Airline Leader Interview - IAG, CEO, Luis Gallego

Transcript

John Strickland:Morning, ladies and gentlemen. I'm John Strickland. I hope you had a great night out last night. That little clip there of flamenco, I think it was amazing to see that being done live. Many of these cultural things, sometimes you can't access them, but that was really powerful and emotional. I'm delighted we're kicking off this morning with the CEO of Iberia Express, IAG. Now it's a mouthful of a name, and it's actually international— not just International Airlines Group, but International Consolidated Airlines Group.

Luis Gallego:Yes, that's true.

John Strickland:And the CEO of the group is Luis Gallego. Luis, welcome to CAPA Summit.

Luis Gallego:Thank you very much.

John Strickland:You're here on your home turf in Spain, not your hometown. You're from Madrid, but you were telling me earlier you did your military service in this region, so you know the mountains and all the intricacies very well.

Luis Gallego:I can say that I started working in aviation here because I did the military service the first 3 months in Armilla, very close to here, and I left Armilla as a second lieutenant. And then after that, I started working in aviation.

John Strickland:And you are an aviation man through and through. I also know your family background is aviation. You lived and breathed it growing up.

Luis Gallego:Yes, yes. My father and the major part of my family, we are from Getafe. That is called the cradle of Spanish aviation. A lot of people, they work in aviation there. So my father was working for Construcciones Aeronáuticas, that became Airbus after that. So he worked there for more than 40 years.

John Strickland:Wow. And airline-wise, again, your bio is available on the website, but you've worked for many Spanish airlines, a long period in particular with Air Nostrum, and then leading up to IAG also, you established Clickair, which was Iberia's own low-cost, which became merged with Vueling.

Luis Gallego:Yes.

John Strickland:I first became aware of you when you were tasked with setting up Iberia Express from zero, which has become a successful low-cost and feeder. And then I remember going to an IAG, one of the first Capital Markets Days, and Willy Walsh said he was putting you in charge of Iberia, and he said, don't underestimate this man. I think you're a little quieter in public demeanor than Willy can be, but he said, don't underestimate him. So that's the point I'd like to start on. You turned around Iberia. There were many people, not least in the UK, when that merger happened that formed the basis of IAG, Iberia and BA, many people said, this is crazy, this— why the hell is BA merging with Iberia? You know, if there's any merger that should happen, it should be with KLM. Iberia was seen at that time as an airline similar to all the challenges that Alitalia went through, Loss-making, poor service, demotivated staff. How did, how did you turn it around to a completely different position today of a preeminent carrier?

Luis Gallego:I didn't do it. It was a team of excellent people in Iberia. So we came in in 2013, and then at that time Iberia was losing €1 million per day. Punctuality was a disaster, strikes. And at the end, everybody understood that the merge with BA was bad for Iberia. But we explained to the people that IAG was a great opportunity for Iberia, a company, medium-sized company like Iberia. We needed to be in a strong group in Europe, and to be together with British Airways was the right model because we are very complementary. We don't have a lot of overlap in our network. And then we started a transformation process. And in 3 years, I always say that is the fact I'm more proud, we became the most punctual airline in the world in 2016. Because I think everybody worked together in the same direction. And then again, we were profitable. We could invest in new aircraft, new routes. During all the transformation process, we needed to cut the network, short-haul, long-haul. But after that, we launched the new brand. And last year, we have seen all the benefits of the good things that we did in that period.

John Strickland:Now, as you said, you didn't do it all by yourself. And I was thinking the key thing there has to be convincing the people, and many different kinds of people— pilots, engineers, frontline staff, office staff. That takes some doing, doesn't it? But we look at this week, Lufthansa is I saw the German media is calling it Strikehansa because it's having so many problems. That must take a lot of time personally to sit down, look in the eyes of people across the table, and get that trust. They don't think you're just telling them a story to exploit them.

Luis Gallego:Yes, it took more than 1 year to close collective bargaining agreements because the people, they didn't believe that we wanted to save Iberia. They thought that we wanted to kill Iberia because IAG didn't like the company. But when they realized that we were there to invest in the company, but we needed the right cost structure, the right model, the right punctuality, we— then they started to work together. And I always say that the same people that they were in strikes in 2013 were the same people that 3 years later they were the most punctual airline in the world. It's only because they were aligned, same direction. We talked a lot about what we wanted to do with the company, and I think it worked very well.

John Strickland:If we move from 2011 to today, 13 years later, as I said, the public name is maybe not so well known outside of the industry, IAG, but the key thing, it seems to me, is you've kept the brands and the identities. Iberia is still there, BA is still there, and now you've got Aer Lingus. Vueling, created Level. You know, there's more to talk about in terms of acquisitions. So from a customer point of view, I guess you saw the value that people knew those airlines and play to their strengths.

Luis Gallego:Yes, we always say that the secret sauce of the group is the capital allocation model that we have. We are a holding group, but we have an active role, so But it's true that the airlines, they are responsible for the P&L, the customer, the brand, labor agreements. But at the group level, we have some activities that we consider can improve the performance of the different airlines. For example, we do procurement at group level, or part of the IT, we do it together. We launched in 2019 a transformation program that we run from the group. But we don't want to do a lot of things because we believe that to have freedom in the airlines is good in order to deliver the results.

John Strickland:They have freedom, but I think you do encourage— I mean, a part of the mantra is there is competition between those airlines. They don't just automatically get freedom. They have to deliver in terms of who gets the aircraft, the precious, highly capital-intensive resources.

Luis Gallego:Yes, because with the capital allocation model that we have, in the last Capital Markets Day in November 2023, we explained that for the next 3 years, we want a group of airlines with EBIT margin between 12% and 15%.

John Strickland:Mm-hmm.

Luis Gallego:And that's what we ask for all the airlines in the group, and a ROIC margin between 13% and 16%. But it's true, if they don't deliver, we don't invest because we have places where it makes more sense invest, and that's the model that we have in the group.

John Strickland:So you order aircraft without necessarily saying where they will go. That's to be decided later depending on performance.

Luis Gallego:Yes, and for example, today we, we have an order of 737s that still we are—

John Strickland:50 MAX aircraft.

Luis Gallego:Yes, MAX. So we are still considering where we are going to fly, or even the XLR that we are going to receive this year in the last quarter. We are still thinking where is the right place to fly.

John Strickland:I think one thing I suppose you could say that is quite flattering, we're going to hear later this morning from Ryanair and their business model. I think Michael O'Leary said he was going to practically copy the IAG structure, make Ryanair a group company. They too now have separate airlines in the group and he kind of cracks the whip over all of them. You're here today, Luis, in the middle of a busy Investor Week because your results were just out, I think, Thursday last week, very strong results for 2023. We know every airline went through a very tough period of COVID You've recovered from that. All airlines in the group strongly profitable and your margins are on the rise. I saw even in the media last night your share price is being re-rated upward by one or more of the banks. Things appear to be going strongly in the right direction. for the group financially?

Luis Gallego:Yes, I think 2023 was a very good year for us. We have an EBIT of €3.5 billion above the EBIT that we had in 2019. We generated €1.3 billion of free cash flow. We repaid the major part of the debt that we raised during COVID We came back to investment grade in the group and also in British Airways. The leverage now is 1.7 times. We said also in the capital markets day that objective is to be below 1.8. So things are working, and what we see for this year is also good. So with the visibility that we can have for the 2nd and 3rd quarter, things continue strong. So the main challenge and the debate we are having in this roadshow that we are having this week and the next week with all the investors is why share price in some way is not raising—

John Strickland:reflecting—

Luis Gallego:yeah, reflecting this. And that's the challenge that still we have.

John Strickland:And you embrace all business models in the group, from network, premium, full-service, right through to low-cost. As I mentioned, they're all performing. But I think the dynamics of the market— and we talked about this in a panel on network planning yesterday— the dynamics of the market are changing. You've acknowledged, many other airlines have said, the premium traditional corporate traffic hasn't come back. It's strong, it's strong, but nowhere near as strong as it was pre-COVID. But you've been getting incredibly high yields, and not least in the premium cabins, far more with premium leisure. And you've said that— I was quite surprised— leisure is about 80% of your volume activity, not revenue. Is that something you would feel is going to be more of a trend for the future? This ratio is going to stay like that, and that's where you have to address focus?

Luis Gallego:We didn't know how was going to be the future after COVID. We made the hypothesis that corporate traffic was going to come back to 85% of the levels that we had in 2019. We are still behind that. In British Airways, we are in 70% in volume, but in revenues, In the first weeks of the year, we are around 85%. So revenues are higher for sure than volumes because of the yields. In Iberia, it's different. In Iberia, volume of corporate traffic is around 85%, in revenues 95%. And I think it's linked also to the different behavior in Spain after COVID. People, they came back to work earlier.

John Strickland:Mm-hmm.

Luis Gallego:And in the case of Lingus, it's a little lower. But what we see is slowly volumes are coming back, revenues are strong. But the good thing, as you said, is we have a very strong leisure demand and premium leisure demand. So our premium cabins, we don't have the same volume of corporate traffic, but we are offsetting with premium leisure traffic.

John Strickland:Mm-hmm.

Luis Gallego:The yield is different. But at the end, as we have more people, we are having an important advantage in RASK.

John Strickland:It's an interesting development and obviously an important one that it does stick because although the results were strong, as we've seen with COVID or indeed the current geopolitical situation, any airline can be thrown off course rapidly. Fuel prices, again, always a big element of volatility. I guess you can't take your eye off the ball when it comes to cost. And making changes. You mentioned transformation, which we'll talk about more fully in a few minutes.

Luis Gallego:Yeah, it's critical, I think, the transformation, because there is the debate if this demand, leisure demand, is going to continue. We had this debate from 18 months ago, and we see that, I think, everything has changed after COVID and it's going to continue. But in parallel, we are in a very inflationary environment, so we need to do the things better. And then we launched the transformation program with more than 1,000 initiatives. affecting revenues, costs, customer initiatives, operations, etc. And the idea is to mitigate these increases in costs that we are having. And to reduce the unit cost, you can manage the numerator, but you can also manage the denominator. So we are trying to do things better, improving efficiency, flying more. For example, we have some companies very seasonal, like Vueling, like Aer Lingus, and we are increasing the utilization in the shoulders.

John Strickland:Multiplying.

Luis Gallego:And this is helping. And this profile of demand that we are having now, for example, more leisure demand is more seasonal. So I think that in British Airways, they are coming back to Asia. And for example, we are going to start now Bangkok and Kuala Lumpur. This is going to help also to the seasonality, and this will help to the utilization of the aircraft.

John Strickland:Absolutely. In terms of the organization, you also just announced, Tim, last week you're moving people around within the group. There's a new CEO coming into Iberia, Marco Sansovini. Carolina Martinoli, who maybe is less known in the industry, she's going to become the CEO of Vueling, a lot of experience. Antonio Candela?

Luis Gallego:Fernando.

John Strickland:Fernando Candela, who has been looking after Iberia more recently, is going over to Level.

Luis Gallego:You promote from within the group your own Yes, we have a very good talent pipeline in the group. We hire also people from outside the group. But the good thing we have is, for example, Fernando Candela, he was in charge of the transformation from 2019. But last year he became the CEO of Iberia, and we said that at the end of the year we were going to make the change. And but we had the conflict of the ground handling in Spain and we decided to postpone the change. And now Marco, that was the Chief Commercial Officer when we did the transformation of Iberia and then he became the CEO of Vueling, is coming back to Iberia. He knows very well the house and what we have to do there. And Carolina, she was part also of the transformation of Iberia.

John Strickland:In Iberia.

Luis Gallego:And she moved to BA. In BA, she was in charge of cabin crew, brand, customer, and now she goes to Vueling. So, and Fernando, he was CEO of Level before, but he is coming back there to continue the operation of Level because we announced that we want to launch a new AOC for long-haul in Level. So he is leading now that.

John Strickland:Okay. IAG was born with the mantra, Willie used to say, you've said it, to continue consolidation in the industry and the acquisitions beyond BA and Iberia as a start. We mentioned Aer Lingus and Vueling as existing companies. There's been an ongoing plan to invest in and ultimately become majority owner of Air Europa. It's taken longer than you thought.

Luis Gallego:Yes.

John Strickland:It's not a done deal yet. We're here in Spain this week. How do you see that going? Because the regulators in the EU seem to have taken a much tougher line recently than in the past. There were always remedies, give some slots up here and there, and then you get the green light. But Lufthansa is equally struggling on ITA. Are you still optimistic that you can get that deal through in a way that makes sense to you as a business and makes the regulators comfortable?

Luis Gallego:First of all, I think that Europe, we need more consolidation. And that's the reason Lufthansa is trying to do ITA. We are trying to do Europa. Air France, 20% of SAS. TAP, let's see what happens, but we're trying to sell the company. And we need scale. We need scale to compete in a global world. And we need scale also for the challenges that we are going to have in the sustainability area. So if Europe wants to lead the sustainability change, we need big companies that can invest. Otherwise, it's not going to be— possible. So we are trying to do the Air Europa operation. All this started in November 2019. We needed to abandon during the COVID because of all the uncertainty, and now we continue with the, with the process. We are talking with the European Commission. We are in the second phase. Last week they asked to stop the clock to have more time to analyze the all the documents. But in principle, the second half of the year, we will have a clear idea if this deal can happen or not. We presented remedies trying to address the concerns the Commission has in several routes. And let's see if at the end the deal makes sense, we will do it, and if not, we will not do it. But, but my point of view is This is good for Europe. To have a strong Madrid hub is good for the customer. Customers from Europe are going to have more alternatives if we have a stronger hub in Madrid to compete with the strong hubs in the north of Europe than if we have a smaller hub. And Madrid in 2019, before the pandemic, was the 19th airport in Europe in number of destinations.

John Strickland:19.

Luis Gallego:19, because we don't have the scale. Yeah, so we need to have a big airline and a big group investing in Madrid in order to develop further the hub.

John Strickland:But some people would say, well, Madrid can never be, you know, Heathrow in Amsterdam or Paris or Frankfurt in terms of some of the network going east, although there are things you do going east. But then Latin America equally is a massive growth market and at your natural strength from an Iberia perspective?

Luis Gallego:It's difficult to fly to the east. When I was in Iberia, we tried— we launched routes to Shanghai and Japan. Iberia, they are going to come back now at the end of the year to Japan, but China always is a challenge. The geographical position doesn't help. But to invest in new routes and to have a 360-degree hub, you need again You need volume. Latin America is a market with a lot of growth, and we see that after COVID, the traffic between Latin America and Madrid mainly is booming, and we want to take advantage of that. We know that if we are bigger, we are going to have more opportunities and more options for the customers.

John Strickland:Helping that move east, I mean, 2 points here, Luis. You have both a shareholding IAG from Qatar, Qatar as a country, and you have a joint business arrangement with Qatar Airways, which I was reading is now the biggest in the world, and Iberia has just joined that. So I guess that also helps you expand east, given their own hub strength in Doha.

Luis Gallego:Yes, in the Capital Markets Day, we said that we have 3 strategic priorities. One is to strengthen our core markets and brands. And our core markets are North Atlantic, South Atlantic, intra-Europe. And we are investing also a lot in the different brands. The second strategic imperative was to develop the asset-light businesses that we have. And one of them is loyalty. I think we have a big opportunity there. And last year, they increased the EBIT by 17% to £280 million. Partnerships are going to be critical in that pillar because with Qatar, for example, we have the biggest joint business in number of destinations in the world. I think it's an opportunity for us to go to Asia. Even in 2019, we only had 8% of our capacity to Asia. We have less exposure to Asia if you compare with other big groups in Europe. But we have the potential to do things together with Qatar.

John Strickland:You don't see the likelihood of that stake from Qatar or that partnership reducing given that their very high-profile CEO Akbar Al Baker has gone because he certainly very much personally led those stake acquisitions and had an incredible profile in the industry. You don't see that would risk withering or diluting?

Luis Gallego:No, I think we continue talking continuously with Qatar, with the new CEO, We are sure that we are going to continue developing the partnership.

John Strickland:I did want to ask you in the short time we've got left, Luis, about the operational side of the business. You're very much an operational man. You're an engineer by training. We talked about how you turned around Iberia, but me being a Brit and living in the UK, I witnessed the frankly terrible year of performance BA had last year. They could blame it on COVID in 2022. Last year they couldn't. Not only, as you've shown in your recent presentation, a very low punctuality level, round about 55%, 60%, but very high cancellations, not least on long-haul flights, and lots of media coverage about that bad performance. You've said, not least in the last few days, you are investing strongly to address that. Do you expect to see results coming through? And it's not just BA, but BA in particular. It's like polar opposites between Iberia and BA in recent performance.

Luis Gallego:Yes, in our transformation, to have a very good operation is critical. And in the case of BA, we need to increase the punctuality. As you said, we have levels of punctuality very low. It's true that some airports in Europe, in the north of Europe, they had a similar situation. In the group, for example, we have Iberia and Vueling. They are performing very well. Even Iberia in January, again, they were the most punctual airline in the world. But in BA, in Aer Lingus, we have a challenge. So we are investing a lot in British Airways and I think we are seeing the results. In January, the punctuality was 80% and in February even above. It's true that it's winter, you have less flights, but you have also the weather that doesn't help. But I think—

John Strickland:Is the cancellation rate coming down as well?

Luis Gallego:It's coming down because also the TDR of the aircraft is improving.

John Strickland:Much better.

Luis Gallego:The supply chain that we still have but has improved, but the TDR of some aircraft that was very poor in the past is improving. Because of that, we have a much more resilient operation. When we have disruptions, we can recover the operation faster.

John Strickland:Again, that must require investment in digital, not simply from the customer-facing end, which itself has challenges in BA. People are always commenting the app doesn't work. There's the customer side, but there's running the business. All the airlines that I see that are succeeding at the moment operationally, and indeed shouting loudly about it, like Emirates, Delta, Ryanair, they talk digital, digital all the time in terms of managing aircraft unserviceability issues directly, information from a plane, managing the operation of a program. I assume that's something that part of your big investment going to be going towards as well.

Luis Gallego:Yes, we have now 3 years where CapEx is high. 70-75% is fleet because we are renewing the fleet. But a big part is also IT and transformation of the systems. And IT is not only moving systems to the cloud, that we are in the process, is before doing that, we are changing all legacy systems with new systems. And in the case, for example, of the commercial The commercial platform of BA is going to be a new one. This year we will see a new webpage and a new app, but also in operations we are changing all the systems that we have to follow the operation. It's going to take time, but I think at the end we are going to see a much better and a stronger BA.

John Strickland:Again, in terms of performance, we've got 5 minutes left. We've got to try to get 2 more bits of information out of you, Luis. Tying in both investment and fleet and sustainability, you've got a big order book for latest-generation aircraft, including the 350, 787, the 777-9, and short-haul, the 321LR. I mean, that is relevant both from a sustainability emissions point of view and also operational and operational capability.

Luis Gallego:Yes, in IAG, we want to lead the path to net-zero emissions by 2050. We were the first worldwide group to commit to that objective and also the first European group to commit to 10% of SAF by 2030. The change in the aircraft that we are having is a key part of that. We are receiving the A350s, the 787s, and we will have the 777-9 in 2026. In the narrowbody, we are receiving also the A320s and A321neos, and also the XLR that I said before. We have the order of the 737 MAX that we will start with the delivery in 2025. All these will help to the sustainability path, although we always say that the only solution that we have in the medium term and in the short term is the use of SAF. I think you were talking yesterday here in—

John Strickland:There was a lot of debate about this yesterday. The comment was put that if SAF is the answer, Then it was a stupid question. I mean, to you, I'm asking as an engineer, Luis, do you have any optimism? Although we say in the next 50 years we won't have new technology that allows non-SAF or conventional fossil fuels to power long-haul aircraft, do you have any sense of optimism, even if we're not on this planet as individuals anymore, that we could push that technology quicker as we're doing on some short-haul aircraft, electrics, hydrogen, and so on?

Luis Gallego:I think it's difficult to predict the future. I think—

John Strickland:So far.

Luis Gallego:In 30 years, we didn't know what is happening today, but we are investing in different technologies, not only in SAF. So we are investing in hydrogen aircraft, carbon capture, et cetera, because we want to explore all the options. But to be honest, I think hydrogen aircraft, maybe an aircraft with a hydrogen battery moving an electric engine, we can have by 2030, but a small one. Maybe 76, something like that. Airbus, they say that we are going to have a hydrogen aircraft by 2035. I don't know, they know better than me. But even if we have that, we need to replace all the fleet in the world. So it's going to take a lot of time with the capacity that we have today.

John Strickland:Time.

Luis Gallego:And in the widebody, we don't see a solution in the short term. So the only solution that we are going to have in the medium term Unless something happens different to what we see today, is the use of SAF.

John Strickland:My last question I think we'll have time for, Luis, returning to the agenda of IAG as a consolidator, and I know from talking last night, we have a lot of people in the room from TAP. The open question, we know what maybe happens with ITA. From your point of view, Air Europa, SAS indeed, what about TAP? You have expressed interest. Is that interest still there? Is it too much to take on if you were to get the green light green light on Air Europa? Would that be too much for you to digest? Is the interest a realistic one?

Luis Gallego:No, last year we said that we were interested to see the process of privatization of TAP. The main reason is that because with Air Europa, if we can do it, we are going to have a stronger hub, but the capacity that we have in Brazil, for example, is Not huge. So we consider if we can do the TAP operation, it's going to be good for the group, mainly in flights from Europe to Brazil and also some destinations in Africa. We consider both operations very complementary.

John Strickland:Complementary.

Luis Gallego:But we need to see what, what's going to happen in Portugal. There is an election, new government. Coming. Let's see what they want to do, and let's see if with the conditions that they establish, we are interested or not.

John Strickland:Because the politicians, I guess you never know. And I, yes, I imagine that is a sensitivity with Madrid and Lisbon being so close. There would be a political risk of thinking, well, IAG just feed it all via Madrid, you know, we'll lose out.

Luis Gallego:But what we say is we had the same debate when we did the Aer Lingus operation. The people, they said, if you do Aer Lingus, you are going to kill Dublin because of London. And the reality is that one of the places where the, the biggest growth in the group in the recent years has been Aer Lingus, because we have a dual hub model that works very well. And I think we can have a dual hub model in the Península Ibérica with Madrid and Lisbon that can work very well. So the objective is not to try To to to have a tap smaller is to develop a tap if we can do the operation.

John Strickland:Be one and one equals three as opposed to one and one equals two.

Luis Gallego:Yes, yeah.

John Strickland:I mean, it's interesting because we we didn't really have the time to touch in the detail on North Atlantic. But as as you say, BA is is the largest player at North Atlantic. But Aer Lingus has what is an advantage of the Irish population in USA, but also the easy ability to to have see as a good example. to give. Luis, we're right out of time. Anything else you want to say as a last comment before we get cut off?

Luis Gallego:No, thank you very much. A pleasure to be here in Granada.

John Strickland:Great to speak to you on your home turf. Muchas gracias. Luis Gay, CEO of IAG.

Luis Gallego:Okay, thank you very much.

John Strickland:Thanks, Luis.

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