U.S. Markets open in 8 hrs 46 mins

Edited Transcript of IAG.L earnings conference call or presentation 2-Aug-19 8:00am GMT

Half Year 2019 International Consolidated Airlines Group SA Earnings Call

HOUNSLOW Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of International Consolidated Airlines Group SA earnings conference call or presentation Friday, August 2, 2019 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alejandro Cruz de Llano

International Consolidated Airlines Group, S.A. - Chairman & CEO of British Airways

* Andrew James Light

International Consolidated Airlines Group, S.A. - Head of IR

* Antonio Vázquez Romero

International Consolidated Airlines Group, S.A. - Chairman

* Luis Gallego Martín

International Consolidated Airlines Group, S.A. - Chairman & CEO of Iberia

* Lynne Embleton

British Airways Plc (UK) - MD of Gatwick, Director of Strategy & Director

* Stephen William Lawrence Gunning

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

* William Matthew Walsh

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

================================================================================

Conference Call Participants

================================================================================

* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* David Howard Perry

JP Morgan Chase & Co, Research Division - Head of European Aerospace and Defense

* Jaime Bann Rowbotham

Deutsche Bank AG, Research Division - Research Analyst

* James Edward Brazier Hollins

Exane BNP Paribas, Research Division - Senior Transport Analyst

* Malte Christoph Schulz

Commerzbank AG, Research Division - Equity Analyst of Industrials

* Rishika Dipak Savjani

Barclays Bank PLC, Research Division - Assistant VP

================================================================================

Presentation

--------------------------------------------------------------------------------

Antonio Vázquez Romero, International Consolidated Airlines Group, S.A. - Chairman [1]

--------------------------------------------------------------------------------

Good morning, everybody. Welcome to this result presentation. I want to share with you that the Board of Director of IAG is extremely happy with the way the management is performing and managing this -- the company. Once more, we're happy to share with you very good result. We are one of the few airlines worldwide to report an improved operating margin compared to 1 year ago, and we are glad to present to you the highest operating margin from a European airlines.

As far as the dividends is concerned, the AGM in June, shareholders approving you -- our AGM, a final dividend of EUR 0.165 in respect to 2018. This makes a total of EUR 0.31 for last year, which is 15% higher. And in addition, the AGM approved as well the payment of special dividend of EUR 700 million, equivalent to EUR 0.35 per share paid in early July.

As far as the Board is concerned, we are pleased to announce the election of 3 new Board member at the AGM: Steve Gunning, as the CFO, who's going to be presenting to you today; Margaret Ewing; and Javier Ferrán. And I'm happy to welcome the Senior Independent Director of the Board, Alberto Terol, which is joining us today.

So I hand over to Willie.

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [2]

--------------------------------------------------------------------------------

Thank you, Chairman, and good morning, everybody. Very pleased you could join us this morning for another good set of results. We continue to do what we've promised. We're strengthening the platform and you can see evidence of that, and we'll see more when Steve takes you through the financial performance. LEVEL has continued to expand its business out of Barcelona. We've now opened the Amsterdam base as well. And you are now seeing more tangible evidence of the investment that British Airways is making in new products, in addition to the new Club lounge at JFK and San Francisco, the first of the Airbus A350-1000 aircraft has been delivered, and that's fitted with the new Club World suite. And I think a number of you have been able to see that.

We're seeing strong performance on NPS, particularly at British Airways and Vueling. I'll take you through some of those issues later on in the presentation.

And when we look to growth, we're growing the business, I believe, in a very sensible manner, 3.4% growth on the North Atlantic, principally coming from investing in the strong network that we have, but expanding the network as well at British Airways to places like Charleston and Pittsburgh, LEVEL out of Barcelona to New York and the Aer Lingus transatlantic performance continues to be very strong, having launched to Minneapolis just recently. Unfortunately, because of ongoing delays with Airbus A321s from the Hamburg facility, which clearly has been unacceptable, we've had to postpone the launch of Montreal from Dublin until summer of next year.

LEVEL is also expanding our network into Latin America with the start of Barcelona, Santiago. And when we look at the growth on Latin America and LACAR Caribbean region, it's important to point out that some of that is actually into the Caribbean through the BA additional seating on the 777-200 that are operating from Gatwick. And Europe, for us, has been good. Very strong performance on our domestic network. We are slowing growth in Vueling through the peak summer to reflect the difficult ATC environment, which we anticipated, and that is having a positive impact, both in terms of NPS, but equally, you'll see that it's offsetting some of the EU 261 compensation costs that we would have seen, and we're investing that in resilience. And we continue to take advantage of the strength of IAG in negotiating new contracts with the aircraft to -- for both Boeing and Airbus. We've seen the orders for the 321XLRs for Aer Lingus in Iberia, the order of the 777-9 for BA and the recent letter of intent with Boeing for 200 and MAX aircraft.

Financial performance, I think, is very solid and increases, as Chairman said, in the quarter from EUR 900 million last year to EUR 960 million on a pro forma basis. Better results at BA and at Vueling, flat at Iberia and Aer Lingus and a positive unit revenue environment.

So it's a good second quarter for us. We are maintaining our guidance for the year. This is unchanged then, you can read it in the document there. And as the Chairman said, very pleased to see the AGM approve the final and special dividend. And I thank all of the shareholders who've written to me to thank us for the special dividend, in particular.

You see we're slowing down growth as we had promised to do, so we (inaudible), particularly in the fourth quarter, and I'll take you through a more detailed presentation. But before I do that, I'll hand you over to Steve, who will take you through a closer look at the financial performance. Steve?

--------------------------------------------------------------------------------

Stephen William Lawrence Gunning, International Consolidated Airlines Group, S.A. - CFO & Executive Director [3]

--------------------------------------------------------------------------------

Thanks, Willie. Good morning. So let me canter you through the results. As Willie says, the operating profit for the quarter, EUR 960 million. That's up EUR 60 million on last year. Our constant currency is up EUR 52 million. So FX, not a big story at an operating profit level in Q2.

In terms of capacity, up 5.4%. As Willie was alluding to, we knew Q1 would be the highest capacity growth, it's less growth in Q2 of 5.4%. RPKs were up 6.6%. So seat factor, load factor was up, too.

In terms of passenger unit revenue at constant currency, up 1.1%, which is a turnaround from quarter 1, where we were down 1.4% at constant currency on RASK. So 2.5 points swing quarter-on-quarter. And clearly, there was a benefit of Easter and other holiday timings in that number.

And then finally, on this slide, non-fuel unit costs, up 0.4% at constant currency. If we strip out the sort of non-ASK-driven businesses, Iberia MRO, BA Holidays, actually the underlying non-fuel unit costs are actually down 1.7%. So overall, a strong performance over the backdrop of fuel price. Fuel cost is up. Fuel costs were up EUR 245 million in the quarter. So to grow profit in that context was a good result.

Let me take you through a little bit more as to what's been going on with the revenue because this is quite a turnaround in terms of how this graph looks compared to Q1. In Q1, all of the regions, with the exception of domestics, were showing a negative RASK movement. And now as you can see, all regions have improved with the exception of LACAR.

Let me just give you a quick canter around these. Domestics. Domestic was the one strong region in Q1. It continues to be strong. This is primarily driven through demand in the Canaries and the Balearic Islands because there is this price discount assistance that the residents that are getting there.

As Willie just alluded to, in terms of Europe, it's a pretty good performance in Europe, both Iberia and Vueling had positive RASK developments. And if you look to Q1, we were down 5.7% in Q1. So to be down 1.1% is a good improvement in those numbers.

In terms of Asia Pacific, all of our routes have improved on the quarter, with the exception of China Mainland. And I think the main drivers of that is partly the Chinese economy, but primarily, the amount of capacity that's going into -- that's been put into the market by the Chinese carriers.

With regards to AMESA, also a very positive performance, sort of 3 points to highlight there. Firstly, India, our performance there has benefited from the demise of Jet. No 2 ways about that. Secondly, in terms of Nigeria, we did have some sort of turbulence in Q1, particularly with elections. Now with the other side of that, we're seeing Nigeria perform more solidly. And we're also seeing South Africa perform more solidly as well. We have tuned capacity there, Iberia took capacity out, BA has taken capacity out, so there's been some degree of rationalization. But overall, AMESA, a good performance.

Probably the one challenging area at the moment is Latin America and the Caribbean. Clearly, Argentina and Brazil have been a drag on this region in terms of performance. We think we're seeing both of those bottom out at the moment, maybe even some slight signs of improvement on Brazil.

With regards to Argentina, probably a bit too early to tell. Interestingly enough, the rest of that region is performing well. So there's significant ASK growth, but there's significant revenue growth performance in that area if you exclude Argentina and Brazil.

And then you turn around to North America, and you'd say, well the -- a very disciplined and modest capacity growth in the quarter at 1.5%. And as you can see, a very solid RASK improvement of 2.9% unit revenue improvement. So that's very good, particularly with new routes coming online such as Pittsburgh and Charleston in that quarter.

So overall, strong revenue performance in the quarter, and it sort of underpins the overall results.

I'll turn now to non-fuel unit costs and fuel unit costs. As I said earlier, non-fuel unit costs up 0.4% at constant currency. If you strip out the non-ASK-driven businesses, actually an improvement of 1.7%. One thing that's too much to point out on the employee and ownership costs, both down at constant currency. Supply costs are impacted to some degree by the non-ASK-driven businesses. So we see more engineering costs, particularly MRO-related costs, coming through. And that's one of the reasons when you strip those out, you see the unit cost coming down rather than going up.

With regards to fuel, fuel, clearly, is a story during the course of the quarter, up EUR 245 million in total. And so there has been a drag on the overall performance of the business. Interestingly, when you look at that, the actual commodity price year-on-year is actually down. But in 2018, we had significant hedging gains. In 2019, we had some modest hedging losses. So when you look at that overall, you'll see that the fuel bill has gone up.

Let's talk a little bit more about fuel. So this slide basically sort of gives you a scenario based on our hedging book at the moment. So a few observations here. We've based this scenario on 640 fuel, and you know, as well as I do, how volatile that is at the moment. I think it's a decent proxy, and we based it on $1.11 to euro exchange rate. And what you can see is, in half 2, so Q3 and Q4, remainder of this year, you can see that we're about 90% hedged. And so when you play through that scenario, our guidance for the fuel bill cost for 2019 is EUR 6.1 billion.

If you look back to our numbers at the end of Q1, we were guiding at that point to EUR 6.2 billion. So a slight improvement there. I think if you look out to the 4 quarters of 2020, you will basically see that at a euro level, we're pretty much flat, slightly down in half 1, and we're certainly down 1 to 1.5 points in half 2. So that gives you a feel of where fuel is going and where our hedge book looks at the moment.

You will look at the business as a whole, operating margin, 14.2% is very respectful. is a very good operating margin for the quarter, only 0.4 down despite the fuel headwinds. And ROIC above 15% our target, that's 15.6%. All of the businesses have had a good performance in the quarter. A couple of things I would observe. If you're eagle eyed, you will have seen that the Iberia return on invested capital is down a point or so. That's primarily driven by aircraft deliveries in the quarter building up the capital base. You'll also see the Vueling operating margin actually improve on the quarter, and that's partly due to the improved operational performance and resilience of the business, which Willie will touch on later on in the presentation.

In terms of this next slide, it's -- these are the half year numbers rather than quarter 2 numbers, and these are reported currency, not at constant currency. And what you can see here really is that the results were -- the complexion of these results were set in Q1. Overall, we were EUR 205 million off of last year in Q1. Because we're EUR 60 million better in Q2, we've clawed EUR 60 million back in the second quarter. We're EUR 145 million off versus last year for the first half. And you can see that coming through on the operating result numbers.

Also, if you look at that penultimate line at the bottom, you can see the CASK number, which includes the fuel pricing coming through, and you can see a significant increase there as I've touched on.

Overall, the fuel bill for the half rather than the quarter was up EUR 499 million. So a significant improvement. So to, in one sense, [to only pay 145] off year-on-year is a good performance.

If we look below the operating profit line, you can see the profit after tax is pretty much flat year-on-year and EPS slightly up. Only one item I would sort of bring to your attention here is the net currency retranslation credits. This is a EUR 138 million credit. This mainly relates to FX hedging. We basically take out derivatives to hedge all of our dollar debt payments going forward, including right-of-use assets. And clearly, we took out a number of derivatives around the start of the year. At that point, the forward dollar rate was particularly strong. It was about $1.40 at that point. Since then, you'll know that the forward rates have come off. So when we've marked these to market, we've had a significant gain in the quarter and in the half.

And last slide from me, just looking at leverage. Leverage is reduced and improved primarily because we grow the cash during the first half of the year. So we're sitting there with EUR 8 billion of cash at the end of half 1. That's pretty much consistent with the cash position (inaudible) this time last year as well. Interestingly enough, you'll know, as Willie alluded to earlier, that subsequent to this event in July, we would then have paid out about EUR 1 billion of that with the dividend and the special dividend. So overall, a strong set of numbers. I'll now hand you back to Willie.

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [4]

--------------------------------------------------------------------------------

Thank you, Steve. So as I mentioned, we have trimmed our growth plans for the remaining part of the year, and that's in line with the comments we made at Q1. You can see that for Q4, we are now seeing 3.2% growth. That was originally when we first presented this chart to full year results last year, it was 5.9%. Would take us down from 3.7%, which was the last figure we gave you, to 3.2%, and that's very much in line with what we said. We would look for opportunities to trim the plans capacity increases to adjust to what we believe is appropriate for the demand environment that we're expecting in the fourth quarter. And you will see that flow through into next year. So growth this year now planned at 5%. We had originally given you a figure of 6.5%. So you can see where we're doing hopefully what we had said we would do, which was to look at the evolution of the year as we went through it and to take capacity out if we felt that, that was appropriate.

Our guidance remains unchanged. So at current fuel prices and exchange rates, we expect our 2019 operating profit before exceptional items to be in line with the 2018 pro forma passenger unit, revenue is expected to be flat at constant currency and non-fuel unit costs expected to improve at constant currency. And just to reaffirm that we expect passenger unit revenue at constant currency to improve for the remainder of the year. So absolutely, no change to the guidance that we had previously given you.

Now you've seen this investment case many times, so we're not going to take you through it. But just to highlight a few issues. As the Chairman had said, we now have paid a total of EUR 3.8 billion to our shareholders since 2015, and that includes EUR 1.3 billion in 2018 in relation to 2018. And we calculated there a fantastic dividend yield of 8.2%. So if you were to have bought shares in the 28th of February, that's what you would have got. So it's clearly a very strong dividend yield. Our cash priorities remain exactly as we said. We're going to reinvest in the business to support accretive organic growth. We have a commitment to maintaining a sustainable dividend, and any surplus cash that is not going to be used for inorganic opportunities, and we're not pursuing anything at the moment, will be returned to shareholders. And as we've said for many times now, it's only the manner in which we return that excess cash to shareholders that gets debated by the Board.

Now we've highlighted the problems with ATC. It continues to be a major issue, although we have seen a slight improvement in 2018 versus 2019. I have to give credit to Eurocontrol. But also, we've got to take some credit ourselves because we have moderated our planned growth, particularly at Vueling, to remove the biggest problem areas that we witnessed last year. Now that does entail quite a bit of replanning of the network, but I think it was absolutely the right thing to do. So although the environment has improved versus last year. It's still very, very core relative to where we would expect it to be historically and relative to the targets that have been set for ATC providers across Europe.

Eurocontrol, through their new Director General, Eamonn Brennan, is making a difference and has come up with a number of initiatives that is improving the environment (inaudible). But it's still not good enough, and we continue to call for ANSP providers to make adequate provision of manpower to deal with the planned ATC environment that we expect to see in 2020, 2021 and beyond. Some of these issues can be addressed through additional resources, some of them require a more strategic approach to be taken by European governments. And we will continue to lobby in a united fashion through our association, the Association of European Airlines, and we believe we are being effective in the lobbying action that we have.

If we turn to Vueling, because Vueling got badly hit last year, as you know, and then encountered significant ATC disruption to its network, largely because of the core performance in Marseille where we had a number of strikes. We've redesigned the network and put significant resilience plans in place, and that is proving to be effective. We've seen a 19 points improvement in our Net Promoter Score, our on-time performance has improved by almost 6 points and flight cancellations are down over 80% versus last year. And you will have seen a number of other European airlines highlight the reduction in the number of flight cancellations. That is down to a lot of actions that the airlines are taking and Vuelling in particular has contributed to that, adds to a slight improvement in the ATC environment versus last year.

I'm pleased to say that based on Eurocontrol's statistics for the period that is available, unfortunately, we don't have this right up to the end of June, show that Vueling improved from being #31 out of the top 50 to #12. And so it's not just reflected in the internal metrics that we were looking at, it's also very much evidenced by the data that Eurocontrol is providing us. So we avoided quite a significant amount of the additional EU 261 compensation that we paid last year, but that's been invested in the resilience. So you can see there again, our additional backup aircraft, additional crews. So we're operating in a sub-optimal fashion to reflect the ATC environment. But it's absolutely the right thing to do for the business, and we will continue to look at how we can strengthen that resilience as we go forward.

LEVEL, you will have seen that Luis Gallego is now responsible for LEVEL as Chairman. So the LEVEL management team reports into Luis, and I think they will benefit from the significant experience that Luis has in the low-cost area and also understanding of the network into Latin America and North America. We've had some significant milestones. We've now carried more than 1 million passengers as of July of this year, and we've expanded to 8 long haul and 21 short-haul destinations for A330-200 into Barcelona with new destinations, from Barcelona to New York and to Santiago. And LEVEL France celebrated its first anniversary, LEVEL Vienna also celebrated its first anniversary. And we've now started the Barcelona base with 3 aircrafts serving 7 destinations. So we're very pleased with the performance, particularly so with the performance of Barcelona, although, as we highlighted previously, the results have been impacted as a result of the depreciation of the currency in Argentina. But Barcelona is still proving to be very effective.

Some initial issues that we had to deal with in Paris, but the operation is now solid and robust, and we're seeing some of the shakeout that you would normally expect from the competitive environment there. So pleased with the way LEVEL is developing, and very pleased with the guidance that Luis would be able to bring to that going forward.

Now I just wanted to clarify issues in relation to aircraft orders. And what you see there is the Capital Markets Day presentation that we gave you. And just to remind you that the recent aircraft orders that we have announced, including the LOI with Boeing, is absolutely consistent with the plan, the aircraft deliveries that we gave you at our Capital Markets Day. In fact, as you can see from this, we still have a number of outstanding aircraft to be decided on. So we're pleased so far with what we've ordered, but there is more work that we need to do. Disappointed, as you've heard me say previously, with the performance of Airbus. Very poor delivery from Hamburg on the A321. It's not just for us, as you know. I'm sure by now you've heard every airline that is excited about taking the 321LR expect -- express huge disappointment about the delays that they're encountering. We need Airbus to improve their performance, and they need to get working on that very quickly because, quite honestly, the delays that we're seeing are just completely unacceptable, and it is impacting on the growth plans that we have. That's particularly true with what we want to do with Aer Lingus on the transatlantic.

We're having very, very constructive discussions with Boeing. And the LOI that we signed talked about deliveries between 2023 and 2027, we're actually looking to see if we can get some of those deliveries in 2022, and the engagement with Boeing has been very positive and very constructive.

But the simple message is that all of this is consistent with what we said we would do when we gave you the big plans at Capital Markets.

Now my favorite subject, Heathrow expansion. And if you doubted my views on Heathrow, I want to just reassure you that I'm right and they're wrong. There is absolutely no way that Heathrow can expand in line with the promises that they've made. And we will expose the Commons for being untrue as and when they make them.

The total cost of expansion is now GBP 32 billion. If we just focus on what was originally talked about in terms of the third runway, which the Airport Commission (sic) [Airports Commission] said would cost GBP 17.6 billion and Heathrow very publicly stated when the government supported the expansion back in October 2016 that they could do it for GBP 14 billion, and you still hear them making comments that they'll do it for GBP 14 billion, what you get for GBP 14 billion is not what was promised because that GBP 14 billion does not give you any terminal infrastructure now. So, in fact, if you look at what we're now -- or what we're originally promised for GBP 14 billion, it looks like that will cost about GBP 17.5 billion. And that's escalate, and there is absolutely no way that Heathrow can deliver this. We have no confidence in their ability to do it. They demonstrated absolutely zero evidence of them being able to do it, and we're particularly concerned the amount of money that is now being spent in advance of getting approval. So they will have embedded about GBP 3.3 billion of additional cost in the Heathrow RAB before they get approval. Now the regulator needs to step in. This is completely unacceptable. The costs are out of control, and we still challenge Heathrow to demonstrate that they can do it. So the government needs to be very focused on this. I have to be honest, I was very pleased with the commitments from the former Secretary State for Transport, Chris Grayling, who I think was really good on this. I know he's been criticized for other issues. I can't criticize him at all because he got this message and got it very clearly. The only way we can support Heathrow expansion is if it's done in a cost-efficient manner, and that is impossible based on what we see at the moment. So we're going to be spending quite a bit of time with the regulator, with the government on this issue. And this is before you get into the issue of climate change and the commitments that the government has made.

We're absolutely committed to play our parts to improve the performance of our airlines and within the industry, to influence the industry. We were influential in getting IATA to agree, or get the industry through IATA to agree to long-term targets. We're still the only industry to have agreed these long-term targets. We're looking to continue to improve our carbon efficiency in advance of 2020, and we've committed to carbon-neutral growth. And then 50% reduction in net emissions by 2050. We're doing that through ongoing improvement in the performance of our business through operational measures. We're improving our performance by taking delivery of new aircraft. Our carbon efficiency of 2018 was 91.5 grams of CO2 per passenger kilometer. And we have a target of 87.3 by 2020, which we're on track to achieve.

We're also investing in sustainable biofuel. We're absolutely convinced that this is a real possibility. And we're prepared to put our money to support the development of the infrastructure and also to give the commitment to take the project, and that should give encouragement to other investors. And we're calling on the government to set up an office for sustainable aviation fuel to really drive the investment in this area because we believe there is a real opportunity.

And through the CORSIA, which is the ICAO platform, the global first and the only industry to have a solution on climate change at an industry level, and this will see industry's aviation reducing its net emissions by 2.5 billion tonnes from 2020 to 2035. And this is through investment in quality and measurable carbon offsets. This is very much the focus of the industry. We want to ensure that we're playing our part, and we're absolutely determined to do so.

Now just a couple of -- 2 issues before I wrap up. You will know that the permitted maximum notice was issued. I think most of you are familiar with the background to this. To ensure that we can retain the operating licenses of the airlines, it must be -- it must be able to demonstrate majority ownership and effective control by EU nationals. And like all listed airlines, we've had this provision in our bylaws. It's been in the bylaw since we created IAG in 2011. We announced the permitted maximum notice on 11 of February 2019, when our non-EU shareholding have reached 47.5%. So we keep this under review, and we intend to remove the permitted maximum when possible. I can't give you any guarantee around when that will be, but this is under a constant review and the Board spent quite a bit of time yesterday, just considering the current position and the options that are available to us.

And turning to Brexit. I'm not going to rehash the first couple of bullet points there because you will know the background to it. I would say that we remain confident that a comprehensive air transport agreement will be reached between the EU and the U.K. But the important point is the next bullet point. As required by the EU, we submitted to all of our individual airlines, the plans on ownership and control to the national regulators in Spain, Ireland, France and Austria. And these regulators have confirmed that the plans would satisfy EU ownership and control rules in the event of the no-deal Brexit.

The EU Commission has been notified about the remedial plans by the national regulators. The plans don't require EC approval, but clearly, the EC has, the Commission has the right under EU law to investigate and, where appropriate, request the regulators to implement corrective measures. But I'm pleased that the national regulators in Spain, Ireland, France and Austria have acknowledged that our plans satisfy EU ownership and control groups.

And just to wrap it up, we're strongly of the belief that our -- what was unique and maybe will not be unique going forward as everybody seems to want to copy our structure, but this does drive innovation and superior returns for our shareholders. We've got a strong portfolio of World Class brands. We've got global leadership in our markets. We take advantage of the integrated platform that we have. We've delivered on non-fuel unit costs. And at Capital Markets Day this year, we're going to give you, which I think is more important, actually, is the adjusted non-fuel unit costs. Because as we've seen more and more of our business in non-ASK-related activity, I think what you really do want to see is how are the underlying airlines performing, particularly in this area. So we're going to go back and give you information on our performance 2011 to date in November on an adjusted non-fuel unit cost basis.

Strong performance in the second quarter of 2019. Very pleased with that. We're on track to meet our financial targets. We have an investment-grade balance sheet. We're paying dividends. We're pleased with the response from our shareholders. And we're maintaining our guidance unchanged for 2019.

So all in all, I have to say I'm pleased with what we've achieved so far this year. Clearly, there's a lot of work that we need to do. But we're demonstrating our ability to respond quickly to any changes in the external environment, adjusting capacity as appropriate.

And I have to be -- take this opportunity to thank the team at Vueling for the actions that they have taken to stabilize the performance. It wasn't of their making, the challenges that they faced last year, but they demonstrated that they know how to operate in difficult environments and the measures that they've taken, delivering very positive results for our customers and for the business.

So I'll now take -- going to hand back to Andrew. Andrew will take us through the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [1]

--------------------------------------------------------------------------------

Thank you, Willie and Steve. Yes, it's time for Q&A. You'll see in the seat rest, so there's a microphone. So if you want to ask a question, stick your hand up, and I'll pick you. And then if you pick up the mic, and in answering it -- if you're asking your question, if there's a gray button, you press that down and keep it pressed down and the red light should show. And we've got all the OpCo CEOs here and most of the management committee teams, so feel free to ask your questions to whoever you want. James?

--------------------------------------------------------------------------------

James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [2]

--------------------------------------------------------------------------------

All right. So James Hollins from Exane. Three for me, please. Just firstly, you didn't mention the premium versus leisure trends. I was wondering if you could sort of -- if, ideally, give us some data on how those are tracking? And particularly obviously Q3 was a more leisure quarter, whether you think Q3 RASK can be up or whether just H2 as a whole?

Secondly, Willie, you were quite ambiguous on Heathrow. So wondering, if you were right and obviously your campaigning goes to plan, what do you think will actually happen? I mean both in terms of the sort of U.K. government, will they just say, "Okay, fine. This is a hiding to nothing gilt-edged platform, et cetera. Let's just cancel it." And secondly, what the CAA might say in terms of those tariffs? Obviously they've been, I think, relatively okay so far, [so they should] be kept flat through the process. But just some more views because, obviously, you're closer to them than I am.

And then probably one for Alex. Obviously BA versus the unions, it's 0 all at half time, 0 all full-time, 0 all that extra time. I was wondering how we're looking as we go into penalties.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

James, thanks for your questions. As you know, we don't break out the premium and leisure. But just to say, premium's performing very well, transatlantic premium, in particular, Aer Lingus transatlantic premium really, really good. So we're seeing good performance across the network, with the exception of the areas that Steve had highlighted. If you take out the Argentina and Brazil in Latin America, the rest of that area is actually performing very well for us as well.

So the areas that we'd identified previously, Argentina, Brazil, South Africa and then China. And China, I think, is a combination, as Steve said, it's a supply issue with a lot of additional capacity. And I think that reflects the second issue, which is trade. Because I think you're seeing a switch in some capacity that would have gone across the Pacific is now going into Europe. So you're seeing capacity being redirected. You're seeing a slowdown in some areas because a lot of capacity is not coming online for various reasons. But with those exceptions, the rest of the network performs well. And it's performing well both in premium and in leisure.

And you can see in the IMR, and Steve had mentioned this, that U.K. point-of-sale is good. So I've said again on the radio and TV interviews that I've done this morning, we are not seeing any evidence of the Brexit impact. We can't, quite honestly, we cannot identify any impact. Now I've heard what O'Leary has said and what others have said, and it may be that we're not as exposed to the whole of the U.K. and the way that they would be where our business has a much heavier weighting towards London and the southeast. So that could be one explanation for us. But we're not seeing any impact on bookings or the profile of bookings going forward in terms of the visibility that we have.

On the third runway, I'm sorry I wasn't clear enough. This is a really, really important issue, and this one's just important for us. It is important for us. I don't try and hide that, but it's important for U.K. plc. Because if you remember, Heathrow is out there trying to con people that this is good for the U.K. plc. It's not. It's good for them, and them only. And to be honest with you, we're not going to allow it because they got away with this for too long. They promise on time and on budget. It's clearly neither on time nor on budget. And it's gone so far off budget, we've got to call them out. When they're saying we can still do this for GBP 14 billion, but they don't mention that, that GBP 14 billion gives you 0 terminal infrastructure. And actually to get the full value out of their own way, you have to spend GBP 32 billion. These are outrageous figures. And we really do need people to wake up to what's going on here because if we don't stop it now and force the meter to deliver to the original plans that they have, I'll stop them.

What we're going to be left with is the most expensive piece of infrastructure that will be underutilized because you are not going to get people coming in here if the costs are driven up as they will be based on this particular investment profile that Heathrow is looking at. So they should be honest and admit at this stage that they can't do it, and maybe there's somebody else that could do it better than them. There are others who are interested. We'd have more confidence in some of the others who have expressed an interest in developing the infrastructure, and maybe that's what should be done. But the CAA can't turn a blind eye to this, and the government can't turn a blind eye to it. And we don't expect them to do that, and we don't believe they will do that.

So they should be honest and admit at this stage that they can't do it, and maybe there's somebody else that could do it better than them. There are others who are interested. We'd have more confidence in some of the others who have expressed an interest in developing the infrastructure, and maybe that's what should be done. But the CAA can't turn a blind eye to this, and the government can't turn a blind eye to it, and we don't expect them to do that and we don't believe they will do that.

Turning to BA before Alex comments. Let me just repeat what I've been saying to people. I don't like giving running commentaries when those negotiations are ongoing. But personally, I do need to acknowledge, and I think BA pilots do a great job. They're very professional. We know they have issues that have upset them. But if I looked at the pay offer that BA has made, I think it's a generous and I think it's a fair offer. This is being managed by BA. I'm not involved in this. I won't be involved in it. This is for Alex and his team to resolve, but I'm pleased to say that some of Alex's team and representatives for BA spent a day yesterday with BALPA. And maybe, Alex, you can update us on what's going on.

--------------------------------------------------------------------------------

Alejandro Cruz de Llano, International Consolidated Airlines Group, S.A. - Chairman & CEO of British Airways [4]

--------------------------------------------------------------------------------

A great deal more than that. I was going to say it's hard to tell if we're in the first half, second half, overtime or penalty. So I think the conversations continue. It's important that our team continues to be with them. They spent all day long yesterday. They may be together tomorrow, et cetera. So I think it's best not to comment. Very productive discussions. And if there's something certain about a football game is that it ends, and this will also end at some point. So -- and we're looking forward to that.

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [5]

--------------------------------------------------------------------------------

Ireland's got a good track record in penalties. We lost some penalties to Spain which, obviously, we have to do it from time to time, but we have done well in penalties in other competitions. But anyway, it's for Alex to deal with. But yes, I'm pleased. And we do have to acknowledge, by the way, that BALPA has not served any notice of industrial action at this stage. That's not to say they won't, but they haven't at this point, which I think is positive as well.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [6]

--------------------------------------------------------------------------------

Gerald?

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [7]

--------------------------------------------------------------------------------

On the data, there's quite a detailed explanation. I think it's on Page 26. I'm just looking for it now. Yes, Page 26, Note 17 on contingent liabilities. So I think the best thing I can do is to point you to that because there is a formal appeal process which we will follow. We've been very clear, we will pursue this vigorously. But I think it would be wrong for me to rehearse the arguments that we're going to make, given that the first step on that is that we'd make representations to the ICO, and that will be done in the coming weeks. You're asking the ICO to mark their own homework in one degree. So yes, there is an appeal process that follows that, and we've outlined some of that. So maybe the answer to the question you asked is -- would be best covered if I refer you to Page 26 of the report.

On the environment and carbon, yes, you're seeing that the price of carbon is increasing. We factored that in. So going forward, it's currently embedded in our fuel price. We will continue to embed it in the fuel price, but we will give you more visibility if you wanted on that. Our gross emissions for the group last year was 29.99 million tonnes of CO2. So we expect gross emissions to continue to grow. It would stabilize because of the investments we're making, but the focus will continue or will turn to net emissions because we'd be offsetting some of those gross emissions through the various schemes that we're involved in. But we're fully committed to that and we're not arguing about it. We think it's the right thing for the industry. We believe that, in the short term, there isn't a simple solution for aviation. So therefore, aviation needs to use some of its money to provide incentive toward those, and we'll only do that where -- these are real carbon reductions. We want to make sure that the investments that's made by the industry are quality reductions. I think that's what everybody wants to see.

We're not seeing any consumer pushback at the moment. There's clearly greater awareness in relation to the issue. I keep giving this statistic, and it is important, but 80% of all emissions from the aviation industry are from flights in excess of 1,500 kilometers, and there is no alternative. And as you know, a lot of people don't have an alternative option when it comes to travel. So there are options for some, but for a lot of people, there are aren't any alternatives. And Michael O'Leary often says it more colorfully than I do, but Ireland is an island and I think will continue to be an island, and there is not many easy ways to getting off the island without flying.

So what we've got to do is recognize that there will be a need for people to continue to travel by air. We've got to make sure that, that's done in an as efficient a way and that we play our part to ensure that we reduce our environmental impact. And it's great to see that Ryanair and everybody else is highlighting what it is they're doing. I think that's a positive for the industry.

On capacity, you're right. We'd give you more detail, but -- at Capital Markets Day. But, yes, we said this before. Yes, we admitted we got Tier 1 wrong, and you could have seen some of that in Q4 of last year. We tried some new things through Q4 and Q1. It didn't work, and we feel the additional space. As you know, we had RPKs in excess of ASKs, but it was at a significant yield impact and unit revenue impact. We've stabilized that. We announced positive unit revenue. We'll be positive unit revenue for the rest of this year in Q3 and Q4. But we recognize that some of the initiatives we tried we're not going to repeat, and that means our Q4 ASKs have come down 3.2 and that -- you see that flow through into Q1 and beyond. So yes, I think you'd see us, as you would expect, to moderate the capacity funds from the headline figures that we gave you at Capital Markets Day last year.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [8]

--------------------------------------------------------------------------------

I'm going to take a question that's been sent in by e-mail from Neil Glynn at Credit Suisse. He, unfortunately, couldn't make it because of the evacuation of the Bank station. It's a question for Steve and one for Willie. And, by the way, if anyone else is out there, you couldn't get here, just e-mail me a question and I'll pass it on.

On cash flow, disposal proceeds of EUR 458 million were strongly up year-on-year. Is this all sale and leasebacks? And what does it imply for net CapEx in FY '19? And does this explain why the lease repayments have doubled to EUR 823 million in the first half? And then a question for Willie, I guess, or even Alex. U.K. point of sale, given the weakness of GBP, how you're thinking about trying to stimulate point of sale in the rest of Europe and rest of the world?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, I think on the U.K. point of sale, it's clearly something that we have levers that can be operated that maybe other businesses can't. And what we've seen previously, when you see a weakening pound, the flow of traffic changes. So nothing new in this. We've witnessed it back in 2016 when we saw a significant devaluation of the pound, and we see it in other areas where we see currency devaluation. So a great example of that was Argentina where Argentina was 60%, Argentina point of sale until they devalued the currency there. It's now switched into Europe point of sale because Argentina becomes a very attractive destination with the devaluation that has taken place.

And we have the ability to do that and we have the levers within our revenue management teams that they can pull to adjust traffic flows and take advantage of what should be increased inbound traffic into the U.K. And I've heard a lot of people now talk about this as being an option. And particularly London because I think London -- and the U.K., clearly, has a lot to offer from a tourism point of view and also, going forward, I think from a business point of view, when there's a bit more clarity around what's happening with Brexit.

So we're reasonably relaxed. We clearly will have a translation impact as we've seen before, but you guys understand all of that given the BA profitability, BA revenue, BA profitability. But in terms of the business, you'll see us putting a greater bias towards the non-sterling point of sale -- points of sale, and we've been able to manage that situation very well in the past. Steve?

--------------------------------------------------------------------------------

Stephen William Lawrence Gunning, International Consolidated Airlines Group, S.A. - CFO & Executive Director [10]

--------------------------------------------------------------------------------

Yes. In terms of doubling of repayment leases, I presume Neil's referring to the cash flow statement on Page 11 of the IMR. And really, what you're seeing here is the move from the pro forma report or the statutory reporting last year to the IFRS 16 reporting. So really, all you're seeing is the payments split in a different way. Before, those payments would have gone through the operating profit after exceptionals. Now they come out of there and they split between the interest payments and the repayment of leases. So it's a reclassification item. It's not a change in the expectation in overall lease payment costs.

In terms of CapEx guidance, I think we've been clear on our guidance when we did the reclassification. Net CapEx will be between EUR 2.6 billion and EUR 2.7 billion, and we'll update that guidance when we get to Capital Markets Day.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [11]

--------------------------------------------------------------------------------

Damian, can you remember to press the -- I think is a gray button. Otherwise, you can't be heard on the webcast. Hopefully, that works.

--------------------------------------------------------------------------------

Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [12]

--------------------------------------------------------------------------------

Damian Brewer from RBC. Two questions, please. First of all, on cargo, historically seen as a lead indicator, and the data there have been quite weak. There's some debate about whether that's really the case this time. Can you elaborate a little bit more about what you're seeing there? And in particular, were there any sort of industries or customers in general which are causing the, I guess, disruption and weak pricing?

And then secondly, I don't really want to mention it, but the sort of B word, Brexit. Given what our politicians are talking about, could you elaborate a little bit more about how you're thinking about contingencies? For example, how much of the BA fleet is depreciated or near fully depreciated? How much flex there is around there and how you're thinking about the sort of treasury function in the event of another currency devaluation?

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [13]

--------------------------------------------------------------------------------

On cargo, for some time now, probably, I'd say, maybe 8, 9 years, there's been a significant change in cargo and passenger performance. And we no longer see cargo as a lead indicator because where we've seen cargo change, we've seen passenger just continue. So we do look at this quite a bit. And in fact, just recently, we spent quite a bit of time to challenge ourselves again. Has this become an indicator? We don't believe it is. It is an indicator of trade, but the environment in which we're operating, trade is one of the inputs. But you can't read anything into cargo performance or read across anything that we're seeing in cargo performance through the passenger performance. And that's been the case for, at least 8, maybe 10 years now, I think, and IATA has acknowledged that as well. But Lynne, I don't know if you want to comment on any cargo specifics.

--------------------------------------------------------------------------------

Lynne Embleton, British Airways Plc (UK) - MD of Gatwick, Director of Strategy & Director [14]

--------------------------------------------------------------------------------

Yes, can do. So the cargo market is in a different environment to the passenger market for sure. And the overall market decline that we saw in Q1 has continued into Q2. Q1 started with weakness in Asia. By the time we get to Q2, we're also seeing weakness in Europe. So the -- and of course, we've also got more cargo capacity in the market, which is part of what you're seeing in terms of yield decline is an overall supply-demand imbalance.

If I look at the segments within this, there's some segments holding up very well. The perishables are holding up well. Constant Climate holding up pretty well. And we are seeing declines in some sectors that may be of interest, automotive, for example, and sort of the high tech, we're seeing declines there. But it's a mixed bag for us in cargo at the moment.

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [15]

--------------------------------------------------------------------------------

And on Brexit, you'll know that we're currently operating 33, or as of the end of June, 33 747. And clearly, they're nearly or some of them very closely and fully depreciated. But in effect, you've got a fleet of 33 747s that are -- you could say are depreciating. And we've also got a number of 777-200s. The early deliveries of the 777-200s effectively fully depreciated. So in relation to the long haul, there's quite a significant bit of flexibility there. And on the short haul, a lot of flexibility with the aircraft that are leased, which is a feature of the business that we always look at to ensure that we have flexibility. And we got flexibility to move aircraft around the group as well.

So at this point, we're -- we can't tell you what's going to happen after the 31st of October in the same way as [you're not going to tell me]. But we're planning our bases. Our plans are based on there being a sensible Brexit, whether that's -- so that's not a hard Brexit. I mean, in the event of a hard Brexit, we will review our plans and you would expect us to change that. But yes, at this stage, we're very comfortable with the flexibility that we have, not just within the BA fleet, but right across the airlines in the group. We've got a lot of flexibility. I think we're actually very well positioned relative to a number of our competitors.

And what you got to look at, and we do look at this, our relative position. We're extremely strong relative to some, and anything that is going to impact on this is going to have a huge disproportionate impact on a lot of airlines out there who are in a very weak position today.

When you look at the strength of our balance sheet, our cash, our fleet, everything about the structure of our organization, our ability to respond quickly, we've all been here before. We've gone through a number of shocks. We know what to do. We've done it before. We feel better this time and we do it better than anybody else and we've got the flexibility that others don't have and, most importantly, the determination. So it's -- I hope we don't have to prove this, but if anybody doubts that, we'll be able to demonstrate what it is we can do. But I think you're going to be looking to a lot of other airlines to say how they're going to survive, to be honest with you, given where they are at the moment and where they're likely to be in the event of a significant weakening in the economic environment. Yes, treasury?

--------------------------------------------------------------------------------

Stephen William Lawrence Gunning, International Consolidated Airlines Group, S.A. - CFO & Executive Director [16]

--------------------------------------------------------------------------------

Well, not too much to say. Clearly, we've seen the devaluation of sterling even from when we were looking at the guidance for Q1. And clearly, we had to factor that in when we made the decision to hold guidance this time around. And clearly, we have a huge sterling profit stream that if there's a devaluation of sterling has an impact to the euro level, so undoubtedly the case. But we've seen this before in 2016. When the referendum result came out there's a significant devaluation then. And we had a bit of a playbook established at that point. And one of the benefits of BA is more than 50% of its revenue is non-sterling-denominated. And because we've got strong point-to-point business as well, we do have the ability to reemphasize the point-of-sale mix that we have and emphasize the inventory availability to the other end of routes. So yes. Could there be some initial turbulence? Yes, there could be. Do I think we've got the ability to adjust? Yes, I do. So those will be some of the factors we consider.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [17]

--------------------------------------------------------------------------------

Rishika?

--------------------------------------------------------------------------------

Rishika Dipak Savjani, Barclays Bank PLC, Research Division - Assistant VP [18]

--------------------------------------------------------------------------------

It's Rishika from Barclays. Three questions, if I may. Maybe, firstly, just touching on the disruption environment in Europe. I think you've obviously said that you think a large part of the improvement has been because the investment in resilience in Vueling and by other airlines. I mean, obviously, there's been a lot less strikes this year as well. How much of the improvement do you think is simply a function of that? And maybe just a bit of color as to what you think Eurocontrol has done that has been particularly good, that would be helpful.

And then maybe second question on the transatlantic. Capacity growth into the winter is quite clearly quite benign. Large part of that it seems to be the function of what some of the other low-cost long-haul operators have done in terms of pulling back on the capacity. But maybe if you could give us a sense of your conversations with the joint venture partners around the more mature capacity growth and how that's kind of playing out into the winter next year.

And then finally, in the Capital Markets Day, Willie mentioned the cost guidance and the change in the definition there. Is there anything else that we can expect to the Capital Markets Day, maybe something on level financials potentially?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I think, as I said, too, we have to give credit to Eurocontrol. They're being much more proactive in terms of proposing solutions to the problems, and I think there's good evidence to support them being given an even stronger authority over the management of the network as we go forward. But what they have proposed and what's being implemented is different routings to avoid the known pinch points. So there's a lot of traffic has been taken out of Karlsruhe, which was a known pain point last year and continues to be, and so we're avoiding that. There's been a change in the payment structure because, previously, the ANSP, the air navigation service provider, got paid on the basis of the file's flight plan, not the flown flight plan. So we get file to fly through a place like Karlsruhe or Marseilles and then end up bypassing it. They still got paid. And the problem there is twofold: One, you're paying people for not providing a service; but two, the people that were giving you this service weren't getting paid for it. So they weren't -- there was no incentive for them to take on the additional workloads. That's changed. And I think there are 2 very tangible measures that Eurocontrol have taken that will make a big difference. So now you're seeing traffic bypassing these pinch points. There is an incentive for the neighboring ATC providers to take that because they're going to get paid for that work. And clearly now, hopefully, the ones that aren't performing will start suffering from a financial point of view. But also, what Eurocontrol have asked airlines to do, and I think there is good adherence to this, is to fly the flight plan that you're given. I know from past experience as a pilot, you're always looking for shortcuts, which is great if you want to get home a little bit early. The problem is that does add to the workload of the ATC providers. And in an environment where they're already stretched, these -- what are considered the right thing to do is actually causing problems, knock-on problems. So that's encouraged us to just -- for everybody to behave. And it's always expected that most airlines would, but there would be one particular airline that wouldn't. I'm pleased to say they are behaving because it's in everybody's interest to do so.

So that's all playing to a situation where there's still a lot of ATC restrictions in place. The problem has not gone away. But when you consider that there's been growth in traffic, so Europe is handling more traffic this year than it did last year, there's been a reduction in the overall delays. And there has been a reduction in the strikes, you're right. But also, there has been actions that can kick in if strikes are a feature that we see going through. So it's a combination of a number of issues, but it is proving to be effective.

And on transatlantic capacity, I need to point out that I think this is not a party to the joint business. So we can't have any discussions with our joint business partners in relation to what Aer Lingus is doing and they can't participate. So the only thing we can say is what's being said publicly. That's why I can't give you any information beyond what you will have read publicly because that would be inappropriate. But what we see and what I think everybody is seeing is, there is moderation in the capacity that people have. Transatlantic continues to be a very healthy environment. I think the fact that a number of the so-called low-cost airlines disappeared is evidence of -- that's a challenging business to get right. We believe long haul, low cost is a potential profitable segment of the industry, but it's only going to be profitable if you have low cost, and a lot of these airlines just didn't have a low cost and certainly not a low enough cost to be profitable. And there's still -- anybody who thinks they can do it, we just look at their cost base and we know they can't. So I think the situation that we're seeing there is reasonably good.

On Capital Markets Day, it's a little bit early to give you some details. We're talking about the plans for that at the moment. As I said, one area where I think it would get value is getting greater visibility on what we call the adjusted nonfuel unit cost, how we measure that and going back and looking at the performance because that's really a more accurate assessment of the underlying performance of the airlines. And it is being -- and Steve gave you the figure, 1.9% improvement in adjusted nonfuel delivery cost for the half and 1.7% for the quarter. So yes, these are having a big impact, and I think more visibility around that would be helpful to you. So we'll definitely do that for Capital Markets Day.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [20]

--------------------------------------------------------------------------------

Jaime.

--------------------------------------------------------------------------------

Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

Jaime Rowbotham from Deutsche Bank. Three, please. Firstly, going back to ownership and control. So the country regulators are happy with your plans. And as you've said, you don't really need a blessing from the EC. So would it actually be terribly radical just to push ahead with those plans anyway, thus rendering the ownership structure at the IAG parent co level irrelevant, allowing you to lift the permitted maximum?

Secondly, you talked a bit about the weakness in -- to Mainland China. But Asia Pac, in general, looked very strong in 2Q with the ASKs up 7% and the yield up 2%. What's driving that? Is there a bit of sort of Asia point-of-sale strength there?

And also, it looks as though Iberia's growing quite strongly to Asia. Could you talk a bit about what's going particularly well there in 2Q?

And then thirdly, and finally, this might be a long shot, but going back to BA and the unions. I appreciate you don't want to talk too much given the ongoing negotiations. But some of the numbers going around in the press talking about if we get into the unfortunate situation of strikes, there's a suggestion of EUR 45 million a day of potential strike cost. Is that a crazy number or is it a sensible rule of thumb?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. On ownership and control, it's always important to remember that we don't just fly within the EU. There are lots of other jurisdictions around the world, and the structure we have in place has satisfied them. And I think there's been a fixation around the EU issue, but there's a lot of countries around the world that don't even recognize this concept of EU ownership and control. And that's one of the things we've got to bear in mind as well. So we're looking at this. I think, certainly, Capital Markets Day, we'll have a lot of clarity because the Prime Minister said it's all going to be resolved by the 31st of October, and of course, we believe him. So we'd be able to talk about that. On Asia Pac, Iberia's growth is obviously -- it's off a small base. Luis is here. I don't know if you want to comment, Luis. But maybe before you comment, Luis, Steve, is there anything you want to say about it?

--------------------------------------------------------------------------------

Stephen William Lawrence Gunning, International Consolidated Airlines Group, S.A. - CFO & Executive Director [23]

--------------------------------------------------------------------------------

The only couple of things, [just would be], all routes, so it wasn't specific all routes, except for China Mainland, routes improved quarter-on-quarter. Probably what was encouraging was we saw Hong Kong improve to some degree, and that had been in a challenging market environment. So it was across the board and we saw some improvement in Hong Kong, which was encouraging. I don't know, Luis, if you want to add to that.

--------------------------------------------------------------------------------

Luis Gallego Martín, International Consolidated Airlines Group, S.A. - Chairman & CEO of Iberia [24]

--------------------------------------------------------------------------------

No. In the case of Iberia, the rate is very small because we are only flying to Tokyo and Shanghai, and we have increased the number of frequencies to Tokyo from 3 to 5. That's a reasonably huge increase that you see there.

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [25]

--------------------------------------------------------------------------------

And on BA, what BA -- I think the figure that's been quoted was in a submission that BA made to the court as part of their appeal. It was -- first of all, it was specific to BA and it's more specific to an anticipated type of interest reduction. There can be many different forms of interest reduction. The point I would make is, obviously, what might be negative and would be very negative for BA, obviously, will be positive for other airlines in the group and we will use the group assets. So when we look at it from an IAG point of view, it's different to how we look at it from a BA point of view. But I can't put a figure on it because we need to understand what form of industrial action is being taken. So when and if they do serve notice, we'll then put an appropriate mitigating plan in place. BA will do whatever they can do to assist the customers and the rest of the group will do what they can do to take advantage of the unfortunate situation and support and help BA in their efforts to look after customers. So we'll wait and see.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [26]

--------------------------------------------------------------------------------

Malte?

--------------------------------------------------------------------------------

Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [27]

--------------------------------------------------------------------------------

Yes, Malte Schulz from Commerzbank. Just to be a little bit more clear also on your EMEA expectations beyond -- I mean we've already talked a little bit on Asia, on North America, but on the rest, it is like a bit Africa, India. What do you expect that to benefit more from the Jet Airways demise? And maybe also on your -- a little bit on your ex-fuel cost outlook for the rest of the year. Should we just think of it, it will decline in a more straightforward way? Or is there a lower decrease in costs anticipated for the rest of the year?

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [28]

--------------------------------------------------------------------------------

The rest of the network, as I said, and Steve highlighted India and Jet, that there's not going to be a quick solution to Jet. I know there's still people thinking about trying to reincarnate Jet. I can't see that happening personally. So there's always been strong demand into and out of India. That continues to be the case. There has been some traffic, additional capacity put into the market, but it's clearly performing better as a result of the demise of Jet. And the rest of the network, again, with the exception of the routes that we've highlighted, it's performing well. The areas that we've been very much focused on and have been challenging ourselves is in relation to specifically Argentina and Brazil. We are seeing evidence of Argentina stabilizing and Brazil may be improving a little bit. So we're probably, at this point, more optimistic about Brazil than we are about Argentina. But it's still way off where we had expected it to be.

And in relation to China, we don't see anything changing there because it's clear that the trade between the U.S. and China doesn't look like it's going to be solved anytime soon. So the Chinese carriers are clearly looking to put capacity where it makes sense for them.

The other side of that, obviously, is, though, that there aren't that many aircraft being delivered into China, and I think this is going to be an issue. We've seen some figures that are very surprising in terms of what should have gone into China now won't go into China. So the supply of aircraft environment is clearly challenged by the grounding of the MAX at the moment. So when we look at all of the moving parts, the general environment that we're seeing at the moment is quite good, and we don't see that changing quickly. And what is clearly changing is the global economic environment, which is softening, but it's still positive. And we've operated in worse economic conditions than this. So we're looking at where we need to trim capacity, but we're also looking at where we think there will be opportunities. And we're particularly looking at where we see vulnerable competitors as well because I don't believe all of the airlines that are operating today will be operating this time next year, and we're in a position to take advantage of that as well.

So on cost, given that we're reducing our capacity, it clearly makes the challenge of improving your nonfuel unit costs harder. But we're continuing to say what we say, that we see the unit revenue improving and the nonfuel unit cost being flat on a constant currency basis for the rest of this year. And that's on the back of a reduction in the capacity that we've seen.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [29]

--------------------------------------------------------------------------------

And I've just got another question by e-mail from Andrew Lobbenberg of HSBC. First question, regarding the LATAM joint business, what is the timeline and plans to get that operational given the decision by the Chilean High Supreme Court? And then secondly, on London airport expansion, very clear about your thoughts on Heathrow. What are your views really on Gatwick's plan, London Gatwick's plan, to use the emergency runway as a second runway?

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [30]

--------------------------------------------------------------------------------

So on LATAM, clearly, we were disappointed with the decision of the court. We continue to discuss the options available to us with LAN. Maybe, Luis, you can comment?

--------------------------------------------------------------------------------

Luis Gallego Martín, International Consolidated Airlines Group, S.A. - Chairman & CEO of Iberia [31]

--------------------------------------------------------------------------------

Yes. As you know, the restriction we have right now is Chile, and we are evaluating if we can develop the JV in the rest of the countries. We are now trying to find out if we can do that or if it's very complex to develop it that way. But that's the situation we have right now.

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [32]

--------------------------------------------------------------------------------

And on Gatwick, well, clearly, what Gatwick has demonstrated is that they can expand at a much more realistic price. I've always argued that the economic case for an expansion at Gatwick is much lower than at Heathrow. But if Heathrow's third runway is costing as much as we believe it is now, then that significantly improves the economic case for Gatwick because the problem Gatwick would have faced is, that if you build a third runway at Heathrow, they will lose customers in Gatwick. That's what history tells you, that the operators at Gatwick will look to move into Heathrow, and then there'll be a hole in the Gatwick capacity. But if Heathrow isn't expanded, then I think it's a huge opportunity for Gatwick, and they clearly demonstrated that they have a much more sensible approach to expansion. As I was sitting there, I was thinking, "Did I give the guidance wrong in relation to...?" So if I -- think I may have said nonfuel unit costs flat and -- (inaudible) nonfuel costs improved.

--------------------------------------------------------------------------------

Stephen William Lawrence Gunning, International Consolidated Airlines Group, S.A. - CFO & Executive Director [33]

--------------------------------------------------------------------------------

That's right. Yes.

--------------------------------------------------------------------------------

William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [34]

--------------------------------------------------------------------------------

Thanks, Steve. You're supposed to interrupt me and correct me. That's your job now.

--------------------------------------------------------------------------------

Stephen William Lawrence Gunning, International Consolidated Airlines Group, S.A. - CFO & Executive Director [35]

--------------------------------------------------------------------------------

You got it wrong, Willie. It's the other way around.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [36]

--------------------------------------------------------------------------------

David?

--------------------------------------------------------------------------------

David Howard Perry, JP Morgan Chase & Co, Research Division - Head of European Aerospace and Defense [37]

--------------------------------------------------------------------------------

So David Perry -- Right. Okay. Yes. 2 questions. Steve, the pro forma gearing falls to -- fell to 1.2 under IFRS 16, and your predecessor had told us he thought it would be inefficient to go below 1.2x. I just wondered if you share that view. And then secondly, just curious if you've got any thoughts about how much money you might be putting into the pension scheme as a top-up next year. I think it's just over 800 this year, but maybe falls next year.

--------------------------------------------------------------------------------

Stephen William Lawrence Gunning, International Consolidated Airlines Group, S.A. - CFO & Executive Director [38]

--------------------------------------------------------------------------------

With regards to whether it's efficient or not, I'll leave Enrique to his thoughts on that one. Clearly, one of the things I've enjoyed over the last month or so from being in the [RAB] is doing our initial bond issuance, and it's been very helpful to have an investment-grade credit rating as a business to be able to do that. We got particularly good coupon rates on the EUR 1 billion we raised. It was 0.5 point and 1.5 points. So getting the leverage at the right level is important for us. I do have a sympathy with what Enrique's saying that going too low isn't capital efficient.

In terms of pension schemes, 2 things to mention there. Really, the first one is on both of these or one of these is well documented in the IMR. With regards to the APS pension scheme, we've reached agreement with the trustees which we're now awaiting court blessing on, and we're hoping we will get that in Q4. The consequence for the company of that agreement would be, we'd be putting no more cash into that scheme effective 1st of January this year. So that would be a big way -- big progress and big development from where we were. Previously, we were putting in EUR 55 million a year, plus we were putting in a cash sweep element as well. So that's good progress, but we're awaiting the court blessing and hopefully that will be Q4.

In terms of NAPS pension scheme, which is the one we closed the future accrual last year and previously had a deficit of EUR 2.7 billion, it will probably be inappropriate for me to give too much guidance because we're in the middle of negotiating this with the trustees as we speak. Actually, the regulatory deadline was 30th of June for this, so we've gone past the deadline. We're having good constructive talks, but they're vigorous talks as well. And we hope to try and achieve clarity and agreement by the end of September. But I think, from my perspective and the way we're entering into these negotiations is, having closed the scheme to future accrual is a real positive. If the risk is -- derisks the scheme, and I also look at the quality of the covenant that BA has which is stronger. So part of what the company is saying when it's going to those discussions is that needs to be reflected in whatever the deficit recovery payments are.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [39]

--------------------------------------------------------------------------------

Questions in the room? I've got one further question in the e-mail from Johannes Braun of MainFirst. And he says, "I have a question for Luis". On Latin American weakness, to what extent does the strong growth of Air Europa play a role? And how do you view the longer-term impact from a potential Air France-KLM-Air Europa joint venture? (inaudible)

--------------------------------------------------------------------------------

Luis Gallego Martín, International Consolidated Airlines Group, S.A. - Chairman & CEO of Iberia [40]

--------------------------------------------------------------------------------

I think as Willie has said today, the 2 countries that we are suffering are Argentina and Brazil. The rest of the countries are behaving well. I think now we have an advantage in the cost structure that we have in Iberia. That's the reason we are growing, and I think we are competing very well with all the other companies that are putting additional capacity in this environment. So I think that we are not worried about that. Our main concern is Argentina. They're going to have general elections at the end of October, and I think it's going to be a time where we hope the situation is going to be very good.

--------------------------------------------------------------------------------

Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [41]

--------------------------------------------------------------------------------

Okay. Thank you very much, everyone, for coming. And we referred to the Capital Markets Day several times today. That's November 8. Hopefully, you can join us then.