IAG: FULL YEAR RESULTS ANNOUNCEMENT

International Consolidated Airlines Group (IAG) today (February 27, 2015) presented Group consolidated results for the year to December 31, 2014.

IAG period highlights on results:
· Fourth quarter operating profit €260 million (2013: operating profit of €113 million) before exceptional items
· Revenue for the quarter up 9.9 per cent to €5,015 million, up 5.8 per cent at constant currency
· Non-fuel unit costs for the quarter down 0.8 per cent at constant currency
· Operating profit for the year to December 31, 2014 of €1,390 million (2013: operating profit of €770 million) before exceptional items
· Revenue for the year up 8.0 per cent to €20,170 million and passenger unit revenue for the year down 0.4 per cent at constant currency
· Fuel unit costs for the year down 7.8 per cent also down 7.8 per cent at constant currency.
· Non-fuel unit costs before exceptional items for the year down 1.9 per cent, down 3.9 per cent at constant currency
· Cash of €4,944 million at December 31, 2014 was up €1,311 million on 2013 year end
· Adjusted gearing up 1 point to 51 per cent and adjusted net debt to EBITDAR improved 0.6 to 1.9 times

Performance summary:

Willie Walsh, IAG Chief Executive Officer, said:
“We’re reporting strong full year results with an operating profit before exceptional items of €1,390 million which is up 80.5 per cent. Total revenue was up 8.0 per cent with non-fuel costs up 7.0 per cent and fuel costs up 0.6 per cent on capacity growth of 9.3 per cent.

“Iberia made an operating profit of €50 million compared to an operating loss of €166 million last year. The airline’s turnaround has been remarkable, both financially and operationally, and we’re very proud of its achievement especially its strong cost discipline. In 2013 we said our intention was for Iberia to breakeven in 2014 and it has fulfilled that promise.

“British Airways’ operating profit increased to €1,215 million up from €762 million last year which shows significant progress towards its long term targets. Vueling made an operating profit of €141 million, compared to an operating profit of €139 million in 2013, with the airline focusing on flexible growth.

“We achieved a strong unit cost performance, down 4.1 per cent, through increased productivity, supplier cost savings and lower fuel unit costs. The latter was boosted by the introduction of more efficient aircraft into our fleet and lower fuel prices in the last quarter of the year. However, the positive effect of the oil price reduction has been partly offset by hedging and significant currency impact.

“In the quarter, we made an operating profit before exceptional items of €260 million which is up from €113 million last year. Revenue for the quarter was up 9.9 per cent. Non-fuel costs were up 10.5 per cent and fuel costs decreased by 0.4 per cent on capacity growth of 5.8 per cent.”

Trading outlook

At current fuel prices and exchange rates, IAG expects in 2015 to generate an operating profit in excess of €2.2 billion, with total fuel costs of around €5.9 billion, based on capacity growth of approximately 5.5 per cent.

CONSOLIDATED INCOME STATEMENT

Financial review:

IATA market growth

In 2014 industry passenger load factor reached 79.7 per cent supported by stronger growth in demand rather than capacity increases. International load factors have displayed a downward trend throughout the year, particularly as a result of solid capacity expansion in Asia Pacific carriers. In addition, there has been a gradual easing in business confidence towards the end of 2014 which has weighed on some international travel in certain markets.

IAG capacity

IAG increased capacity in 2014, measured in available seat kilometres (ASKs), by 9.3 per cent. The increase was across all regions, reflecting the full year impact of Vueling, the restoration of routes as part of Iberia’s Plan de Futuro and changes to the British Airways network including up gauging related to new fleet and additional flying from more efficient replacement aircraft. Across the network, passenger load factor for the year was 80.4 per cent; although a decrease of 0.4 points compared to last year, it remains higher than IATA industry average of 79.7 per cent.

Market segments

In 2014, the IAG Domestic and European market capacity increases reflect:
· Full year impact of Vueling forming part of the IAG Group and its year-over-year network growth;
· Additional frequencies and new destinations for Iberia as part of the Plan de Futuro; and
· More efficient replacement aircraft for British Airways at London Gatwick and London City, increasing frequencies and introducing new routes.

While the Domestic and European markets were very competitive our passenger load factors improved in both regions, but remain lower than the European average reported by IATA, influenced by the growing presence of the low cost carriers.

North America continues to represent the largest part of the IAG network and with the highest passenger load factor. At British Airways, capacity increased primarily from up gauging aircraft with the Airbus A380 flying to Washington D.C. and Los Angeles, and the Boeing 787 on routes such as Newark, Philadelphia and Toronto. At Iberia the increased capacity reflects additional frequencies to Chicago and New York. IAG passenger load factor for North America was down 1.5 points, consistent with the year-over-year decrease reported by IATA. Despite the decrease in volume our unit revenues improved.

Latin America and Caribbean capacity increase reflects additional frequencies to Brazil and Mexico by both British Airways and Iberia. As part of the Plan de Futuro Iberia has also restored routes such as Santo Domingo and Montevideo and increased frequencies to Panama. Passenger load factor in this region decreased but overall remains high at 81.4 per cent.

Africa, Middle East and South Asia capacity increase primarily reflects the up gauging of aircraft to the Airbus A380 on the Johannesburg route and additional frequencies to Accra. Flying has been reduced in North and West Africa by British Airways and Iberia due to weakening demand resulting from the Ebola crisis and political unrest. Passenger load factor improved 0.4 points.

In Asia Pacific, the capacity increase is driven by the full year impact of routes added last year and the introduction of the Airbus A380 to Hong Kong. In 2014, the Hyderabad and Chennai routes see more capacity reflecting the up gauge to the Boeing 787. Passenger load factors increased to 82.1, the second highest region on the IAG network.

Acquisitions

The 2014 performance includes Vueling for the full year, however the comparative period only includes Vueling results from the acquisition date April 26, 2013.

Revenue

Passenger revenue

Passenger revenue for the Group increased 9.6 per cent for the year on a capacity increase of 9.3 per cent. At constant currency the increase was 8.7 per cent, with a unit revenue decrease of just 0.4 per cent. The Group carried 77 million passengers, up 15 per cent from 2013.

At the Group level passenger revenue performance was based on flat passenger yields (passenger revenue/revenue passenger kilometre) at constant currency and a marginal decrease in load factor of 0.4 points. The passenger yield performance was stronger out of London, up 1.6 per cent benefitting from the continued recovery of the UK economy, which grew by 2.6 per cent. Passenger yields in Madrid and Barcelona were down by approximately 3 per cent for the year, but with improvements in the fourth quarter as Spain’s economy started to strengthen.

From a market perspective, our revenue performance was strongest in North America reflecting consumer confidence. Meanwhile Europe and Domestic markets saw marginal declines in unit revenues reflecting competition and IAG capacity changes. The World Cup, political unrest, Ebola and the redeployment of Venezuela capacity had a mildly dilutive effect on Latin America and Africa and Middle East revenues.

Cargo revenues

In April 2014, IAG Cargo exited its longhaul freighter business and formed a partnership with Qatar Airways to purchase capacity on its air cargo freighters. While the new operating model reduces total cargo revenue reported, it is more flexible and generates better margins whilst maintaining the key trade lane between Hong Kong and Europe. Cargo revenue for the year was down 7.5 per cent or 6.6 per cent at constant currency. Excluding the longhaul freighter business, volume measured in cargo tonne kilometres (CTK) is up 6.7 per cent but with excess capacity in the market the underlying yield per CTK is down 3.2 per cent at constant currency.

Other revenue

Other revenue includes the BA Holidays programme, third party maintenance and handling revenues, and aspects of the Avios customer loyalty programme. Excluding the adverse impact on the Group’s handling and maintenance revenues due to the consolidation of Vueling, other revenue increases approximately 10 per cent. Half of this improvement is related to growth at BA Holidays, with the remainder primarily from recovery of Iberia’s maintenance and handling activities. The Avios customer loyalty programme performance is also increasing, benefitting from the increase in the fair value of a point and an underlying improvement. A €67 million one-off charge was recorded in the fourth quarter of 2013 at the total revenue level.

Expenditure before exceptional items

Employee costs

Employee costs are up 4.9 per cent. At constant currency, total employee costs are up 2.2 per cent and down 6.7 per cent on a unit basis. On average the Group employed 59,484 people (measured in average manpower equivalents ‘MPE’) a decrease of 1.0 per cent versus last year driven by headcount reductions flowing through from the Mediation Agreement reached by Iberia last year.

In 2014, Iberia reached further long-term labour agreements with all its employee groups, resulting in an additional employee restructuring charge of €260 million included as an exceptional item. The new agreement allows 1,427 exits, in addition to the original 3,141 from the Mediation Agreement. At British Airways efficiency initiatives were implemented, including mixed fleet and other productivity improvements. Vueling has increased productivity through its growth however has incurred certain unit cost increases, such as overnight expenses on international routes and salary inflation under its new crew collective agreement. Productivity increased 10.4 per cent for the Group, with improvements at each airline.

Fuel, oil and emissions costs

Total fuel costs are up 0.6 per cent and up 0.9 per cent at constant currency, on a 9.3 per cent capacity increase. Fuel unit costs are down 7.8 per cent at constant currency (ccy), benefitting from more efficient aircraft, improved operating procedures and lower fuel prices net of hedging.

Lower fuel consumption per ASK has contributed to half of the unit cost improvement for the year. This was driven by the fleet replacement programme with the more efficient fleet types, such as the Airbus A380, A320 family and Boeing 787. In addition, British Airways and Iberia have implemented procedures during take-off and landing which has lowered fuel consumption.

The US dollar foreign exchange impact on fuel costs net of hedging for the first nine months has been positive for the Group against the sterling and the euro. However, the strengthening of the US dollar towards the end of the year has resulted in a net adverse foreign currency impact on fuel for the fourth quarter.

Supplier costs

Total supplier costs for the year have increased by 6.0 per cent. At constant currency and on a unit basis supplier costs were reduced by 4.4 per cent. This is due to two main factors, productivity and efficiency improvements across the Group, and the final effects of consolidating Vueling in the Group (c. 2 points).

The Group’s supplier unit cost performance was solid with improvements at British Airways and Iberia, while Vueling was flat. Through cost initiatives, joint procurement and the continued benefit of the synergies programme, savings have been achieved, including catering costs, lounge synergies and maintenance.

By supplier cost category:

Handling, catering and other operating costs increased 6.8 per cent, with 1.5 points of adverse currency. The discontinuation of the Cargo freighters reduced current year costs by c. 1.5 points. The BA Holidays business raised costs by c. 3 points with improvements in Other revenues. The underlying increase is related to the additional capacity.

Landing fees and en-route charges were higher by 9.4 per cent, with 1 point of adverse currency. The inflationary increase was on average 2.5 per cent across the Group while the discontinuation of Cargo freighters improved costs by c. 1 point. The remaining increase is driven by higher capacity.

Engineering and other aircraft costs were up 3.2 per cent, with 1 point of adverse currency. The discontinuation of freighters and the effect of Vueling consolidation improved the costs by c. 8 points. In the fourth quarter a €28 million (c. 2 points) provision for the obsolescence of spare parts was recorded. The remaining underlying increase reflects more aircraft and higher flying hours, increases in third party maintenance and inflation.

Property, IT and other costs are up 0.5 per cent but are down excluding currency reflecting the Group’s commitment to cost control. Selling costs increased 9.4 per cent, with 1 point of adverse currency impact, primarily from a higher number of passenger bookings.

Ownership costs

The Group’s ownership costs were up 17.4 per cent, with 3 points of adverse currency. The increase is related to a higher depreciation charge related to the Boeing 747s due to a reduction in estimated useful life, with a year-over-year impact of €81 million (c. 6 points). The underlying rise in ownership costs reflects inflation and an increase in owned and leased aircraft, up 6.5 per cent.

Operating result

The Group’s operating profit, before exceptional items, for the year was €1,390 million, a €620 million improvement from last year. This improvement reflects the Group’s approach to dealing with significant capacity increases related to the delivery of new aircraft and market opportunities, with a minimal negative impact on unit revenues (at ccy) while benefitting from productivity improvements, non-fuel cost savings and fuel cost reductions net of hedging.

Non-operating costs

Net non-operating costs after exceptional items were €201 million, down from €300 million last year. The decrease is related to:
· Lower net finance costs since the conversion of the £350 million bond, reducing costs by €60 million;
· Reduction in net finance charges for pensions of €49 million, due to lower deficit;
· Increase in gain on the sale of the available for sale financial assets of €91 million, primarily Amadeus;

Offset by:
· Losses not qualifying for hedges and retranslation charges on borrowings, a swing of €131 million over the prior year’s credit position.

Taxation

The majority of the Group’s operations are taxed in the UK or Spain. In 2014, the corporate tax rate in the UK decreased to 21 per cent (2013: decreased from 24 to 23 per cent) while the corporate tax rate in Spain was 30 per cent (2013: 30 per cent).

Excluding the impact of the tax rate change in Spain and the recognition of a deferred tax asset related to prior period losses, the Group’s effective tax rate for the year is 22 per cent (2013: 8 per cent). The tax credit was €175 million (2013: €76 million charge).

Profit after tax and earnings per share

The Group’s profit after tax and after exceptional items was €1,003 million (2013: €147 million), with earnings of 48.2 euro cents per share (2013: 6.4) and 46.4 euro cents per fully diluted share (2013: 6.3).

Exceptional items

For a full list of exceptional items, refer to note 3. Below is a summary of the significant exceptional items recorded.

In 2014, net exceptional charges at the operating profit level were €361 million (2013: €243 million). The exceptional charges for the year include €260 million employee restructuring costs related to Iberia’s labour agreements, currency differences charge of €180 million related to funds held in Venezuela, partially offset by the reversal of the Iberia Brand impairment of €79 million.

A non-operating exceptional item was recognised on the gain on sale of Amadeus of €83 million and for the recognition of deferred tax assets, net of all other tax impacts on exceptional items, of €413 million.

In 2013, exceptional charges included employee restructuring costs at Iberia of €268 million, partially offset by reduced US employee benefit obligations at British Airways of €170 million. Iberia also recorded restructuring costs for aircraft of €44 million. The Group recognised net business combination credits of €5 million related to Iberia and Vueling. In addition, there was a charge to revenue of €106 million for the timing of the recognition of deferred revenue. A non-operating loss on acquisition was recognised of €17 million.

Exchange rates

Exchange rate movements are calculated by retranslating current year results as though they had been generated at prior year exchange rates. The reported results are impacted by translation currency from converting British Airways’ results from sterling to the Group’s reporting currency of euro. British Airways represents approximately 70 per cent of the Group’s revenues and operating expenses which causes a significant variation year-over-year. From a transaction perspective, the Group performance is impacted by the fluctuation of exchange rates; primarily sterling, euro and US dollar. The Group exchange rates used and the estimated impact of translation and transaction exchange rates on operating profit before exceptional items are set out as follows. At constant currency, the Group’s operating profit before exceptional items would have been €1,459 million, €69 million higher than the reported operating profit.

Financial performance by Brand

British Airways operating profit was £975 million, a £324 million improvement over prior year. British Airways continued its fleet replacement programme, with the delivery of five additional Airbus A380s and four Boeing 787s. The increase in gauge of these aircrafts is contributing in part to the 5.9 per cent rise in capacity for the year. British Airways’ strong result is based on increasing revenues and a strong cost performance.

Iberia operating profit was €50 million, a €216 million improvement over prior year. Iberia has made significant progress during the year, resuming services and launching new routes. Capacity for the year was up 3.6 per cent with a flat revenue performance reflecting the competitiveness of the market. On the cost side, Iberia has reduced costs in employee, fuel and supplier reflecting the progress of its Plan de Futuro with its 30 initiatives across all key areas.

Vueling operating profit was €141 million, a €2 million improvement over prior year. Vueling’s focus in 2014 was on flexible growth with capacity up 24 per cent, new bases in Brussels and Rome, and a new collective agreement with crew. Vueling introduced 20 additional aircraft by year end with a total fleet of 88. Revenue was up 22.0 per cent and operating margin was 8.2 per cent.

Balance sheet

Property, plant and equipment and intangible assets

The increase in property, plant and equipment in 2014 is mostly related to the Group’s investment in aircraft. On balance sheet fleet includes:
· Delivery of 15 new aircraft, including five Airbus A380s, four Boeing B787s, two Boeing B777-300s, three Airbus A320s and one Embraer E190s;
· Pre-delivery payments related to future deliveries;
· Positive translation exchange; offset by
· The sale and leaseback of three aircraft; and
· Depreciation.

The intangible asset increase is primarily related to software additions and the reversal of the Brand impairment.

Other non-current assets

British Airways’ defined benefit pension plan assets increased by €400 million from higher interest rates, offset by the sale of Iberia’s investment in Amadeus.

Shareholders’ equity

In 2014, shareholders’ equity decreased €424 million from movements in other reserves. Profit after tax for the Group was €1,003 million offset by adverse movements in the fair value of cash flow hedges of approximately €1,235 million primarily related to lower fuel prices, a net decrease mainly related to the sale of Amadeus recycled to the income statement, an increase in post-employment obligations of €400 million from a decrease in corporate bond rates and a currency translation benefit of €168 million from the weaker euro.

Other non-current liabilities

Non-current liabilities are up due to the increase in the British Airways defined benefit obligation, higher net derivative liabilities from lower fuel prices and an increase in provisions for Iberia’s current year restructuring charge. These impacts were partially offset by a reduction in the deferred tax liability balance from the recognition of Iberia’s deferred tax asset.

In respect of cash, cash equivalents and interest-bearing deposits and interest-bearing long-term borrowings, see Liquidity and capital resources.

Liquidity and capital resources

The primary source of the Group’s liquidity over the past two years has been cash generated from operations.

In 2014 cash generated from operations increased to €1,862 million from €1,218 million. The improvement in the year is proportionate to the increase in operating results achieved by the Group. The cash flows generated from operating activities is after payments made to pension schemes of €409 million, and after interest and tax payments of €277 million.

Net cash flow from investing activities

The Group invested €2.6 billion in fixed assets during the year, primarily represented by fleet transactions and increased its current interest-bearing deposits by €1.4 billion. The sale of Iberia’s investment in Amadeus generated net proceeds of €572 million.

Net cash flow from financing activities

The Group’s proceeds from long term borrowings relates to aircraft delivery in the year, and includes $431 million drawn down from the Enhanced Equipment Trust Certificates (EETC) issued in 2013. In addition, debt repayments of €1 billion were made during the year.

Cash, cash equivalents and interest-bearing deposits

At December 31 the Group’s cash position improved by €1,311 million, generated from the Group’s operating activities and the sale of Amadeus. The net cash flows from operations covered the repayment of borrowings including finance leases; funded the acquisition of some fleet and all non-fleet assets; and contributed to the current year increase in cash.

Liquidity risk management

Adequate cash levels are maintained by each operating company. The cash balance at December 31, 2014 comprised €3,206 million held by British Airways, €870 million held by Iberia, €651 million held by Vueling and €217 million held by the parent and other Group companies.

In addition, the Group had undrawn general and committed aircraft financing facilities (primarily available in US dollars) in euro equivalent of €2,975 million (2013: €3,686 million). The Group also had undrawn overdraft facilities of €13 million (2013: €12 million) and undrawn uncommitted money market lines of €32 million (2013: €30 million).

Capital risk management

IAG’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to maintain an optimal capital structure in order to reduce the cost of capital, and to prepare the Group to provide future returns to shareholders. The Group monitors capital using the adjusted gearing and adjusted net debt to EBITDAR.

The Group’s cash increased €1,311 million during the year due to improved cash flows from operations. Net financing was up €1,000 million and reflects the draw down on the remaining EETC and refinancing of the Iberbond. Including adverse exchange and other non-cash movements of €495 million, the Group’s net debt was €184 million higher. Adjusted net debt was up €380 million reflecting the increase in net debt and the additional off balance sheet operating leases.

Excluding the remeasurement of employment benefit obligations, IAG’s total adjusted shareholders equity for the year was broadly flat, with the profit after tax offset by the fair value movements on cash flow hedges. Combined with the increase in adjusted net debt, this drives adjusted gearing up 1 point to 51 per cent. Adjusted net debt to EBITDAR improves 0.6 to 1.9 times.

Capital commitments and off balance sheet arrangements

Capital expenditure authorised and contracted for amounted to €9,027 million (2013: €8,745 million) for the Group. The majority of this is in US dollars and includes commitments until 2021 for 88 aircraft from the Airbus A320 family, 34 Boeing 787s, 26 Airbus A350s, eight Airbus A330s and four Airbus A380s.

IAG does not have any other off-balance sheet financing arrangements that currently have or are reasonably likely to have a material future effect on the Group’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditure or capital resources.

Strategic framework

Our mission is to be the leading international airline Group. This means we will:
· Win the customer through service and value across our global network;
· Deliver higher returns to our shareholders through leveraging cost and revenue opportunities across the Group;
· Attract and develop the best people in the industry;
· Provide a platform for quality international airlines, leaders in their markets, to participate in consolidation;
· Retain the distinct cultures and brands of individual airlines.

By accomplishing our mission, IAG will help to shape the future of the industry, set new standards of excellence and provide sustainability, security and growth.

IAG’s six core strategic objectives are:
· Leadership in IAG’s main cities;
· Leadership across the Atlantic;
· Stronger Europe-to-Asia position in critical markets;
· Grow share of Europe-to-Africa routes;
· Stronger intra-Europe profitability; and
· Competitive cost positions across our businesses.

Principal risks and uncertainties

The 2013 Annual Report and Accounts refers to a risk of retaliatory action from Non-EU governments should the EU extend their Emissions Trading Scheme (EU ETS) from just intra EU flights to all flights through EU airspace. This risk was mitigated in 2014 by the EU’s restriction of EU ETS to intra-European flights until the end of 2016. This EU move was in response to progress made by the International Civil Aviation Organisation (ICAO) in developing a roadmap for a global market based mechanism to tackle aviation emissions.

The 2013 Annual Report and Accounts refers to residual Iberia Transformation risks related to receiving union general assembly approval of negotiated agreements and the refinancing of 16 Airbus A320 aircraft. During 2014 the required union approval was obtained and the aircraft refinancing successfully executed.

Iberia continues to experience problems in repatriating cash balances held in Venezuela with all balances relating to 2013 receipts and seven months of 2014 receipts being trapped in Venezuela. An exceptional charge has been recognised in the year revaluing the cash balance to better reflect the economic reality, and is explained in note 3.