IAG reports an operating profit of €530 million ($582 million) in the second quarter

International Airlines Group-IAG (British Airways, Iberia and Vueling Airlines) (London) presented the Group’s consolidated results for the six months to June 30, 2015:

IAG period highlights on results:

• Second quarter operating profit €530 million ($582 million) (2014: operating profit of €380 million)
• Revenue for the quarter up 11.2 percent to €5,656 million
• Passenger unit revenue for the quarter up 5.0 per cent and down 6.6 per cent at constant currency
• Fuel unit costs for the quarter up 3.0 per cent, down 12.0 per cent at constant currency
• Non-fuel unit costs for the quarter up 3.2 per cent, down 6.9 per cent at constant currency
• Operating profit for the half year €555 million (2014: operating profit €230 million), up 141 per cent
• Cash of €6,421 million at June 30, 2015 was up €1,477 million on 2014 year end
• Adjusted gearing down 8 points to 43 per cent and adjusted net debt to EBITDAR improved 0.4 to 1.5 times

Willie Walsh, IAG Chief Executive Officer, said:

“We made an operating profit of €530 million in the quarter, up from a €380 million operating profit last year.

“At constant currency, revenue was down 1.2 per cent with passenger unit revenue down 6.6 per cent. Non-fuel unit costs were down 6.9 per cent while fuel unit costs were down 12 per cent.

“We said previously that profit improvement would be slower in the second quarter and we are on track to reach our full year targets.

“We continue to take cost out of the business, with both employee and supplier unit costs down at constant currency, and improvements in productivity levels.

“In the half year, we made an operating profit of €555 million which is up from a €230 million operating profit last year”.

Quarter 2 operating profit overview:

IAG’s operating profit for the quarter to June 30, 2015 was €530 million, an improvement of €150 million from the same quarter in the prior year. British Airways made a profit of €453 million (2014: operating profit €332 million); Iberia made a profit of €51 million (2014: operating profit €16 million) and Vueling’s profit was €24 million (2014: operating profit €30 million) on top of a 13.9 per cent capacity increase.

Half year financial review:

Strategic development

On May 26, 2015 IAG and the independent directors of Aer Lingus Group plc (‘Aer Lingus’) reached agreement on the terms of a recommended cash offer for the entire issued ordinary share capital of Aer Lingus to be made by AERL Holding Limited, a wholly incorporated subsidiary of IAG. The offer is for €2.55 per Aer Lingus share, comprising a cash payment of €2.50 per Aer Lingus share and the payment of a cash dividend of €0.05 per Aer Lingus share (paid by Aer Lingus on May 29, 2015 to Aer Lingus shareholders on the register of members on May 1, 2015). The transaction values Aer Lingus’ entire issued ordinary share capital at approximately €1.4 billion. The offer, extended to August 18, 2015, is subject to the terms and conditions that have not already been satisfied which are set out in Appendix I of the Offer document (www.iairgroup.com), in particular acceptance of the Offer having been received in respect of the Aer Lingus shares held by the Ryanair Group.

Operating and market environment

The half year has seen decreasing fuel prices although partially offset by adverse exchange. The improvement in the pound sterling against the euro has generated translation benefits for the Group which again have been partially offset by the US dollar strength.

Revenues in our domestic, LATAM and Asia Pacific markets were up 3 to 4 per cent at constant currency (‘ccy’) on capacity growth of about 8 per cent. The LATAM market has been impacted by weakness in Brazil and Venezuela. Revenues in our European markets rose 8 per cent at ccy while capacity for the Group was increased by 13 per cent partially through seat densification but also reflecting additional capacity in our low cost carriers, Iberia Express and Vueling. Capacity in the Africa, Middle East and South Asia region was reduced 4 per cent but revenues fell further impacted by weakening of oil routes. North Atlantic passenger unit revenues were broadly flat for the six months, down 1 per cent.

Capacity

IAG increased capacity (ASKs) by 5.3 per cent in the first six months of the year and traffic volumes rose 5.8 per cent, increasing seat factor to 79.3 per cent. The rise in capacity reflects growth at Vueling, restoration of routes at Iberia and seat densification in British Airways’ shorthaul.

Revenue

Passenger revenue increased 11.5 per cent compared to the prior year six months with approximately 10.4 points of beneficial currency impact. Passenger unit revenue (passenger revenue per ASK) was down 3.8 per cent at constant currency (‘ccy’) from lower yields. Yields have been impacted at Vueling and Iberia by growth. British Airways yields are down related to weakening oil routes and increased competitor capacity on transatlantic routes in addition to the impacts of currency dislocation. Overall the Group has maintained its volumes in the first half of 2015 with seat factor rising 0.4 points.

Cargo revenue for the period decreased by 8.0 per cent at ccy reflecting the reduction in the Cargo freighter programme. The performance of the Cargo business was up with load factors flat, positive mix partially offsetting market price pressure, and benefits from strong cost management.

Other revenue was up 6.3 per cent at ccy. The increase includes a €50 million benefit from the timing of the recognition of Avios revenue. The underlying revenue rose through higher customer engagement at BA Holidays and in the Avios loyalty scheme, partially offset by lower third party maintenance activity in the period.

Costs

Employee unit costs improved 3.5 per cent at ccy. The average number of employees reduced by 0.3 per cent and productivity rose by 5.6 per cent with improvements at each airline.

Fuel costs decreased 6.8 per cent at ccy, driven by lower average fuel prices net of hedging. At constant currency and on a unit basis the improvement was 11.7 per cent, with benefits from more efficient aircraft and improved operational procedures.

Handling, catering and other operating costs decreased 1.8 percent at ccy benefiting from an improvement in operations reducing costs related to disruption, including compensation fees and baggage costs. The improvements have been partially offset by higher costs due to additional passengers carried, inflationary price increases and BA Holiday activity.

Landing fees and en-route charges rose 6.4 per cent excluding adverse currency impacts. The performance reflects increased airport charges and additional volume, with ASKs up 5.3 per cent and sectors flown up 6.1 per cent.

Engineering and other aircraft costs were broadly flat at ccy. Increases are driven by volume and price, offset by the reduced freighter flying of IAG Cargo and less third party maintenance activity.

Property, IT and other costs decreased, half of which is due to cost improvements including IT initiatives and the remaining reduction from one-time benefits.

Selling costs decreased 3.9 per cent excluding adverse currency impacts due to the timing of promotions and from improvements in supplier contract terms. The reduction in selling costs was partially offset by volume increases related to additional passengers carried during the period.

Ownership costs increased 1.6 per cent at ccy. At June 30, 2015 the Group had 472 aircraft, an increase of 13 from June 30, 2014. The increase in aircraft primarily related to 22 additional Airbus A320s, while the Boeing 737-400s are being retired.

At constant currency non-fuel unit costs decreased by 4.9 per cent with benefits from exiting the Cargo freighter program and the seat densification at British Airways. Non-fuel unit costs improved at British Airways and Iberia, while Vueling was broadly flat.

Operating profit overview

IAG’s operating profit for the six months to June 30, 2015 was €555 million, an improvement of €325 million from the prior year. British Airways made a profit of €570 million (2014: €327 million); Iberia made a loss of €4 million (2014: €95 million) and Vueling’s loss was €5 million (2014: €0 million).

Exceptional items

There have been no exceptional items in the six months to June 30, 2015 or 2014.

Non-operating items

The net non-operating cost was €143 million for the six months compared to €75 million for the same period last year. The increase related to ‘Net currency retranslation charges’ from the weakening of the euro against the US dollar and additional finance costs primarily from adverse translation currency with the weakening of the euro against the pound sterling.

Taxation

The tax charge for the six months to June 30, 2015 is €80 million (2014: €59 million charge) with an effective tax rate of 19 per cent.

Profit after tax

The profit after tax for the six month period to June 30, 2015 was €332 million (2014: €96 million).

Exchange rates

For the six months to June 30, 2015, the reported results are impacted by translation currency from converting British Airways’ results from sterling to the Group’s reporting currency of euro. The net impact on the operating profit was €73 million favourable, with an increase in revenue of €814 million and an increase in cost of €741 million, reflecting a 10.3 per cent weakening of the euro versus the pound sterling.

The transactional exchange rate impact across the Group was €167 million favourable on revenues and €194 million adverse on costs with a net adverse impact of €27 million.

The net benefit on operating profit from currency was €46 million for the six months to June 30, 2015.

Cash

The Group’s cash position was €6,421 million up €1,477 million from December 31, 2014. British Airways’ cash position was €3,730 million, Iberia €1,118 million, Vueling €829 million and the parent and other Group companies €744 million.

Compared to December 31, 2014, the Group’s adjusted net debt decreased by €618 million to €5,463 million and adjusted net debt to EBITDAR improved 0.4 points. Adjusted gearing improved by eight points.

Principal risks and uncertainties

During the period we have continued to maintain and operate our structure and processes to identify, assess and manage risks. The principal risks and uncertainties affecting us, detailed on pages 87 to 93 of the December 31, 2014 Annual Report and Accounts, remain relevant for the remaining six months of the year.

Other strategic developments

On January 26, 2015, Iberia announced plans to begin flights to Cali and Medellin in Colombia in early July. Iberia highlighted that this has been possible due to its restructuring which has allowed it to achieve a competitive cost base.

Iberia and its subsidiary Iberia Express were the world’s most punctual airlines in January according to the latest ranking published by FlightStats. Iberia led network carriers with 92.72 per cent of flights on time while Iberia Express achieved 96.34 per cent punctuality the highest score among low cost carriers. The airline’s improvement in operational performance has been a key aspect of its restructuring.

British Airways is changing its ‘On Business’ loyalty scheme for small and medium sized businesses to incorporate American Airlines and Iberia. The new partnership will allow On Business members to benefit from collecting and spending across all three airlines under one program.

Vueling Airlines has become the first airline to offer a self-service baggage check-in at its hub in Barcelona, also as part of a marketing agreement, Vueling has begun to install power outlets in the priority seats of its fleet.

On March 4, 2015, Iberia announced that it had reached an agreement with Airbus to take early delivery of eight Airbus A330-200s that IAG ordered for the airline last year to replace Airbus A340-300s. The new aircraft will join Iberia’s longhaul fleet up to 14 months earlier than initially planned, between November 2015 and December 2016.

On March 19, 2015, Vueling signed an agreement with American Airlines to feed its longhaul flights from the US at Barcelona-El Prat and Rome-Fiumicino airports.

On March 29, 2015, British Airways began its Airbus A380 services to San Francisco from London Heathrow adding 6,000 more seats a month between the two cities.

In April 2015, IAG took delivery of its first five Airbus A320s standardized aircraft which have joined Vueling’s fleet. The aircraft are part of IAG’s harmonization plan which aims at reducing costs by standardizing its Airbus A320 fleet across the Group.

On May 13, 2015, Iberia announced that it won 17 out of 21 tendered licenses to provide handling services at Spanish airports. The airline remains the main handling operator in Spain and highlighted that this outcome has been achieved due to the cost and productivity agreements reached with its employees.

On May 27, 2015, British Airways started daily flights to Kuala Lumpur on a four class Boeing 777-200 ER aircraft. The airline also announced two new routes from Heathrow for the winter season. From October 25, 2015, it will start flights to Keflavik (Reykjavik) while services to Salzburg will commence on December 5, 2015.

On June 1, 2015, Iberia resumed its flights to Havana. The five per week service between Madrid and the Cuban capital is operated on Airbus A330 aircraft with new longhaul cabins. These new flights aim to strengthen further Iberia’s leadership between Europe and Latin America.

On June 9, 2015, Vueling announced that it had become a member of IATA (International Air Transport Association). The airline will benefit from lower costs on transactions with IATA members.

On June 17, 2015, the chief executives of IAG, Air France-KLM, EasyJet, Lufthansa Group and Ryanair announced that they will work together to develop an EU aviation strategy which will support growth and jobs across Europe, strengthen the sector and provide more choice and competitive fares to European passengers. This is in response to a consultation by the EU Transport Commissioner Violeta Bulc.

Objectives

Our mission is to be the leading international airline group. This means we will:

• win the customer through service and value across our global network;
• deliver higher returns to our shareholders through leveraging cost and revenue opportunities across the Group; • attract and develop the best people in the industry;
• provide a platform for quality international airlines, leaders in their markets, to participate in consolidation;
• retain the distinct cultures and brands of individual airlines.

By accomplishing our mission, IAG will help to shape the future of the industry, set new standards of excellence and provide sustainability, security and growth.

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