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Edited Transcript of IAG.L earnings conference call or presentation 28-Feb-19 8:45am GMT

Full Year 2018 International Consolidated Airlines Group SA Earnings Call

HOUNSLOW Mar 19, 2019 (Thomson StreetEvents) -- Edited Transcript of International Consolidated Airlines Group SA earnings conference call or presentation Thursday, February 28, 2019 at 8:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alejandro Cruz de Llano

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

* Andrew James Light

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

* Antonio Vázquez Romero

International Consolidated Airlines Group, S.A. - Chairman

* Enrique Dupuy de Lôme Chávarri

International Consolidated Airlines Group, S.A. - CFO

* William Matthew Walsh

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

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Conference Call Participants

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* Alex Paterson

Investec Bank plc, Research Division - Analyst

* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* Daniel Roeska

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* 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

* Neil Glynn

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

* Penelope Jane Butcher

Morgan Stanley, Research Division - MD

* Savi Syth

Raymond James - Analyst

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Presentation

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

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All right. Good morning, ladies and gentlemen. And I'm glad to welcome you jointly with the management; and the Senior Independent Director of the Board of IAG, Patrick Cescau. And welcome to the IAG results presentation 2018.

I'm really glad, another year to be here reporting quite a good result and despite of the headwinds, fuel price up by 30%; the worst air traffic control environment in Europe in the recent history; and the impact of ForEx, a change in the -- in our result, EUR 129 million. So despite of all these headwinds, we have been able to report EUR 3,230 million operating profit, which is 9.5% up versus last year and with an increase in our adjusted EPS of 15.1%. Based on those airlines that have reported so far, we are the only major airline group on either side of Atlantic to have reported a high operating profit and a higher margin on 2018 compared to 2017. So the management team, led by Willie, deserve a very deep and very strong recognition.

As far as the shareholders' return is concerned, at the results presentation of the third quarter 2018, we announced an interim dividend of EUR 0.145 per share. I'm pleased to announce right now that the Board of Director has recommended a final dividend of EUR 0.165 per share. This makes a total dividend for 2018 of EUR 0.31 per share, which is 50% -- 15% higher than the -- than for 2017, and it is in line with the increase in the EPS -- with EPS growth. This demonstrates the Board of Director confidence in IAG financial strength, IAG strategy and the outlook.

I'm also pleased that the board yesterday approved a special dividend of EUR 0.35 per share, approximately EUR 700 million of additional return to shareholder. Total cash returned to shareholders in respect to 2018 will therefore be just over EUR 1.3 billion, which will be around EUR 260 million more than previous year's. Including this final special dividend, we will have returned a total of almost EUR 3.8 billion since 2015. We're glad with this figure and looking forward to continue returning our shareholders.

I hand over to the management, led by Willie.

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

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Thank you, Antonio, and good morning, everybody. Thank you for joining us.

And I have to say, as you would expect, I'm very pleased with the performance of the group in 2018 not just from a financial point of view but clearly making good progress on our strategic objectives as well. We've continued to invest in our brands and our customer proposition, strengthening the brands and our network. You've seen the expansion of LEVEL at Barcelona and the launch of LEVEL at Paris and then exploiting the LEVEL brand to launch a short-haul operation at Vienna. And we'll do more of that in 2019.

We've seen a very significant improvement in the British Airways Net Promoter Score and, in fact, very strong Net Promoter Score for all of our airlines, with the exception of Vueling. And as you know, Vueling was disproportionately impacted by the air traffic control environment in Europe in 2018. So not only were they hit by the en route ATC delays, but Barcelona was one of the most impacted airports on the European network. So we operate about 201 flights, I think, in 2018 from Barcelona. 19% of all flights in Barcelona were delayed by ATC. And the average delay on flights operating out of Barcelona was 19 minutes -- roughly 19 minutes. That's across the whole airport. So when you consider the business model that Vueling has, similar to other low-cost airlines where quick turnaround times are a feature of the business, what the delay statistics don't show you is that a lot of the problems were caused not just by ATC but to -- the reaction to those ATC delays, which are not embedded in the ATC statistics. So if they delayed a flight on the outbound leg and the flight remains delayed on the return leg, they don't count the return as being an ATC delay. So that clearly had a big impact on the Vueling NPS. We've taken measures to try and counteract what we believe will be a difficult ATC environment in 2019, and I'll talk about that again later on.

In terms of our leadership position across our network, I know some of you last year expressed concerns about our growth plans. We had announced this time last year that we were planning to increase ASKs by 6.7%. We actually finished the year with 6.1% doing what we said we would do, which was to look to trim capacity as we went through the year. I think that capacity has been justified, particularly when you look at our unit revenue performance, which showed at constant currency a 2.4% improvement versus last year.

We had 8% capacity growth on the transatlantic. It's represents 30% of our capacity across the network. In Latin America, which is about 16.5% of our capacity, 9%. And the Latin American market was a bit more challenging than I think we probably expected given the devaluation in Argentina and the economic environment in Brazil. I think our assessment is that it has bottomed out. So it's an important part of our network, as I said, about 16% -- or 16.5% of total capacity but over 50% of the Iberia capacity. And we had 7% growth on our intra-European. Most of that was in Spain. And as you know, Europe represents about 26% of our capacity. And we grew at Gatwick. This was principally through the acquisition of the Monarch slots but also through the densification of the aircraft. And just going back to what I said about ATC: Most of the capacity reductions that we had were with Vueling, where we cut their growth ambition because of the ATC environment. The transatlantic performed very well, new routes by Aer Lingus, British Airways, Iberia and LEVEL. The Aer Lingus performance continues to be very strong. Very pleased with both Philadelphia and Seattle has been a fantastic success.

And then in relation to the -- what we call the platform, we continued to improve our non-fuel unit cost, down 0.8%, down over 11% since we created IAG. We continued to take new aircraft, 25 aircraft delivered in 2018, more to be delivered in 2019 and beyond. And distribution, what we call NDC or New Distribution Capability/API now represents about 17% of total indirect sales. And the way to look at that is that although those sales are indirect, they're effectively at the same costs as our direct distribution. U.K. in -- with Avios, we merged the British Airways programs. And we continued to see good work from our digital teams looking to exploit new technology. And that's been clearly something that has not just improved our cost performance but also improved our operational and customer performance.

Now just focusing on the high-level financials, and Enrique is going to go through these in detail. Return on invested capital, 16.6%, above our targets. Lease-adjusted margin, 14.4%. Equity free cash flow, 2018 was a "higher than average CapEx" year, so therefore lower-than-average equity free cash flow but still very strong at EUR 1.8 billion. And adjusted earnings per share of EUR 1.177, 15.1% improvement. And you heard the Chairman comment on the proposed final dividend and the proposed special dividend to be approved by our shareholders at our AGM later on this year.

So I'm going to hand over to Enrique, who will take you through the detailed financial performance, and then I'll come back after he has taken you through that to address some other issues.

Thanks, Enrique.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [3]

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Thank you, Willie. Good morning, everybody.

So I think we are going to be quite consistent through the morning in terms of emphasizing that year 2018 has been a very good year in terms of our financial performance and the rest of our operational performance as well.

By the -- if we focused on the year 2018 full year figures.

We recognize, first of all, an increase in terms of operating profit, one of our main targeted metrics, of EUR 280 million and then reaching EUR 3,230 million for this year. And then there has been a negative impact coming from net FX, basically having to do with transaction, which has been in the range of EUR 110 million. So in constant currency terms, the improvement year-on-year has been more on the line of EUR 400 million, which is really a big, big increase. By the Capital Markets Day beginning of November, we were signaling an increase in operating profits more in the range of EUR 200 million. We'll explain a little bit later about where have been the levers that have allow us to enhance the improvement just to reach the EUR 280 million, but at the end of the day, it has been a combination of better unit revenues, lower fuel costs and lower non-fuel unit costs as well.

So the foundations of these improvements have to do basically on this combination of passenger unit revenues growing by 2.4% in terms of constant currency and non-fuel unit costs which have been decreasing on a yearly basis by quasi 1%. But that's unadjusted, so if we get to real underlying apples-to-apples comparison, we'll be finding that the real saving in unit terms constant currency has been closer to 2.5% for the full year. We have had total unit revenues growing slightly higher than the passenger unit revenues, and that's because of our non-ASK-related businesses and in this case basically having to do with Iberia MRO third-party business and British Airways Holidays business. That has improved our unit revenues on a total base up to a level of 2.9%. And then total unit costs, of course, have to include the fuel costs, which as you well know, has been a significant headwind through the year in the range of 12% in constant currency terms.

So at the end of the day, we've been able to grow capacity in terms of 6.1% with an improvement in load factors. So really, we have been attending markets that were growing in terms of demand, so we've been able to improve load factors and unit revenues at the same time. We've been able to reduce our recurrent underlying non-fuel costs and to cope with an increase in fuel costs of 12%, improving our reported operating profit by EUR 280 million. So I think it has been a big success.

And a similar success has to do with the performance of the fourth quarter. And we've been improving last year operating profit, fourth quarter, by 150 -- EUR 105 million, sorry. So in constant currency terms, it has been in the range of EUR 114 million, which is slightly higher than the average of 4 quarters on a linear basis. And remember the EUR 400 million figure that we have noted for the full year. So fourth quarter has been relevant, has been important, has been slightly better than the average. And again, on a challenging capacity increase 6.7%, which we basically have been able to match with real underlying demand. So we have been achieving a passenger unit revenue, constant currency terms, improvement of 1.5%. We are going to be talking later more about the figure and how it's been allocated in our different strategic markets.

The second big reason behind our improvements in Q4, they have to do with non-fuel unit cost on an ASK-related basis. So as you can see here, we had a significant increase in non-ASK-related revenues, of course, dragging costs. If we carve them out, the underlying performance in non-fuel cost has been very, very positive. And this, of course, has to do with several things, we'll talk them later on, very much having to do with what we called efficient growth model. So we are growing fast with a very efficient growth model. And this has to do with not only the cost-cutting plans and efforts, the efficiency improvements of our legacy carriers but also of our new value carriers and the fast-growing tools as Aer Lingus and LEVEL. So this is again a very efficient combination of growth, revenue management, cost management and the challenge of fuel cost increase.

So on this bridge exercise that we bring to you every time, we can differentiate what has happened in Q4 between last year and this year. FX in the quarter has not been very significant, slight headwind but not very significant. Growth, of course, has its positive impact, the 7%. Very importantly, passenger revenues, and this bar, of course, has to do with passenger unit revenue impact on total improvement. Passenger unit revenue impact are very significant. And then fuel costs, of course, representing a significant burden. These comparisons is also one that we are proud about. So we are offsetting same day, same quarter 70% -- quasi 70% of the fuel cost drag through increased passenger management initiatives and unit revenues.

The other one is non-passenger revenue, which in this quarter has had a special impact. Of course, this bar represents additional revenues. And here, we should be decomposing this net EUR 21 million into a negative bar, of course, which has to do with you have more revenues but you are creating more attached costs. They have to do with the supplies that we need to create these additional third-party revenues, but then on the other side there is a big improvement in other non-fuel unit costs related to day-to-day operations. And those are mostly recurrent, and we'll go through them later. And that's basically how we get to EUR 655 million.

Let's talk a little bit of revenues. Fourth quarter, significant growth basically focusing on our main strategic markets again, North America; Latin America; of course, Europe domestic; and consistently less growth allocated to Asia Pacific and Africa, Middle East and South Asia.

If we start with North America. Basically, 5% out of the 8.2% has to do with new routes. New routes represent a significant percentage of the capacity increase that we have seen in the fourth quarter. And new routes basically have to do with our expansion through our new tools, talking about Aer Lingus. We are talking about LEVEL, but also, in the case the British Airways, on their own initiatives of opening new destinations that we have been informing you about. So the rest is basically related to growth in routes in which we already operate. And this has been done with not a dilutive impact in terms of unit revenues. It's a flat type of performance, but if we compare company by company and route by route, what we are seeing is positive performance in British Airways; positive performance in Iberia; and of course, dilutive effect in the case of LEVEL and Aer Lingus, where we are seeing growth levels in the range of 15%, 18%.

In terms of Latin American and Caribbean area, we're also growing very significantly. And of course, that level of growth, 15.8%, it's having to do -- or having a consequence in terms of unit revenues. This unit revenue negative performance is very much affected by 2 special markets. One is Argentina. The other one is Brazil. And what we are seeing lately is those markets are bottoming already, and that's the case of Argentina; or are slightly picking up again, which is the case of Brazil. So we believe we have gone through the worst, and we believe we are going to be having good news to show you later on in the year when we roll over the impact of the devaluation in the case of Argentina and when we start picking up the pickup of demand that we have seen in the case of Brazil.

Very good news on the domestic and European markets in spite of a capacity increase of quasi 7%. So maybe here our message is slightly different to others that you may have heard on the region. That's basically because the way we're playing our capacity growth on our main strategic market and how we cannot compare ourselves with what happens in the global Europe but what's happening on our main strategic markets and on our main hubs. So the fourth quarter has been positive both in terms of European performance, the balance between capacity growth and unit revenue growth. Very especially, domestic unit revenues are still growing fast. There's a reason here that we are benefiting from still, which has to do with the special discounts being given in Spain to residents in Balearic Islands and the Canary Islands. And these really have been exciting demand, filling better our aircraft in lower seasons and then improving unit revenues. And we feel that's going to gradually be fading through rest of the year as we roll over these decisions and these incentives but still is going to be allowing us positive unit revenue performance for most of the year.

Asia Pacific, it's less relevant, the same with Africa, Middle East, because of a lower strategic significance, the lower capacity growth that we are deploying there. What we can say is, Asia Pacific, most of the markets are still behaving positively, with positive unit revenue performance. And if we need to mention a market that is lagging behind, that's Hong Kong. And Hong Kong is about overcapacity. So that's something that we'll probably be adjusting further on through the year, but we are still on the positive side in terms of unit revenues in both markets, with modest capacity growth.

And this is non-fuel unit cost performance Q4 again which I was mentioning. Well, fuel, as a reminder, constant currency terms has represented an increase of 9.2%. I was telling you before that fuel costs in Q4 is 1 of the 3 pillars where we have based the improvement in operating profit. It -- remember, when I was talking to you early November, that fuel prices in the market were just coming down from $84, which has been the recovery dollars per barrel of Brent. So really, our projections at that point in time were not very confident in terms of fuel savings. The reality is fuel prices dropped since then. And even with a high level of hedging, we've been able to benefit from our collar structures and then achieve better reductions in costs than the ones that we imagined at that point in time. In terms of unit revenues, we also have been able to achieve a better performance in the fourth quarter. And I will say especially Europe has been performing for us better than we thought.

And in non-fuel unit costs again, a significant improvement. Of course, we don't need to refer again to employee unit cost reductions, which is, at the end of the day, the result of all these significant plans and measures that we have been completing and agreeing earlier in the year. It has to do with project Athens. It has to do with Plan de Futuro II. It has to do with pension fund agreements, et cetera, et cetera. And basically improvements in productivity you will see in our figures when you read them in detail, significant improvements in terms of productivity and which we'll be lasting at least for the first quarter of this year.

Ownership costs, that's also a little bit of a miracle, I would say. We are investing in fleet. We are investing in other critical nonfleet areas. And at the same time, we are able to maintain our ownership unit cost flat against last year. So it has to do basically with this idea of efficient growth. It has to do also with how we've been able to achieve some very significant improvements in leasing costs because of the new terms and conditions prevailing in the marketplace. The operating lease market is really becoming a very efficient one. I don't know if this is going to be lasting forever, but for the time being, we are achieving record-low level of monthly rentals, which here we have never seen before.

So finally, talking about the supplier non-fuel costs, you see a positive one. So this positive is fully related to non-ASK supplier costs. So basically the supplies, the contracts, the services that we need to fulfill this business related to MRO third party and British Airways Holidays. If we strip that one out, this would be a negative figure. And by the way, when we do the right approach, instead of 0.5%, we get to a minus 3.8%, which is easy to check with the figures because, remember, the only thing that we're doing there is a very simplistic correction where we say let's take away as a negative cost the increase in other revenues that we have achieved. Those numbers, you can make it, then you get to the minus 3.8%.

So this is fuel, fuel for next year. And again, we are facing a period of quarters, a row of quarters where we are going to be seeing increased unit fuel cost for the group. We have made this exercise at $620 per metric ton of kerosene and 1.4 -- $1.14 per euro. Of course, these figures are changing every day. So one day, we find this is a $650. The other day, we find this as a $630. I think it's basically a consistent figure with how the market is evolving, although there is a high level of volatility. This pattern of assumptions is consistent with a growth in terms of fuel unit cost for next year in the range of 10%, 11-ish percent, which is slightly lower than the one that we have seen this year and the one that we have been able to manage efficiently.

The other good type of message in this pattern in this chart is the way the increases are going to be diminishing just because of comparison with last year average figures for each quarter. And again a little bit of the light at the end of the tunnel that could -- we could be seeing late in the year and early in 2020 if the prices and the dollar stays where we foresee them today.

Okay. And this is how we have been able to perform in terms of margins and in terms of ROIC. So again, I think it has already been mentioned, record level of ROIC for the group and for most of the companies of the group this year. It is 16.6% against 16% on a similar accounting basis for last year, so important improvement well above what we are calling the base, recurrent base, that we have as reference on our business plan which is 15%.

And we are seeing very high figures for some of the companies of the group, Aer Lingus improving 23% to 26%, British Airways improving from the 16-ish to the 17.3% and Iberia also improving and getting to the above 13%, Vueling keeping a very similar figure to last year in the range of 13.3%, 13.4%. So basically showing that the way we are growing is also keeping a very significant focus on the profitability of our assets and our asset allocation and fund allocation and decisions for the group.

And this is another way to tell a very similar story, I think, with a little bit more of flavor. I think the big message here is these operating profits, and you will see also in terms of profit after tax, we are achieving this year record levels for the group and record levels for each of the companies of the group, of the main 4. LEVEL is a start-up that's having its own type of improvement through time. But for British Airways, it has been operating profit margin increase of 0.7, up to 15.1%. And in terms of operating result, it's EUR 305 million. So lease-adjusted margin of 16.2%, again 0.5 percentage points above previous year -- sorry, for Aer Lingus. For British Airways, it's an improvement of GBP 203 million against the last year figure and a quasi 1% of operating margin improvement, quasi 1% of lease-adjusted margin improvement.

For Iberia, it's also an improvement of EUR 61 million against last year, reaching a record EUR 437 million, with improvements in both operating margin and adjusted lease margin. Vueling is having a slight reduction in operating margin but an improvement in terms of the operating profit for the year despite the big challenges that the company has been going through; and of course, I'll remind you because we were referring to them very in detail in the Capital Markets Day, having to do with disruption, ATC disruption, so living in the eye of a hurricane in terms of ATC. So despite that very significant difficulty, this figure is record for Vueling, and the same for the rest of the companies of the group.

So what's happening below the operating profit levels? As you have been seeing, this improvement in terms of percentage is around 9.5% operating profit improvement for the year. Net financial expense has a modest growth in the range of 5%, which is better than the 7% -- or the 6.1%, sorry, average of ASK capacity growth, so has a lot of sense, efficient use of assets as well and financing of assets. So the profit before tax figure will be growing by 11%. Tax, effective tax, being applied as a rate has been slightly improving. And I will compare it with last year's average which were in the range of 20%, 19%. This year, it's in the range of 18%. And basically -- and profit after tax will also be above 11%. And diluted EPS, as Antonio and Willie have been mentioning, is slightly above 15%, 15.1%.

So balance sheet on a very -- and leverage on a very type of synthetic way we'd like to show. Of course, we've been going through a significant level of CapEx this year. Our asset base has increased. We've been financing our new assets, increasing our level of debt. So we have been adjusting also the level of cash because we feel we're comfortably above the tactical level of cash that we should be keeping. So as a whole, our model and our ratios and projections have been supported by rating agencies, Moody's and Standard & Poor's, which have considered our debt an investment-grade level, BBB (sic) [BBB-] and Baa3, stable for both S&P and Moody's. So what we can say is that we are now perfectly comfortable with the level of leverage with our liquidity structure. And of course, the big second message is it's sustainable. It's clearly sustainable. We say it because we are seeing our business plan ahead, but also these guys have been saying the same.

And a very, very short insight into IFRS 16 and the future impact on our balance sheet and profit and loss account you will be seeing through Q1, Q2, Q3 and Q4; just arrows to express the main differences and trends that you're going to be seeing, nothing special; a couple of figures which we'll be condensing how the whole thing is going to be working.

So in terms of what's going to happen on our asset lines, both asset and liability balance sheet lines. Of course, I think you are familiar with it. It has to do with the recognition of right of use. So all these right of use contracts that we have on fleet and others were a non-balance sheet item in the past. And we adjusted our level of leverage and liabilities, recognizing an approximation using the rate of 8x rents. So now it's not an approximation in the way IFRS 15 (sic) [IFRS 16] explain us. We need to account for those additional assets in terms of right of use and liabilities. They have to do with fleet. They have to do with other types of property and equipment. There are small changes on our current assets in terms of how we recognized some other contracts, maintenance contracts; and the rate of recovery in terms of the fleet contracts, the operating lease contracts, which create a little bit of noise here at the level of other current assets and also other current liabilities. Of course, there is the recognition of additional liabilities having to do with the net present value of the rents that we have committed to pay. And basically, that will create a balance sheet where total liabilities will grow, and the same for total equities and liabilities.

Just a couple of figures for you to keep. The recognition, notional recognition, that we were giving ourselves through the 8x multiplier in terms of additional liabilities has been around EUR 7 billion. The right of use precise accounting gives us comparable figure of EUR 5 billion, so there's going to be a reduction in the total adjusted level of debt in the range of EUR 2 billion. And that will be creating also an adjustment lowering our leverage in terms of net adjusted debt-to-EBITDAR from the prevailing 1.5, 1.6 that you have been seeing to a level of 1.2. It expresses in some way that our approximation through the 8x multiplier was a very conservative one.

In terms of profit and loss. So at the end of the day, nothing special. So if we come down to profit before tax, profit after tax, there is minor adjustments that would be offsetting each other through time. There's a little bit of maybe different recognition of costs and taxes through the period of time of the use of the operating lease. They are minor. So at the end of the day, we don't foresee, nothing significant happening at the bottom lines of our profit and loss account. Of course, the main difference is going to be about our operating profit, which now is going to be better. It's going to be higher. Why is it going to be higher? Because the portion of interest-related charges that was embedded in the rents now is carved out and then transferred below the operating profit line into additional net expenses. So that could be just the main difference that we are -- you're going to be foreseeing in our profit and loss size and shape. So it's going to be better operating profit, more financial expenses. At the end of the day, very similar net profit before and after tax. And that's something that we are going to be informing you through the next quarter. So before the first quarter, we'll give you some insight on how those new trends in terms of accounting language are going to be affecting Q1 and then the rest of the quarters.

Having said that, I pass again the word to Willie.

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

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Thanks, Enrique.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [5]

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Thank you, Willie.

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

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So just moving on to look at the outlook and the rest of 2019.

We have here the usual chart that we show you in terms of our capacity plans for the year. We're now looking at a 5.9% increase in ASKs, and you can see that's broadly flat across the various quarters. And Aer Lingus expected to grow about 6.5%; British Airways about 2.6%; Iberia 8.7%; and LEVEL, obviously it's from a small base, 95% roughly; and Vueling at 5.5%. I'll just point out just the Aer Lingus capacity in the first quarter, 14.1%. That's unique to this particular first quarter. That's not something you will see on a recurring basis, so you're not going to see that sort of level of Q1 growth in 2020, 2021 and beyond.

So altogether looking at 5.9% growth and -- ASK growth. We, clearly, will continue to look at that. I think there will be issues in terms of growth that we will not have planned. And clearly, we'll look at tapering growth where we see the demand environment changing through the year.

And just to point out in terms of BA fourth quarter. That's cycling over the Monarch slots at Gatwick and also further aircraft densification at Gatwick. So some of that growth is through the densification of the aircraft, and it's principally a Gatwick environment in fourth quarter for BA.

And to remind you of the guidance for the year. We're saying that, at current fuel prices and exchange rates, we expect our 2019 operating profit before exceptional items on a like-for-like, so excluding the impacts of IFRS 16 that Enrique has talked about, to be in line with the EUR 3.23 billion that we reported in 2018. Passenger unit revenue is expected to improve at constant currency, and non-fuel unit costs expected to be flat at constant currency.

Now the investment case. You'll have seen this chart before and we've talked about this already this morning. You know about our unique structure. You've seen what we're doing in terms of our brands. You've seen what we're doing in terms of our capacity growth and strengthening our network, the cost efficiency. And there's clearly more of that to come. We've delivered ROIC of 16.6%; margin, lease adjusted, 14.4%; and EPS growth, as we said, 15.1%. The regular dividend that the board has recommended to be approved by our shareholders increased to EUR 0.165 per share, and then a special dividend.

And we've always talked about, if there is surplus cash, the manner of which we would return that would be discussed with shareholders. And you can see the level. And so in respect of financial year 2018, we're looking at the interim dividend, which is already paid in December; and then the final dividend and the special dividends, clearly subject to shareholder approvals, to be played -- to be paid in July, looking at over EUR 1.3 billion of cash to be returned to our shareholders. So I think a strong performance building on the performance of 2015, '16 and '17.

Our cost performance, there's more that we can do and more that we will do. We continue to have this longer-term target to achieve a 1% reduction in our non-fuel unit costs on an annual basis. We've achieved 11.1% so far to 2018. That's been through structured programs in each of the airlines. There are structured programs in each of the airlines that will continue through 2019 and beyond. And so we remain confident that this is an appropriate target of 1% reduction in non-fuel unit costs. It's not going to be 1% every year, and we've said that on a number of occasions, but we do see opportunities to further improve on our cost performance. And we will be pursuing those initiatives with vigor as we progress through the year. So a lot more to come.

I've talked about ATC disruption, and this is -- it is a feature of the business now, but I do expect -- while 2019 won't show an improvement on 2018, I don't expect it to deteriorate, but I do expect that this can be addressed going forward because some of the issues relating to this disruption are within the control of the air traffic control providers. And it's principally related to a mismatch between their capacity as they believed was required based on the assumptions that some of these ATC units had for growth, which they got wrong. So they need additional manpower. That takes time. Those recruitment processes have been put in place, and we will see some of these structural issues addressed in 2020 and beyond.

And I'm pleased Eurocontrol actually are being very proactive and much more determined than I've ever seen before. So I think great credit to Eamonn Brennan, the Director General of Eurocontrol. And a lot of the statistics are produced, and these are Eurocontrol statistics. We're getting a lot of data from Eurocontrol now. So they're not trying to hide the problem, but as I did mention, these are -- you can see the light blue are airport related and the darker blue are en route related. The big increase that we've seen is in the en route air traffic control, but within the airport, disappointed how Barcelona was the one that was particularly impacted. And I know this has disproportionately hit Vueling.

And maybe just to give you one statistic. And again, this is from Eurocontrol data. It's not our own data. Eurocontrol analysis shows that -- delays attributable to the airline, to Vueling. So of all the flights that they operated in 2018, for the flights that were delayed, just over 20%, 20.3%, were directly attributable to the airline. Now that compares in Iberia, which is rated as one of the most punctual airlines in Europe in 2018, where delays attributable to the airline were almost 35%. So I think what you can see from that is that Vueling fundamentally is a very well-run company, a very strong operational performance in its own right but has been impacted very significantly by the ATC environment both at Barcelona and at Europe. So we have no concerns about the Vueling performance, as they can control it, but clearly we are concerned about the ATC environment which is impacting on their performance.

LEVEL, pleased with the performance. It's still very early days, but you can see the expansion of the network out of Barcelona and the redirection of some of the flying there. So we've launched Santiago. We then launched from Paris to Newark, Martinique and Guadeloupe. And then we have the network at Vienna. And we're looking to use the LEVEL brand short haul in Europe. We'll be making some announcements in relation to that. So performance so far is in line with our expectations. It was actually running significantly ahead of expectations prior to the devaluation in Argentina. Argentina had been particularly a strong-performing route for LEVEL. But we're pleased with this performance, very positive customer feedback both in terms of the brand positioning and the customer proposition.

Now we announced, as you saw this morning, an order for 18 Boeing 777-9 aircraft for British Airways, with options on 24 further aircraft. I think it's an excellent aircraft, a perfect replacement aircraft for the Boeing 747. These aircraft, just to be absolutely clear, were included in the Capital Markets Day presentation. They're not additional. If you remember, we identified for 2022, 2023 a number of aircraft to be decided. As you know, we were in discussions with both Boeing and Airbus, Rolls-Royce and GE in relation to these options. So they're already included. We'll have -- 15 of those aircraft will be delivered in the period up to 2023. And we commented that 14 of the aircraft relate to the retirement of the 747. And 4 of the 18 that we've ordered are the start of the replacement of the 777-200s fleet in British Airways, but they were all included in the Capital Markets Day presentation that we gave you. And you can see how then we've now covered off the replacement of the 747s with the A350s, whereas those A350s which will be delivered into British Airways; and 350-1000s; some additional 777-300ERs, still fantastic aircraft in our configuration, working very well; and now the 777-9, which I think will be excellent in the fleet as well.

Brexit, a lot going on. And we remain confident that there will be a comprehensive air transport agreement negotiated between the U.K. and the EU, as is stated in the political declaration. There is good progress being made, in the event of a no-deal Brexit, on the issues of aviation security; aviation safety; EU, U.K. market access; and ownership and control. And the U.K. government has already concluded a number of bilateral agreements with key countries, particularly the U.S., Canada, Israel, Switzerland, Norway. So those negotiations have been completed. There are agreements that will move into operation as and when the U.K. leaves the EU. We've done extensive contingency planning. Specifically, we've had very detailed and very constructive engagements with our national regulators and governments, particularly on the issue of ownership and control. And that's going to continue, including discussions with the European Commission. And we remain confident that our operating companies will comply with the relevant rules post Brexit.

I don't need to remind you, but just to say it we are a Spanish company. We have long-established AOCs in France, Ireland, Spain and the U.K.; substantive business in these countries. We employ in total over 71,000 people. It's 65,500 -- 65,000 full-time equivalents, but it's 71,000 people employed across the group. So as I say, we remain confident that there will be a comprehensive air transport agreement as stated in the political declaration and that our operating companies will comply with the rules.

And finally, just to come back and say it was a great year, very pleased with the performance. Financial performance is evident from the results that you've seen today. We're also making good progress on the strategic issues as well. And just to reaffirm our guidance: that we're looking at, excluding the impact of IFRS 16, our operating profit to be flat versus 2018, with an improvement in our unit revenue performance at constant currency and flat non-fuel unit costs at constant currency.

And I think David is -- or we have the microphone here. So we're going to take your questions now. And we'll have Andrew moderate this and do it in the usual format. We do have a number of the CEOs with us today, who would be happy to answer your direct questions as well.

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Questions and Answers

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [1]

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Daniel from Bernstein. Three questions, if I may. Number one, not on Brexit but on the ownership structure because you had an announcement a couple of weeks ago. Would you consider updating the corporate structure within your group to at some point remove ownership restrictions from the holding level? And number two, you commented on the continued unit cost performance you would be targeting for the next couple of years, minus 5%. You listed several initiatives at the individual airlines. Is that to say that the performance you're foreseeing is more based on the efforts at individual airlines than on the group level? So the question kind of goes to are there any ideas on the group level across all airlines you'll continue to drive. What will be the big ideas on group level? And lastly, on Avios maybe. You saw quite an increase in BA Holidays, in the MROs and the noncore revenues in the other revenue line. When would you expect or hope for Avios to also start contributing into those other revenues maybe as you progress that strategic initiative?

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

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Sorry. I just missed that last bit. When would we expect...

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [3]

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So on we've been talking about Avios and how you're trying to rebuild Avios. At some point, you're planning to, hopefully, make more money out of it. When is that? And when will that contribute into that as well?

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

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So we remain flexible in terms of our structures. And any changes to the corporate structure would be in consultation with the regulators in the countries that we deal with, so we're not going to do anything unilaterally. We are, as I said, having very extensive and constructive dialogue with the regulators in our principal places of business, and this will continue. So it is a complex issue. I don't think it's well understood outside of the airline industry. People have confused and conflated a lot of issues and jumped to conclusions, but I think it's been dealt with before and we're confident that it can be dealt with again. So we have flexibility. We have a number of options within our existing structures, but anything we do will be fully communicated. But it will be subject to the discussions that we're having with the regulators, and we're continuing to do that. In terms of non-fuel unit costs, I would say it's both from within the group and from the operating companies, and we'll continue to do -- there's no new big-ticket items. It's delivering on the initiatives that we've already flagged to you. There's more to come in terms of our approach to maintenance. That's proven to be very effective so far. Our distribution, which is a group initiative -- so you've seen there I mentioned NDC and API indirect bookings at 17%. You're going to see that grow. And that's a group initiative that will contribute. We've talked about that being in the short term actually adding to our costs, but ultimately we'll get some cost reduction coming through on that. Our plans are running ahead of schedule in relation to that at the moment. And then each of the individual operating companies have initiatives.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [5]

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We have procurement plans which are a group plan. We are now focusing, for example, on improving with the group bargaining power our user charges in the main airports in which we jointly operate. We multi-operate in Europe, for example. And that's very promising, but it's this combination about, I would say, centrally and group-driven projects and also efforts and projects that are driven more on an OpCo local type of effort.

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

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Do you want to comment about the great performance of Avios already?

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [7]

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Exactly. So Avios will basically improve in the next years. There was a question about how they were facing IFRS 15 changes in accounting and that now we have -- they have rolled over that issue. And they are facing 2, 3 years of very significant growth into the future. Talking also about, I think you were mentioning, non-ASK-related activities, as Iberia MRO third-party business. So that's a very opportunistic area of our business where we combine our own maintenance plans and timetables with the ability to fill these gaps, these opportunities with the business coming from third parties. And that's going to be staying like that. So we are not going to change the approach because we don't want to make a big independent business out of it. It's more about allowing us to reduce our total costs using efficiently our means and resources, and that's why we keep it as it is.

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

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Jarrod?

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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 [9]

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It's Jarrod from UBS. Three, if I may, two on the balance sheet. Any indication of what the CapEx spend will be in '19 and maybe 2020, if I may? And then just on the related to the balance sheet, the big special dividend, just some of the thinking versus -- special versus share buyback given how the share price has performed. And then third question, M&A now. Where do we stand? We've obviously got reviews from Thomas Cook. You've walked away from Norwegian. Are you sitting on the sidelines at the moment?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [10]

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Maybe on CapEx, 2019 CapEx?

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [11]

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2019 CapEx is going to be more or less in the same line as '18. So we are forecasting net CapEx figure in the range of 2.6, 2.7, depending on dollar levels. At the same time, we are forecasting for '19 an increase in free cash flow. So the combination for next year is -- of EBITDA growth and CapEx is going to be providing us a net result in terms of equity cash flow; and probably allowing us to approach to the famous medium which we have for the business plan, which is EUR 2.5 billion. So it will be probably getting closer to 2.5.

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

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And in relation to the special dividend, the board considers several issues in relation to how the surplus cash should be returned to shareholders. And as you know, we do consult with our major shareholders and take that into account. And on balance, this time around, the board concluded that we should pay a special dividend. And that special dividend, as I said, will be recommended to our shareholders, for approval at the AGM in June of next year. And on M&A, just to confirm, we have disposed in full of our shareholding in Norwegian. We completed that disposal in mid-February, from memory, but we have fully sold out the shares that we held in Norwegian. And we're not actually looking at anything at the moment. There's a lot going on in the industry. We were approached and have continued to be approached by airlines who are looking to be part of IAG. None of them have been of particular interest to us, but we continue to look at opportunities. And that's the great thing about the group. We have that flexibility to move quickly if the right opportunity came along, but we're not actively looking at anything at the moment.

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

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And at the same time, there all these disruptions happening to different airlines are creating new gaps in terms of capacities and the destinations that have been abandoned. And we have to be active and quick enough to fill the strategic gaps that we are interested in.

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Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [14]

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Damian? (inaudible).

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Damian Brewer, RBC. Can I ask 2 questions, please? First of all, on NPS. If we go away from the group number, which sounds like it's been heavily influenced by Vueling, could you talk a little bit more about, firstly, Iberia; and then British Airways; and what happened there? And if possible, put some numbers on it and tell us in particular what's driven NPS to improve and what you've discovered in terms of the NPS work that means maybe there's areas where you're putting costs in where customers just aren't recognizing it or prepared to pay for it. And then secondly, just on, I guess, following up on the capital allocation point. Enrique, you mentioned about the lease rates. Is that changing anything in the way you're thinking about the lease-versus-buy balance and the duration at which you take leases? And in particular, I'm noticing what seems like a very opportunistically timed 777 order after what happened at Etihad. Are you now purely looking at new aircraft? Or if there are distressed second hand 777s out in the Middle East, would you still be looking at those?

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

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Okay, on NPS, the -- because we weight our NPS to passenger numbers. So that's the way we do it. We do also look at internally we have weightings by revenue, weightings by profit, weightings by cabin. So we look at this internally, clearly, in a number of different ways, but the single metric we use for one of our nonfinancial metrics is NPS weighted by passenger numbers. So it is heavily influenced therefore by the big passenger airline British Airways and Vueling. The Vueling performance showed a very significant decrease versus 2017. And that was directly -- we can see it within the figures' direct correlation to the on-time performance and the disruption that Vueling suffered through the peak summer. The BA performance showed a significant increase, over 10 points of improvement from 2017. The others were broadly flat versus previous years. And what we're seeing in BA is a further very significant increase in January and so far in February, so it's well ahead of the targets that we have. And what we're seeing is actually the investments we're making are investments that are appreciated by the customer. So I think we're targeting the right areas. We're doing the right things. We're very pleased with the progress. This is a long-term plan. Well, long term. I suppose everything in our industry is influenced by the short term, but this is a very structured plan of targeted investments. All of our airlines do it. We understand where we need to invest. We understand where we may not be perfect, but investment doesn't really -- isn't really justified. And we know the critical areas that we need to focus on. So it's an excellent metric that we use. We go into it in a very detailed way analyzing all of the cabins within the airlines and the airlines and comparing -- although, NPS, you can't really use and compare one airline with another, but we do use it to try and get a better feel for what's going on. So -- and so I think I'd have to say that I can't see any evidence of us getting the investment wrong. And in fact, all of the evidence shows that we're targeting the right areas. And you'll see more of it. So we have, as you know, a new business-class seat coming with the delivery of the A350-1000 into BA. That will have a noticeable impact on our Club World NPS. On...

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [17]

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On the operating lease market, nothing structurally has changed. Remember our aims and proportions in the operating lease market have very much to do the combination of 3 elements. On one side, we need flexibility in the different fleets because we need to adjust our size and we need to be prepared for changes in technology. So we need flexibility. On the other side, we worry sometimes about our ability to manage residual value exposure on some fleet, so that's another big reason why we hold certain percentages, which are different for the different fleets, in terms of operating lease finance. Thirdly, of course, we like cheap money. And in this occasion, cheap money coming from operating leases has been a huge tailwind. Is it going to last forever? Nothing lasts forever, I'm afraid, but you know well it has to do with this appearance or flooding of new lessors with probably a different risk approach and very eager to earn some positive yields on their investment and not regarding so much the risks behind. So that will be basically ending at some point in time. It has to do with Chinese lessors which are in some way imbalancing the market, but while it's there, come on. Take it.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [18]

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And on fleets, we have very, very constructive engagements from -- the way we run this is, although it's 2 aircraft manufacturers, 2 engine manufacturers, but -- there are 4 parties to negotiate with. So although you don't have an engine choice on either the 777-9 or the A350, we do negotiate separately with the engine manufacturers and the airframe manufacturers, very constructive engagements. They all wanted this. They wanted to win this. This is probably the most aggressive approach that I've seen from all 4. And I've been dealing with these issues now for the best part of 20 years. It's -- even longer, it's the best I've seen in terms of wanting our business. We're very pleased. We think the 777-9 is the right aircraft. Because don't forget what we're trying to do here is replace 747s. So we needed an aircraft that had a similar capacity to the 74. We'll operate the 777-9 with 325 seats in a 4-class configuration. And I think it's 8 First; 65 club; 45 or 40-something, 45 Club World -- sorry..

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Alejandro Cruz de Llano, International Consolidated Airlines Group, S.A. - British Airways Chairman and CEO [19]

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(inaudible)

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [20]

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World Traveller Plus. And then 206. So if that doesn't add to 325 -- but it's somewhere nearer there. And so very similar to the configuration that we have on the 747s today. And we continue to look and we did look through this process at secondhand aircraft. And we had detailed discussions right up to the very end, but we concluded that the right aircraft at this stage is the 777-9. And I would remind people that 4 of these orders will start replacing the 777-200 fleet, and we've got 46 of those. So there are more aircraft to be replaced, which means that all 4 of the players have still a lot to play for. But I think this was a very good process, and we're pleased with the outcome.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [21]

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It's Andrew Lobb from HSBC. Can I ask about the recent deal at Heathrow around incentives and airport charges? And then also interested to see how that plays into your thinking around the negotiations on the third runway and the third runway pricing, so how that fits together. And then a third question would be around LEVEL and how it trades on the short haul because you discussed the long haul in the presentation. But Vienna is quite a lively place, nice chocolate cake, but you're also deploying it into Amsterdam. So yes, what are your expectations there and indeed to roll it out potentially further elsewhere in Europe?

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

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Yes. So as you know, the recent negotiations with Heathrow were to address the fact that they have over-recovered, so -- and we've said all along these guys are bandits. So they have over-recovered, and we've got to get that money back. And it was the manner in which we get it back was the negotiation. And so we are pleased that we've got an agreement, a commercial agreement, with Heathrow. And they engaged with all of the airlines, but as you would expect given the scale of our operation at Heathrow, we would be one of the most significant. So there is a new pricing structure which Heathrow have talked about, and we believe it's right to incentivize growth. I disagree with what Heathrow said in terms of all of the airlines at Heathrow operate below the IATA global average. That's the seat factors. We don't. In fact, most of our airlines operate above the IATA global average seat factor, but there is capacity and scope for us to grow and improve seat factor further and particularly as we have gone through that process of adding additional seats to the aircraft. So I think this was a commercial negotiation, and the outcome is one that we're pleased with. I wouldn't read anything into the longer term. I still have significant concerns about Heathrow's ability to deliver a third runway in a cost-effective manner. It's clear from things we've seen that -- the GBP 14 billion, that there's no way they can achieve the expansion at that price. And we think that price is high. So based on everything we are seeing at the moment, we remain concerned that the expansion plans at Heathrow are unrealistic. And we're very clear, and I'm pleased that this issue has been addressed and accepted by the government and the CAA, that the expansion cannot be at the expense of passenger charges. So we will continue to constructively engage with Heathrow and the regulator on the expansion plans, but I still have my doubts. And I don't think I'm the only critic of Heathrow. I know I'm probably one of more vocal critics of Heathrow, but I can assure you, when I talk to my counterparts across the industry, they all share my view in relation to the performance of Heathrow and concerns about the potential impact of the increased charges as we go forward. So -- but Andrew, I wouldn't read anything into this. I -- we saw them as 2 very separate issues, but we are pleased with the outcome of the negotiations that we've had.

And so your second question. Yes, you obviously have access to the Internet, and you've seen how LEVEL will be in Amsterdam. I was told I wasn't allowed to mention that, but given that you've seen this and I've seen this, yes, that is the plan. And we're looking at 3 aircraft in Amsterdam. I think we'll announce it formally in about a week's time. And the reason we haven't announced it formally, so far, is it's not ready to go on sale. So we think using the LEVEL brand in Europe is to try and -- it's just it's free branding, and it's exposing the brand. And it's giving us an opportunity to do things in a different way and to test things. I'll say it's flexibility that we have within the group. So -- and Vienna itself very competitive. It won't come as a surprise to you to know that everybody has put a lot of capacity into Vienna. I did notice that Vienna had made record profits last year. It's just reinforces everything I say about airports. We do all the work, and they make a lot of money on the back of all of the hard effort that we have. But we will be adding LEVEL activity to Amsterdam and we will formally announce that in a couple weeks time.

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Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [23]

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Neil, please?

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [24]

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Neil Glynn from Crédit Suisse. If I could ask 3 questions, please. The first one, just in terms of your guidance. Obviously, you've got a unit fuel bill headwind into 2019. And I'm just interested in terms of how you think about revenues. Do you either back yourselves on the industry's more concentrated structure to recover that fuel bill headwind? Or is that actually based on a more bottom-up view of the revenue picture as the year develops? And second question, maybe following on from Andrew's Heathrow question, just focusing on BA short haul at Heathrow. Just interested. Can you give us some color how far away is that from covering its costs of capital at the moment? You're obviously charging for in-flight catering now. I guess the Heathrow deal incentivizes boosting the load factor there. So how do you think about the -- how returns might develop at BA short haul in the future? And then the third question, which is on -- sorry, one second. The third question, BA margins, excuse me. You've obviously got 15% now in terms of the operating margin for 2018. The guidance would suggest that, that margin might fall in 2019. It just prompts some questions in terms of whether BA's margins have indeed peaked now. And how do you think about that in the future?

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

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So on revenue, as I said, the environment in -- or as we've commented, the environment in 2018 was quite challenging on a number of fronts, fuel, foreign exchange, ATC. And I think we did well against those issues. So fuel bill in 2018 increased by just under EUR 700 million, EUR 673 million, I think it was. And we're looking, you can see from the chart there, at EUR 6.1 billion in 2019. So there is a big -- I should say, big fuel headwind coming our way. We -- I think we did very well in 2018. I think we're being realistic given our assessment of the capacity in the markets that we're operating in, but we're still looking at unit revenue improvements on a constant currency basis in 2019. I think that's important. So our non-fuel unit costs are effectively flat at constant currency in 2019. Unit revenue is forecast to improve. And that's one of the things. We're all the time looking at the various step, different metrics to ensure that we can fine-tune to get the right result, yes, yes. And...

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [26]

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We have the capacity and other measures to keep the margin that we are aiming at.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [27]

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And BA short haul, yes. You're right. It does incentivize short-haul seat factor improvement at Heathrow, and we believe there is scope for us. When we look at the Heathrow, short haul performance at Heathrow, we do have to take into account the contribution that it makes to the long-haul and feeding traffic. We don't do that at Aer Lingus, for example, and -- but the way Heathrow operates and the extensive long-haul network that BA has, we do have to take that into account. So the -- when we look at our short haul performance, the BA short haul does more than cover its costs of capital, but there is scope for improvements. In terms of BA margin, I wouldn't say it's peaked. I can remember, when we hit 10%, everybody thought we peaked. It -- there's still work that's BA can do. And I think there are initiatives that BA plans to do. And as -- we look at things over a 5-year period. Typically, we're looking out -- when we're looking at these investments and the changes over 5 years, we look at the improvement that we get in 5 years, recognizing, as I've said many, many times individual years will see changes. But I think there is still scope for BA to improve its performance. So I don't believe it's peaked, by no means. I don't believe that it's peaked. And thinking...

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [28]

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I mean that traditionally we were talking about a total operating profit margin target as a healthy one for the industry and for us of 10%. It was a little bit of a magic figure. If we get to 10% for the full year, we'll be getting close to where we need to be. We've shown figures where the operating profit margin of the fourth quarter for the group, which is the second worst of the year after the first quarter, the fourth quarter is the second worst, is 12%. So I absolutely agree with Willie. There is much, much more to be done both on the revenue side and also, for sure, on the efficiencies and the cost side. And it's going to be done.

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

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Jaime?

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [30]

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Jaime Rowbotham from Deutsche Bank. Three for me, please. Firstly, I know it's small and early days, but I'd like to revisit quickly LEVEL in Austria, following up from Andrew. I mean one of your competitors, you'll know who it was, suggested that the discounting there is too hot for LEVEL to handle and suggested retrenchment on your part. I presume that's somewhat off the mark, and I'm interested to know how strong your resolve is in that highly competitive environment. Second question, on the topic of excess liquidity. You didn't need it for Norwegian. You've used some of it today for additional shareholder returns. Is there any way to use some of it to accelerate the upgrade to the BA long-haul premium offering? And if the answer to that is no, perhaps you could just give an update on the upgrade of the 777s. It's going to be retrofitted on time. I presume you're going to receive your A350s on time. Last question, revisiting unit -- passenger unit revenue progression in 2019. How do you see the phasing? Q1 is clearly when you need it the most based on the fuel slide you showed us. Is it going to be very different in the summer, do you think, to the end of this winter and beginning of next?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [31]

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Okay. LEVEL Austria. And what you need to remember is the results for LEVEL are embedded in our performance here. We don't separate it out and say it's an exceptional cost. I struggle to justify how people can do that. So our performance shows an improvement in profitability based on the embedded performance of LEVEL in the figures there. So we're more than capable of holding our own. We're not stupid. We're never going to do silly things. We'll do what's right for our business, but Vienna is clearly extremely competitive at the moment. I don't think anybody foresaw the amount of capacity that has gone in there, but we're a very efficient operator. LEVEL's cost performance is excellent, and that's one of the advantages that we have with LEVEL both long haul and with short haul. In terms of surplus cash, if there's an opportunity to improve or accelerate the program in BA, we will do it. We don't believe there is. And that's for a number of reasons but principally relates to the supplier of the product. And so we've looked at the planned maintenance. We have the ability. If we had any confidence that we could get the equipment to put on the aircraft, we can and we have actually made changes to the program. We've identified additional hangar capacity, if -- so we're lined up to do it. We have a desire to do it, but we've got to be realistic. Everybody knows that this is an area that has been quite challenging and continues to be challenging. So we're not going to make promises that we know we can't deliver, but if for some reason somebody else fell out and one of these suppliers has an excess of capacity, we'll -- we have the capability of accelerating. But the 777s will be retrofitted. I believe, based on everything we see, they'll be retrofitted in line with the program that we've identified, but as I said, we're willing to accelerate it but we don't see the opportunity. We're not going to break out passenger unit revenue...

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [32]

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But we have to tell you they're not going to be homogeneous and symmetrical through the four quarters of the year, of course not. We recognize Q1 is going to be a difficult year because of headwinds. So on one side, Easter holidays...

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

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It's Easter, yes, yes. Easter is (inaudible).

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

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Yes. On the other side, we had a very benign fuel -- sorry, dollar price last year. It's going to be much tougher this year. Thirdly, our peak of capacity for '19 is going to be in the first quarter. Some things are going to be getting easier since quarter 2, quarter 3, especially quarter 4. So yes, we are still betting strongly for these increase in unit revenues through the year. It's not going to be exactly symmetrical, yes.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [35]

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Yes. As you know, Easter is going to have a big impact on Q1 performance given that it appeared Q1 last year and it's Q2 this year. And very -- it's definitely in Q2. We've had some years where it sort of bridged both, it's not. You're not going to see any Easter effect in Q1 of this year.

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

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(inaudible).

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [37]

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Sure.

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Savi Syth, Raymond James - Analyst [38]

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Yes. So 3 small questions for me. First, you gave the growth by brand. I was wondering if you could talk a little bit about how you're thinking about growth by region. And along those lines, what are the trends in the region that you're looking at as you head into 1Q? It looks like some of the U.S. carriers are talking about transatlantic maybe softening somewhat from the trends we've seen last few years. And then the last question, just with IFRS 16, would you consider kind of switching to talking about pretax income instead of operating income focus on the guidance?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [39]

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So you can deal with IFRS 16. I know it's your favorite subject...

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [40]

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Yes, I know. Thank you.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [41]

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Growth by region. It's going to be similar to what we've seen. And we're -- we've clearly got a focus on the transatlantic because that is an area, despite what people have been saying, that we see as being very positive. The expansion, the new routes that we've launched. I would highlight Nashville as being excellent; and Seattle, fantastic. And interesting, one of the things we're seeing with Aer Lingus is the very strong premium cabin performance in Aer Lingus. And I think that reflects what we're seeing in Dublin, the strong Irish economy but particularly Dublin economy; and very significant U.S. investment and strong demand. And Sean pointed out to me that actually another positive of that in premium bookings is we're getting a lot of it direct. So it's been a significant feature of the Aer Lingus performance in 2018 and one that we believe will continue in 2019, but the broad focus of expansion: So if you look, Iberia, as I've said, is -- 50% of Iberia's capacity is Latin America. And Iberia, forecasting to growth -- its grow at around 8%. You can imagine it's, very much Vueling is in Europe. Aer Lingus is transatlantic. BA then is across the network. So it's a broadly similar structure of growth regionally...

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [42]

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IFRS 16 impact on the profit and loss. I think I went through it. So basic differences is, on one side, operating profit will increase. And that's because of financial charges embedded in the rents are going to go below the line. And that's big figures. On the other side, the net financial expenses are going to increase because it's just reallocation. And then net after tax and pretax are going to be affected by those two, by the volatility on the currencies that may be affecting the financial charges and the restatement of debt nominated in foreign currencies and also a little bit having to do with the different timing accruals from the point view of tax and from the point of view of accounting. Net-net, through time, very different; very, very, very small differences. We should be foreseeing nothing very special on a 2-figure average in terms of net income.

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Savi Syth, Raymond James - Analyst [43]

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So we'll just keep looking at EBIT then from a guidance standpoint.

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

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Yes.

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

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Yes, absolutely, although our own goals are going to be remeasured mathematically. So come on. We're not going to be playing with the figures. If it's going to represent an increase of 200, our figures and targets will be increased by 200, so...

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [46]

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It's James Hollins from Exane. I have two for Alex, to begin with. First, on BA labor relations. I think I've seen a few headlines on quite a significant vote for industrial action, I can't remember where, it might have been at Gatwick. I'm just wondering if you could sort of update us where we are on that. And I think there's another headline on only a 1-year deal being offered on wages. Just a general update would be good. The second is on Gatwick BA, just wondering if you had sort of optimized your Monarch slots as planned for this summer and whether that's involved quite a big switch from short haul last summer to long haul this summer. And then back to you, Willie. Just wondering. Now clearly Norwegian is firmly behind us. Was wondering if you could sort of reveal what eventually have led to you not doing it and whether personally you regret that it didn't happen.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [47]

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Alex, do you want to?

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Alejandro Cruz de Llano, International Consolidated Airlines Group, S.A. - British Airways Chairman and CEO [48]

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Yes. Very quickly on labor relations. You've seen a headline this morning. And as we do, when we finalize a particular pay deal -- we're in the middle of discussion, so we wouldn't really comment on it, but we haven't seen any behavior that would be extraordinary in terms of where we are in negotiations which is very early on. And that applies to the whole company. Anything that you may have seen in Gatwick, I think, is minor. And it's been solved and small things related to, small things. Gatwick indeed, last year, began to implement the slots very quickly. We had to use leased aircraft. This year will be our own aircraft. We are adding long-haul capacity but very slowly. So it will be extra aircraft coming in at the end of this year. Very, very, very encouraged with -- by the performance in Gatwick. Gatwick has been working on its cost base very hard for the last 10, 15 years. Today, it's an incredible position from a competitive cost base. It is the best-performing airline in Gatwick with a big difference in terms of OTP and NPS, et cetera with any of its competitors. So full support to the Gatwick team from that perspective; very happy with what they're doing there, adjusting very quickly to a tough environment overall for them operationally with a single runway, et cetera, but doing very well in that process.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [49]

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On Norwegian, no regrets. The way we did this was we had a board subcommittee consisting of the two of us with the Chairman and the Senior Independent Director. We were unanimous in our views that we should recommend to the board that we do not proceed. I have been talking to Bjørn for over 2 years, trying to get him excited about IAG. He was excited, so unfortunately, it was a deal that ran out of time. And absolutely no regrets. It's the right decision for us. And we -- I think we saw an opportunity. We went for it, and in the end, we decided it wasn't worth pursuing beyond where we are. So no, I wish them well, but it's clear that they still have very, very significant challenges ahead of them. And we will continue to focus on our organic growth, and we have opportunities to do that.

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Penelope Jane Butcher, Morgan Stanley, Research Division - MD [50]

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Penny Butcher from Morgan Stanley. Maybe to come back in a slightly different way on the BA question. What do we assume in your flat cost guidance is baked in for a deal? Is it what we've seen in the press as the offer that's on the table from your side, the 2.7%? Or how do we sort of square the circle on at least what's included within this year's guidance? And the second question is to come back on your earlier comment, Enrique, on the evolution of free cash flow through this year. Could you talk us through that math? Because I'm not quite sure how you get there with a flat EBIT and a flat CapEx number year-on-year. So -- and we have a...

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [51]

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So what's embedded in our plan is what we said. We know that flights will continue. We know the safety and security regulations will have been agreed. We know that there are measures that have been taken in relation to ownership and control. So we continue to operate in terms of Brexit based on a realistic assessment of where we believe we'll be through 2019 and beyond. And the engagement we've had with the national regulators, as I said, has been very constructive. So we remain confident that these issues will be addressed. And ultimately, we've seen nothing to suggest that there won't be a comprehensive air transport agreement reached at some point between the U.K. and the EU. That's the stated of political ambition of both. It's the long-term direction of both the EU and the U.K. in relation to aviation. And we've not see anything that causes us to change our view in relation to that.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [52]

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And then I'm not going to be very precise on the figures, but I'll give you a little bit of a flavor. So we know first quarter is going to be challenging. It's going to be challenging because of Easter holidays because for us it's peak capacity period. We have some ways to deal with this specific weakness on the first quarter. And it's very clear one has to do with the impact in our employee labor costs of what we did last year, and that will be rolled over after April. So there's going to be some offsetting mechanism that we are going to be using. And we are now seeing the pattern of bookings and revenues that will be prevailing for April, a little bit of May, a little bit of June. And we see how revenues that have been lost for the first quarter because of Easter are coming back. So we believe Q2 and Q3 are going to be recovery -- quarters. And Q4, you'll see that fuel prices are not going to be a challenge, so we expect to be able to improve. So that's a little bit of a flavor on how we see the different challenges and opportunities through the 4 quarters of the year.

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Penelope Jane Butcher, Morgan Stanley, Research Division - MD [53]

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Maybe just a quick follow-up on the first question. I was more inferring on the labor relations point with BA, as in what we feel is baked into your unit cost guidance.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [54]

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So we will -- no. Wait. Sorry -- yes, well I'm not going to -- not the -- give you a -- we have baked in assumptions (inaudible). Yes.

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Penelope Jane Butcher, Morgan Stanley, Research Division - MD [55]

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Okay. And that's (inaudible).

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Alex Paterson, Investec Bank plc, Research Division - Analyst [56]

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It's Alex Paterson from Investec. I have 2 questions, please. Firstly, just back on Heathrow. You seem very confident that the cost is going to exceed what is currently mentioned. Are you confident that passengers and yourselves are not going to bear that? Are there safeguards in place? What needs to happen to make sure that they're culpable, not yourselves? And then secondly, on ATC, I think you said staffing was clearly the issue, the need to get more staff in. Is that happening? And also, obviously capacity is going to continue to grow in Europe, so the staffing levels will continue to rise. Are they going to be able to catch up and stay ahead, or are we perpetually going to be in a challenge of staff shortages?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [57]

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Yes. On Heathrow, I think there's a number of parties that will be looking at this, including Heathrow shareholders because, to be honest with you, if I was a shareholder of Heathrow looking at a bill well in excess of GBP 14 billion, I would have to question the management's desire to proceed with expansion. I wouldn't. So I think you've got to look at the various players here. You've got the CAA. You've got the U.K. government. You've got all of the airlines. It's not a situation where -- as I said, I may be one of the more vocal. I'm not the only one that's concerned and critical of the plans at Heathrow. I've yet to hear anybody who has been positive about spending GBP 14 billion. And even fewer people being positive about Heathrow spending more than GBP 14 billion. So I don't think it's going to happen. And we're certainly not going to be quiet. And it's not a case that it's me. It's everybody in IAG and it's everybody in the industry that will resist this. On ATC, there were specific, Karlsruhe was the specific area that got -- it's manpower planning completely wrong. They assumed a reduction in capacity, a reduction in demand through their area rather than what everybody else saw was an increase. So I'm happy that, that will be addressed. There have also been changes made which I think are positive. The system, you could argue, was crazy. The payments for ATC is paid based on the flight plan that you file, not based on the flights that -- plan that you actually follow. And what that has does is where there are neighboring ATC units, if the aircraft has filed through one but flies through the other, the one that it actually flies through doesn't get paid and the money goes to the one that didn't actually have to do the work. It's a strange structure. That has changed now. So the payments will be based on the flights plan that's -- was actually followed rather than planned. That's a big change, but that now incentivizes both airlines and ANSPs, Air Navigation Service Providers to be more efficient. And I can see it from an ATC point of view. If you're not going to get paid for this additional activity, you're saying, "Well, why the hell should I accept it?" So there's been no incentive for neighboring air traffic control providers to accept it. Now to be fair: Most of them have been very good and have accepted it, but the idea that you accept additional work and you know you're not going to get paid for it and the ones that are inefficient and have not made the plans are going to continue to get the money just doesn't add up. So that has been a very significant change. And that's why I'm confident that, as we move forwards, we will see a change because there's now a financial incentive for those to be efficient and there's a clear financial penalty for those that don't provide the capacity. And that's a very critical structural change that we'll see from this year. So ATC will be a challenge this year, and we've factored that in. We've already factored in different routes planning. We've factored in capacity. We've factored in the -- particular traffic flows and timing of those as well. So we've done what we think we can do and -- but even in that environment I think it will continue to be a challenge in 2019. I'm hoping, because of action we've taken and action that has been taken, despite the fact that we have -- we are going to see an increase in traffic. It's less than the increase we saw last year, but the situation, for us anyway, should be more managed well. But 2020, 2021, I believe that there are solutions.

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Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [58]

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All right, any more questions? Okay. (inaudible). We have the last.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [59]

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Can I just come back on Penny's question? Because I'm not sure I followed the answer. Enrique, I thought you said that the free cash flow in '19 was expected to be better than in '18. And yet EBIT is guided flat. And I thought you said CapEx was going to be the same. So I know in answering to Penny you described how you're expecting a flat EBIT, and that's good, but I'm not understanding how a flat EBIT and a flat CapEx gets you better free cash flow. Unless we're just playing with IFRS 16, EBITDA is going to be slightly above.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [60]

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Well, not slightly. Some millions above last year...

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [61]

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But is that because of IFRS or something real?

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [62]

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EBITDA?

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [63]

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Yes.

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [64]

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No. Just because the way the net financial expenses are going to be reallocated, EBITDA is going to be higher figure, okay?

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [65]

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(inaudible).

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Enrique Dupuy de Lôme Chávarri, International Consolidated Airlines Group, S.A. - CFO [66]

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Yes, yes. And then yes, but apart from that, we'll be having a reduction of about EUR 100 million in terms of net CapEx as well. And we're having other pension fund-related payments that we did in '18 and that --we're not going to be repeating in '19. So at the end of the day, we are foreseeing improvement in free cash flow in the range of EUR 200 million.

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Andrew James Light, International Consolidated Airlines Group, S.A. - Head of IR [67]

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Okay, thanks very much. Thanks, everybody.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [68]

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Okay, yes, just thank you again.

As I said, we're pleased with the performance, pleased with the progress, lot for us to do but confident about our performance in 2019. And the Q1 will be challenging, as we've talked about, but the rest of the year, we believe we're in very good shape. And we're looking forward to seeing you or talking to all at our Q1 results.

Thank you.

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Editor [69]

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COMPANY DISCLAIMER

Following the event, the company offered the following clarification on comments made on equity free cash flow and the impacts of IFRS 16 during IAG's results presentation on 28 February 2019.

"IAG expect equity free cash flow to be lower in 2019 than in 2018 based on our guidance of operating profit being similar in 2019 compared to 2018 and on an increase in net capex from €2.2bn in 2018 to €2.6-2.7bn in 2019. The impacts of IFRS 16, which IAG will adopt from 2019 on its balance sheet and income statement are shown on slide 18 of the 2018 results presentation. The impacts on IAG's cash flow statement will be an increase in net cash flow from operating activities, due to the exclusion of operating lease rental costs, which will be offset by an increase in net cash outflows from financing activities due to the inclusion of interest on operating lease liabilities and repayment of operating lease liabilities. IAG expects the impact of IFRS 16 on equity free cash flow to be negligible"