International Airlines Group 2019 Full Year Results

IAG has released its annual financial results and provided a strategic update on the group’s airlines.

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International Airlines Group - Aer Lingus, BA, Iberia, Vueling
International Airlines Group – Aer Lingus, BA, Iberia, Vueling

International Airlines Group, the parent company of Aer Lingus, BA, Iberia, LEVEL and Vueling, has released its annual financial results.

IAG has reported an operating profit of €3,285 million for 2019, compared to €3,485 million for the prior year.

By airline, operating profits were: BA £1,921 million (down £104 million, primarily due to last year’s pilot strike); Aer Lingus €276 million (down €35 million); Iberia €497 million (down €36 million) and Vueling €240 million (down €24 million).

The announcement does of course take place against a background of considerable uncertainty over the impact of Coronavirus (COVID-19).

There is also the judgment of the Court of Appeal on a third runway at London Heathrow and the unanswered question of state support for Flybe.

This was also Willie Walsh’s last results announcement before Luis Gallego takes over as CEO on 26 March 2020.

Coronavirus (COVID-19)

Unsurprisingly, the results announcement and consequent presentation was dominated by IAG’s response to the Coronavirus outbreak.

IAG has not given any guidance on the financial impact of Coronavirus. The negative impact on demand was initially limited to Asia and had showed signs of stabilising. Following news of the outbreak in Italy this week, demand is now falling more broadly as major events have been cancelled and many organisations restrict employee travel.

IAG has reviewed its long-haul schedules up to the end of June 2020 and its short-haul schedules up to the end of March 2020.

BA has suspended Beijing and Shanghai until mid-April 2020 and cut frequencies to Hong Kong, Seoul and Italy. Iberia has also suspended Shanghai until the end of April.

Long-haul aircraft have been redeployed to India, South Africa and the US up to the end of June where demand had remained strong.

In addition to existing frequency cuts by all IAG airlines to Italy, there will be further cuts to short-haul flights across Europe, without redeployment of aircraft elsewhere, up to the end of March.

There is a careful balancing act in play here as IAG airlines have to use slots at airports such as Heathrow for 80% of the season to avoid forfeiting them. Discussions are underway at an industry level on an alleviation of this rule.

Discretionary spending is also under review. Some other investments may be deferred. A recruitment freeze is also in place. Employees will also be offered part-time work and unpaid leave, for which IAG thinks there is pent-up demand.

Unsurprisingly, as it has done for much of its existence, IAG is keen to emphasise its relative resilience and preparedness to deal with any further challenges that may be forthcoming, as well as the experience of its airlines of having dealt with previous industry crises.

IAG expects a number of weaker airlines in and outside Europe to fail this year, and other airline groups will not be buying them.

Aircraft Orders & Deliveries

There will be no changes to IAG’s plans for the delivery of new aircraft this year.

In the case of BA long-haul, this includes 5 Airbus A350-1000, 4 Boeing 777-300 and 6 Boeing 787-10 aircraft.

IAG still intends to convert its Letter Of Intent for 200 Boeing 737 MAX aircraft into a firm order. Shareholder approval will be sought when the aircraft has been re-certified and returns to service. IAG maintains that competition is needed between Airbus and Boeing for both short-haul and long-haul aircraft.

BA Club Suite Roll-Out

Whilst some investments are under review, IAG has no plans to pause or slow down the planned roll out of the Club Suite at BA. This will be accelerated if possible.

By the end of 2020, the Club Suite will be on 38 long-haul aircraft at Heathrow. This includes 9 Airbus A350-1000, 16 Boeing 777-200, 7 Boeing 777-300 and 6 Boeing 787-10 aircraft.

Heathrow Third Runway

IAG has always been a vocal advocate against Heathrow’s approach to a third runway, particularly with regard to its management of costs and the potential impact on passenger charges.

Following the Court of Appeal judgment handed down on Thursday 27 February 2020 (which Heathrow airport intends to appeal against), IAG is to call on the Civil Aviation Authority to mandate that Heathrow stops spending any further money on the new runway.

State Support For Connect Airways / Flybe

Willie Walsh did not pull any punches regarding Flybe, which is now owned by the Connect Airways consortium.

Willie does not have any sympathy for Flybe in the current environment. It’s a business model that “does not work”. Its shareholders have copped on the fact that they have “bought a dog” and Willie does not see the UK Government coming to its rescue.

Air Europa

There was little news on the planned acquisition of Air Europa, other than the process of securing regulatory approval is ongoing.

There was specially no mention of what regulatory concessions would be demanded and how palatable these would be to IAG.

Iberia

One brief update on Iberia is that it is planning to announce improvements to its long-haul business class product later this year.

LEVEL

There’s been relatively little news about IAG’s low cost long-haul brand LEVEL in recent months.

It has another new CEO who is reviewing the business. IAG believes the underlying business model does work, but admits that its launch was rushed in order to launch low cost long-haul flights in Barcelona before Norwegian. Had IAG taken more time it would have done things differently – IAG effectively used the operations and distribution channels of existing airlines, rather than setting up a new airline.

Whilst some routes such as Barcelona – Buenos Aires initially performed well, its operation in Paris is performing below expectations. This is possibly because of strong local brand loyalty to Air France.

Avios / IAG Loyalty

IAG has appointed Adam Daniels as Chief Executive for IAG Loyalty following the departure of Drew Crawley.

IAG has recently announced Barclays Premier as a new partner. Discussions are under way with MasterCard as well as a number of other potential partners.

British Airways Data Theft

IAG’s financial statements included the following statement on the data theft at BA in 2018:

On July 4, 2019, British Airways received a Notice of Intent from the Information Commissioner’s Office (ICO) in which it informed the airline of its intention to fine it approximately £183 million (€205 million) under the UK Data Protection Act. 

British Airways made extensive representations to the ICO regarding the proposed fine and has complied with various further information requests. As part of its procedures, the ICO will seek the views of other EU data protection authorities. The ICO initially had six months from issuing the Notice of Intent to British Airways within which it could issue a penalty notice, which has been extended through to May 18, 2020, to allow the ICO to fully consider the representations and information provided by British Airways. If a penalty notice is issued, British Airways has 28 days within which to lodge an appeal with the First-tier Tribunal in the General Regulatory Chamber. A decision by the First-tier Tribunal may, with permission, be appealed to the Upper Tribunal. Any appeal of the Upper Tribunal decision would be to the Court of Appeal. It is British Airways’ intention to vigorously defend itself in this matter, including using all available appeal routes should they be required. 

At December 31, 2019, and through to the date of these financial statements, no final penalty notice has been received from the ICO, although it reserves the right to issue such a notice on completion of its investigation. It has not been proven that British Airways failed to comply with its obligations under GDPR and the UK Data Protection Act. Should any final penalty notice be issued, and having regard to the representations made by British Airways, the Directors consider that it should be for a considerably lower amount than the initial Notice of Intent.

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