Q3 2019 Earnings Thursday, 31 October 2019
Q3 2019 Earnings Thursday, 31 October 2019 IAG Results Presentation Willie Walsh Chief Executive Officer, IAG Thank you very much and good morning everyone. Thank you for joining us. As you can see, these are good underlying results. The quarter was negatively affected by the BALPA pilot strike at British Airways. Our operating profit of €1.425 billion , that’s a margin of 19.5%. The impact of the strikes and disruption in the third quarter is € 155 million. You remember on the 26 th September we indicated a total of € 215 million impact for full year; so, € 155 million of that has affected the third quarter, and the balance € 60 million will be in the fourth quarter. We continue to have very strong RoIC performance with the last four quarters equating to about 14.8%; and we’ve continued with our generous cash returns. I’m pleased to say the board of IAG yesterday approved an interim dividend of €0.14 5 per share which will be payable in December. Our guidance for full year 2019 remains unchanged from the guidance we gave you on the 26 th September. Our fourth quarter capacity growth will now be 1.9%, and that will give us a full year capacity growth of 4%. So, to take you through the details of the financial results, I'm going to hand over now to Steve Gunning. Steve, over to you. Financial Results Steve Gunning Chief Financial Officer, IAG Thanks, Willie. Good morning. We turn to slide five. As Willie said, the operating profit of € 1.425 billion , that’ s € 105 million down year-on-year. As Willie said, € 155 million of the deterioration is a consequence of the strike and disruption and the slight softening we saw in Vueling in Q3. It’s also despite an increase in the fuel bill of €13 6 million in the quarter, and clearly there’s been a little bit of FX help going the other way of about €41 million. So, that’s the operating profit. If you look at ASKs, we originally guided you to 5.2% ASK growth for Q3 when we were doing the half one results. Actually, our ASK growth for the quarter has only been 2.8%, so 2.4 points of ASK decline compared to previous guidance. 1.5 points of that relates specifically to the BA strike; so not really a surprise there, but that explains the deterioration. We then look at passenger unit revenue. It’s down 1.1% at constant currency. I’ll take you through a slide in a moment on that to get under the skin and give you some colour as to what’s going on passenger unit revenue. But if you look at total un it revenue, it’s also down 1.1% and that probably masks two offsetting factors. You’ve got the cargo business in a challenging environment at the moment. Global trade seems to be slowing and across the air 2
Q3 2019 Earnings Thursday, 31 October 2019 freight industry, we are seeing reduced amount; so, air cargo for us in Q3, the revenue is down 7%. Offsetting that, we are seeing good performance in BA Holidays and the Iberia third-party MRO business and third-party handling business. So, those two are largely offsetting one another and hence, while total unit revenue looks pretty much the same as passenger unit revenue on a performance. In terms of non- fuel unit costs, they’re up 1.1%, clearly impacted by t he disruption and the strikes, n ot only because that increases our costs, but it’ s also reduced our ASKs. If you strip out the non-ASK-driven businesses in our group, such as BA Holidays and Iberia MRO, which I’ve just alluded to on the revenue side, actually our non -fuel unit costs are largely flat. If you look at total unit costs, you ca n see they’re up 1.9%; and that’s factoring in the fuel bill as well as the non- fuel unit costs. What we’re seeing with fuel is that, although the commodity price is down, the net impact of our hedging year-on- year is up and, hence, it’s increased our costs. As I said earlier, the overall fuel bill year on year is € 136 million higher. Those are the sort of highlights. Let me turn to the next slide which will give you a bit of a feel as to what’s going on with unit revenues in the quarter. As you can see, we’ve t ermed this as mixed revenue performance. There’s various different things going on in different regions. Overall, as I said, ASKs are up 2.8% and RASK was down 1.1%. Domestic I’ll quickly take you through each of the regions and give you a flavour of it. Domestics: 87% of the domestic ASKs relate to Vueling and Iberia , and what we’re seeing there is strong revenue growth again in Q3. You're not seeing the dramatic RASK improvement that we saw in Q2, simply because we’re now cycling over the resident discounts that were introduced last year. So, still strong revenue growth, but not quite the same level of RASK improvement that you saw in Q2. Europe In terms of Europe, you see that RASK performance is similar to the Q2 performance, but off a lower ASK growth. One of the reasons for that is last year, 2018, Q3 Europe performance was particularly strong. We were seeing RASK performance last year up 4.5% on 6% ASK growth, and that was largely driven by BA and Vueling last year. If I look at Iberia and Aer Lingus, their performance in Q3 has been very similar to that as Q2. In terms of Vueling and BA, we’re seeing some degree of softening, partly attributable to some of the disruption that we’ve seen in the quarter. Furtherm ore, when we gave you the re-guidance on the 26 th September, we talked about we saw some softening happening in Vueling demand. And consistent with that, France and Italy seem to be the routes in particular that are softening there. Asia Pacific and AMESA If I turn to Asia Pacific, bear in mind 91% of the ASKs for this region relate to British Airways. And so, the strike and disruption impacts will have a significantly distorting effect on Asia Pacific. As you can see, the RASK is -3.7% compared to up 1.9% in Q2. 3
Q3 2019 Earnings Thursday, 31 October 2019 Factors over and above the strike impacting Asia Pacific are, one, Hong Kong. Hong Kong is clearly going through a period of unrest, as we know, and we’re seeing a RASK decline in Hong Kong, low double digits. So, we’re certainly seein g that come through on that route. The other development in Asia Pacific that’s coming through is with regards to mainland China, particularly Beijing where we’re seeing a lot of competitor capacity coming in. When we look at Africa, Middle East and South Asia, once again 90% of the ASKs in this region relate to British Airways and so the strike will have had an impact there. But other factors that we’re seeing in that region are post the Nigerian election, at the end of Q1, we saw a sort of uptick in performance in Nigeria in Q2 because there was some pent-up demand. C learly that’s come off of there in Q3. In terms of the Middle East, the timing of Eid compared to the school holidays has had an adverse impact, and we’ve also mentioned to you that we did divert capacity away from South Africa into India with the demise of Jet. That’s come through . But when you bring so much capacity across in a quick period of time, you will see some degree of RASK decline, and that’s what we’ve seen in AMESA. Latin America and North America With regard to Latin America and the Caribbean, a slight improvement on the RASK from Q2. In terms of Argentina and Brazil, both are showing some improvement in Q3. Argentina is not a structural change. We just saw a small bubble of increased demand ahead of the elections in Argentina. We would expect some deterioration the other side of that as a consequence. In terms of Brazil, more positive comment: we actually do see some signs of improvement in Brazil, which is encouraging. If we look at the non-Argentina and non- Brazil part of this region, actually we’re still seeing double-digit revenue growth across the board and a strong performance. Last, but by no means least, North Atlantic, once again BA is 68% of the ASKs there, so the stri ke impact will have had a noticeable impact in this region. It’s the first time we’ve seen North America reduce ASKs since 2013. If you look at the non-BA element of the North Atlantic, you’ll actually see the RASK is up broadly 2% on ASK growth up about 3%. And that’s particularly driven by Aer Lingus performing well and Iberia performing solidly. So, North Atlantic, we’re not seeing an underlined deterioration. We did see clearly some strike impact in North America. That gives you a bit of a flavo ur into what’s going on across the regions from a revenue perspective. 3Q 2019 Non-Fuel Unit Cost Performance If we turn to slide seven, I’ll talk about non - fuel unit costs. As I said, they’ re up 1.1%, but if we strip out the non-ASK- driven businesses, we’re up 0.2% on an adjusted basis. Quickly running through these, in terms of employee costs two drivers for improvement. One is productivity improvements overall across the group, particularly in Iberia and Aer Lingus; but also, the cost per head has improved. Now, this is not a structural change, but as we indicated when we re-guided, we have released the BA bonus provision in the quarter, and as a consequence that benefit is coming through in these numbers. 4
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