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Edited Transcript of IAG.L earnings conference call or presentation 10-May-19 8:00am GMT

Q1 2019 International Consolidated Airlines Group SA Earnings Call

HOUNSLOW May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of International Consolidated Airlines Group SA earnings conference call or presentation Friday, May 10, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Enrique Dupuy de Lôme Chávarri

International Consolidated Airlines Group, S.A. - CFO & Executive Director

* William Matthew Walsh

International Consolidated Airlines Group, S.A. - CEO & Executive Director

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Conference Call Participants

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* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Jaime Bann Rowbotham

Deutsche Bank AG, Research Division - Research Analyst

* James Edward Brazier Hollins

Exane BNP Paribas, Research Division - Senior Transport Analyst

* Jarrod Castle

UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team

* Johannes Braun

MainFirst Bank AG, Research Division - Director

* Malte Christoph Schulz

Commerzbank AG, Research Division - Industrials Analyst

* Neil Glynn

Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator

* Nuala McMahon

Goodbody Stockbrokers, Research Division - Analyst

* Savanthi Nipunika Syth

Raymond James & Associates, Inc., Research Division - Airlines Analyst

* Stephen Furlong

Davy, Research Division - Transport and Logistics Analyst

* Sumit Mehrotra

Societe Generale Cross Asset Research - Equity Analyst

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Presentation

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [1]

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Okay. Thank you very much, and good morning. Thank you for joining us for the call. And before I hand over to Enrique to take you through the detailed presentation, just allow me to make a few comments.

We're very pleased with our first quarter performance. As you know, it was a challenging quarter for European airlines, and we've highlighted some of those issues talking about the fuel and FX headwinds; the timing of Easter, which we always said would impact on our Q1 performance; and markets capacity in the quarter, which clearly impacted on yields. Our passenger unit revenue declined by 1.4% at constant currency, but we saw a further reduction in our nonfuel unit costs down by 0.6% at constant currency. And as Enrique will show you later on, when you take out the non-ASK-related costs associated with Iberia MRO and BA Holidays, has improved even better than that.

And while we saw a slight decline in our ROIC, still ahead of our 15% target. And we are sticking to our guidance for the full year. We expect to get there in a slightly different way. We're now saying passenger unit revenue is expected to be flat at constant currency, and nonfuel unit costs expected to improve at constant currency. And therefore, for the avoidance of any doubt, we expect passenger unit revenue at constant currency to improve for the remainder of the year. We're also adjusting capacity and now forecasting full year capacity growth of 5.3% compared to the 5.9% that we gave you on the previous call, and we'll go through that in a moment.

And you may have seen yesterday, we announced our AGM to be held on the 20th of June. And subject to the approval of our shareholders, at that meeting, you'll see some very generous cash returns to our shareholders with the final dividend of EUR 0.165 per share and a special dividend of EUR 0.35 per share.

So I'll hand over to Enrique, who will take you through the presentation now. Enrique?

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO & Executive Director [2]

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Good morning, everybody. Thank you, Willie. So as has been just said, Q1 '19 has been a challenging quarter for IAG and for the industry, especially the European industry. We would be probably the only or one of the only European companies to achieve positive operating profit and positive net earnings figure for this quarter. And it shows our resilience and determination to which and to commit to our targets, the ones that we share with you from time to time.

Operating profit then for this quarter has been reaching EUR 135 million, which is EUR 205 million lower than last year. But if we carve out the negative impact of FX, especially the strength of the dollar in respect to last year through the quarter, this means the real comparable constant currency terms has been a drop of EUR 144 million. And as you will see, most of this drop is basically referred to Easter holiday change in timing. And that's basically a type of confirmation of the messages that we have been sharing with you through the last months.

In terms of how this EUR 135 million has been built up, we have to mention positive passenger unit revenue performance at constant currency basis of minus 1.4% and total unit revenues again at constant currency terms of minus 1%. This difference shows again the growth of our third-party MRO business and handling business in the case of Iberia and also British Airways holiday.

On the cost side, we have been probably beating on expectations, the ones that we had for this first quarter, and achieving a minus 0.6% improvement constant currency and pro forma compared with last year. And as Willie was advancing, here we carve out the costs that are related to these non-ASK activities as Iberia third-party MRO, which shows holidays, et cetera. The real underlying positive performance on the unit cost -- nonfuel unit cost basis has been minus 2%.

Of course, fuel has not been a help to the quarter. It has been a significant headwind for us, for the rest of the industry, and has been then driven total nonunit costs, again constant currency basis and pro forma, to a positive 2.2. Basically, the deterioration of the margins this quarter refer to the difference between this total unit revenue slightly negative performance and the total unit cost increase.

We have been achieving -- we have been producing a capacity increase of 6.1% against last year and then RPK figure of 6.4%. It also notes -- it also shows in some way that revenue weakness has been more related to yield pressure than to real, I would say, passenger numbers flying in our network.

If we can pass through the second slide. Basically, we're trying to split in detail how the difference between the operating profit in '18 and first quarter '19 has been doing. So first, remind you again this negative net impact of ForEx, again stating that it's basically transaction-related, so strong dollar-related. Of course, we have been growing 6%, and there is a margin increase having to do in this, I would say, chart to volume increases. It's about EUR 21 million. And then, again, having to mention the negative impact of passenger revenues, which is basically related to yield, as I was saying, and very much refer to Easter holiday migration on the timetable between somewhere in the middle between Q1 and Q2 last year and the full Q2 in this year. It's always difficult to evaluate precisely, surgically what's the impact of Easter holidays. A reasonable guess, it has been around EUR 65 million.

Nonpassenger revenue improvement. Again, worth to mention the improvement in activity and then margins related to Iberia MRO; also, marginally, British Airways holidays; and then, of course, fuel cost. Fuel cost increases for the quarter has been very relevant. A combination of the market prices and hedges has been creating for us this headwind, but in unit terms, will be in the range of 15% our term and 11% on a constant currency terms.

The positive is coming on the management and the achievements on the nonfuel costs, which has been bringing us a positive contribution of around EUR 22 million for the quarter, leading then the operating profit for the first quarter at the EUR 135 million level.

So unit revenue and capacity. This is a chart -- there's a couple of pies is a chart that we bring to you every quarter, and this quarter probably is showing in terms of RASK, one of the weaker performance that we have seen in the last quarters. It's related to capacity. It's also related to weak demand in some cases and also, very specifically, in the case of Europe, to Easter holidays.

So very quickly going through it. Domestic is still benefiting from this positive performance on the Iberia specifically and also a little bit of Vueling domestic networks. It has to do again with the incentivization of traffics attached with subsidies for Icelanders, Balearic and Canary Islands. And then is Europe. And Europe revenue -- unit revenue weakness is very much related to Easter and weaker demand. And surprisingly or not, the U.K. does not appear as the weaker regions in this chart in this quarter. It's more around Germany, Spain and other areas that have been basically concentrating the weak revenue profile.

Asia Pacific. Again, very similar picture as the last quarters we've been sharing with you. And again, very specific weakness on some specific areas. Again mentioning in this case, Hong Kong and maybe a little bit of Tokyo, Hong Kong having to do basically with overcapacity developments lately on some of our competitors.

Africa, Middle East and South Asia has had probably one of the best performance for the group on a low-capacity increase.

Latin America and Caribbean, of course, is basically, again, a quite concentrated negative impact. And we have to refer here again to Argentina basically and Brazil. Although there is a difference, Brazil, we believe, is already bottoming and maybe showing some spikes of brightness. In the case of Argentina, it's again a very troubled market and is probably bumping on the bottom. And we'll only get better probably through Q3 and especially Q4 when the impact of the devaluation last year gets fully rolled over.

In the case of North America, we have a minus 2.3. But if we basically split or carve out the negative implications of the high growth we've been producing there in LEVEL, Aer Lingus and Iberia with lower unit revenue on top of structural basis. We see that, that average in down effect has been creating most of the positive -- of the negative figure. And we can say that [which one] is remaining on positive unit revenue performance in the North Atlantic, which is again a mature path that we are basically -- providing us confidence in the performance of this sector -- important sector for us on the remainder of the year.

So on the cost side. Of course, starting with fuel, this 11.1%. We'll explain again in the following chart how we see the performance for the following quarters. It has had also to do with a strong performance. So low fuel cost, fuel unit cost we had in the first quarter of year 2018 that has made the comparables for '19 slightly more difficult. Employee unit costs also, as the previous quarter, performing very positively. Again, you will see productivity of the group for the first quarter has been still growing in a very significant way, more than 3%. And this is again one of the structural facts behind this nonfuel employee positive cost performance and savings.

Supplier is marginally negative, but then it is here where most of the impact of the costs that are related to Iberia MRO, maintenance cost, British Airways holidays, handling costs are basically being charged. So if we were to carve out the negative, so the savings, the negative figure, in this quarter for the supplier would be consistently higher.

Ownership is quasi-flat and this also is a positive sign having to do with a number of additional aircraft that we are bringing to our operations in these last quarters and specifically in Q1. So that's how we get nonfuel 0.6% negative and really minus 2% in terms of underlying basis. Our total nonfuel cost increase of 2.2%.

Referring now more precisely to the fuel chart. We are basically reevaluating our fuel bill for 2019. And we are getting into an approximate figure of EUR 6.2 billion. And this is referred to kerosene price of $67 per metric ton and the value of the euro against the dollar of EUR 1.12. These are mainly spot type of references. So we feel comfortable with the figure of EUR 6.2 billion as being the appropriate estimate for the fuel bill of the whole year. Especially noting that our level of hedging for the remainder of the year is high, and it's above 80%. And this gives this figure quite a bit of consistency. You also see how the fuel cost increases for the following quarters will be gradually diminishing, especially in Q4, and probably entering into neutral or even slightly positive territory through 2020. This again shows that we will be able to digest big piece -- this big increase that happened since early or mid-2018, keeping the basic achievements that we had stated on our Capital Markets Day in terms of results, in terms of profitability ratios.

So talking about profitability rates -- ratios. ROIC has achieved a decline since last quarter. This is basically the substitution of quarters. So Q1 '18 was a strong quarter in terms of profitability, in terms of ROIC as well, has been substituted by the first quarter '19, which has been explained as a weaker one. So this substitution effect has been creating this drop in ROIC for the last 4 quarters, but still showing a figure which is above 15%.

Operating margin trends have been dropping again because of the reasons that I have been explaining. Nominal margin for the last 4 quarters for the group still holding at the 12% level.

Another type of consequence that you are seeing here in this chart of the application of IFRS 16 is about the ROIC convergence between the different companies of the group. So companies as Iberia and Vueling that had the higher content, higher component of operating leases have been benefiting and increasing the ratios. And that's because of the right-of-use equivalent that we have been evaluating is lower than the 8x notional figure that we were using in the past.

And having said that, British Airways is still the company achieving profits in the first quarter of the year, the same as the full group. ROIC in Aer Lingus is still holding at very high levels above 20%. So most of our main messages or main achievements are being kept, are still there and will be there for the remainder of the year.

So leverage improved. And again, this matter of the way IFRS 16 is having an implication on our figures, especially on net adjusted debt figures, also because, as you see that in the first quarter, end of the quarter is capturing a significant cash increase having to do it with the sales that are going to be flown that has -- have been already flown by our passengers through the month of April. So that cash increase has been one of the basic arguments and reasons why our cash position has been holding very strong in the first quarter even through this reduction in our operating profit figure. The other one has to do with basically less restructuring cash costs in this year against 2018.

So finally, and because we don't want to bore you with too many figures, of course, you have on the appendix a lot of details. We are going to be running very quickly through these type of basic consequences of the application of the IFRS 16 new accounting methodology. So in the usual suspects, which we have been sharing with you, an EBITDA of lower CASK ex fuel having to do with the way the rental costs are treated and now split between interest and depreciation. There is EBITDA replacing EBITDAR because there's no more rentals to be considered as such at the operating profit level and higher operating profit margin again due to the exclusion of the interest element on operating leases, a similar adjusted level of operating margin. So we were not so far away when we were applying the 8x and then we were splitting the rental on slightly artificial way between depreciation and interest charges.

Normalized operating profit margin as the numerator of ROIC calculation will be slightly lower due to adjusted right-of-use, aircraft depreciation and also the inclusion of amortization, depreciation of the intangible software investments.

So adjusted EPS is going to be having ups and downs depending on the age -- the relative age of the operating lease contracts. But as a whole, the differences are going to be smooth and through, I would say, the period of our business plans, also the next 3, 4 years, having positive or negative, small deviations against the non-IFRS 16 -- pre-IFRS 16 figures.

Net debt this year where we really find the big change, and, of course, it has to do, as we had advanced you, with the fact that the liabilities attached to the right-of-use calculations are well below the ones -- notional ones considered until the 8x multiplier. So no surprises, and it has been as we told you. And then creating a leverage difference -- positive difference. So a significant reduction coming down then from the prevailing 1.6 levels to 1.5 levels to the 1-ish levels in which we are moving today.

Equity free cash flow has been a pure cash metric will not change. And return on invested capital, ROIC, is going to be changing very slightly. Again, probably this could have positives and negatives for the next years. This year will be slightly higher basically because of the inclusion in the numerator of additional margins due to the way we treat other nonfleet rentals and also this IT depreciation, which will be part of the numerator now.

In the case of the denominator, it's going to be again experiencing a little bit of a drop and then it's again on the new definition that we are applying. Basically, a new one that appears is -- a new element that appears that's absolutely rational is now we are averaging the invested capital through the fourth quarter's -- last 4 quarters of the year instead of taking the end of the quarter last figure, which was a bit unfair.

Sorry for these very detailed explanations, and I'm passing back the word to Willie to explain other important issues around our future performance.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [3]

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Okay. Thank you, Enrique. So turning now to capacity for 2019.

As I mentioned in my opening remarks, we're now adjusting full year capacity growth to 5.3%, down from the 5.9% that we previously gave you. And you can see that, that takes effect mainly in the fourth quarter with a reduction from what we've previously announced, the 5.9% to 3.7% capacity growth in Q4. And this is a number of measures taken across all of the airlines.

I think it's fair to say we tried a couple of new initiatives in Q4 of last year rolling into Q1 of this year, which didn't quite work out as we have planned. And therefore, we won't be repeating that and you should expect, therefore, the lower growth that we're showing in Q4, 3.7%, that'll flow through into Q1 of 2020.

And finally, just to reaffirm our guidance for the year. As I said, we're sticking to our guidance. And at current fuel prices and exchange rates, we expect 2019 operating profit before exceptional items to be in line with 2018 pro forma. Passenger unit revenue is expected to be flat at constant currency. Nonfuel unit cost is expected to improve at constant currency. And again, just to reiterate, we expect passenger unit revenue consequently to improve for the remainder of the year.

So I'll now hand back to the operator, and we can start taking your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question, and it's coming from the line of Savi Syth from Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [2]

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Just a couple of questions for me. First, on the lowering of the kind of revenue outlook slightly for 2019. Just kind of curious what regions caused that change. And to the second question, it's a bit of a long-term and conceptual question that you do have JetBlue that announced wanting to do transatlantic. And then there's a bit of a difference with JetBlue versus kind of Norwegian is that they actually have a premium product and a strong network at least on one side. Kind of curious your thoughts on what that impact might be? What the competitiveness will be? And also just what the implications are for Aer Lingus given the strong relationship there with JetBlue?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [3]

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Okay. Thank you. I think the best way of dealing with the unit revenues, it reflects the weaker performance in the first quarter, which clearly was lower than we had expected. Our outlook for second and third quarter remains as we had originally planned. We're not seeing any evidence of activity that's unusual.

The areas of weakness across the network are the ones that we've highlighted to you before, and there were areas where we're making adjustments to capacity. And they're principally in places like Argentina, Brazil, South Africa. And so we've already announced we're canceling the Madrid-Johannesburg-Iberia route. BA is cutting capacity into South Africa as well, and we'll be slowing down growth in the fourth quarter into these markets. And it just reflects the macroeconomic environment in those countries. The rest of the network is performing pretty much as we had expected.

I think the issue in Q1, as we mentioned, was capacity issue -- industry capacity issue. And we have to put our hand up. We contributed to that in Europe. So we had strong capacity growth in the quarter. In our case, as you can see from the figures, we grew capacity in the quarter by 6.1%, and RPKs grew by 6.4%. So we did fill the capacity we put in there, but it clearly was of an impact to the yield. I think other European carriers saw similar situations and may not have been as successful in tendency to as we were.

So as I said, the adjustment to the unit revenue for the year really does reflect the difference in performance in the Q1 to what we had planned. The rest of the year, we see very much in line with our original expectations.

On JetBlue. Yes. I think we've been hearing about JetBlue coming into Europe for 4 or 5 years now. And it doesn't come as a surprise to anybody. And I think they're talking about 2021, maybe 2022. We know, like everybody else, there are delays to the delivery of Airbus aircraft. So that may impact on their timing as well. I mean we don't really see it changing. We've been anticipating it. We've been waiting for it. The relationship between Aer Lingus and JetBlue remains strong, and we expect that to continue. So we're not proposing to make any changes to that. It's Aer Lingus' desire that they continue to work with JetBlue, and we see no reason why we should change that. I think everybody's waiting to see where in Europe they actually fly to given the slot restrictions that apply to most of the airports that they probably want to serve. So we'll wait and see. But it's a long time away, and it's not anything that would be concerning us.

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Operator [4]

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Our next question comes from the line of Jarrod Castle from UBS.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [5]

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Enrique, if I'm not mistaken, this is the last set of results. So I guess on behalf of the analysts, thanks for the help. And 3 from me. One, any updates on shareholding structure conversations with the EU if it's constructive? Two, anything to be said at this stage in terms of conversations with the unions and British Airways? And then lastly, obviously coming quite a big special and ordinary dividend on the 8th of July, but any thinking kind of in terms of the cash returns as we move through the year.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [6]

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Thank you. So in relation to the conversations that we have, it's important to point out that the main conversations take place with the national regulator because it's the national regulator that has responsibility in the area of ownership and control certainly in the first case. We've had comprehensive discussions with them. I can't disclose the details. I think it would be wrong for me to say that. And you should expect the national regulators to make some statements in due course. We engage also at the highest levels with the Commission, and we remain confident in our position in relation to our structures and a post-Brexit, whatever type of Brexit is this environment that we will continue to operate and we're pleased that the air connectivity regulations have been passed. And we've seen a corresponding and liberal approach being adopted by the U.K. government. So we remain confident in relation to these issues.

And the conversations with the trade unions in British Airways are ongoing. Obviously, we don't provide a running commentary in relation to that, but BA continues to engage in open dialogue with the trade unions. And if there's any news to report, we'll clearly be the first to tell you in relation to that.

And yes, it's a lovely special and ordinary dividend that will be approved by our shareholders at the AGM hopefully on the 20th of June. In relation to any future return -- cash return to shareholders, that's obviously something that the Board will discuss at the appropriate time. But we've always been clear that where we're generating any cash in excess of the cash that we believe we can use sensibly, that's money to be returned to shareholders. And the debate has always been around the form in which that money gets returned, not whether it gets returned. And that continues to be the attitude of the Board, which they have reaffirmed on a number of occasions. And no doubt that the Chairman will reaffirm that at the AGM on the 20th of June.

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Operator [7]

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Our next question comes from the line of Stephen Furlong from Davy.

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Stephen Furlong, Davy, Research Division - Transport and Logistics Analyst [8]

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Just want to again, Willy, maybe just get your general comments on -- I know you're a proponent of consolidation. I mean you're very well positioned, and net debt-to-EBITDA of 1x. But I think you said fairly recently maybe don't expect anything from IAG in 2019, 2020. So just a general comment there.

I just want to ask about the April traffic stats, maybe any comments there. Because it looks like a very strong performance by Aer Lingus, maybe it's Easter. Not so much by LEVEL but maybe it's the law of small numbers and that maybe just on also, the cargo market because that's also a bit weak.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [9]

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Thanks, Stephen. Yes. We're very clear. We believe consolidation will continue to benefit the industry in Europe. We're pleased with the activity that has taken place. And we're pleased that a number of our competitors are talking about actively pursuing further consolidation. I can reaffirm that we are not actively considering anything at this stage. I said we don't normally comment on rumors and speculation, but in relation to Thomas Cook, we're not looking to do anything with Thomas Cook. So I think the only ones I've seen to confirm their interest has been Lufthansa, and I believe their interest principally relates to Condor. But we are not looking to do anything there. So again, as we've been clear, if there is an opportunity, we are well positioned. But we don't see anything that we would consider to be attractive or that would make sense to us. That's not to say it doesn't necessarily make sense to others, but it certainly doesn't make sense to us at the moment.

And yet April traffic stats are good. You're right. April was very good for Aer Lingus. There is an Easter impact in that, and it impacts on the airlines in a different way. It's -- Easter's -- and like I said, it's normally positive for leisure, negative for business travel. So we didn't see any change in patterns associated with the Easter activity. And just to say it upfront. We see no impact of Brexit or any Brexit-related issues either in the first quarter results or in anything we're seeing in terms of booking patterns at the moment. I've been asked that by a number of journalists.

And LEVEL, yes, it's in that growth spurt. So you should expect to see us take a little bit of time for it to catch up.

On cargo, the cargo situation remains challenging. As we've always said, it's structurally a market where supply always exceeds demand, and that will continue to be the case, as you see wide-body growth to deal with the growing international passenger demand and the associated empty space in the cargo hold. So we're not seeing anything that's particularly different. It's a challenging year, which we expected it to be. And we think that's going to be the case through the rest of this year. But it's -- we've long given up looking at cargo as a lead indicator for passenger, and that continues to be the case. We don't see any correlation between the trends that we see in cargo and the trends that we're seeing on the passenger side of the business.

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Operator [10]

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Our next question comes from the line of Jaime Rowbotham from Deutsche Bank.

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [11]

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Willie and Enrique, just 1 question from me. A good start to the year on nonfuel unit costs is clearly there for all to see. But back at the full year results, you were also quite clear that this probably would not be one of the years where you were able to reduce nonfuel unit costs, and now you say it can be. So could you just give some specifics in terms of what's changed, please, on the outlook for nonfuel unit costs?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [12]

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Yes. I think this reflects the strength of IAG and the flexibility that we have, that we can change and change quickly to respond to changing market conditions, and that's exactly what we did. As I said, we tried different approach -- a slightly different approach with some of the airlines to the commercial activity in the fourth quarter and the first quarter, and it didn't work. I don't mind mentioning. We put too much capacity in there. We're able to fill this, but it's at the expense of yields. And it was something that we tried. We thought it was right to do, and we got it wrong and we're not going to repeat it. So when we could see that, that wasn't working the way we had planned, we started taking action early. And this is something that we've done -- we responded early to the increase in the fuel price that we saw in 2017 going into 2018, and we adjusted pricing early. And that's what we're going to continue to do. So it reflects the flexibly that we have. And if we see the need for a change in approach, we'll do that. And we have a number of initiatives that we've accelerated in relation to our nonfuel cost approach. There's nothing -- no major, big programs there. It's just the ongoing focus that all of our operating companies and all of the managers in the business have in relation to cost. And it demonstrates the control that we can exercise over our cost base, and we will continue to do that.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO & Executive Director [13]

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Yes. We achieved some improvements through Q1 on our cost-management targets. And that's something that we want to retain. So that's nothing that we are going to be giving back again through the following quarters.

On the other side, the underlying minus 2% gives us really a lot of confidence in our ability to make these improvements structural through the year. So that's why we have been more confident in retargeting a reasonable, small and modest reduction in nonfuel unit costs for the full year.

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Operator [14]

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Our next question comes from the line of James Hollins from Exane.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [15]

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And then a few for me. Just a first one. Does that capacity planning in any way, if it -- certainly if it were to go through into 2020, impact your CapEx guidance? Is it still technically EUR 2.6 billion to EUR 2.7 billion this year?

Secondly, it feels like many, many quarters since you haven't mentioned BA Holidays as being extremely strong. I was wondering if that ever is showing signs of calming down or whether it's just super strong and maybe continues for a long time to come.

And then thirdly, just on -- clearly, you're not doing Thomas Cook. I'm just wondering on Norwegian. Obviously, you sold your shares and said you're not doing it. Have you technically ruled yourselves out forever? And technically when could you come back? Is there any regulation that says you can't come back fairly soon with another bid, particularly at 38 kroner where it is now?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [16]

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Thank you. So the -- I'll take them in reverse order. No, there's nothing to prevent us, but we're not on Norwegian. But we're not active, and so we're not locked out if something were to happen there. But I can assure you, we're not looking at it, and we are not intending to do anything. As you saw with Liverpool, 3 nil down. You can always come back. So I'm ruling it out at this stage.

BA Holidays continues to perform well. It's been a strong performer and continues to be a strong performer. And it's become a real player in that market. And it reflects the customer base that we have and the network that we clearly have as well, which is a particular strength that BA has that other carriers can't match.

And so you're going to have to remind me of your first question again. Sorry, CapEx. Yes. No, no change. We're still looking at CapEx this year in line with the guidance that we gave you, EUR 2.6 billion to EUR 2.7 billion, yes. But we'll update you at Capital Markets Day in November in relation to both future capacity plans and future CapEx plans. And as I said, the capacity, you should certainly expect us to adjust that from the previous figures that we gave you, and that should have an impact on CapEx associated with capacity growth. But it's too early to give you any insight into the longer-term impact of that, and we do that at Capital Markets Day.

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Operator [17]

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Our next question comes from the line of Andrew Lobbenberg from HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [18]

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Can I ask about reigning in the performance in the quarter? There was quite a large drop in the margin. Was that just fuel and Easter timing? Or was there anything else getting on that?

And can I ask about the 787 delays that continue and seem to drag on? How's that affecting your capacity plans? And where might we go hunting for any contemplation issues from Rolls? Are they to be seen in any part of the financial statement?

And then in terms of off-level. Obviously, we're not disclosing -- you're not disclosing it. It's profitability specifically. But -- and it's very high-growth mode. Is it performing yet in line with what you expected? And is there a differentiation between us performing long haul against short?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [19]

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Thank you, Andrew. On dwelling, yes, it's fuel and Easter principally. They did see some weakness, softness in the Italian markets and in the French markets, which I think was not just Easter-related, but it was principally, as you would expect, given the laser focus that Vueling has, it was principally the issues that you highlighted, Andrew.

On the 787, the additional inspections on the TEN engines will have an impact because we have to take aircraft out of service to complete the inspections. We're not expecting to see any issues with the engines, but as you said, it is the -- there is a strict maintenance inspection program that does require us to take the aircraft out of service to complete those checks. And we will be pursuing additional compensation from Rolls-Royce.

I'm probably a little bit more positive about the situation. It's clearly very frustrating and annoying for us, but we do think that Rolls have now identified solutions. It just requires them to get the solution manufactured and delivered to customers. So it will have a very small impact on capacity with the 787 program. We will have to adjust that to deal with the additional maintenance inspections required on the engines.

And LEVEL. Yes, it's still very early days. What I can tell you, LEVEL Barcelona is performing well. It's profitable, LEVEL -- and in line with our expectations. LEVEL long haul in Paris is behind expectations. And I think we've seen a very strong capacity and competitive situation in Paris, but we're seeing a number of those competitors now withdraw. But the Paris performance has lagged behind. And on the short haul, as everybody knows, Vienna has seen a huge increase in capacity. So that has had a big impact on yields in the Vienna market, which are behind what we had planned. But as we have said before, the financial performance of LEVEL is embedded in the figures. There's no separate exceptional costs that others are reporting in relation to their initiatives in these markets. So we remain confident about LEVEL. I'm particularly very encouraged with LEVEL's performance in Barcelona. We're more confident given what we are seeing in terms of the competitive reaction now to our performance in Paris. And Vienna is performing in line with what everybody else has said Vienna is doing. It's a market where customers and the airports are making -- well the airports are certainly making money, and customers are getting great offers but it's challenging for the airlines. But as I said, it's a yield impact. The volumes that we're seeing and the customer reaction to the LEVEL product on short haul has been well in excess of our expectations.

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Operator [20]

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Our next question comes from the line of Sumit Mehrotra from Societe Generale.

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Sumit Mehrotra, Societe Generale Cross Asset Research - Equity Analyst [21]

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Most important question been asked by Andrew. I just have to ask you about anything specific you saw in the domestic sector. I see unit revenues up 2%. So if you could highlight a few geographies that have been doing well for you in the domestic sector.

Secondly, on the North Atlantic market. You say that British Airways' underlying unit revenues have been doing well. What are your expectations for this summer? Early indications into the bookings, how the trends are in unit revenues? Especially your thoughts about pressures from the long-haul capacity growth from low-cost airlines this summer. And then lastly about -- I know you would have limited elbow room to discuss your employee costs. But do you expect the impact to be felt in Q3 this year and whether it would be more loaded towards H2 rather than H1 from the BA discussion.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [22]

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Yes. Domestic, as Enrique said, I think he pronounced his Icelanders. We would say Islanders.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO & Executive Director [23]

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Sorry for that.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [24]

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This is a Spain activity between the Canary Islands and the mainland, which has been very, very strong. We've been using Iberia wide-body aircraft to serve the market there. So it's just a very, very strong performance in the Spanish domestic markets that has continued into the second quarter.

On transatlantic, transatlantic is fine. The -- again business continues to be strong. We're not seeing any unusual trends. And we're not seeing anything that would concern us in relation to capacity. And in fact, I'd say quite the opposite because we have seen some capacity come out from the low-cost carriers that have pulled back or disappeared. So no, nothing to say on transatlantic through the summer. And obviously, I'm not going to provide commentary on the employee discussions. They are ongoing, and it would be wrong for me to say anything at this stage. But it -- when there is information, we'll be very clear with you in relation to any impacts. But as I said, we're not going to provide a running commentary to the negotiations that are ongoing at the moment.

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Sumit Mehrotra, Societe Generale Cross Asset Research - Equity Analyst [25]

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Sure. And just a quick follow-up on the North Atlantic bit. Do you see the pressure this year to be lower than last summer?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [26]

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It's competitive on the transatlantic. But I think the capacity growth is lower than people would have expected with the collapse of WOW and with Norwegian clearly experiencing challenges and just in capacity accordingly and with the ongoing issues on the 787 and a few other things.

So it's probably -- there is certainly less capacity growth this summer than we would have expected. But the underlying demand environment continues to be very good. So it's been a good [marker] and the trends that we're seeing at the moment are very much in line with what we expected to see in the second and third quarter. And as you know, we have limited visibility into the fourth quarter at this stage, but we don't expect any significant change in the capacity outlook that has been adjusted as a result of those changes that I mentioned earlier.

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Operator [27]

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Our next question comes from the line of Malte Schulz from Commerzbank.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Industrials Analyst [28]

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Two questions left for me. First of all, can you give us a little bit more color on the different development within your premium cabins and economy particularly on the long-haul side, of course? And also, we expect already a lot about North Atlantic but not so much about Asia. Do you also see any areas where you can rather maybe increase a little bit capacity? And how do -- did you already adjust your kind of capacity outlook for the travel area like Hong Kong or so, is there anything planned?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [29]

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Okay. I'll deal with Asia, and I'll let Enrique just comment on the Premium long haul. On Asia, we're increasing capacity in some markets. But we have seen significant capacity coming in from the Chinese carriers, and that clearly is very significant. Less so for us because of our footprint in China relative to a number of our European competitors who would have a much bigger footprint in that market.

Hong Kong, yes, we're seeing a lot of capacity coming into Hong Kong as well, but yes, we've always had a strong position there. But it's principally from China, from the Chinese carriers with significant capacity growth. But as I said, our exposure to China is a lot lower than our main European competitors. Enrique, do you want to comment on that?

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO & Executive Director [30]

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Yes. Nothing really special to mention. So it's -- the performance through the first 4 months of the year is very consistent with our expectations. So figures, years, unit revenues on the Premium cabin are performing as we thought. So there has been a little bit of a shift in terms of some of our companies having to do with the calendar, having to do with the timing of Easter. But what we are seeing for the first 4 months and what we are seeing into the rest of Q2, Q3 is looking positive. No special weakness to be recorded in the business cabins. Maybe more what we have seen in terms of the leisure and especially, as we have said, very much refer to the intra-European market. So that's basically the message.

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Operator [31]

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Our next question comes from the line of Nuala McMahon from Goodbody.

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Nuala McMahon, Goodbody Stockbrokers, Research Division - Analyst [32]

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Just 2 questions from me. The first one just on your pricing outlook, specifically in Europe. The European pricing was down 5.7% in Q1. And while you expect that to improve in Q2, should we still be thinking about it as down year-on-year versus last year? And the second one is just on your IT platform. So previously, Willie, I know you were quite excited about what you were doing with your NDC providers. But that commentary seems to have faded a bit, and it probably feeds into our view. How are you feeling about spend in your overall IT systems? Or are you happy with how they sit currently?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [33]

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On the IT systems. Yes, we're happy. We continue to invest where investment is justified, and you see it performing well. It's -- we're one of the leaders in relation to that, and we're -- the -- it's more of a commercial strategy and distribution strategy than an IT strategy in relation to NDC.

On Europe. Yes, we've commented, and I think everybody else has that capacity in Europe was strong growth in the first quarter. It was very strong. That's moderated in the second and third quarter. But it was clearly, from our point of view, although we filled it and improved our seat factor overall, this has had 6.1% ASK growth across the networks, 6.4% RPK growth. It was at the expense of yield. And I think that's exactly what everybody saw in the European markets. So we -- as I said, we put our hands up and said we got capacity around there. But we have adjusted, and we're not seeing anything in second or the third quarter that as of line...

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO & Executive Director [34]

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Maybe the MAX issues will contribute to moderate capacity increase through Q3 and Q4 depending on how the whole thing ends and when. But it appears as some of our direct competitors were using or planning to use MAX's through the following quarters, and that's going to be also then a contribution for a moderation of capacity growth intra-Europe.

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Nuala McMahon, Goodbody Stockbrokers, Research Division - Analyst [35]

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Sorry. Just on the European side. While I understand what you're saying on the capacity side, do you actually expect pricing to be up year-on-year for the summer period for Europe?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [36]

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We don't give any details of that. We'll give you the details after it's happened. But we don't give guidance in relation to that.

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Operator [37]

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Our next question comes from the line of Neil Glynn from Crédit Suisse.

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [38]

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If I can ask 2 questions, please. The first one, best of luck, Enrique, for the future. And I thought maybe as a departure gift, I might ask you a question on the transfer pricing for the first quarter within the unit revenues, if that's okay.

Just looking towards the RASK, down 1.4% year-on-year. You've obviously highlighted on the slides that the differential between that and the regional performances is partially transfer pricing and Avios redemptions, et cetera. But the gap seems wider than it has been over the last few years. And I just wanted to check whether there was anything specific in there and whether that should normalize, if you will, through the rest of the year.

And then the second question just on the other revenue. Obviously, a very strong performance year-on-year, I think, partially due to maintenance that you've called out. But I guess your visibility is probably okay on the maintenance pipeline for Iberia through the rest of the year. So I was hoping if you could help us in terms of understanding whether there will be any particular lumpiness second quarter, third quarter or fourth quarter on that or whether it should be quite uniform through the year.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO & Executive Director [39]

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Yes. I'll take the 2 questions. So on transfer traffic payments and flows, yes, they are -- they become in Q1, an important part of the difference between what we call the raw figures, the regional figures in unit revenues and the final minus 1.4%. The other ones to mention, which have also been contributing to bridge that gap, are around ancillary growth. So ancillaries have been growing significantly on this quarter in respect to last year. And again, other type of a variety of reasons among which Avios is one of them. Outdated paper is another one. So there is a basket of different matters why there has been this raw difference between the raw figures on unit revenues and the final RASK combined figure for the group.

We see probably that gap is going to be closing through the following months. Especially we believe transfer traffic payments will become narrower through Q2 and Q3. They are explained basically by the different unit revenue performance due to the different economic strength at both sides of the Atlantic.

On the maintenance business, MRO business of Iberia on third parties. Yes, it has been a high-revenue figure for the first quarter. It's going to be kept high but gradually fading through the next 3, 4 quarters. So we'll see that figure coming narrower basically into Q3 and Q4, although for the full year, it's going to be probably above the full year of '18.

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Operator [40]

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Our next question comes from the line of Johannes Braun from MainFirst.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [41]

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Just have one more general question, I guess, left. On the delivery of unit revenue recovery in the remainder of the year that you expect, is this rather based on Q2? Or is it more on the Q3 trend? Or is it actually Q4 when capacity is cut down to that 3.7%?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [42]

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No. It's -- as we said, it's Q2, Q3. It's not so much Q4. The change from what we had said previously is really the Q1 performance. And we saw some -- it's always difficult, as Enrique said, to call Easter and the impacts that, that has. But it's principally as a result of the lower unit revenue performance versus our plan in the first quarter. For the rest of the year, we're very comfortable with what we see, and it's very much in line with what we had expected to see going forward.

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Operator [43]

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We have no more questions at this time. I hand the conference back over to you.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [44]

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Yes. Go ahead, Enrique, comment first, and then I'll give a short comment before we close.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO & Executive Director [45]

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Yes. So this is, as you know, my last occasion to disclose quarterly results for IAG. And of course, I have to mention, I have to say to all of you, it has been a great pleasure to work with you. It has been always very positive interaction, very understandable and really have enjoyed it a lot. Of course, I've enjoyed more working here with the team on the IAG project. It has been a fantastic 8.5-year period. We've been really enjoying building up this fabulous project, this fabulous group of companies, which is probably at the very top of the range of the worldwide airline companies and groups.

I have to mention a very specific issue about our value. So when people think about IAG, they think about Heathrow as maybe being one of our more valuable assets. It's not such, it's not Heathrow. It's our team. I think, basically, we have the best management team in the whole industry. And it's not the [thin] team. It's a very broad team. So in reality, we are securing succession, which is going to be absolutely positive, absolutely valuable. And we'll be ensuring the creation of additional value for the shareholders as we have on future shareholders that we'll have.

But again, thank you. Thank you very much for your help and contribution.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [46]

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Thanks, Enrique. And I speak for everybody around the management team to thank you for your fantastic contribution. And we will wish you well in your retirement, but we will continue to work you hard until the 20th of June when you retire.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO & Executive Director [47]

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I'm sure you will.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [48]

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Yes. Don't worry. I just want to make a personal statement because, as you know, I like to be upfront with everybody and need to tell you that I will be selling a part of my shareholdings. And this is to me, say, an outstanding financial obligation to my ex-wife. And I know any CEO selling shares attracts headlines and theories. But I want to be absolutely clear with you that this does not in any way reflect the view of the business looking forward or my own wish to walk away from IAG. But owing to a combination of results and other issues, principally the Norwegian situation, I've been deemed an insider for most of the last 2 years and have not been able to sell any shares. So I need to take advantage of this open period.

As you know, I've not sold any shares in IAG until now. My shareholding is around 2 million shares, and I will be selling it -- a portion of these shares to allow me to fulfill an outstanding financial obligation in respect to my divorce. And we will make obviously a formal announcement when the shares have been sold. But I thought it would be better that you hear it directly from me now rather than wait to -- after the event. And as I say, it's not something I want to do. In fact, quite the opposite, but it's something I have to do.

So on that very happy note, and I thank you all for joining the call, and please state your support and we look forward to talking to you at our next results announcement.