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Recorded at CAPA Live December

Airline CEO Interview with IAG, Group CEO, Luis Gallego

A look at how the Group is performing within Europe and on the trans-Atlantic. Plus how the Group responds to competition within Europe from the low cost carriers. Also a look at sustainability and the Group’s plans for SAF.

Speakers:

  • CAPA - Centre for Aviation, Chairman Emeritus, Peter Harbison
  • IAG, Group CEO, Luis Gallego

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Transcript

Peter Harbison:

Hello and a big warm welcome to Luis Gallego who's the, as you well know I'm sure, the CEO of International Airlines Group. Great to have you on CAPA Live Luis. Welcome.

Luis Gallego:

Thank you very much Peter. Good morning everyone. A pleasure to be here with all of you.

Peter Harbison:

Great to see you. And as we were saying half a year, hopefully next time it'll be really live. That's where we're going. Can I start with that, maybe Luis, a with a few things I'd like to talk about, but initially just what the situation is like at the moment? Where you expected it to be and where you think it will be in two or three months as the winter progresses?

Luis Gallego:

Okay. I think 8th of November was a pivotal moment for us, for our industry, with the opening of the U.S. market. Since then long haul has seen the highest looking activity in October and November reaching 80% of 2019 levels. But as you say now, we are pending of Omicron variant. It's having an impact for sure. We hope that it's going to be a question of weeks, but the aim that we still have is to have around 90% of our capacity, the capacity we had in 2019 in next summer, 2022.

Peter Harbison:

Right. When you say 90%, that's across the entire group or you talking North Atlantic still?

Luis Gallego:

Yes. I'm talking about the entire group. We need to see the impact of the Omicron variant. We want to maintain 100% of the capacity in North Atlantic, but we still need to see the impact of this new wave. In any case long haul traffic has been working very well. I think also premium leisure is performing very strong, both in Iberia and British Airways. We have early signs of recovery also in the business travel. So I think we are still optimistic, but as everybody cautious about what Omicron can represent.

Peter Harbison:

Yeah, exactly. Looking at within Europe, Luis, you and the UK have been hit. In the UK, particularly, I know you are not just in the UK, but the UK has been hit probably harder from an industry perspective than most of the other European countries because of the approach the UK government has taken. Do you see that that position will improve? Do you... In close contact with the government, presumably on that?

Luis Gallego:

We are trying to change all the measures that are not based in scientific data. And it's think that the reaction that, for example, we had in UK, doesn't help. Now the restrictions to come back to UK from abroad are not helping. We see cancellations of trips because the people they are afraid not to come back to UK when they finish their travels. So I think we need to change that. We are working on that. It's true that in Christmas season visiting friends and relative traffic is doing well, but some business is traffic that they see the risk to have a problem in destinations before coming back, they are cancelling their trips. So we are trying to reach to a solution that for example, is working in Europe, in other countries in Europe, and it is not valid for UK.

Peter Harbison:

Right. Yeah. It's been difficult. Luis, I'd like to talk about having gone from that sort of specific present to the broader picture of the group as a whole. It's in a couple of very interesting developments if we can start, or if we could lead into those, that's the announcement of the gap with short-haul subsidiary for BA, but also if we could just in the last hour or so, we've seen the new has come through about the likelihood, if not the definite decision that you'll be not pursuing the Air Europa deal. Would you like to comment on those specifically and also just let's talk about the way you as a group with many, many aspects to it aim to go ahead? It's an interesting strategic time.

Luis Gallego:

Yes. I think during this crisis, we have continued with the evolution of the group and we are in the middle of a transformation plan to take the opportunities that we can have in the future. For example, IAG is expanding the U.S. destinations, with the addition of Dallas and Washington is recovering market share in Latin America. Aer Lingus launch new route from Manchester, with a new AOC, the... As you know, they will fly to New York, Orlando and Barbados. Our objective is to come back to pre- pandemic levels of capacity in 2023. And then the Air Europa operation, we always said that from the strategic point of view is very important. Not only for the group, I think it's very important for Madrid hub and for the connectivity of Spain. So unfortunately, because of the devastating effects of the pandemic, the conditions are not favourable to close the agreement in the original shape. What we are doing is... And we are in advanced conversations to try [inaudible 00:08:06] agree [inaudible 00:08:08] and we are assessing other possibilities to continue.

Peter Harbison:

So the news in the Financial Times just now is that you're going to terminate their approach is not correct, or are you still hopeful that it can go ahead?

Luis Gallego:

Is correct in the way. We are not going to continue with a current structure. I think we are trying to have a newer structure that allow this deal to happen.

Peter Harbison:

Right. And that's what mostly around relinquishing slots in Madrid?

Luis Gallego:

We cannot provide more details. Sorry, Peter.

Peter Harbison:

Okay. No, sorry. I thought I'd try anyway.

Luis Gallego:

Yes.

Peter Harbison:

And the other interesting one with over the last few months, the Gatwick operation started out as a low cost operation, was dropped and now a short-haul subsidiary is being established. Which is for the time being called British Airways. What's happened there and how hopeful are you that will provide the right sort of low cost competition in the market?

Luis Gallego:

Oh, okay. We had a debate about the future of Gatwick. You know, that when all this pandemic has started, we needed to stop the shortfall operation from there. And the question mark was, are we going to be able to fly from Gatwick in the future in a sustainable way? We need to take into consideration that in the last 10 years, a step think in 2016 over the year, we were not profitable. So in a contest pre-COVID, so we needed to be more efficient. We had several alternatives in the group to fly from Gatwick.

So our preference was to fly with the BA brand, with the BA proposal to the customers, but for that we needed an efficient model. So we negotiated with the different collectives that we have there. Finally, BA reached an agreement, a good agreement, to develop the base again. We'll start flying next summer season and with idea to have around 30 aircraft there, with the right cost and structure, with the right proposals to the customer. And ensure we are going to have opportunities because with that competitive cost base, even we can develop farther the base in the future.

Peter Harbison:

Right. So you have been able to strip some costs out of that, and that is going to be pretty much a standalone operation as I understand it?

Luis Gallego:

Yes. For sure. I think it's very important. It's very important to have a standalone operation to maintain the costing structure that we need in order to be profitable. I think also the model that we have there is different to the model that we have in the main line. So we are going to put people with a focus in efficiency, with a focus in the customer, and I ensure we are going to have a very competitive race.

Peter Harbison:

Right. It certainly is a very competitive end of the market, isn't it? While we're talking about airports, you've had a little bit of toing and froing with Heathrow just recently, with the suggestion you might even relinquish some slots at least at Heathrow. Are you happy that there's some progress that Heathrow Airport is being a bit more reasonable on pricing or is that just a rock and a hard place?

Luis Gallego:

What we have seen is that to be... We are not sure that is going to happen, but we cannot repeat more times that Heathrow is becoming more and more expensive for everybody. It's already 44% more expensive that its European competitors. It has the highest landing charges of any airport in the world. But from my point of view, it doesn't have the best service. So to try to increase those fairs by around 50% is a big mistake. It doesn't make any sense. So the reality is that around 40% of the people who use Heathrow are connecting passengers they simply pass through. But they can go to the destination using other hubs. So if we raise the charges, it's not going to help. We have a lot of uncertainty now, we were talking before about Omicron. We know what's going to happen. So to raise charges, it's not the way. I think we need to work together. If we want a global greeting, what we need is a global hub. And for that we need to be competitive enough with the other hubs that we have in Europe.

Peter Harbison:

It's hard to feel sorry for airports mostly. I know, but of course they have suffered pretty badly through the last two years and obviously need to make some sort of return for their shareholders. Do you think they're going to be a bit more receptive to your approaches?

Luis Gallego:

I can understand their situation. We have a very similar situation. We didn't have customers. We have also big assets, fixed cost very high. So we are in a very similar situation. The only difference is that, in our particular case, we ask for capital to our shareholders and now we are not trying to recover everything suddenly, increasing the prices to our customers. What we are trying is to try to develop, again, the network that we've had before to try to send a message to our customers, that travelling is safe. And in general, we need to rebuild that together. I think it's not a question of if somebody can recover faster than others, because then nobody is going to recover.

Peter Harbison:

Do you sometimes think you'd rather be in the airport business than the airline business?

Luis Gallego:

Sometimes I think that I don't have to be in aviation business, but not in the airports or airlines.

Peter Harbison:

You've certainly taken on the role during a very interesting time.

Luis Gallego:

Yes.

Peter Harbison:

Luis let's go back to the structure of the group. I mean, you have so many different elements in it, which on the one hand gives you a great deal of flexibility, but on the other hand some complexity too, in terms of overlap, in terms of deciding who flies where and with what type of product. How do you go about making those big decisions from where you sit?

Luis Gallego:

The origin of this group was to build a unique disrupted model in the industry, with objectives of consolidation, flexibility, for sure financial performance. I think we benefit from share capital strength and diversification because we can allocate capital where we consider it makes most sense at any a particular time. We also have the opportunity to share best practises and also talent across the organisation and in that way to facilitate the collaboration that we consider is key to take advantage of this situation. From my point of view, this is our differentiator, because of that we can generate synergies and revenue opportunity. Opportunities in a way that I think others, they cannot do it. And we have also flexibility, as we said before, about Gatwick, we have different tools to fly from Gatwick in case, we consider one is not working.

So to have the internal benchmark is also very interesting, but having for more than eight years in the management committee of IAE even when I was in Iberia and for me was very helpful to compare the KPIs, the indicators of Iberia with the performance of other operators, operating companies in the group, because then you can see how others do the things better than you and others can learn from you of things that you are doing well. And I think this model has allowed us to pass this extraordinary difficult period with the only support of our shareholders. Having said all that, this group is always in continuous evolution and the crisis has sped up some of the initiative that the pipeline. Now we have included in the transformation plan, we are implementing

Peter Harbison:

Luis, it does seem as if... It doesn't seem... It's more than seems. It seems inevitable that certainly in the next 12 months, 2022, that you're going to be looking at a price sensitive market with continuing difficulties with openings and closing of international routes. As a group, and you have this opportunity of course, are you seeing it tilt towards the need for lower cost operations to compensate for the fact that you're not going to be getting the premium over your competitors that you would have been say in 2019?

Luis Gallego:

Okay. I think that we have long collaboration and we have short collaboration, as I said before, premium leisure is performing very strong, both in Iberia and British Airways. And I think we have also the advantage that we fly long haul to popular destinations such as the Caribbean or the India Ocean. So long haul strength is not only driven by North America, but also these destinations. Visiting family and friends is also a traffic that is more resilient. And we see that in the holiday season, we destinations such as Argentina, India, Pakistan that are working very well. Other competitors in Europe, they have reduced the capacity by much more than IAE. And we have increased for example, our market share in Latin America in this crisis. So I think we have our resilient model. We have opportunities. And that's the beauty of the group.

Peter Harbison:

Yeah. It's the beauty and the complexity and I guess there's a lot of beauty-

Luis Gallego:

Yes.

Peter Harbison:

And complexity sometimes. Particularly though within Europe, you're seeing Ryanair getting back up to above 2019 levels for Christmas and getting some pretty good loads.

Although I understand not great yields. Are you concerned that the Ryanairs and the Wizzes are going to occupy a position within Europe in the short-haul markets, which are your feeder markets in many places, that you won't be able to get back once you start expanding again?

Luis Gallego:

I think when I see Europe, Spain is the biggest domestic market in the EU and during this year due to less travel restrictions has been the strongest market in Europe, I will say. We restore full capacity on domestic roots in the third quarter, compared to 2019. The group operated 43% of 2019 capacity in that quarter. But if we see the difference between Iberia, and Vueling and Aer Lingus and BA. In Iberia and Vueling they were flying around 70%, in the case of Vueling 77%. While Aer Lingus and BA, they were flying around 30%. Aer Lingus 27% and BA 32% due to the restrictions that was had there.

As a consequence of that in the Q3, Iberia made an operating profit and Vueling reached break even. So I think when we don't have restrictions, we capture opportunities. And we have seen, for example, that we have taken the opportunity in Orly where Vueling has introduced 32 new European destinations. And now is the second largest operator at the airport. The airline was previously operating 22 routes, mainly to Spain and Italy. And now it offers 54 roots that connect France with more than 13 countries. So I think where we don't have restrictions, we are competing well. We are capturing market share. I think we see an opportunity more than a threat.

Peter Harbison:

If I can draw a comparison or the contrast between say the approach that EasyJet are taking as opposed to Ryanair, you have the opportunity of perhaps being more conservative or being more aggressive and, Whizz for example has been very aggressive. Where would you say you sit in that spectrum of conservative to agree?

Luis Gallego:

I think again, when we see the demand, when we don't have restrictions, we have capacity because we consider we can compete well. It's true that after this COVID crisis, we are going to have a huge amount of debt that we need to repay so the capital allocation model that we have, we need to be very selective where we decide to invest. But right now, what we see are opportunities in the different markets, North Atlantic are ensured that BA and compete very well. Some of the operating companies that were there, they have disappear in this crisis.

Latin America, the situation of the competitors in the region is not very good. Iberia is doing well capturing also market share. Air Europa, let's see if finally we can find a way to do it. Intra European, I said before about Vueling and the capacity they are flying. So I think I cannot compare IAG with EasyJet or Ryanair or Wizz Air. We have a different model. We have different type of airlines. So the strategy is different for the different markets and for the different airlines.

Peter Harbison:

Fair enough. Talking about the North Atlantic. I mean, you did have a good recovery and I'd like to ask you what the yields were like, but you probably won't tell me that, but in that market, obviously, it's a very powerful thing that you've got the metal-neutral joint venture and your partner on the American side, American Airlines or American, is to put it bluntly, probably struggling a bit compared with its competitors in the U.S. market.

It's taking a more conservative approach to expansion for the time being. Is that going to be a problem for you as you look to reinstate your position on the Atlantic?

Luis Gallego:

No, we are having lot of meetings with our partners of American Airlines. I think that the new agreements they have also with JetBlue and Alaska are going to help. I think in some way, we are trying to revamp the joint business that we have together. We have opportunities there after this COVID crisis. As I said before, some of the players that they were there before are not going to be anymore. Also we have, for example, the opportunity to develop a different business with a 321 long range and extra long range. So I think it's a market where we are going to have opportunities.

Peter Harbison:

And do you see the business market recovering? I mean, obviously it's going to be down, everybody agrees on that, but probably the North Atlantic is going to be one of the better markets for business travel. How much are you anticipating business travel will be down compared with 2019 levels next year?

Luis Gallego:

No. First thing is to say that corporate revenue accounted for 30% of IAGs total revenue in 2019, 13. So it's important, but it's not so huge, in general, as people think. As I said before, premium leisure is performing very strong, both in Iberia and British Airways. After the reopening, sorry, of the U.S. in November, corporate travel recover to 50% of 2019 levels.

Peter Harbison:

Really.

Luis Gallego:

And when we talk to the companies that they fly with us, 75% of them, they are telling us we are going to travel again to do business. So we consider that the shape of business travel might change, but face-to- face meetings are going to be important, in any case. In the new normal we are assuming in our plans that in 2023, there we are reduction of corporate traffic of 15%, but I think we are conservative. But we prefer to be in that way because I prefer a more efficient model and then we have the opportunity we develop more than to rely on false promises in some way.

Peter Harbison:

But even that sort of reduction is a very large hit to the premium you'll have over your cost base, isn't it, compared with competitors?

Luis Gallego:

It is true, but we need to think also that, for example, the profitability that we have in the premium economic class, sometimes it's higher than the profitability that we can have in the more premium classes. So I think we need to have a different model for the future and then our objective is to come back to the profitability that we had 2019 in 2023. But it's true that we are going to have a different model. We retire the 747s. We retire the 34600. We are going to have less premium seats, but we are going to have an aircraft more appropriate for the market and the demand that we are going to fly.

Peter Harbison:

Right. Which sort of implies a lower cost model in that respect. Let's talk about retiring those older aircraft. Obviously part of the pressure is coming from the environmental front. I know from, and I think I'm right in this, British Airways has stated a 10% SAF goal, a Sustainable Aviation Fuel goal by 2030. Is that a group goal or is that just a British Airways goal?

Luis Gallego:

No, it's a group goal. We were the first European airline group to commit to that 10% of flights power by sustainable aviation fuel by 2030. For that, we will purchase 1 million tonnes of sustainable jet fuel per year. And this will enable us to cut our annual emissions by 2 million tonnes in 2030, that's equal to remove 1 million cars from Europe's road each year. We are also investing a lot of money, $400 million to develop sustainable aviation fuel over the next 20 years. And we are working with companies like LanzaJet, Velocys, along with BP and Repsol in Spain to try to see if we can help to advance in some way the future. So we were talking before about North Atlantic traffic, the 8th of November British Airways when they operated the first commercial trans Atlantic flight were the flight with 35% of sustainable aviation fuel.

So I think sustainable elevation fuel is going to be key in the medium term, but it's not only a problem for the airlines as you know. We can create the demand that we need the supply and government support is going to be critical in attracting the necessary investment to construct the plants that we are going to need. So we always say that we need to work in this together it's a question of the whole ecosystem. The UK Department of Transport has allocated £180 million to support the construction of new plants in Britain. And I think it's a good start, but we are going to need more.

Peter Harbison:

Yeah, it's a drop in the ocean really, Isn't it, if we're going to invest this seriously. What are you finding about... I mean the UK has been... The UK public has been probably more vociferous about out the environment and the airline industry than most other countries. What have you found since COP26, is there still that heavy accent on airlines and how nasty and polluting they are?

Luis Gallego:

I think it's different in the situation in different countries, all over the world. But I think sustainability was a critical point before COVID and now it's going to be even more crucial. So IAG, we were the first group to commit to net-zero emissions in 2050. So we are trying to lead that new sustainable aviation and for that, even we have a startup programme that we call Hangar 51, and we are supporting more than 60 startups and investing in new technologies. For example, I said ZeroAvia that they're working on the world first hydrogen plane, or we are working also with technology to capture carbon from the atmosphere. So I think for IAG has been always a priority. We want to lead this new aviation and we are investing a lot to be there.

Peter Harbison:

Qantas has just announced that there'll be aiming for 10% SAFs on their ultra-long range operations from Australia to the UK. Do you foresee any of those sorts of operations yourself, those very long-haul operations or are they not what you'd consider in this suitably sustainable area?

Luis Gallego:

I think for Qantas, it makes more sense because of the geographical position they have. In our case, it is not now our focus. We have enough trying to come back where we were, let's see the opportunity that we can have in the future with other models.

Peter Harbison:

Yeah. And on sort of as a tangent to that, excuse me, as a tangent, Qantas is one of your partners, one of your many partners, do you see the need for improvement in joint ventures and alliances, maybe even more consolidation as you try to operate long haul routes?

Luis Gallego:

We always said that the group that consolidation is necessary to compete. It's very difficult. We have seen now, for example, here in Europe, that in a moment where you have companies that they are not disappearing because of the health of the government, but they are in a very difficult situation. Even in this moment, it's difficult to consolidate. But I am sure we are going to continue trying to do operations that are good for the group and for the customers. As I said before, we have very good partners, North Atlantic with American Airlines, Finnair, and also we are working with Qatar Airways. I think it's an opportunity for us. We only have 8% of our ASKs to Asia. It's a region where we want to develop more, IAG. To have Qatar as a partner is an important opportunity to access that market, sorry, through Doha hub. So we are analysing all that, thinking also in how it's going to be the IAG of the future.

Peter Harbison:

Right. Well, it's going to be a very interesting model. No doubt. Luis, thank you for spending some time with us. I do wish you well in navigating a very complex operation through a very complex time. I wish you well with it and perhaps you will really want to stay in the aviation business after the end of next year. But thanks for being here.

Luis Gallego:

Yes. I don't know what else to do so I will be here. Don't worry.

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