I'm just trying to understand the kind of cash outflow beyond the cash operating cost you provided. Wondering if you can provide, you know, what the level of debt and pension payments are left yet for 2020 and and any color on how we could think about working capital.

Okay. Steve is saying that he wants to answer all those questions.

I think I'm going to pass over to him. Thanks, Zoe. Yeah, in terms of financing options out there at the moment, I think it'd be fair to say the WTC market's been pretty much closed over the last month or two. I think it's starting to open at the moment. We're seeing one U.S. and one non-U.S. airline look like they're going into the market on WTC. So I think that's slowly starting to open. Sale and leaseback transactions, those have been challenging in the last month or two as well. We've seen situations which we haven't seen before where you have signed letters of intent and those have then been repriced later on, which historically you'd never see. So it's been challenging from an aircraft financing perspective. We've made a lot of progress with that in the last few weeks, which is why on the slide that we showed you, we're confident now of financing 90% of the deliveries that we've got coming this year. But it has been a challenge and much more difficult than we've seen in the past. In terms of your question about the sort of non-operating cash items coming through, In terms of pensions, as we've disclosed in the past, we pay $450 million deficit recovery payments per annum. That's one of the items that sits outside of this. In terms of debt repayments, relatively minimal, to be honest. The group does not have a lot of non-aircraft related debt. So I think it might be $100 million per annum off the top of my head, but it's It's not a high level compared to some other groups because we've tended to raise our financing secured on the back of aircraft. Hopefully that gives you some help.

That's great. And just in terms of equity raises, any thoughts on kind of where that sits in the priority of financing?

Well, I think that relates to the question that was asked earlier in terms of what do you want the shape of the balance sheet to be and how quickly do you want to try and return back to investment grade? Clearly, that's an area we're doing a lot of work on at the moment, but not anything that we'd be prepared to share at this time.

Thank you. Thank you. The next question comes from the line of Martha Schultz. Please ask your question.

Hi, good morning, and thank you for taking my question. First of all, maybe one question on the vouchers. As the EU was very reluctant to approve a refund in vouchers, is there something that you would consider offering your customers, maybe a bonus, a 5% or 10% bonus if they take up a voucher, to avoid a cash drain? And maybe also on your strategy going forward, it's probably the first time in a long time that London Heathrow will be not as constrained as it used to be. Does it involve also in your planning kind of change in strategy, either moving more leisure business into Heathrow or also changing generally the size of your aircraft to more specific needs?

Okay, thank you. Yeah, I think we've seen at a European level about 16 of the EU 27 countries have come out in favor of vouchers rather than cash refunds, but the commission and particularly the transport commissioner has been reluctant to amend the legislation EU 261. So what we're doing is it's voluntary. The customer wants a refund, the customer is entitled to a refund and will get a refund. Aer Lingus has offered a bonus, if you like, if people want to take the voucher. So we have trialed some issues to see what the appetite would be, whether that would incentivize people to take a voucher rather than a cash refund. But what we're doing at the moment, we're trying to be as flexible as possible with the voucher. You know, we're offering vouchers to people who want to cancel now for flights that are planned to operate in the future. in case their needs have changed. And that clearly applies to people with non-refundable tickets. And there is appetite for that. Where people don't avail of that and then don't take the flight, obviously they lose their ticket. If we cancel the flight, they're entitled to a refund. So it's a complete mixed bag. But we do see an appetite for vouchers at the moment. In the same way as we've seen an appetite for customers who have had bookings on flights that were cancelled to book a new flight. So it's quite a dynamic situation and we are keeping the situation under review. I know there are moves at a number of country levels to try and get the voucher accepted under the legislation or the regulations as an alternative for cash, but we're not planning on that happening. And in relation to our strategy on London, clearly, again, that will be influenced by the consultation that we're undertaking with the representatives, but it would be fair to say we do have flexibility in relation to what it is we could and might do at all of the airports that we operate, but particularly at airports like Heathrow, Gatwick, and London City.

Thank you.

Thank you. Dear participants, once again, if you wish to ask a question, please press star and one on your telephone keypad. The next question comes from the line of Alex Patterson. Please ask your question.

Morning, everybody. Can I ask two questions, please? Firstly, you mentioned a need to get some aircraft back to your hub and to then provide maintenance. Could you just say how many aircraft that is and what the kind of costs are, i.e., is there a big cost for aircraft that have been grounded for three or four weeks, whatever it is, to get them flying again? And secondly, just broadly, if I look at your Q1, you're saying in March, basically, you lost, you know, most of the operating loss was incurred, you know, let's call it 500 million euros, something like that. Do you expect that to be your worst month of this year, i.e., as you go through Q2? the cost reduction measures will be sufficient to mean that those monthly losses are less than that.

Thank you. So we have about 440 of our aircraft are technically grounded. The cost of reintroducing empty services is small. We're talking to bring that total fleet would be less than 10 million. So it's not a significant cost. So I don't have an exact figure, but it's not a meaningful cost to the overall scale of things. And clearly the number of aircraft we take back into service will be very much dependent on the ramp up of business against the scenario that we've shown you in the slide. I think we're not gonna give you a monthly breakdown, but the one thing I would say is You know, the ability to take costs out in March was clearly not as great as we would normally have. And I was looking at some figures. You know, in the beginning of March, I think up until the 8th of March, we were effectively operating the same number of flights as a group as we did in March 2019. And then by the end of March, the number of flights we were operating had fallen by 90%. So it was a very sudden and sharp fall off during March. It was easy for us to take the aircraft operations out, but you do need a bit of time to take the costs associated with those aircraft out. So we did get some cost saving in March, but it's not on the same scale as we would have had in April, May and clearly in June. But I don't wanna give you a sort of a breakdown on a monthly basis, It would be fair to say that cost reduction in March was not as strong as it was in April, May, nor in what we would expect to achieve in June.

Understood. Thank you very much.

Thank you. The next question comes from the line of Johannes Brown. Please ask your question.

Yes, hi. Thank you. Just one for me. Can I just ask about the current status of the CMA investigation into your transatlantic TV? I'm not completely sure what the status is here, but related to that, in a scenario where Virgin Atlantic and Norwegian shrink or even disappear, would that put more risk of the CMA taking a tougher stance because of your even more dominant position on the transatlantic in that kind of scenario?

We don't have a dominant position. I'd like to think that other carriers do, but our position at Heathrow relative to other hubs is actually significantly lower. So I'm aware of what the CMA is likely to do, but unfortunately I can't disclose it. But it's something that we will disclose in the very near future. There has been significant progress in relation to that, but I'm not in a position to give you details But suffice to say, the outcome of that investigation is not something that's on my agenda at the moment.

Thank you.

Thank you. Dear participants, once again, if you wish to ask a question, please press star and 1 on your telephone keypad. The next question comes online of Muneeba Kayani. Please ask your question.

Hi, William, Steve. So wanting to understand, you've talked about your fleet plans. How does that result in kind of capacity for next year versus pre-crisis levels? And what's your expectation for the industry capacity next year? And then secondly, just following up from a question earlier, what do you think is your break-even load factor? And how does that relate with this debate currently on leaving the middle seat empty?

Okay. Well, we don't see a situation where we will be leaving the middle seat empty on a, you know, we will be expecting to see a return to normal service where all seats are available for sale. Social distancing, I don't believe it's possible to do that on an aircraft. And I think it's important to point out, you know, Average width of an economy seat on a narrow-body aircraft is about 18 inches. So, you know, when people talk about social distancing, it's not really something that is appropriate. And we believe that the appropriate mitigating action is for mandating masks or face covering on board the aircraft associated with all of the additional work that will be done to disinfect aircraft. But we don't... expect to see a situation whereby people try and impose social distancing that is relevant to outdoor and large public areas that clearly doesn't apply on board an aircraft in the same way as it can't apply on board a train or a tube or a taxi or a bus or many other forms of transport. In relation to capacity, I expect capacity in 2021 to be down. I can't give you a figure, both from an individual point of view and from an industry point of view. So that's down, down. And break even, you know, clearly break even, there's a number of factors that go into that. And, you know, including yields and unit revenues, fuel prices, it changes all the time. But as I said, we're able to assess, and the way we're doing it at the moment with cargo is we know what the demand for the cargo capacity is, we know what the yield is, and we can decide 24 hours in advance, and that's the way we're doing all our contracts with cargo, whether that will be cash positive. If it's not cash positive, we don't operate the flights. And in some cases... We've had situations where suppliers who are desperate to move their product, we point out to them that we can't operate the flights at the yields that we're getting, and we'll give them a yield that will make us operate the flights, and if they're prepared to pay that, we'll operate it. So it's very different. on the cargo side of the business to the passenger side of the business. So, you know, we clearly will monitor that and we've become quite expert at doing it in the current environment. And that will help us make decisions as we go through the rest of this year. But I can't give you a figure. I know IATA gives, you know, a general break-even load factor. But there's so many different variables in that, it's meaningless for me to give you a figure at this stage.

Thank you. Thank you. The next question comes online of James Goodall. Please ask your question.

Hi, morning, everyone. So can I just ask how your thoughts have progressed regarding consolidation? At the start of this disruption, I think your view was that we'd see a number of airlines exiting stage left. So I guess given the abundance of state aid that we're seeing across Europe, I guess the exception being the UK, have your views on consolidation changed? Thanks.

No, they haven't fundamentally changed because what we are seeing is if airlines remain in place in the short term, they're significantly smaller. And there's still, I think, very big questions to ask about their capacity never mind long term but medium term viability given the state of the business as they go through this so I still believe that there will be failures we have seen some I think we will see more I think there are businesses that are in denial about the need to restructure and that doesn't just apply to the airline industry I think it applies more widespread as well there is temporary alleviation for some people given the government stimulus packages that exist. They're not going to exist for long. So I still fundamentally believe that the industry will change. And those that have received some aid, some of the conditions associated with that aid will require them to do things in a different way. And it's also important to recognize that a lot of that state aid is debt. Now, it may be cheap in the current environment, but it's actually quite expensive relative to where the industry was. That debt is going to have to be repaid. That debt will influence decisions that these airlines will be able to take going forward. All of that points to an industry that's going to behave in a different way in the future to the way it's been behaving. So I still believe that there will be consolidation. But regardless of whether that's in the form of failures or M&A, we will see capacity being significantly reduced at an industry level in 2021 and beyond as a result of what's happening at the moment.

Great. Thank you.

Thank you, dear participants. And as a reminder, if you wish to ask a question, please press star and one on your telephone keypad, and your line will be open. The next question comes from the line of Miguel Sevrian. Please ask your question.

Thank you very much. My question is around the unearned revenues. The latest figure is as of December 19, roughly $3 billion, excluding the obvious side. Wondering in this kind of like worst-case scenario, do you expect if that gets unwound all the way, then how much time do you think is is going to be required to start seeing cash inflows from there. Thank you very much.

Yeah, so we update that figure at half year when we give you the balance sheet. So clearly we're not going to give you a figure today. We don't do it at Q1 or Q3. But, you know, that figure has changed significantly. with flights that have been operated, tickets that have been refunded, and then we've got people who have bought tickets. We're still seeing some people buy tickets. The activity is significantly lower. So there's a number of moving parts to that, but at half-year, we'll give you more visibility around that when we give you the balance sheet at the half-year point.

Thank you very much.

Thank you. Dear participants, once again, if you wish to ask a question or leave a comment, please press star and one on your telephone keypad.

Okay, I don't think there are any additional, or maybe we've just, one has... Would you be happy to take another question? No, I think, no, we don't see any more questions. questions here from people on our list. So at this point, can I just thank everybody for joining us on the call. We appreciate you taking time out. I think we've proven that technology doesn't work and we need to get back to face-to-face activity as soon as we can. Difficult quarter for us and for the industry. We're very pleased with the progress that we are making. We're very confident that we're gonna steer our way through this. We recognize that fundamental restructuring is required not just for us but for everybody in the industry to reflect what is a fundamental change in the way the industry needs to operate and we're determined to do everything that is required to ensure that we come through this in a stronger fashion. So I look forward to speaking to you again. I will be handing over to Louise formally at the AGM which is scheduled to take place 24th of September, but I'll have an opportunity, I think, to talk to some, if not all of you, before that date. And if I don't, I wish you well, but I'll be around for a little while anyway, and Luis and I will be working more closely together over the next couple of months as we manage the transition from my leadership to his, and I'm looking forward to him taking over, and I'm sure he's looking forward to taking over as well. So thank you very much for joining us, and we'll talk to you again soon.