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Edited Transcript of IAG.L earnings conference call or presentation 31-Oct-19 9:00am GMT

Q3 2019 International Consolidated Airlines Group SA Earnings Call

HOUNSLOW Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of International Consolidated Airlines Group SA earnings conference call or presentation Thursday, October 31, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Stephen William Lawrence Gunning

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

* William Matthew Walsh

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

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Conference Call Participants

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* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Damian Brewer

RBC Capital Markets, 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

* Johannes Braun

MainFirst Bank AG, Research Division - Director

* Malte Christoph Schulz

Commerzbank AG, Research Division - Equity Analyst of Industrials

* Mark A. Simpson

Goodbody Stockbrokers, Research Division - Analyst

* Neil Glynn

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

* Savanthi Nipunika Syth

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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the International Airlines Group Q3 results call. (Operator Instructions)

I must advise you that the conference is being recorded today, Thursday, the 31st of October 2019.

I would now like to hand over to your first speaker today, Willie Walsh, Chief Executive Officer. Please go ahead, sir.

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

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Thank you very much, and good morning, everyone. Thank you for joining us. As you can see, these are good underlying results. The quarter was negatively affected by the BALPA pilots' strike at British Airways. Our operating profit of EUR 1.425 billion, that's a margin of 19.5%. The impact of the strikes and disruption in the third quarter is EUR 155 million. You'll remember on the 26th of September, we indicated a total of EUR 215 million impact for full year. So EUR 155 million of that has affected the third quarter. And the balance, EUR 60 million, will be in the fourth quarter.

We continue to have very strong ROIC performance with the last 4 quarters equating to about 14.8% and we've continued with our generous cash returns. I'm pleased to say the Board of IAG yesterday approved an interim dividend of EUR 0.145 per share, which will be payable in December. And our guidance for full year 2019 remains unchanged from the guidance we gave you on the 26th of September. Our fourth quarter capacity growth will now be 1.9%, and that will give us a full year capacity growth of 4%.

So to take you through the details of the financial results, I'm going to hand over now to Steve Gunning. Steve, over to you.

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

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Thanks, Willie. Good morning. I turn to Slide 5. As Willie said, the operating profit of EUR 1.425 billion, that's EUR 105 million down year-on-year. As Willie said, EUR 155 million of the deterioration is the consequence of the strike and disruption and the slight softening we saw of Vueling in Q3. It's also despite an increase in the fuel bill of EUR 136 million in the quarter. And clearly, there's been a little bit of FX help going the other way of about EUR 41 million. So that's the operating profit.

If you look at ASKs, we originally guided you to 5.2% ASK growth for Q3 when we were doing the half 1 results. Actually, our ASK growth for the quarter has only been 2.8%, so 2.4 points of ASK decline compared to previous guidance. 1.5 points of that relates specifically to the BA strike, so not really a surprise there, but that explains the deterioration.

If we then look at passenger unit revenue, it's down 1.1% at constant currency. I'll take you through a slide in a moment on that to get under the skin and give you some color as to what's going on, on passenger unit revenue. But if you look at total unit revenue, it's also down 1.1%, and that probably masks 2 offsetting factors. You've got the cargo business in a challenging environment at the moment. Global trade seems to be slowing. And across the airfreight industry, we are seeing reduced demand. And so air cargo, for us, in Q3, the revenue was down 7%. Offsetting that, we are seeing good performance in BA Holidays and the Iberia third-party MRO business and third-party handling business. So those 2 are largely be offsetting one another and hence why total unit revenue looks pretty much the same as passenger unit revenue on a performance.

In terms of nonfuel unit costs, they're up 1.1%, clearly impacted by the disruption and the strikes, not only because that increases our costs, but it's also reduced our ASKs. If you strip out the non-ASK-driven businesses in our group, such as BA Holidays and Iberia MRO, which I've just alluded to on the revenue side, actually our nonfuel unit costs are largely flat.

And then if you look at total unit costs, you can see they're up 1.9%, and that's factoring in the fuel bill as well as the nonfuel unit costs. And what we're seeing with fuel is although the commodity price is down, the net impact of our hedging year-on-year is up. And hence, it's increased our costs. And as I said earlier, the overall fuel bill year-on-year is EUR 136 million higher. So those are the sort of highlights.

Let me turn to the next slide, which should give you a bit of a feel as to what's going on with unit revenues in the quarter. And as you can see, we've turned this as mixed revenue performance. There's various different things going on in different regions. Overall, as I said, ASKs were up 2.8%, and RASK was down 1.1%.

But if I quickly take you through the -- each of the regions to give you a flavor of it. Domestic. 87% of the domestic ASKs relate to Vueling and Iberia flying to the Canary Islands and the Balearic Islands. And what we're seeing there is strong revenue growth again in Q3. You're not seeing the dramatic RASK improvement that we saw in Q2, simply because we're now cycling over the resident discounts that were introduced last year. So still strong revenue growth but not quite the same level of RASK improvement that you saw in Q2.

In terms of Europe, you see that RASK performance is similar to the Q2 performance but off a lower ASK growth. One of the reasons for that is, last year, 2018 Q3, Europe performance was particularly strong. We were seeing RASK performance last year up 4.5% on 6% ASK growth, and that was largely driven by BA and Vueling last year. If I look at Iberia and Aer Lingus, their performance in Q3 has been very similar to that of Q2. In terms of Vueling and BA, we're seeing some degree of softening, partly attributable to some of the disruption that we've seen in the quarter. And furthermore, when we gave you the re-guidance from the 26th of September, we talked about we saw some softening happening in Vueling demand. And consistent with that, France and Italy seem to be the routes, in particular, that are softening there.

If I turn to Asia Pacific, bear in mind, 91% of the ASKs for this region relate to British Airways, and so the strike and disruption impact will have a significantly distorting effect on Asia Pacific. And as you can see, the RASK is minus 3.7% compared to up 1.9% in Q2. Factors over and above the strike impact in Asia Pacific are, one, Hong Kong. Hong Kong is clearly going through a period of unrest, as we know. And we're seeing a RASK decline in Hong Kong in low double digits. So we're certainly seeing that come through on that route. And the other development in Asia Pacific that's coming through is with regards to Mainland China, particularly Beijing, where we're seeing a lot of competitor capacity coming in.

If we look at Africa, Middle East and South Asia, once again, 90% of the ASKs in this region relate to British Airways, and so the strike will have had an impact there. But other factors that we're seeing in that region are post the Nigerian elections. Sort of at the end of Q1, we saw an uptick in performance in Nigeria in Q2 because there were some pent-up demand. Clearly, that's come off of there in Q3. In terms of Middle East, the timing of Eid, compared to the school holidays, have had an adverse impact. And we've also mentioned to you that we did divert capacity away from South Africa into India with the demise of jet. That's come through. But when you bring so much capacity across in a quick period of time, you will see some degree of RASK decline, and that's what we've seen in AMESA.

With regards to Latin America and the Caribbean, a slight improvement on the RASK from Q2. In terms of Argentina and Brazil, both are showing some improvement in Q3. Argentina is not a structural change. We just saw a sort of small bubble of increased demand ahead of the elections in Argentina. We would expect some deterioration in the other side of that as a consequence. In terms of Brazil, more positive comment. We actually do see some signs of improvement in Brazil, which is encouraging. If we look at the sort of non-Argentina and non-Brazil part of this region, actually, we're still seeing double-digit revenue growth across the board and a strong performance.

And then last but, by no means, least, North Atlantic. Once again, BA's 68% of the ASKs there, so the strike impact will have a noticeable impact in this region. It's the first time we've seen North America reduce ASKs since 2013. If you look at the non-BA element of the North Atlantic, you'll actually be able to see the RASK is up broadly 2% on ASK growth of about 3% and that's particularly driven by Aer Lingus performing well and Iberia performing solidly. So North Atlantic, we're not seeing an underlying deterioration. We did see clearly some strike impact in North America.

So that gives you a bit of a flavor as to what's going on across the regions from a revenue perspective. If we turn to Slide 7, I'll talk about nonfuel unit costs. As I say, they're up 1.1%. But if we strip out the non-ASK-driven businesses, we're up 0.2% on an adjusted basis.

Quickly running through these. In terms of employee costs, 2 drivers for the improvement. One is productivity improvements overall across the group, particularly in Iberia and Aer Lingus. But also the cost per head has improved. Now this is not a structural change, but we -- as we indicated when we re-guided, we have released the BA bonus provision in the quarter and as a consequence of that benefits coming through in these numbers.

If we look on the supplier line, the costs -- nonfuel unit costs for supplier are up 2.4% basically driven by BA and Iberia. For BA, it's the impact of strike and disruption, so compensation costs, et cetera, coming through. And also for BA, it's the growth in the BA Holiday's cost base which corresponds to the growth in the revenue. With Iberia, you're seeing the engineering costs up largely related to the third-party MRO business. And then in terms of ownership in this IFRS 16 world, the ownership costs, depreciation costs coming through on the aircraft, and we've had a number of new aircraft deliveries in the quarter or in the year which are affecting the quarter's costs.

And as we turn to fuel, as I alluded to earlier, commodity price is actually down. It's down from about $700 jet per metric tonne, so about $618 for the quarter. But actually, it's the impact of the hedging that's driving up the unit costs. A few more details on fuel. If you turn to the next slide, several comments on this. Firstly, you can see that our fuel bill for 2019 we estimate will come out at EUR 6 billion. That's very slightly down on what we've guided before. But to be honest, it's a -- before, we were rounding up to EUR 6.1 billion. And on this one, we're rounding down to EUR 6.0 billion. We're 96% hedged for the rest of the year, so the fuel bill should not move a great deal based on commodity price. And as you can see, with the detailed chart that we've shown you here, which is basically overlaying a $630 jet price and a $1.10 to euro exchange rate on to our hedge book to give you a feel for what we'll see in 2020. And as what you can see there, as we look on from a fuel headwind that we've experienced in 2019 to a fuel tailwind in 2020. And we are currently 71% hedged for 2020.

I go to the next slide. As Willie alluded to in his summary at the beginning, it's been a strong quarter from a margin perspective at 19.5% despite some of the challenges we've faced in the quarter with fuel and disruption. That's also meant that the return on invested capital is very close to our 15% target, and so we're pleased to see that resilience coming through in the business. And as you can see, all of -- all 4 of our major airlines are performing strongly in the quarter.

I turn to the next page, Slide 10. In terms of leverage and cash, you can see our net-debt-to-EBITDA is at 1.2x. That's consistent with where we were in December. Our cash is a very healthy EUR 7.8 billion. It was at EUR 8.0 billion at the half year. A number of things have been happening on the cash front during the quarter. Clearly, we did our debut bond issuance, which rose to EUR 1 billion. We actually redeemed our 2022 convertible, which was about EUR 0.5 billion. And we've also, as Willie alluded to earlier, paid a final and special dividend during the quarter as well, so strong cash position and strong leverage.

We go to the next slide. It's worthy of note that last Friday, we've put out an RNS to say that we've concluded our triennial valuation for the NAPS pension scheme. Just to take you through a few of the highlights, the deficit, the actuarial deficit came down from EUR 2.8 billion to EUR 2.4 billion. We have been, up to this point, been paying off, up to 2027, a fixed contribution of EUR 300 million per annum, plus a cash sweep of up to EUR 150 million per annum as well. To be frank, in the previous 2 or 3 years, we'd always paid out of the EUR 150 million, so we've basically been paying out EUR 450 million every year. What we've done under the new agreement is gone from EUR 300 plus EUR 150 million to EUR 450 million fixed. But those payments go out to 2023, rather than 2027.

Other developments in this agreement is, as you will know, there were protections in the last agreement for the trustees which sort of said if we paid out the dividend higher than 35% profit after tax, then we needed to make other benefits or hand over other benefits to the trustees. We've now increased that level from 35% to 50%, which gives us more flexibility in moving cash up from British Airways into the group company. Also, we were very keen, as part of this agreement, to introduce overfunding protection mechanism. So as this scheme matures and now it's close to future accrual comes into land, we wanted to make sure that we didn't make payments into a scheme that were ultimately unnecessary. And so under this mechanism, when we get to a 97% funding level, we then start making payments into escrow, rather than straight into the scheme. And when we reach 100% funding, we cease paying whilst the formal valuation is carried out.

And last but not least, with regards to NAPS. As we've indicated before in the annual report and accounts, et cetera, there was a EUR 250 million contingent liability that we knew we were going to have to pay, either to APS, the older scheme; or to NAPS, the scheme we've just been talking about. We were very keen it went across to NAPS because that was the scheme with a very significant deficit. And as part of this arrangement with NAPS and also our discussions with APS, I'm pleased to say that EUR 250 million will go into the NAPS scheme.

Just one comment with regards to APS. No real change from what we've updated before, which is we've reached agreement with the trustees. The trustees are seeking court approval, and that process is ongoing, and we would hope to hear about that during quarter 4. So good progress on the pension arrangements compared to where we were.

I think that's it in terms of financial summary. I'll now hand back to Willie.

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

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Thank you, Steve. And as you can see from the next chart, we've continued to decelerate the capacity growth as we've gone through the year with fourth quarter capacity growth plans now is 1.9%. That's a significant reduction from previous guidance and giving us a full year capacity growth of 4%. So consistent with what we said at the beginning of the year, if we saw the opportunity to trim capacity, we would do so. And you can see the capacity plans for all of the airlines on the chart.

And finally, before taking your questions, just to reiterate that our guidance remains unchanged from the guidance we gave you on the 26th of September update. So our current fuel prices and exchange rates, IAG expects its 2019 operating profit before exceptional items to be EUR 215 million lower than 2018 pro forma, which was EUR 3.485 billion. Passenger unit revenue is expected to be slightly down at constant currency, and nonfuel unit costs are expected to improve at constant currency.

So I'll hand back now to the operator, and we will start taking your calls.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from the line of Daniel Roeska from Bernstein Research.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [2]

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Two questions then, one on LATAM and the Delta move. Could you comment a little bit how these changes kind of your view on joint venture prospects to South America, and generally, how you would view the South American market with the Delta/LATAM JV in place and your competitive position vis-à-vis that? And then secondly, could you update us on the current level of non-European ownership and maybe any chance or any thoughts about how to address the permitted maximum? And what's the time frame for that?

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

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Thank you. I suppose I should start by complimenting Delta on their move to acquire a 20% stake in LATAM, which, for them, I think, was a very good, strategic move. As you know, our close partner, Qatar, has a 10% stake in LATAM, and we continue to have a good relationship with LATAM. But this clearly does potentially change the nature of that relationship. Like others, we were disappointed when the Chilean court refused permission for our joint venture with LATAM to Chile. We did have or do have approval to Brazil. But clearly, having approval in one country and not in another does create logistical challenges to see how that could operate. So we continue to have discussions with LATAM in relation to that. The market is an important segment for us. We have a lot of direct services, and that's one of the strengths of IAG, and particularly the Iberia network, with the direct distribution that we have into Latin America. And it remains an important focus market for us. So we will give you some updates at Capital Markets Day on Friday week in relation to that.

And on your second question, nothing new to say. And again, we may well -- in fact, we will have some comments to make when we talk to you on Friday week at our Capital Markets Day presentation.

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Operator [4]

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And our next question comes from the line of Savi Syth from Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [5]

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Just -- I know you don't really necessarily like to break out premium, but we've had -- heard some commentary from the U.S. carriers as well as Air France on softness on the premium cabin and premium demand. I was wondering if you can provide any color on what you're seeing there from kind of a corporate and premium basis. And then just second on the cargo side, any color on what -- if there's any change in trend or if there's any kind of change in strategy in response to the softness there?

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

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Yes. We don't split out premium. But just to comment, our premium traffic continues to be very much in line with our plans. Corporate traffic is good. We're not seeing any change in trends as we've gone through the year. So there's -- I'm not sure what others are seeing, and I haven't had the chance to look at the specific comments from Air France-KLM, but we're not seeing anything that would cause us to highlight a change in the performance or in trends. They're very much as we would have expected.

And on cargo, I think what the cargo -- or cargo is seeing a structural -- continuing structural disconnect between the supply of capacity and the demand. And we have been talking about this for many years. And in fact, if you go back to when Steve was running the cargo business, he took the decision. What was that, Steve, 4 years ago maybe?

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Stephen William Lawrence Gunning, International Consolidated Airlines Group, S.A. - CFO & Executive Director [7]

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Pretty long.

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [8]

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Yes. Probably a bit longer to get out of dedicated freighters and to rely solely on belly-holds cargo space because we were seeing a structural change at that stage. So we're, I would argue, performing better than the industry in terms of our performance. So although our cargo revenues are down, I think they're ahead of where the industry would be, and that's largely because of the decisions we took strategically a number of years ago and our focus on premium airfreight, rather than the traditional bulk airfreight. So our business, like all airfreight, is being challenged by the combination of excess capacity and weaker demand. But I think we're performing better than the industry, and it reflects the strategic focus of our cargo people.

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Operator [9]

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

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [10]

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Can you give an update on kind of thinking around Thomas Cook slots, please? And then secondly, I don't know if you can say anything. But obviously, 1.9% capacity growth in Q4 for this winter quarter. Should we be thinking about a lower number in Q1, just given the base effect and all?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [11]

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Thanks, Jarrod. In relation to Thomas Cook, we've expressed an interest in a very limited number of slots at Gatwick. The general slot portfolio that the Thomas Cook has at Gatwick wasn't that very particularly attractive. And with the exception of some limited slots, we've no interest in any of the residual assets or activities of the Thomas Cook group. And as you will expect me to say, I think you're going to have to wait until tomorrow week for an update on capacity plans for 2020 and beyond. The one thing that I would say, and we've been saying this now for some time, is that given that we have seen softening macroeconomic conditions in 2019 and we've adjusted our capacity to reflect that, we've been very clear that we do have the ability to adjust capacity quickly. We still see growth opportunities next year, so you should expect us to give you ASK growth figures for 2020 and beyond. But it's clearly not going to be anywhere close to the guidance we would have given at Capital Markets last year. But we will update you tomorrow week.

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Operator [12]

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And our next question comes from the line of James Hollins from Exane.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [13]

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Just one from me, actually. I'm just wondering if you could give us an update on the BA pilot strikes. I think, Willie, you were quoted this morning saying, the fact they've not called for more is a good sign. Maybe just say is that a good sign? Where are we in? if you're a betting man, does this get dealt with positively quite soon?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [14]

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Thanks, James. I don't think I gave any quote this morning, but I am confident that this will be resolved. And yes, I know the team at British Airways are very much focused and engaged fully in resolving the issue, and I am very confident that we will see a resolution in the very near future.

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Operator [15]

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

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [16]

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If I could also ask 2 questions, please. The first one on your property, IT and other costs line. I appreciate you report multiple things in there, but it's flat year-on-year. And I'm just looking towards understanding how we should think about spending on IT, on maintenance and system upgrades versus the rationalization of suppliers you've talked about in the past, if it's possible to get color on that because it is down 5% year-on-year on a per ASK basis. And then second question on the North Atlantic. Obviously, the underlying performance suffered from European point-of-sale dominance or overweightness in the third quarter. Should the change in mix, U.S. versus European point of sale, have a meaningful impact on fourth quarter unit revenue trends on the North Atlantic?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [17]

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Thanks, Neil. In relation to IT, we continue to invest. In fact, our IT spend, going forward, will show an increase. We have a new CIO in place. His initial comments to us were that, in fact, he thinks we've got opportunities to reduce spend in some areas and use that to invest, and where possible, accelerate some of the structural change that we're making. But going forward, we will see further investment in IT infrastructure as we continue with our planned moves as most people are doing to hybrid cloud technology. So we may give you some feel for that on Friday week when we update you on our plan.

And on North Atlantic, no, I don't expect any issues in relation to North Atlantic in Q4. Our assessment of transatlantic is good. We see good demand, good corporate activity, good premium activity. It was clearly impacted in the third quarter by the British Airways pilot strike. But as Steve mentioned in his update there, the Aer Lingus performance in the third quarter was particularly encouraging and just reinforces the strategic decision to acquire Aer Lingus and to continue to invest in their transatlantic growth, which has proven to be very attractive for us. And you should expect that to continue going forward as Aer Lingus takes delivery of more A321s, A330s, and beyond that, the A321 ex-LR. So transatlantic is good. We see opportunities to expand the network, and we may have some news in relation to that. So that would apply to BA, Aer Lingus and to Iberia, so it's clearly an area that is continuing to perform well for us.

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Operator [18]

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And our next question comes from the line of Andrew Lobbenberg from HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [19]

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Can I -- again, this is a risky one, I wanted to delay discussing it until next week. But can you tell us anything about what's happening at LEVEL, where I think there was a change of leadership? Are we going to see that set up as an AOC or as a specific company? Where are we going with that? And then a second question relating to the ongoing CMA, the Competition and Markets Authority review of the North Atlantic and the JV between you guys and American. There was something in the press saying that the CMA expected to report by December. Do you know if that's still on track given the transfer from the EU to them was so predicated on Brexit having happened anyway? So have you got any colors to what plays out there?

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

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To be honest, Andrew, no, we don't have any more color than you have in relation to that. So that CMA activity continues. I'm not clear, and certainly our competition lawyers are not clear at this stage as to whether there will be an update in December. They have asked for information as we've gone through the year, and we continue to supply them with information, but I have no update that I can give you. And we'll just wait for them to issue their findings or to issue an update.

On LEVEL, yes, we will clearly say a little bit more about that on Friday week. We appointed Fernando Candela as the CEO. Fernando has got a great track record in low cost. Having established Iberia Express is probably one of the best low cost. Certainly, in terms of a low-cost subsidiary of an airline, Iberia Express is a fantastic success story, and he's now in charge of LEVEL. We've given him -- I think he's there 6 weeks now, so he's pulling plans, his plans together for that. And we'll give you some more flavor around that when we talk to you on Friday week.

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Operator [21]

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

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [22]

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Just one for me. There's been some kind of interlining agreement between JetBlue and Norwegian. And at the same time, I think Norwegian do seem to be making some progress with their turnaround. Have either of those things surprised you? And does it impact how you're thinking about the ambitions of LEVEL in the long-haul market?

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William Matthew Walsh, International Consolidated Airlines Group, S.A. - CEO & Executive Director [23]

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No. Neither of those developments surprise us. As you know, we interline with JetBlue through Aer Lingus. We've got a long-established and very successful and constructive relationship with JetBlue from an Aer Lingus point of view. We know the team very well there, Robin and Steve -- the CFO, Steve Priest, are both ex-BA people. So we know JetBlue very well, good business and clearly have ambitions. But we work with them through Aer Lingus, and we will continue to do that. So I wasn't surprised. It's very limited in terms of their interlining with Norwegian given the Norwegian network into North America. And we continue to wish Norwegian well. They've done what they needed to do, which is what we said. They would have to start significantly reducing growth, and in many cases, putting capacity if they were to improve the financial performance. They're clearly not out of the woods yet, and I think they still have a long way to go. But their initial measures are what you would have expected, and I hope they continue to turn the business around. But no surprises in either JetBlue or Norwegian and what they're doing.

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Operator [24]

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Our next question comes from the line of Damian Brewer from the Royal Bank of Canada.

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Damian Brewer, RBC Capital Markets, Research Division - Analyst [25]

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Two for me. First one, I know you don't like pulling this out. But could you maybe elaborate a little bit more given that the 787 issue still seem to be ongoing? We've had further delays to the 321LRs. What's the sort of direct impact of that has been on your profitability? Very wary of other CEO comments on aerospace companies' requirement to pick up the bill for this, rather than your own airline shareholders. So could you tell us a little bit more what that has been both directly but also maybe indirectly on the need to sort of rent an aircraft but also reducing your flexibility to respond to events in markets like Hong Kong? And then just secondly, with Norwegian out of the Irish market effectively for transatlantic, could you give us a little bit of feel about what the Q4 is starting to look like on Aer Lingus across the Atlantic, please?

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

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Okay. Thanks, Damian. Yes. As you know, we are disappointed with the issues with regard to Rolls-Royce engines on the 787s. As we've previously indicated, we can't share with you the commercial agreements that we've reached with Rolls to compensate us because they are confidential, but the financial impact is not the issue. It's very much, as you've said, it's the customer impact, and it's the impact on the flexibility that we have. We are seeing an improvement, so I think Rolls are certainly delivering better to what they had previously indicated, but there's still work to do there.

On the 321, we spent a lot of time with Airbus. It's very clear that the 321 Hamburg issues at Airbus have -- are going to take some time to fix, so we are anticipating delays on deliveries to 321s, and we've now replanned our network, particularly in regard to the Aer Lingus transatlantic, to reflect planned 321LR delays, which we see continuing through '20 and 2021 and maybe into the early part of 2022. So it's disappointing, but I suppose that the good news is we've got a better sense of the extent of these delays. We also have a better understanding as to what Airbus is doing to address them, and we've got greater confidence in the Airbus plan to actually resolve the issue. So I spent some time with the Airbus team a couple of weeks ago, and Guillaume Faury, I think, gave me the best and clearest undertaking that I've had for some time in relation to what Airbus are doing there.

With Norwegian out of the Irish market, I have to be honest it hasn't really changed anything. It's what we see with this low cost and very much with what we've seen with LEVEL impact. It tends to stimulate additional market demands. And when Norwegian went in with the prices they went in with -- which were clearly unsustainable from a profitability point of view. They stimulated some new demand, but it's at a very low price. And that demand doesn't continue to exist if these artificially low fares are removed from the market. So I don't anticipate any impact, positive or negative, on Norwegian's departure from the Irish market. It wasn't really impacting Aer Lingus at all. I think the evidence of that was the continuing strong performance of Aer Lingus through the period of competition with Norwegian and the Irish market.

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Operator [27]

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

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

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Also 2 questions from my side. It's -- maybe can you give us a little update on how do you see, particularly LEVEL, in France and Italy developing over the past months? Or it's a little bit over a month now since profit warning, just to get some more color if you see any recovery trends there. And second of all, you said on transatlantic, obviously Aer Lingus and Iberia are quite strong. How much of these strong results were that they just took over parts of BA's passengers in the strike? And how much was organic improvement?

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

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Thank you. No. I think all the evidence is that it was organic improvement, very limited transfer of customers from BA to Aer Lingus and just no evidence of transfer from BA to Iberia. So it's organic improvement.

And on the issue that we highlighted back in September on LEVEL and Vueling, particularly in France and Italy, it's as we had expected. So as you can see, we've held our guidance to what we have given you on the 26th of September, which should indicate to you that we're seeing it very much in line with what we had predicted at that stage. So Steve mentioned earlier that it's principally weakness in France and Italy, and that has continued to be the case. So where we've not seen a change in the trends that we had identified, which I had mentioned was -- really became evident in the -- maybe the end of the first -- the second week in September. It was pretty much at the end of the second week in September when we were seeing this change in activity. So the volumes are okay, but it's at a significant yield discount. So it's not so much a volume issue as a yield issue. And it is very much related to the low-cost segment, and it's very much related to France and Italy.

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Operator [30]

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

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Johannes Braun, MainFirst Bank AG, Research Division - Director [31]

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Just one from me on the Thomas Cook insolvency. To what extent does BA Holidays benefit from the insolvency? So was there a strong uptick in bookings recently? And also on a bigger picture, would you expand BA Holidays in the medium term to seize opportunities in the operating market on the back of demise of Thomas Cook? So what's the potential there?

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

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Yes. I think it's fair. We did see -- I would say, it was a little uptick in business at BA Holidays as you would expect at the premium end. And yes, we do see an opportunity with BA Holidays to continue to expand the business. It's a business that's been doing very well in recent years, and I think both the network and the quality, particularly focused on premium, but not solely focused on premium, but we did see an uptick in the premium holiday and at BA Holidays picked up after the demise of Thomas Cook, and we would expect that to continue into 2020 and beyond.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [33]

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So just as a follow-up, would the expansion of BA Holidays also involves a change in the business model of BA Holidays, thinking about taking commitment for hotel capacities and all that?

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

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No. We're not looking at a change in the business model. We think the business model is right and appropriate for BA Holidays in an IAG context. We are -- we do see an opportunity for BA Holidays to work more with the other airlines in the group as well, and so that's an opportunity for us. It is principally working with BA, but we do see an opportunity for BA Holidays to work, and we are doing some work with Aer Lingus and BA Holidays. So we think the business model is right, and we're not looking to changes in light of the demise of Thomas Cook.

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Operator [35]

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And our final question comes from the line of Mark Simpson from Goodbody.

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Mark A. Simpson, Goodbody Stockbrokers, Research Division - Analyst [36]

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Two questions. On the unit costs, staff looked good in the quarter. I'm just wondering if you can say where the main wins were coming from. And then just circling back on your comments with regards to Vueling in Italy and France, other carriers, low-cost carriers, say they haven't seen this. Is this an issue, you think, which is specific to Vueling? Or do you think that it's a broader market issue?

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

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Clearly, we think it's a broader market issue, but we're wrong. But certainly, the indications we have, it's a broader market issue. I think you've got to look at the Vueling network as well, some of the particular weakness we saw there was in the domestic markets in Italy, so we've been cutting capacity there. It may be that there was some Barcelona impact in it as well given that they would serve France and Italy to Barcelona. But it's very clear that the areas that they're seeing is in relation to France and Italy. And I'll hand over to Steve, just to go back on what he said on the unit costs.

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

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In terms of the employee costs, we sort of look at it in sort of 2 lenses: the productivity levels and the cost per head. And as I touched on earlier, it was primarily Iberia and Aer Lingus that were showing good productivity improvement. In terms of BA and Vueling, slightly impacted by disruption. So actually, productivity slightly dampened down. So then overall, it was an improvement but driven primarily by Iberia and Aer Lingus.

And then in terms of cost per head, the big movement in the quarter was a result of the BA bonus provision being released. Clearly, that's not structural change. That's just a one-off that's coming through.

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Mark A. Simpson, Goodbody Stockbrokers, Research Division - Analyst [39]

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In terms of Capital Markets Day, will you be giving us a bit more on the structural shifts occurring on that front?

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Stephen William Lawrence Gunning, International Consolidated Airlines Group, S.A. - CFO & Executive Director [40]

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Yes. We will touch on that at Capital Markets Day next week.

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

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Okay. Can I thank everybody for joining us on the call? And we look forward to seeing you all on Friday week at Waterside for our Capital Markets Day presentation.

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Operator [42]

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Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.