IAG Sets Out Its Post COVID-19 Future

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International Airlines Group, the parent company of Aer Lingus, British Airways, Iberia, LEVEL and Vueling has set out its plans to recover from the impact of COVID-19 as it presented its 2nd quarter results on Friday 31 July 2020.

IAG reported an operating loss of €1,395 million before exceptional items, compared to a profit of €960 million last year. BA lost £711m in the quarter and its average load factor was 27.6% as passengers fell by 98.6%.

Net debt at IAG increased to €10,463 million at 30 June 2020, compared to €7,508 million at 31 March 2020.

The overwhelming priority in the medium term is the preservation of cash, and improving liquidity whilst undertaking structural changes for what is expected to be a long period of reduced demand and permanent changes to certain markets.

Rights Issue

As expected, IAG is to undertake a rights issue to raise up to €2.7 billion.

This should complete in early September. The rights issue is supported by IAG’s largest shareholder Qatar Airways. In return, Qatar Airways will place two non-Executive Directors on IAG’s board, one of whom is the aviation executive Giles Agutter.

In addition to previously announced measures such as mortgaging BA aircraft and pre-selling up to $750m of Avios to American Express, (though this deal has not yet been finalised). IAG has also sold and leased back five aircraft in July. IAG does not plan to use its loyalty programmes as security for loans as some US airlines have done.

IAG’s approach is in sharp contrast to Air France-KLM and Lufthansa which have both secured loans of several billions from their respective governments.

In IAG’s presentation on the rights issue there are vague references to IAG being able to continue to take advantage of opportunities as demand returns, focus on “value levers” and continue to allocate capital in a disciplined manner. Put another way, IAG wants to be able to do as it pleases without the risk of government interference.

Willie Walsh did also have words of warning for European airlines that have received generous state bailouts.

You know liquidity is very important, but what you do with it is even more important. And quite honestly, without being too disrespectful to Air France we’ve seen little evidence of them restructuring their business to reflect what has historically happened never mind what we believe is going to happen in the future. Now I know Ben [Smith, CEO of Air France-KLM] is a very different leader. But, you know, our view is that the industry is structurally changed.

I gave some figures in relation to BA just to put it in to context in the media interviews I did. In Q4 2001 post the tragic events of 9/11 BA lost £187 million in the quarter. The first quarter of 2009 in the depth of the global financial crisis BA last £309 million. In the second quarter of this year in the depths of this crisis BA’s operating loss of £711 million.

Now nobody questioned the fact that 2001 and 2009 led to, you know, permanent structural change and required structural response. Anybody who believes that this is just a temporary crisis, and can be resolved through temporary measures you know is misguided so we are where we are focused on our liquidity, but more importantly we’re focused on restructuring the business to ensure that we’re in the right shape for the future.

I worry for some of the others in the industry who you know are looking at strong liquidity and are not responding to the structural change that will be necessary. And I think it will be interesting to see the rate at which some of those companies burn through their cash as we go through the rest of this year, and through 2021 and 2022.

Capacity Plans

IAG plans for capacity in the third quarter of 2020 to be reduced by 74% in the third quarter and 46% in the fourth quarter.

With load factors expected to remain depressed for some time, routes will be reinstated according to whether they are cash flow positive and this will depend on a large extent to underlying cargo demand.

Whilst Willie Walsh previously dismissed tools such as Microsoft Teams as “crap” he has accepted there is a structural change to the business travel market which cuts across both premium and non-premium cabins.

In terms of BA’s route network, Willie Walsh expects its long-haul route network to remain focused on North America due to long-standing trade links between the UK and the US. Travel restrictions between the UK and US are expected to be lifted gradually to certain airports and states and this will release pent-up demand. This suggests that some of the thinner BA routes in Africa, Asia-Pacific and the Middle East may be cut in the coming months as aircraft are reallocated between routes.

Willie Walsh was very effusive about American Airlines’ planned partnership with JetBlue which may lead to further co-operation with IAG airlines beyond Aer Lingus.

Fleet Plans

As has been previously announced, BA has immediately retired its entire fleet of Boeing 747 aircraft.

Willie Walsh cited the cost of storing aircraft, bringing them back into service and long term maintenance requirements, as well as their relatively high premium configuration.

Although London City – New York JFK has not yet been officially suspended, BA plans to retire the Airbus A318 aircraft. 13 Airbus narrow body aircraft will also be retired early.

BA plans to ground 4 Airbus A380s and up to 6 Boeing 777 aircraft for up to three years. The good news that does mean that 8 Airbus A380s should return to service relatively shortly. Up to 18 narrow body aircraft will be grounded. BA CityFlyer will also reduce its fleet.

Whilst not broken down by aircraft type, new aircraft deliveries across IAG will be reduced by 11 long-haul and 57 short-haul aircraft over the next two years.

At present, BA does not plan to reconfigure any existing aircraft.

BA Industrial Relations

BA pilots have voted in favour of a package of measures to mitigate against voluntary redundancies.

Willie Walsh criticised Unite who represent cabin crew and ground staff for being “completely out of touch” with the reality of the crisis facing aviation. However, there does seem to be some movement by both sides.

1,400 employees have also left BA by the end of this week through voluntary redundancy.

LEVEL

IAG has substantially downsized its low cost brand LEVEL.

Bases in Amsterdam, Paris Orly and Vienna have closed as these were not considered viable. It will continue to operate from Barcelona, where its brand is stronger, but with a substantially smaller Airbus A330 fleet.

Air Europa

IAG still plans to acquire Air Europa as it considers the deal still makes strategic sense.

However, IAG is in negotiations on changes to the price with Globalia and hopes to complete the deal by the end of the year.

AOB

Willie Walsh was surprisingly guarded when asked about the future of Virgin Atlantic saying it is expected to remain a strong competitor on North Atlantic routes.

BA has also made a provision for a fine of £20m for the theft of customer data from ba.com in 2018.

What wasn’t mentioned

In terms of what wasn’t mentioned, nothing was said as how to IAG airlines will operate across London airports over the coming 12 months and whether IAG is lobbying for “use it lose it” airport slot rules to be relaxed for the winter season.

Nothing was also said about the business rescue process for Comair and whether IAG will participate in a recapitalisation of the airline.