International Consolidated Airlines Group S.A.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 International Airlines Group Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please note you will need to limit this to two questions. I must advise you that this call is being recorded today. on Friday, the 30th of October, 2020. And now I'd like to hand the call over to your host today, CEO, Luis Gallego. Please go ahead.

Good morning and welcome to IAG's third quarter results call. I'm joined today by Steve Ganning, Chief Financial Officer, and Sean Doyle, VA Chief Executive Officer. The third quarter has been one of significant change for IAG. First, we launched our capital increase of 2.7 billion euros at the end of July and successfully completed it in September. Existing shareholders took up almost 93% of their subscription rights. The offer of new shares was oversubscribed by over 200%. The rights issue was fully supported and subscribed by our largest shareholder, Qatar Airways. I would like to thank all those shareholders who participated in the issue. Second, we began the substantial restructuring of British Airways and Aer Lingus, which accelerated as the quarter went on. Over 9,000 people had left BA by the end of September, with more to follow in the fourth quarter. BA is on track to make an annual employee cost savings of at least 30% in 2021 compared to 2019. Aer Lingus will also make significant savings of up to 50% compared to 2019, including some government wage support. Iberian Welling are already benefiting from Spain's furlough program, ERTE, saving over 35% of employee costs currently. Earth Day is in place until at least January of 2021. Should demand for air travel remain weak, we can undertake further restructuring and create a more variable cost base. Third, we have made a number of senior management changes within IAG, leveraging our strong internal talent pool, which I will describe later. In terms of the third quarter, COVID-19 has caused another substantial operating loss of 1.3 billion euros, which we announced last week. The outlook remains uncertain due to government lockdowns, travel restrictions, and quarantine requirements, and the volatility of these restrictions is causing uncertainty among customers. We urge governments to adopt the initiatives already developed by the aviation industry, such as pre-departure airport testing and to introduce air corridors on major routes, in order to increase customer confidence to book and travel. We said in our statement last week that we now expect to operate no more than 30% of our normal capacity in the fourth quarter, compared to 40% previously expected. As a result, we no longer expect to reach break-even in terms of net cash flow from operating activities during the quarter. Finally, our liquidity position remains strong, with total liquidity of 9.3 billion euros at the beginning of October, including the rights issued proceeds. Steve now will take you through the financial results, liquidity position, and restructuring initiatives in more detail, and I will provide more details on the outlook after that. Please, Steve.

Thanks, Luis. Good morning. As Luis says, I'll quickly run you through the quarter three results. So we turn to slide five. In quarter three, we continue to see the negative impact of COVID-19 on our results. We registered a pre-exceptional operating loss of $1.3 billion. In the quarter, we flew minus 78.6% of capacity in comparison to 2019. This was in line with the guidance that we provided in early September, and up from the minus 95% that we flew in quarter two compared to 2019. If I look at load factor in quarter three, it was 48.9%. And in terms of unit revenues, they were down 47 points versus last year. And that was a combination of load factor being down nearly 39 points and yield being down about five points. So clearly load factor, the biggest hit to the unit revenue performance. If you look at the revenue numbers overall from a passenger revenue perspective, they were down 88.6% reflecting the impact of the resurgence of infection rates and the consequential government lockdown travel restrictions and quarantines. If you look at the cargo performance, a bright spot, it was up 12.3% compared to last year, due to much higher yield performance, even though the overall volume levels were down around about 40%. And we ran over 1,115 cargo-driven flights, where the cargo revenue justified the flight operation, not the passenger revenue. In terms of other revenue, BA Holidays, Iberia's MRO and handling businesses and the loyalty business were all impacted to varying degrees by the virus. If I turn to the cost performance, total costs in the quarter were down 56.5%. This was against a capacity reduction, as I said, of 78.6%. So our cost variability in quarter three was 72%. In terms of employee costs, they were down 42% benefiting from furlough schemes, pay cuts and other mitigating actions. It's worth noting in Q3 that the UK job retention scheme, the benefit of that to IAG dropped from about 38 million per month in July and August to only five million per month in September as that scheme unwound and came to a conclusion. And it's also worth noticing that in 2019, when we were putting out the profits warning with regards to the pilot strike, we announced then that we were putting a bonus provision release through the numbers, which benefited the September 19 numbers significantly, which also then has an impact on the year-on-year movement. In terms of fuel handling, landing fees and selling costs all move broadly in line with capacity. If I look at engineering costs, they were down 48.6%, clearly not fully directly related to ASKs, but also partially related to the Iberia MRO business as well. And in terms of property and IT costs, which are far more fixed in nature, they were down 19%, driven by management initiatives, including such things as lounge closures and exiting certain airport offices. And in terms of depreciation, it was largely fixed. So an operating loss before exceptionals of 1.3 billion. We turn to slide six and look at the exceptional items. In quarter three, we booked 618 million of exceptional items, two significant components to that. The net over hedging loss of 352 million was booked in the quarter. This primarily relates to fuel and was driven by the fact that because we've reduced our capacity plans Going forward, we are effectively more hedged or over hedged than we were before. We have less physical fuel requirements, so more of the hedging instruments that we have in place are no longer needed, and therefore we've de-designated them. Also, the price of jet has come down during the quarter, and so when we mark to market these derivatives, that has also had an adverse effect. So 352 million of over-hedging losses booked. And then the other second significant component was employee restructuring provisions of 275 million. The vast majority of this relates to British Airways, but there is a small component related to Aer Lingus and cargo. Worth noting that with regards to the fuel over-hedging, the total amount of that now is 1,599 million, of which 60% has now been paid. And with regards to the employee restructuring costs, 80% of that 275 million was paid out in the actual quarter. If I now move on to balance sheet and liquidity on slide seven, net debt in the quarter increased 633 million. Cash was lower by about 1 billion and gross debt was slightly down by 372 million. The reduction in cash was due primarily to operating cash flows. Despite this, the cash position remains strong at $5 billion. Moreover, on the 2nd of October, we received the proceeds from the capital raise, which on a pro forma basis would put our cash at $7.7 billion and the liquidity at $9.3 billion. This is very close to the liquidity position we found ourselves in in March earlier this year. And cash is a percentage of 2019 revenues back up to 30% and liquidity as a percentage of 2019 revenues at 37%. Moving on to slide eight and continuing on the theme of liquidity. On the right hand side of the slide you can see just some of the major actions that we've taken during the year to improve and bolster the liquidity position. During the course of Q3, as we've previously announced, we signed the multi-year deal with Amex and received in 830 million euros through that deal. And we also completed a five aircraft sale and lease back, which also brought in 380 million euros. Post Q3, as I've just mentioned, we completed the capital increase. Going forward, we do have additional sale and lease backs planned. And we are also considering other further debt funding actions which have been helped enabled through the capital raise. Final point I just wanted to make on this slide was you can see from 30th of June to 30th of September the facilities have declined from 2.1 to 1.6. We have not drawn down any of our general facilities. About 200 million euros of this relates to us using a committed aircraft facility to finance an aircraft delivery, which we will then refinance in Q4. And the rest of it primarily relates to some committed aircraft facilities that we chose not to use and to let expire in the quarter. So that reduction in facilities is not due to operating cash burn or used for operating cash burn. If I now turn to operating cash costs, I just want to update you on the guidance we gave you at the half year. I think first, before I do that, it's just worth remembering what we put in our operating cash cost definition, because I know it is different from a number of other competitors. What we put in there are the likes of employee costs, fuel handling, catering, landing fees, engineering, property and IT and selling. So all of those costs that normally feature above the operating line on the P&L. In addition, we add in the cash payments with regards to leases, net interest, and also the over hedging loss, over hedging loss payments that we have to make as well. What it excludes, which I think is important to note, is revenue. We do not net any revenue against this number. It also excludes working capital movements and it excludes pension deficit payments. So in terms of how we performed in quarter three, we guided that it would be 205 million per week for July and August. We've actually managed to achieve 205 million for the entire quarter. That's a good performance because normally the third month of a quarter normally has higher cash burn than the first two months because there's some quarter end payments. If you exclude the cargo driven flights, then actually the number was a slight beat at 198 million. And this represents a 50% reduction on the operating cash costs that we would have originally planned coming into the year. That all said, we continue to focus on our cost base from two angles, really. One, to reduce the cost base and to right-size it. And secondly, to increase the variability of the cost base, which is a good segue into slide 12 and 13, where we talk about restructuring. Our business will be significantly smaller for the next two years, and given this outlook, it's right to restructure the business and to make sure it's right-sized. In this chart on slide 12, we just show some of the changes we've been making in relation to Aer Lingus and VA in regards to people, and I'm pleased to say I think it's significant progress. In Aer Lingus, we've reduced headcounts but to the tune of about 800 due to removing heads that are on short-term contracts and outsourcing some non-core areas. In addition, we have 250 other planned redundancies going forward. In addition, significant pay cuts and hour cuts have been applied to all staff across the business. In regards to BA, we've reached agreement with the trade unions on most of the employee groups. We've now had over 9,600 people have left the business, as at the end of October, with a further 180 set to leave shortly. Annual employee cost savings expected through this restructuring is about 30% of the 2019 employer costs for British Airways. These new arrangements, particularly within British Airways, give us much greater flexibility and more cost variability. For example, 19,000 of the employees covered under the new arrangements now have layoff clauses and short-time working clauses in their contracts. If we turn to our Spanish operating companies, Iberia and Vueling continue to benefit from the government wage support schemes, the ERTEs, as Luis mentioned earlier, and these were extended to January 21. For Iberia, the ERTE gives flexibility to adapt to current demand. Once it ends, Iberia will then decide what further actions to take. It should be noted that there are restrictions when you can restructure, restrictions following an Airtay being in place. For Vueling, in addition to the Airtay, they have reached some temporary and permanent agreements with pilots and cabin crew to help the variability of the cost base going forward. And then with regards to level, as we've previously announced, we've been closing the bases in Vienna, Paris, and Amsterdam. And so the significant level base now is in Barcelona. Those are the principal points on the Q3 financials. And at this point, I'll hand back to Luis.