IAG Interim Management Report to June 30 2023

Record first half profit driven by continuing strong performance across the Group

Highlights

• Record first half operating profit before exceptional items of €1,260 million (first half 2022: €446 million loss), an increase of €1,706 million, with sustained strong demand across our network and particular outperformance from our Spanish businesses
• Quarter 2 2023 operating profit before exceptional items of €1,251 million (quarter 2 2022: €295 million), including a record operating profit before exceptional items for any quarter at Iberia of €307 million
• Net debt has reduced to €7.6 billion at June 30, 2023 (December 31, 2022: €10.4 billion) due to the increase in profit and seasonal working capital inflows; net debt to EBITDA before exceptional items of 1.5 times (2022: 3.1 times)
• We are particularly focused on delivering resilient operations over the summer, reflecting a challenging operating environment in the UK and parts of Europe
• Encouraging outlook for the summer with around 80% of expected quarter 3 revenue now booked
• IAG is well-positioned to benefit from its attractive customer base and strong network in large and growing markets

Luis Gallego, International Airlines Group's CEO, said:

"Our strong profits since the start of the year are helping to fund investment for our customers, and to improve our balance sheet by reducing debt.  We are aiming to be back to pre-pandemic capacity at the end of this year.

"These results are thanks to a strong performance from all companies across the Group, and we would like to thank our teams for their hard work during the year so far.

"Customer demand remains strong across the Group, particularly for leisure travel, with around 80% of passenger revenue for the third quarter already booked. And our airlines have put in place plans to support operations during the busy summer period."

Financial summary:

Financial highlights for first half of 2023

• Restored 94% of 2019 capacity, measured in available seat kilometres (ASKs)
• Passenger unit revenue for the first six months was 18.4% higher than the same period in 2022, with strong leisure traffic recovery and business traffic recovering more slowly. The premium leisure segment continued to perform very well.
• Non-fuel unit costs reduced by 7.3% versus the first six months of 2022, driven by a passenger capacity increase of 30.9% and transformation initiatives, net of supplier cost increases, mainly linked to inflation.
• Fuel unit cost was up 5.7% versus 2022, linked to higher effective average fuel prices net of hedging in the first six months of 2023 versus 2022 and the benefits of IAG's more efficient aircraft deliveries over the last few years
• Operating margin before exceptional items was 9.3% for the first half and 16.3% for the second quarter
• Profit after tax for the first six months of 2023 of €921 million (first six months of 2022: loss after tax of €654 million)

Trading outlook

• Customer demand remains strong across the Group, particularly for leisure customers, with around 80% of the third quarter's passenger revenue already booked
• We expect full year 2023 capacity to be around 97% of pre-COVID-19 levels, subject to disruption
• Whilst there is no sign of weakness in forward bookings, we continue to be mindful of wider uncertainties that might affect the full year. This includes the potential impact of geopolitical and macroeconomic volatility on the price of fuel and consumer confidence, as well as the impact of external factors on the operating environment, such as strikes. Our Cargo business continues to be impacted by a weak market
• We are currently c.30% booked for the fourth quarter, which is typical for this time of year
• We continue to expect non-fuel unit costs for the year to be in the range of 6% to 10% better compared to full year 2022
• We expect to generate sustainable free cash flow this year and for our net debt at December 31, 2023 to reduce compared to December 31, 2022, in line with our profit outperformance

Strategic highlights

IAG's airlines are well-positioned in large and growing markets

• Both the North and South Atlantic markets are seeing strong customer demand and are expected to reach pre-COVID-19 capacity by the end of this year
• We are seeing very strong leisure demand this year, across all our airlines and across all our cabins, as customers prioritise holidays and visiting friends and relatives
• This is compensating for slower recovery in the corporate market

Trading and network

• We are focusing our capacity restoration in our strongest markets
  • Aer Lingus is focused on its US markets, targeting new cities (e.g. Cleveland) and reopening previous destinations (e.g. Hartford), as well as consolidating its Manchester base
  • British Airways is continuing to focus on its traditionally strong North Atlantic markets, as well as reopening its key Asian routes
  • Iberia is building its capacity from Madrid to reflect strong demand in both the South and North Atlantic
  • Vueling continues to strengthen its presence in its core European markets and slot-constrained bases
• Strong demand for our attractive network and frequencies driving strong yields
  • Aer Lingus driven by US markets and recovery in the shorthaul European leisure destinations
  • British Airways seeing strong leisure demand in all cabins but lower levels of corporate travel
  • Iberia revenue is strong across the network due to exceptionally high demand
  • Vueling's high leisure demand and revenue strategy is delivering very high ancillary revenue growth

Fleet

• Disciplined capacity restoration, with a focus on reinstating British Airways' widebody capacity and supporting strategic opportunity for Iberia
  • 11 new deliveries in first half of 2023 to British Airways, Iberia and Vueling;
  • We are now expecting 30 aircraft in total to be delivered in 2023 including an additional leased aircraft for LEVEL
    • 11 widebodies (six to British Airways, four to Iberia and one to LEVEL); 19 narrowbodies (across all airlines)
  • 43% (243 aircraft) of both our longhaul and shorthaul fleet are now more efficient and quieter next generation aircraft
  • Better aircraft utilisation at Iberia and Vueling supporting capacity growth without the need for new aircraft
  • British Airways to return to pre-pandemic levels of non-premium capacity in 2024; longhaul capacity by 2025; and premium capacity by 2026
• Continuing to order more efficient, sustainable aircraft to support group commercial and sustainability objectives
  • Converted 10 A320neo options to firm deliveries from 2028 as replacement aircraft for our shorthaul network
  • New order for six Boeing 787-10 aircraft to be delivered to British Airways in 2025 and 2026 to accelerate its premium widebody capacity recovery; one new Airbus A350-900 aircraft for Iberia

Investing in our customer proposition

We recognise that we need to continue to drive investment in our propositions at all of our airlines to improve the customer experience. We are investing in our premium propositions to ensure we are competitive and remain attractive to our loyal customers

• We are continuing to roll out our new business class seats at British Airways and Iberia; 55% of British Airways' Heathrow longhaul fleet now embodied with the new Club Suite
• Both Iberia and British Airways are also investing in new and upgraded lounges, as well as developing a premium ground-based service at Madrid airport
• All of our network airlines are offering improved onboard catering in their premium cabins

We are also continuing to invest in customers across all parts of our airlines

• We continue to invest in our IT and digital capability:
  • Cloud-based systems and data centres for greater future reliability and flexibility
  • Commercial re-platforming at British Airways is underway which will deliver better customer experience and a greater range of commercial opportunities
  • Self-service capabilities and disruption management at Vueling
• British Airways recently opened a larger, more modern call centre in Delhi, with better IT and data capability

Building resilience in our operations

• Some of our operations are not where we would want them to be and this is affecting our overall customer service
• We are working in a challenging environment: French ATC strikes are affecting most of our airlines and global supply chain issues are reducing aircraft availability
• British Airways is being particularly affected due to its London exposure (at both Heathrow and Gatwick) and complex schedule. We are addressing this by:
  • Recruited 4,000 people in the first half, with a particular focus on ground operations
  • Taking on a number of wet lease aircraft to supplement availability: four Finnair A320s, one Air Belgium A330 and three Avion Express A320s at Gatwick
• Iberia still one of the world's leading airlines for punctuality

Loyalty

• Our Loyalty business continues to deliver strong growth in its operating profit, up 11% versus the first half of 2022 at £141 million (€160 million) - and 64% higher than the first half of 2019
• This included record remuneration from American Express of £286 million (€326 million), 76% higher than 2019, driven by more users of the branded card, which was relaunched in 2021
• During the first half of the year we issued 66.4 billion Avios, a 14% increase from the first half of 2022. We continue to add new ways for members to collect points:
  • 55% more members using our shopping portal; "Avios Balance Booster" leading to half a billion Avios issued in the first few weeks
  • In July we announced an update to how British Airways Executive Club members earn Avios, based on spend instead of the distance they fly, making it simpler and more transparent
• We are also helping our members to redeem points, with a total of 50.9 billion redeemed in the first six months:
  • Launch of 7 dedicated Avios-only flights to in-demand destinations including Geneva, Sharm El Sheikh and Tenerife; continued growth in BA Holidays redemptions with almost 20% of bookings using Avios
• Continuing to develop third party partnerships for both airline and non-airline earnings and redemptions

People

• We continue to make good progress recruiting people across the Group, in particular to support operations this summer
  • Over 7,000 employees recruited in the first half of 2023
  • British Airways and Iberia have also recently announced cadet schemes to provide a continued source of pilots
• We continue to be in negotiations with a number of employee representatives around the Group
• With respect to improving our gender diversity we are implementing resourcing, talent and succession strategies across the Group in order to achieve our target of 40% of women in senior leadership roles by 2025

Sustainability

• We continue to state the case for the positive social impact of aviation, including commissioning a report by PwC that concluded that IAG contributes directly and indirectly around €70 billion to the EU and UK economies, as well as supporting more than 600,000 jobs
• We are also taking an active role in EU and UK discussions on Sustainable Aviation Fuel (SAF), in particular around mandate design and potential pricing mechanisms
• Specifically we are making further progress in our initiatives to deliver our sustainability targets:
  • adding 11 new, more efficient aircraft which reduce our emissions by 20% compared to previous generation aircraft
  • we have just signed an agreement with Nova Pangea to provide funding for its project to convert waste to ethanol, the first stage in 2^nd Generation SAF production.

Other

• We continue to focus on securing the required approvals for our acquisition of Air Europa, which is still expected to take between 18 to 24 months since our announcement of the transaction in February 2023