Ladies and gentlemen, thank you for standing by, and welcome to the Half Year 2020 International Consolidated Airlines Group Earnings Conference Call. At this time, all participants are in a listen only mode. I must advise you that this conference is being recorded today, Friday 31st July 2020, and now I would like to hand the conference over to your first speaker today, Antonio Baski, the Chairman of IAG. Please go ahead, sir.
Good morning. This is Adonia Vasquez. Welcome to the Resolve Presentation of IAG. I will give you a few words of introduction before handing over to Willie. This has, certainly, the worst quarterly result in our history.
And COVID-nineteen has been the worst event to have affected the aviation industry. This morning, we announced a planned capital increase of to 1,000,000,000, which the management team will take you through. Result meeting as IAG Chairman. Following a very thorough and robust succession planning, I intend to share the board for the remainder of 2020 and then retire early in January. After 9 years as a Chairman of IG and 2 years before as a CEO and Chairman of Iberia, it is time to hand over the reins.
The new chairman will be Habiran, currently a non executive director of 5G and also Chairman of Diageo. Javier and I have worked together with the last year, and I have a very confidence that he's in the right person to take the look forward. It has been for me a privilege to have led the IG Board since the group who was from the merger of British Airways in Iberia. In January 2011. And I'm fully confident that our previous achievement put us in a very good position to face industry towering crisis.
Before I hand over to the management, I would like to thank Willie for all the year, who has been leading the management team and specifically for delaying his retirement to enable the IAG management team to remain in the role. To deal with the initial impacts of the COVID-nineteen crisis. I look forward to welcoming Luis Cajego as a CEO from September. His proven track record in transforming business and his great leadership will certainly drive the group to a new era. With that in mind, and I will hand over to Willie.
Thank you.
Thank you, Antonio, and good morning, everybody, and allow me to take this opportunity to thank Antonio for the job he has done. As Chairman of IAG and in supporting me in my role as the chief executive since we've created IAG I very much appreciate his support and his guidance and thank him for everything he has done and congratulate him on an excellent career. It's clear that we went into this crisis in a strong position both strategically and financially. However, the COVID-nineteen events have caused substantial damage and losses for the global industry and for us within the industry. Today, our first half pre exception of operating loss that we reported of 1,000,000,000.
We acted quickly to offset the negative impacts of the downturn. We've taken all responsible actions to bolster our liquidity and to protect the long term future of the business. Like most in the industry now and I think consistent with the latest forecast, we believe it will take probably until 2023 or 2024. So at least 2023 before we see passenger demand recover to 2019. We have a clear path for returning to service.
We're clear in terms of what we need to do to right size the business and to restructure the airlines to what's right as that demand gradually returns. And based on our current capacity planning scenario, we would reach breakeven in terms of net cash flows from operating activities during the 4th quarter of this year. And as to 1,000,000,000, which will further strengthen our financial and strategic position. So if we look at this proposed increase, we believe it will improve our resilience. It's fully supported by our largest shareholder, Qatar Airways and it will allow us to strengthen our balance sheet and reduce leverage.
Clearly, enhances our liquidity and helps us to withstand, say, prolongs extended downturn in air travel. And we've sized this increase on a commercial downside case, looking at a stress recovery that Steve will take you through later on. It will give us additional flexibility and provide us the opportunity take advantages of any opportunities that present themselves as the demand recovers and enable us to continue to invest to improve the performance of the business and exploit any new innovation important to remind you, and I think this is where we have an excellent track record that we will selectively distribute capital to the operating companies based on our, clearly defined capital allocation disciplines. And this will enable us to focus on long term value drivers for the airline as we come through this crisis. So this is all designed to help us to capitalize on our strengths and to enable us not just to survive this immediate downturn, but more importantly to ensure that we have a business that's fit for purpose as we come out of this crisis.
And we have a successful improvement business model, and you've seen this chart many times before, We believe we have a portfolio of world class brands and operations. We have leadership positions in key markets. And we have a common platform and integrated platform that we continue to build out that delivers significant synergies to the operating companies. Our airlines give an unrivaled customer proposition. They have a clear track records of efficiency and innovation.
And we look at pursuing sustainable value accretive growth. And all of it underpins by our continuing commitment to environmental sustainability. And if you look at our track record in terms of consolidation since IAG was formed in 2000 and 1. The excellent acquisition of BMI to strengthen our position as Heathrow welling in 20 13, our Lingus in 2015, the slot acquisition, from Monarch in 2017. And then more importantly, where we explored an option to acquire Norwegian and having investigated it walked away when we were clear that we could not generate the value that shareholders would expect.
So we are not driven to consolidate. We will only consolidate where we believe that that consolidation will make sense for our, shareholders And that is the case with Air Europa, where the strategic argument remains strong and the synergies remain very encouraging. We've also helped in consolidation through the creation of joint businesses. And while our industry is prevented from genuine cross border consolidation, we have been able to pursue a number of attractive joint businesses starting with the exploitation of the transatlantic joint business, which we signed in October 2010, the creation of the Siberian joint business with JAL in 2012, Finn Air's edition in 2013 to both the Transatlantic and then in 2014 to the Siberian 1, Qatar joint business in 2016. And most recently a joint business with China Sudden in China.
And all of this don't forget, help to deliver synergies that went well in excess of the targeted synergies for the business. Achieving $860,000,000 of annual synergies by 2015 through the BA Iberia merger. We've a track record of delivering strong and improving profitability with targeted margins between 12 and 15%. And those targets remain relevant for the business going forward. And I know Luis will have an opportunity to comment on that later on.
Royce targets, our initial target of 12% changed in 2016 to 15%. And again, we believe that these are relevant to the medium term targets for for the business. So we have a strong track record, delivering on those targets helped to improve our financial position as we went into this crisis with our adjusted net debt to EBITDA at very respectable levels as you can see from the chart on the left hand side. And very important as we've stressed throughout this crisis our cash position was absolutely critical. So entering into the crisis above our cash, targets which is a policy of holding 20 percent of traditionally we look at the trailing 12 months revenue.
So in 2019, December 2019, we had 26 percent of trailing 12 months revenue in cash terms with additional facilities, bringing total liquidity at 30 4%. So we believe this is an important buffer. It's clearly stood the test of time and enables us to take the actions that have been required in the short term and most importantly to continue to put us in a position where our liquidity remains healthy today. And we've been pleased to fulfill the ambition that we expressed when we created IAG to reward our shareholders. And we believe that this is fundamental principle and a requirement of any business to ensure that shareholders get rewarded for the money, the capital that they invest and we have a strong track record.
And I know that the, the board of management remain absolutely committed to reintroducing dividend payments at the right time for the business going forward. And we will not walk away from our commitments on environmental performance. We've led the industry in tackling climate change. Our actions through this crisis reinforced us some of the painful measures that we've had to take will help us to achieve these carbon efficiency targets. And we believe it's absolutely critical that we in the industry and the industry collectively demonstrates our commitment to addressing the environmental impact of aviation and to do everything we can.
So our targets are ambitious. Getting to net 0 by 2050, fully aligned with covenant ambition and fully committed to achieving those targets despite the crisis that we're going through at the moment. I'll now hand over to Steve to take you through the formal results presentation, and we'll talk to you later on.
Thanks, Willie. Good morning, everyone. I'll now take you through the half one results and also our response to COVID-nineteen. We thought it would be useful to set the context of the results. So to do that, we've We borrowed 2 slides from IATA.
The slide on the graph on the left shows passenger demand since the year 2000. And as you can see, as lots of people like to use the word unprecedented, but this truly is an unprecedented event. You'll have to squint to see the global financial crisis or SARS or many of the other crises that we faced since 2000. But you won't need to do any squinting to see the COVID-nineteen events. So these really are unprecedented times The graph on the right shows that airlines registered in Europe have also been very heavily impacted.
Only Asia Pacific has had a greater impact. And I think for Europe, this is partly due to the modest level of domestic flying and the higher level of flying across international boundaries. And hence, government restrictions and travel advisories can have a disproportionate effect So that's the context. Let's turn to the numbers. In quarter 2, you'll see the passenger revenue was down 96.7 percent at $198,000,000.
That's consistent with the ASK reduction of about 95%. You'll see the cargo revenue, it's actually been strong in the quarter and actually recorded a record level of revenue despite volumes being down about 37.5%. And so overall, revenue was down 89%. If we look at the costs, despite all of the hard work that we've done on costs and continue to do on costs, not just temporary, but restructuring the cost base. At the moment, our costs reduced about 63.5%.
So all in all, for Q2, we generated a pre exceptional operating loss of 1365. And if we add that to the minus 5.35 in Q1, we get a half year of pre exceptional operating loss of 1,900,000,000 I'd say that's pretty exceptional. So let's turn and talk about the exceptional charges. 3 items in the exceptional charges for the first half You'll recall, I believe, the Q1 results I took you through in quite a lot of detail the nature of the fuel over hedging loss, which at the time was at 1, 325,000,000. And we explained that actually that over hedging loss could actually increase when we mark to market our excess hedge book at the end of April using the latest forward curve.
At that point, it looked like the hedge loss could go up as high as 1,500,000,000. There have been 3 factors that have moved that number, during the course of quarter 2. The actual commodity price has increased. Which is actually helpful in this scenario. The ramp up of our capacity has been slower, which means we've had to de designate more hedges and the FX rates have been somewhat favorable.
So overall, that 1325 at the end of Q1 has come down to 1269 for the half year. We also do hedge some of our overseas currencies for revenue purposes And we are over hedged on some of those. And so we've had to take an over hedge loss of 38,000,000 in the half as well. And so overall, our over hedging losses in or over hedging charge in half 1 is 1307. In Q2, as we trialed in the Q1 results, we did decide to impair the 30two-seven forty seven-four hundred aircraft that we have.
That's the entire fleet remaining fleet. We also impaired the entire remaining fleet of the A340600s as well. And a number of other aircrafts. So all in all, impairing those aircraft and the related inventory has led to an impairment charge of 1,000,000. And finally, in terms of exceptional charges in the first half, as you know, we received a notice of intent to find from the Information Commissioner's Office in July 2019 for the sum of 183,000,000 sterling We've now booked a provision for what we expect the outcome to be, which is a provision of 20,000,000 sterling.
So moving on from the exceptional charges, let's turn to debt and liquidity As you'll see, since March, our debt has increased by 2,000,000,000 up to 16,500,000,000 Some of the key items in there are clearly, we have received loans in Spain for both dwelling and Iberia that are backed by the Spanish government under the ECO program. That was about 1,000,000,000 of loans. As you know, we also tapped the commercial paper program in the UK, the CCFF for €300,000,000 as well. And we have taken in aircraft deliveries, which have also added to the debt. So overall, gross debt has increased 2,000,000,000 Cash has reduced $900,000,000 and hence, net debt has gone up $2,900,000,000.
Net debt to EBITDA is 4.2 times If I look at cash, the cash position is 6,000,000,000 at the end of June, which represents 24 percent of 20.19 revenues. We came into the year at 26%. So I think we've done a very good job maintaining the cash position. And similarly liquidity is at 8,100,000,000 as Willie mentioned earlier, which represents 32 percent of 20.19 revenues. We came into 2020 at 34%.
We continue to maintain a strong liquidity position despite the challenges of Q2. Liquidities are a nice lead into the response to COVID 19 because a lot of our focus has been how to optimize liquidity during the course of the crisis The way we've looked at this exercise is to break it into a number of work streams. And we've just given you an overview of those work streams on this slide. Clearly, operating cost reductions are key reducing the levels of fixed cost, restructuring the business and also reducing capacity to the optimal level. Clearly, reducing CapEx to the minimum is key, reducing fleet deliveries and fleet delivery payments has been a big exercise.
I'll take you through more of that in a moment. Working capital management, increasing the focus on this to make sure we maintain the cash position and also all the other activities to bolster liquidity, mainly treasury activities, but other activities on top of that I'll now take you through a slide on each of those work streams to give you a bit more of the flavor of what we've been doing. If we turn to operating cost cash burn, at Q1, we said for April and May, that a regular flying program would have had an operating cost cash burn of $440,000,000. And we'd, we're confident we've reduced that to $200,000,000 for April or May. Actually, for quarter 2, we've reduced that down to 190 3,000,000.
So we overachieved on what we were attempting to do, but we did say we were, you know, we were not content with 200 We're showing 205 here because one of the key characteristics of Q2 has been a very strong cargo demand. We've run 1800, nearly 1900 additional rotations that are cargo driven And we hadn't factored in the operating costs related to those flights when we came up with our estimates for April and May. I must add just for clarity, these numbers do not net off the cargo revenue. These are purely cost numbers the revenue sits outside of these numbers. So we think it was very worthwhile in carrying those additional operating costs to generate that additional cargo revenue.
If we look to the months of July August, once again, we would have expected to have a regular flying program cost of about 4 55. We think we will, post our management actions have a cash burn about $205,000,000 per week during those 2 months. And it's worth highlighting the fact that all of these numbers are per week rather than per month. So $205,000,000, pretty much the same as Q2, but do bear in mind our planning scenario at the moment is to fly 10 points more capacity in these months than we did in Q2. So we think that's an improvement in performance.
Once again, these are not static pictures. We continue to work on how to minimize the operating cost cash burn. We'll move to the next slide. Let's talk about capital expenditure. And what we presented at of Market's Day in November 2019 was for the 3 years 2021 2022, a CapEx bill at a gross level of $14,200,000,000.
Due to our discussions, negotiations and contracting with the OEMs, And also looking internally at the non fleet CapEx, we've now reduced that to 7,000,000,000 across the 3 years. So we've gone from an average of 4,800,000 per annum to about 2,300,000 per annum. We think that's a significant improvement. What's changed since we spoke at the end of Q1 is those positions are now contracted with the OEMs rather than under discussion. So that's good progress.
The other thing I'm pleased to say is we indicated that the quarter one results that we had about half of the fleet CapEx covered by committed financing at that time and we were still working at committing and covering the fleet CapEx cost for 2020 fully. And I'm pleased to say we've now done that. So there will not be a cash drain on the business in 2020 due to the aircraft deliveries. So I think that's good progress there. Once again, All of this continues to move, but I think much good progress.
If we look at the next slide, it shows you the fleet delivery program. This is consistent with what we said, of Q1, albeit it's now contracted. Secondly, we've now firmed up the impairments that I touched on earlier. And thirdly, we continue to have the fleet flexibility related to the leases expiring, both this year and in the next 2 years. And it's still our intention to go ahead and let 20 of the leases expire and not be renewed.
So that's CapEx. Let's turn to working capital management. Two things to focus on. I don't know if you recall, but when we went through the full year results in the end of February, I did mention then I was a little disappointed with our level of receivables at the end of December. I thought they were too high.
I think the team has done a very good job over the last 6 months to drive the receivables down to the lowest level possible and to get the cash in. And we've seen really good progress there. And that particularly helped our liquidity in Q1. The other area we've clearly been thinking and putting a lot of focus on has been deferred revenue, including the sales in advance of Carriage. And as you can see, that's come down only 862,000,000.
So the level of working capital unwind there has been minimized, quite effectively We haven't put the split here between what relates to the loyalty program and what relates to sales in advance of coverage. But what I would say is loyalty program has been relatively stable and most of that reduction, most of that working capital unwind has been in relation to sales in advance of carriage. But given the amount of drop in revenue given the and therefore the reduced bookings and also given the level of refunds for that to have only unwound by 862,000,000, I think is a good outcome. We then turn to liquidity, again, as I said, the liquidity at the end of June is $8,100,000,000, 2.1 of facilities and $6,000,000,000 of cash. As I say, we've entered into the CCS F and the ICO loans during course of Q2.
We also entered into some bridge facilities, in order to finance aircraft as well. After June. So subsequent to the 8.1, we've had 2 other significant developments, which will improve our liquidity further. One of them is signing the deals with American Express, and so we will be receiving payments of 750,000,000 in due course. And also, we had 5 aircraft that we'd received by the 30th June which we needed to complete the financing on.
And we've successfully completed those in July. In fact, we've actually received the cash in at the end of July. And that's for $400,000,000. We've had to be patient with the sale and leaseback market because at certain points, the market was very dysfunctional and some of the rates being offered by lessors were particularly unattractive. So we've had to be patient and wait for the right moment to go back into the market, to finance these aircraft.
And I'm very comfortable with the rates we've achieved on those aircraft. So that takes you through what the half one results at a high level. It also takes you through some of the actions we've been taking to optimize liquidity during half one. I'll now hand you over to Luis Gallego to talk about positioning IAG for the future.
Thanks, Steve, and good morning, everyone. As we mentioned at the beginning of the presentation, IAG has a proven as a successful business model. And we have delivered strong profitability and strong returns during all this year. Also it's important that we have arrived to this crisis in a strong financial position. We have a unique structure.
We have weekly meetings with 6 OpCo CEOs and 6 IAG senior manager. And we share best practices and we make decisions in the best interest of the overall group. I think this has been very helpful in all these crisis. Our portfolio of brands, diversifies our exposure to our individual markets, Countries and customer segments. And this is an opportunity to participate in the early recovery of the domestic, short haul and leisure demand As currently, we are seeing in Iberia and Welling.
We can also leverage our consolidation on track record and our global leadership position in Europe and North Atlantic And Latin America, Bruce, to take advantage of any these locations in the sector in the aftermath of this crisis. We also have a strategic and operational freedom because unlike our major European competitors, we don't have constraints by the government. So, we can make acquisitions. We are able to pay dividends to the shareholders. We already have, as you know, a big competitive cost structure, we are sure we can improve further.
With the restructuring process that we have across the group over the coming months and into 2021. And also, we are working very hard improving our innovation capabilities capabilities which are going to be critical as demand recovers and competition intensifies coming out of the crisis. Talking about the customers, the biggest challenge that we have for Airline Industry now is to get people booking and flying again. Customer needs to be able to book with confidence Knowing that, they can get their money back to their flight be canceled. And they need to be confident that they will be safe when traveling by air, both on the ground and in the air.
I'm not going to cover all these measures that you have in the slide, but We have a lot of examples of what the group airlines are doing to encourage the customers to make bookings and to demonstrate that they will be safe from COVID 19 and they will enjoy their experience when traveling. This is especially important because we don't intend to close off seats rebooking, and we need to break price with high utilization in order to maximize positive cash flow as we return the operation to normal. Pre gravel, we are using promotions in order to tempt, leisure travelers, we are all we are allowing data changes without penalty, And we have partnered also with insurance companies to provide travel cover in case you contract COVID 19 or are they rapid due to the rain position of border restrictions while traveling. It's airline has several videos that you can see in the different website, which demonstrates what to expect at the airport and when you are onboard the aircraft. At the airport, we encourage minimal contact with the staff by using a self-service checking and self boarding gate.
And contactless security as much as possible. There will be also the Perator screenings on the departure and on arrival. All the staff and passenger, smart wear, face covering, ad load times at the airport and in the air. All aircraft are clean and sanitized each night as well as in between the flights. And so on, These are only just examples.
There are plenty of other retail procedures that we do in order to protect the health and safety of all of our passengers. If we talk about the demand of recovery, we see early signs of demand recovery, especially in the domestic and in the short haul. We have seen customer bookings rise in the middle of, May of the chart that you can see, shows. This slide shows weekly booky trends for all the airlines in the group since March. As a proportion of last year's levels.
They are based on passenger volume. And you have examples for, for example, in domestic spying, that is 11th largest domestic air travel market in the world. And you can see the recovery that we are having there. With exception of long haul bookings, they have a recent each week with some recent leveling off. Domestic thing, as I said before, has the strongest recovery with bookings currently running and 50% of last year's levels.
24% of our passenger last year were on domestic flights, but only 7% of RPKs were there. Polar Store forward bookings are currently running at around 3% of last year's rates. International shortfall represents for us 25% of the total RPK traffic. However, it's true that there has been a slight flattening in the domestic and so called bookings in the last 2 weeks due to the increase in new COVID-nineteen cases in Spain. And we are also mindful of the UK's decision on 20 of July to impose a 14 day quarantine period for arrivals for instance.
Long hold bookings are still the weakest, running around 20% of last year's rate. And there has not been any improvement since mid June. Reflecting the problems that we are having, in the U. S. And Latin America market.
Moving to the next slide, we are reviewing the capacity for the rest of the summer season and the upcoming winter season on a weekly basis. This slide, in the future, that we can have of 28th July and shows monthly capacity as a proportion of 2019 through to the end of the year and then annually for 20212022. We have reduced the capacity by 95% in the second quarter. We currently planned $75,000,000 for the third quarter. Is true that we are going to increase the capacity from minus 85% in July to minus 62% by September.
But it's still very slow. And, we estimate that the fourth quarter, we will be around minus 46%. So the total passenger capacity for 2020 is expected to be minus 59%, which is worse than what we expected last May that was around 50%. And as I said before, this is mainly due to the UK 14 day quarantine builds. That we have right now.
And the a slow return on U. S. And other long haul routes. We are considering a slow return to service, in that way, we can maximize the load factor and boost the cash for the group. And what we are trying to assure is that, each slide that we do is cash positive.
We have the aim to be operating cash flow positive by the end of 2020. But for sure, this depends of a lot of factors relating to COVID and also the customer behavior booking. If we talk about, the sizing of the business for the future, all the airlines in the group are planning for significant downsizing over the next 2 years. And starting now and continuing next winter. In this chart, you can see some of the changes that they are planning to make in terms of, the network the fleet and the people.
It's difficult to have a specific capacity plans beyond 2020. But we know that the air travel demand will be significantly lower over the next 2 years than it was in 2019. We will try to protest as many jobs as possible that in the short term, we'll have to make significant cuts once the various government follow and wait to both the teams come to an end. Arlingus, for example, has already returned fixed wet leases, wet leases aircraft to the source and expect to have at least 9 aircraft on the ground at the end of 2020. They are currently working also on our action in the headcount of 250, people.
And there will be also, working in pilot salary and outsourcing, the gathering operation. BP Airways proposal, are very well known, in the UK. It has made an agreement with Valpar, with the pilot union, that is currently being in a ballowed. It plans to reduce annual employee costs by around 24% by 2022. And that puts in both over 9 posts and redundancies.
BA has already decided to exit its Boeing 747 fleet with early retirement of the remaining 30 aircraft as well as ground 8 Airbus 380s and 6 Boeing 777 for up to 2 years until long haul demand returns. Iberia is retiring retiring the 34600 and also, they are rounding 19 older aircraft as of the end of this year. We are expecting in Iberia to benefit from the current Erte government scheme that, it will end in September, but, there is a possible extension of some support until the end of 2020. Once there, to finalize Iberia, we will have to decide with what labor actions we're going to follow. Level, as you know, we only maintain the operation in Barcelona.
And, we have, closed operation in Vienna and and also Paris is subject to consolidation. So the idea is to maintain Barcelona operation and to see the development of the demand there. Welling is in a similar situation to Iberia, in terms of the Erste program, they plan to keep, 48, 320 aircraft broadly until the end of 2020. With most of them returning to operation in 2021. All these restructuring plans are still In the current in the consultation stage with the labor unions in the different operators?
For sure, we will keep you updated with the progress of the restructuring, in the future quarterly results meeting. And possible, I'm possibly sure, sorry, at the future Capital Markets Day. We don't expect to have a Capital Markets Day this November. But it will be more likely in early 2021. And finally, about the Peru operation, we are sure that this acquisition has and strategic and financial value for the group.
So despite, the challenging operator environment, we remain committed to take advantage of consolidation opportunities. And we are negotiating to find a way to do the transaction in this difficult environment, but for sure in different conditions, that the ones were agreed last November. And with that, I hand over to Willy
Thank you, Luis. I'm going to let Steve, take you through the proposed capital raise and then I'll come back and wrap it up before we take your questions. Steve?
Yes. In terms of the proposed capital increases, as Willie has already covered, we're looking to increase up to 2,750,000,000 our equity position. There's a general meeting scheduled now where we will seek shareholder approval on the 8th September. I'm pleased to say in regards to the rights issue that Qatar our largest shareholder with 25.1% irrevocably committed to support the capital increase. And for the remaining 74.9%, we have fully underwritten the capital raise on a standby basis.
We think that's a worthwhile exercise to undertake given the time scales from the 31st July to the general meeting, markets are volatile at the moment, and this gives us a commitment to funding the full amount irrespective of share price movements which is helpful. I'm pleased to say the directors have committed to take up in full or in part their entitlements under the capital increase And it's our current expectation that we would then launch soon after the general meeting, which would be on 10th September. We'll turn to the next slide as I think Willie's touched on already. The purpose of this raise is to strengthen the balance sheet by reducing leverage and also to enhancing liquidity. And this would give us more resilience to withstand, prolonged downturn in the industry.
And it would give us confidence going through that process. As Willie alluded to, it's been sized on a downside case, and I'll take you through that a bit more in a moment. The raise also provides us strategic flexibility and the ability to further develop the group. And it is worth noting as we've put on this slide that this money is being raised at the IAG level, and we will continue to exercise capital discipline as we look to use those funds. We will only use it where we think there is valid returns on that money.
If we turn a bit more to the sizing of the exercise. The principles we've, employed in coming up with the sizing is to ensure that we have sufficient liquidity to withstand a prolonged downturn in the air travel industry. And how we arrived at that, well, as Willie alluded to earlier, we have run with the principle of having 20% of revenue as a cash holding at any point in time. And so what we came to what we did was we produced a commercial downside case which looked out for 2 years. That commercial downside case was based on numerous different assumptions.
It assumes that ASKs will be down 66% in 2020. They'll be down 35% in 2021. Those are both versus 2019 figures. We've made assumptions as to how markets will ramp up in a pessimistic scenario both on a regional basis. So we've looked at North America.
We've looked at South America on separate basis, and we've looked at the other regions too. We've considered what we think the Fleet financing environment will be like and the other mitigating cost actions. So all of those factors and assumptions go into a commercial downside case, we've then projected what we think the cash could look like in that severe scenario. We found the trough point And then we've solved from that trough point back to 20 percent of the next 12 months' revenues as a cash holding and that's how we've sized it. Liquidity to prolong to withstand a prolonged downturn.
We also think this is the right time to do this in terms of where markets are and the degree of uncertainty. So at the right time and the right sizing, The other factors in our view, it also helps, re equitize the balance sheet and offsets pretty much all of the debt that we've incurred since the advent of COVID-nineteen. So that's some of the principles and some of the work that we've done in order to size and think through the timing of the capital raise. And with that, I will hand you back to Willie for final conclusions.
Thanks, Steve. So just to remind you, we came into this in a strong position. Clearly, the crisis has been damaging to the industry and to IAG as part of the industry with the results that we're announcing today. We acted fast we took all responsible actions to address and mitigate the negative impacts we bolstered liquidity We're clearly very focused on protecting the long term future of the business. We don't expect demand at a passenger level to recover for a number of years.
And hence, we're resizing and restructuring the airlines within the group to ensure that we have the right structures and size in place as that demand gradually returns. And, as we've mentioned on a couple of occasions, now through presentation, based on our current capacity planning scenario, we would reach breakeven in terms of net cash flows from operating activities we have taken to date, we proposed this capital increase of up to 1,000,000,000 to our shareholders to further strengthen our financial and strategic position. So on that, I'm going to hand back to the operator who will now manage your question session and we'll try and get through as many of your questions as possible. Thank you.
Thank you, ladies and gentlemen. You. Your first question comes from the line of Savi Syth from Raymond James. Please ask your question. Hey, good morning.
And Luis, I apologize if I missed this in your comments, but first question is, I was wondering what you expect from a capacity standpoint across the various airlines in the second half and more importantly in the resizing that outlined on slide 31, what the different airlines will be resized to if it's similar or if you expect something different based on maybe business and international taking longer to recover. And then maybe Steve, just the American Express Extension, I'm wondering, how much of that was related to kind of the repurchase of miles in when we might start to see the dilution of that and the length of the extension? Thank you.
Thank you. So we're not going to give a breakdown by individual airline, but I think If we look as we go through this year, as Luis said in his presentation, 74% down in Q3 versus 2019 46 percent down in Q4. But what is important is, as you alluded in your question, the businesses are very different. So if I look at dwelling, about a third of their capacities in domestic markets 2 thirds into European and North Africa. And then you turn to British Airways where less than 2% of capacity is in domestic and very small UK domestic markets, about 18% into Europe, which leaves about 80% in long haul international.
And as Luis said out in his presentation, our expectation supported by what it is we're seeing in the market is that you see a recovery in domestic markets first followed by recovery in short haul international, in our case intra European, and then followed by long haul international flying. So, the capacity, for each of the airlines will reflect the nature of their particular network structure, which is very different for all of the airlines. And as Steve mentioned, the view is that, the recovery in Latin America will lag North America and North America lengths the rest of the network. So, you would like expect as a result of that to see different levels of capacity growth in the different airlines. Steve, on
the MX it's an 8 year deal. As I say, there's $750,000,000 sterling in terms of payments we'll receive in due course a significant element of that related to a prepayment as it were on miles. We're not giving the full details on that, but it was a significant element of it. But also there was a one off payment at the outset, which was also significant too.
All right. And when do you expect that to show up generally from an earning standpoint?
So as Steve mentioned, the cash comes into the business after we finalize all of the details of the agreement, which will probably be August, September, And then the, that translates then into the profitability in the loyalty system over the next couple of years.
That's right. The treatment will be different the different elements of the payment.
Thank
you. Your next question comes from the line of Daniel Roeska from Bernstein. Please ask your question. Daniel, your line is open. Please ask your question.
Good morning, gentlemen. Sorry for that. Starting with your guided operating cash flow for July August and looking out maybe a little bit more into the second half, How does that cash burn change when support programs like labor furloughs and the Este, kind of end the air traffic charge postponant run, how does that change when that runs out? Secondly, you're scrapping a bunch of the older aircraft, so many of which are still owned, you're taking the new aircraft that are coming in on leases, how does that change your kind of percentage of lease aircraft over the next 2 to 3 years? And how are you thinking about the balance, which you previously targeted about roughly half and half So kind of the least owned question, kind of into the next couple of years.
And lastly, could you talk a little bit about what you're seeing and in terms of business demand, also thinking about next year, it kind of seems from your guidance that you're expecting business travel to recover almost to previous levels by 2022, 23? And are there any medium term actions you're considering like reconfigurations in the fleet? Thanks.
Okay. Allow me to address those, the first one, certainly. So In terms of the cash operating costs, as Luis pointed out, we're availing off income support schemes where they exist in Ireland, UK and Spain. But given that those schemes are temporary, we are putting restructuring measures in place. So Luis took you through some of the details of that So, in British Airways, for example, we are expecting, I think, about 1400 people to leave the business by today under a voluntary redundancy scheme.
So we have voluntary redundancy schemes in place. We have restructuring in place So as we unwind these income support schemes, they will be replaced by restructuring in employment costs in the airline. And Steve, on the
It's a good question, Daniel, on the on the aircraft financing. As I alluded to earlier, we have had some success in the sale and leaseback market in recent weeks The WTC market amongst others hasn't effectively properly opened yet. So it's difficult to be too categoric as to how we're going to finance the aircraft deliveries in 2021, 2022 because we need to see how the markets open. If the markets are fully open, then we'll continue to use the principles that we've outlined in previous Capital Markets Day we'll look at the nature of the aircraft we're purchasing. Is it niche?
Is it core? How long we think we're going to hold these aircraft and then determine what's the right way to finance the aircraft. So assuming the markets are open, we won't divert from the principles we've previously adopted But at the moment, I think we still need to see the markets properly open. And I don't think the WTC market is quite there yet.
And on passenger traffic. Let me comment and then I'll ask Luis if he wants to give his view. So you've heard what we said earlier. Domestic markets recover 1st and short haul in effect into European than long haul international. Then in terms of customer segments, we believe it's leisure recovering ahead of business.
And like we saw in 2009 with the global financial crisis, we think there is structural change in the business it's important always to separate business travel from premium travel because now customers that are traveling to premium cabins are traveling on business. But that we would see, business travel lag in terms of recovery. So it'll be a leisure markets recovering ahead of business markets, and that's clearly evidence. Now if that leads to a structural change, which we believe it will, you will see that than reflected in how we configure our aircraft, but we're not changing any of the configuration of the aircraft, but it was a factor in the decision to retire the 747s in British Airways, which as you know, are in a high premium configuration. So, we are expecting change in the structure of the, the business market going forward.
Luis do you want to give a view
Yes. I think what you said, I think what we see is that when the markets are open, we see the recovery of the demand, very faster, to be honest, we have seen that in Spain, in Bariatric islands and in Canary Islands markets. Now, as I said before, we have a delay because of the issue of the quarantine, but it looks like the leisure market recovers fast when there are no restrictions. It's true that, we need to see in the future what's going to be the behavior of the business traveler. But we expect also our recovery in other previous crisis.
I'm talking about the aircraft in our case, for example, in Iberia, we look to the consumption of the 340s and we compare with 350s the fuel consumption, we are going to have a reduction of around 35%. So it's something that is a bit for the future. And also, it will help us to achieve the environment objectives that we have established as group level.
Thank you. Your next question comes from the line of Steven Furlong from Davy. Please ask your question.
Can I ask about Heri Europa, assuming when do you think with the regulatory process that deal and it happens or doesn't, is it H1 next year? It's just interesting in your timeframe for that. And secondly, it's fun to ask, Willie, in terms of the whole industry, in terms of recapitalizations that's happened. I'm going to see this morning, let's pick out one, but aircrafts talking about $14,200,000,000 of liquidity just seems to be there's almost some over capitalization. Where this government supports.
And I just want your opinion on that. Thank you.
Thanks, Stephen. Happy to do that. Let me just comment on there, Europa, and then I'll ask Luis to comment it up because he's the person directly responsible for us On the regulatory side, our view was that it would be addressed in Q4 of this year, but it clearly requires us to reach a formal agreement on the acquisition. And as I said, we believe the strategic case remains very strong, but Luis, do you want to give more detail?
In terms of the approval from competition, what you said, we consider that we can have the approval if we close a deal before the end of the year. I think it's important that what I said before that we believe in the strategical rationale of this deal. The good thing of this group is that as we are in a solid position, we can think in the medium term and in the future, and we consider that this some operation for the future of the group, for the future of Iberia, for the future of Madrid hub. So if we can close a deal that it makes sense for us. The idea is to try to close this transaction before the end of the year.
Thanks, Luis. And Steven, your question is a great one. Liquidity is very important, but what you do with it is even more important. And, quite honestly, without being too disrespectful to air fronts, We've seen little evidence of them restructuring their business to reflect what has historically happened. Never mind what we believe is going to happen in the future.
Now I know Ben is a very different leader, but, our view is that, the industry is structurally changed I gave some figures in relation to VA just put it into context and some of the media interviews I did in Q4, two thousand and one post the tragic events in 911 BA lost 1,000,000 in the quarter. In the first quarter of 2009 and depth of the global financial crisis, BA lost 309,000,000, in the second quarter of year and the depth of this crisis, BA's operating loss was $711,000,000. Now nobody questions the fact that 2001 2009 led to permanent structural change and required structural response. Anybody who believes that this is just a temporary crisis and can be resolved through temporary measures is misguided. So we are focused on our liquidity, but more importantly, we're focused on restructuring the business to ensure that we're in the right shape for the future.
I worry for some of the others in the industry who are looking at strong liquidity and are not responding to the structural change that will be necessary. And I think it would be interesting to see the rate at which some of those companies burn through their cash as we go through the rest of this year and through 20 2021 2022. So, I'll watch with interest from a distance, but that's my view statement for what it's worth.
Okay. Thanks, Luis. Thanks, Willie, all the best, by the way.
Thank you. Next question comes from the line of Neil Glynn from Credit Suisse. Please ask your question.
Good morning. If I could ask three questions, please. The first one on the rights issue. The Qatar Airways board seats are new. Just interested in your view, does this suggest a greater level of influence over IAG strategy for Qatar in the future and potentially a deeper cooperation as a result.
Second question on the Amex deal, obviously a new type of transaction, at least certainly the size. And it sheds some more light perhaps on IAG's loyalty value. Just interested in your view as to whether this might make it easier to use IAG loyalty to raise capital theoretically if needed like some of the U. S. Carriers have done.
And then a third question, clearly there's been a huge amount of focus on the labor side of your cost base going forward. And you've obviously updated fleet plans today. But could you please outline your thoughts on how meaningfully can you renegotiate other supplier deals to try to reset unit costs lower beyond the pandemic?
Okay. Thanks, Neil. In relation to, Qatar, I'm delighted that they're so supportive of the capital raise. And I think it's important for you to look at the quality of the 2 representatives that they have nominated. Giles, Agatha and Robin Phillips.
Yeah, I've known Giles for many years. He's an aviation professional He's an excellent, excellent guy. We've worked with him for a number of years. These are quality nominations to the board of IG and represent a, I think an excellent addition in terms of the skills and backgrounds of the two people. So I don't think it signals anything other than, you know, Qatar's support for our business and their desire to see the, the strength and depth of the board members of IAG enhanced by the that they put forward.
Statement, loyalty?
Yes. With regards to loyalty, it's been interesting to watch how the loyalty business has performed in the first half, which has been pretty well, actually, given all of the challenges. It continues to be a great asset And we have obviously explored all thoughts when we've been looking at liquidity as to how best to leverage that asset Our view is the Amex deal is the right way to do this. I don't think at this stage, securing borrowings off off of our holding in Avios would be a sensible way forward. We think it's a key strategic asset for us And I think the Amex deal is a smart way to increase liquidity without affecting our position with regards to it.
In terms of supplier deals, to your 3rd question, we've looked through all of our critical suppliers to ensure one that nothing falls over and we don't have an issue as we restart. In terms of can we go further with some of the deals with the suppliers. Absolutely. And you won't be surprised to know that we have detailed procurement plans for every category of spending that we have I think one of the areas that we will look to focus on probably more than we have done in the past will be to increase the variability of the cost in the contracts. So one of the things that we'll be focusing on over the next year or 2 is increasing the level of variability of unit costs because if you work on the basis of will we get any second spikes?
Will there be more volatility in capacity? And I think that variability becomes more important I don't know, Luis, whether you had any comments you wanted to make on supplies.
No, I think that you have explained that there was a steep as we said before, we need to adjust the company or the different companies to the demand that we are expecting in the following year. And for sure, the labor cost is an important cost if we look to our fixed costs, but we need to continue working also in the rest of fixed cost that we have also to reduce in order to adjust our cost base to the demand that we are expecting.
Great. Thank you, all of you. And I'll enjoy your retirement, Willie.
Your next question comes from the line of James Hollins from BNP Paribas. Please ask your question.
Hi, good morning. Willie, this feels like a thanks in Archer farewell tour, but I wish you all the best. Once again, 3 for me, please. The first is on coming back on, europa. I think the media talks about you paying about 50 percent of the original 1,000,000,000.
I'm just wondering 2 things on that. 1, whether you should really be paying anything for it and if you're more likely to get full approval given the COVID pandemic, clearly when it was first announced, I think there was talk of a lot of remedies Secondly, on level, looks like you're going down to just 2 aircraft. Should we assume that level brand is not one for the long term. And then finally, looks like you've done a deal with Balfa, so great news there. I was wondering if you can update clearly United made some relatively absurd comments about what you should and shouldn't be doing.
Do you think that things like the equity raise plus some of that data you gave on losses versus 911 at GFC. You think there's any chance that you make some progress with Unite over the coming months or should we expect a long term issue there? Thank you.
Thank you. I can assure you this is the last time you will hear from me. But to answer your questions, on Aerie Europa, I think Luis has given comments. So I'll let him address that. And then, I'll address would state the other two questions.
So Luis, do you want to
talk about where you're open?
Yes. I think that on the figure that you told is something that appeared in the media. We are in the middle of our negotiations. So until we don't return our women. In case we return our women, we haven't closed any price What we are sure is that this deal will provide value to this group And that's the reason we need to find the price that we are really to pay considering that the medium and long term value that this company is going to provide in one of the of our main markets that is the traffic between Europe and Latin America.
So we will inform you a soon as we close, if we close a deal, and for sure, we will do it with a price that we consider is interesting for legal
Okay. In relation to a level, we intend to continue to operate at Barcelona. So it is with more than 2 aircraft. I think the level brand, is very strongly in Barcelona has worked very well for us. But I think what we've done in relation to the level demonstrates us, where we're clearly focused on the businesses achieving the targets that we've set and where they don't achieve us.
Then we're not going to put good money after that. And, I think that demonstrates yet again the capital discipline that we have. So the The management at level Europe, as it was called, Anasek based in Austria were clear that they couldn't see a valuable path recovery and to achieve the targets that's, we have for the business and therefore, their recommendation us that the, the business could not be rescued. Luis mentioned in France, we're in the process of consultation in relation to a level of Paris, but the Barcelona business has been viable and has delivered bunch of returns and has a clear and viable path to achieve the targets that we've set for the business. And I'm, restructuring and BA.
I'm always optimistic. There's no reason why we can't reach agreements. I think the tragedy in Unite entered into this crisis with the view that this is just a temporary downturn that they believe that we could get through this by making some short term measures, which everybody is prepared to do. But I think they've been, completely out of touch with the reality of the situation given the scale of the challenge we face. And that's why I think it is helpful to go back and remember what happened in 2001 and everybody talks about it, but to just put it into context to the scale of the challenge then and to remind people what happened in 2009 and put that into context because that in my 41 years in this industry, 2001 was a very deep and you know, a challenging crisis for the industry.
2009 was even worse. And I said that at the time, if you go back and read what I said about the global financial as I said, it was worse than 2001. This is worse by any measure and, by many times, anything we've seen previously. And therefore, it requires serious structural action. And we're determined at IAG, but more importantly, that the management team in all teams in all of the operating companies are determined So, they know what needs to be done.
They're determined to do it. And I have full confidence that they will achieve all of the objectives that they they have set for themselves, and we share those objectives. We believe they're doing the right thing, and we have confidence that they will deliver.
41 years in a row. Well done, Willie, and best of luck. Thanks.
Thank you. Next question comes from the line of Andrew Lobbenberg from HSBC. Please ask your question. Hi there.
Can I ask about the idea that you can be cash breakeven at the end of Q4? To be there, how much of an opening would you need on the North Atlantic or how much of a a reawakening of the premium, sorry, the corporate, what do you need to make that happen? Can I ask a question? Another question on how your roper these. Willie, I think it was you that said that the best form of consolidation is free as other airlines fail.
Perhaps I'm wrong. Maybe it was one of your compatriots who I talk less to, but what I want to know is why does that logic, which I think is powerful? Why does that not apply in case of a Europa. And then finally, on the North Atlantic, what comments can you offer around the partnership between American and JetBlue. And obviously, Willie, we said goodbye many times before, but goodbye.
And still looking for that beer, but you closed the bloody pub, didn't you? I mean
I'm pleased to say the pubs are open. I've had a pint of Guinness, so I'm in great form. Andrew, great questions. But just to remind you, what we said is that in terms of net cash flows from operating activities, and it is based on our current capacity scenario. So that's the scenario that Luis identified, which is, 74% -74% in Q3, minus 46% in Q4.
So it does assume that we will see some operations on the transatlantic, but it clearly doesn't envisage a full return to transatlantic capacity, but it is based on our current, planning scenarios. In relation to Air Europa, yes, I've said that many times that best form of consolidation is failure, and we believe in this. However, we firmly believe Air Europa will not fail. And that has been a fundamental factor in our decision. So, if we believed Air Europa would fail into appear, then clearly that is something with all due respect to them, nobody wants to see that happen, but is that where to happen?
That would be our preferred scenarios, but that is not going to happen and we're absolutely clear that that is the case. And that therefore, I go back to what we said that the strategic rationale remains strong and that's why we are in discussions with area Europa. And I think Luis has answered all of the related comments in relation to that potential acquisition. And finally, I am delighted that Americans are looking at a relationship with, JetBlue. So JetBlue on the East Coast and Alaska on the West Coast.
I think that's really, really positive. It's good for American, and it's good for us. We've got good relationships with, a lot and we've got good relationships with JetBlue, particularly with Erlingus and JetBlue long standing cooperation. We're pleased to see us We encouraged American to do it and we're delighted that it's actually happening. So I think that's a very positive development.
Cool. Thanks very much. Thank you.
Your next question comes from the line of Carolina Torres from Morgan Stanley. Please ask your question.
Hi, good morning everyone. I have three questions. I guess going back on the on the operating cash or cash net cash flow comparing activities breakeven in the fourth quarter. One level of working capital are you expecting? So we had around 1,000,000 positive for the first half?
What are you expecting for the second half? My second question is, it's what kind of load factors are you expecting to see in the second half of the year? And 3rd question I guess your net debt has increased $3,000,000,000 in the first half of the year. If we take into account the Amex deal and the right issue, Is it fair to say that by year end, you should be with net debt roughly $1,000,000,000 below the level that you are now? In order you were at as of June?
Okay. Thank you. In terms of, I'll let Chris, sorry, let's, Steve, address the second question and the third question. In terms of load factors, we're operating at significantly lower load factors at the moment, and we think it will take a bit of time to get back to normal levels of load factors what we are looking at in all of the flying that we're doing is the cash breakeven load factor, which is clearly very different to the way we would have approached things in the past. And we're measuring this down to the euro It's not down to the 100 or 1000 of euros.
We're looking at this down to the euro. We did the very same with cargo. In fact, one of the really positive things the cargo team did was to be able to assess the cash breakeven point for all of the additional cargo activities. And as Dave mentioned, we did almost 1900s additional cargo flights in the quarter, I think just under 1900. All of those were cash positive And in addition to those flights, we also operated other flights that carried passengers that would not have been cash positive for the cargo.
So We're very focused on what sort of load factors we need to get to, to be cash positive. That is very different to what you would traditionally expect from us but we're very disciplined around the capacity that we're adding, but you should not expect us to get back to normal levels of load factors for some time. One thing I would say is, going back to comments I made earlier, we are encouraged by, booking profiles that we see, particularly in the UK, we were somewhat concerned that after the government reintroduced the quarantine for people traveling from Spain, that that would discourage people flying to other leisure destinations. That does not appear to be the case. So in some of the flights that were operating to places like Greece, we're now forecasting load factors over 100% because of the the short term demand that we're seeing.
So we're adding capacity in those markets because we see good demand But don't be too focused. In fact, I've always said load factors only give you part of the story It's more important for us to look at all parts of it. So the yields and the load factor, and looking at the unit revenue, but particularly at this stage, understanding at what point do we get to cash breakeven in terms of load factors on the both the assumed yield scenarios and the visible and booked yields that we have in the business. Steve, do you want to talk about that?
Yes. I think, they're great questions, Carolina, but, my sort of initial thoughts on them would be Given the fact we can't give you full year guidance at the moment, it would be sort of somewhat irresponsible for me to try and call debt and working capital. My expectation would be working capital will be somewhat positive, but I don't think it would be right for me to try and give a number on that if I can't give proper guidance overall. What I would do is just reiterate what I've said earlier on in the presentation, which is working capital liquidity net debt are the areas we're putting huge amounts of focus on to try and optimize those positions So I know that would be a dissatisfying answer, but I think it's the right answer at this time.
It's okay. Thank you very much.
Thank you. Next question comes from the line of Multi Schultz from Comrose Bank. Please ask your question.
Hi, good morning and of course also all the best for Willy. Maybe if you can give us already some idea on your strategy going forward or your restructuring outcome given now that you've cut down your network quite significantly. Should we also particularly with British Airways, which was restricted in Heathrow that we will see a kind of different British Airways in the future. So it will be a more global one and a little bit less focus of the North Atlantic. And also, how do you feel about your footprint in general?
Will you consolidate more and more operation in your key hops, or will it be spread out as it is at the moment, probably both still relating to Bridge Air West and Wuling?
Thank you for that. I'll let Luis comment, but maybe just to give a view, I think one of the things we do have to recognize is that you know, we expect trade links between the UK and the US to remain strong going forward. There is always strong underlying demands, which we believe will recover. It's very clear from everything we've seen once the travel restrictions are removed. And we understand what these restrictions are in place, but once they are removed, there is very clear evidence of pent up demand, which responds quite fast to the availability of being able to travel again.
So I don't see personally a major shift away from, North America in BA context. It's been a very successful market for BA, and we think that will be the case going forward as well. I think about 37% of BA capacity is on the transatlantic at the moment. So it's a big market, but they have, as you know, also been looking at expanding into other market segments and have increased their presence in Latin America and Asia. And that will ensure remain part of the long term strategy.
But Luis, you might want to comment in terms of the the future for both BA and Welling.
I think that, as we said before, we need to still to understand how it's going to be the future. As you said, I think VA is going to continue to be very strong in North Atlantic and for sure, we are going to have also a bigger presence in South Atlantic with Iberia. And if, we can achieve the operation with Europa. And I think that the boiling is an opportunity that we have is, operator with the right also that, they have developed very well back to run away, but I think, they are doing also a very good job in Italy and France, and we can have an opportunity now after this crisis, to develop more this operator.
Okay. Do you consider also actually, competing with Easyjet and Ryanair and try to catch more markets?
Sure. I think, as I said, we have the right cost structure and we need to ensure that after these prices, we are going to be stronger and our idea is to compete with everybody and to try to capture market share.
Okay. Thank you.
Question comes from the line of Jarrod Castle from UBS. Please ask your question.
Thank you very much. And, thanks Antonio and Wellif, all the many years of service to IAG and willingness to answer analyst questions. Some of which from me have certainly probably been irritating. But, 3, anyway, during the dark days of financial crisis, BA did a hybrid bond, a convertible What was that a consideration for IAG rather than this equity basement? Secondly, just thinking about kind of all these retirements of planes versus new plane orders, mean obviously some of these planes pretty much written off.
And I'm wondering how much of the thinking really relates to environment rather than the fact that very old planes can have very high incremental returns on invested capital. So obviously the newer planes are more fuel efficient, but do they actually generate the highest return on invested capital? So just your thoughts on that. And then just on the kind of the changes to your CapEx, can you talk a little bit about versus, I guess, existing orders, what has actually been canceled rather than deferred?
Okay. Thank you. Let Steve address the first and the third question Jared. And thank you for all your questions. We don't find them irritating at all, so I'm pleased to be able to answer some of them.
Thank you. Let me deal with the middle one first and then Luis will want to comment on this as well. The returns, you're quite right. We do and have always looked at the capsule base and the return to ensure that we are using capital in the most efficient way possible. And I think we've been successful doing that.
I think significant in this one were a number of factors. Environmental performance is one But more importantly, we're taking the 747s, for example, out of service. We're putting them on the grounds. Now while there isn't a lot of cost associated bringing those aircraft back into service from storage. That is a cost.
It is clear that demand is not recovering quickly. And as I said earlier, premium demands will like leisure demand. And more importantly, as these aircraft get older. As you know, they incur significant additional maintenance costs, which we look at from a capsule basis as well. So, yeah, we've looked at all of the factors here.
We decided that we could not make a case to return to 747 to service in the near term. And therefore, given that we would face extended costs associated with grounding them, and then maintenance costs to bring them back into service. And then costs associated with taking them out of service, it made absolute sense to take them out of service now. But you're right, we factored in everything that wasn't driven by one issue. It was driven by a number of factors.
We did the very same on the A340. So maybe Luis, you want to comment before we let Steve answer the other questions.
Yes. You said we were thinking a lot about this because it's true that, in the short term, for example, in the case of Iberia, we maintain the 3 40s Eastern scenario that, can be even better for us. But as I said before, we need to think also in the medium and in the long term. And what we expect about the future with with a fuel price that we consider we are going to have when the war is going to come back to a normal war in some way. We consider that the 350 is the right aircraft in the future.
It's true that it's an aircraft expensive, and we need to pay for that, but we are going to save fuel costs and maintenance costs For sure, we are going to, to achieve the environmental objective of the assets that we have established as a group level.
Louis, if I take over on the other questions, in terms of did we consider a convertible? We considered all options when we were what was the right way to, raise further liquidity and also give ourselves further strength, particularly to withstand a prolonged downturn. So we looked at convertibles amongst other things. We wanted to do something that gave us sufficient levels of improvement to liquidity and to our balance sheet strength and issuing a convertible would have done neither of those things. It wouldn't have been sufficient, the amount you could have raised would have been considerably lower and quite a lot lower than what you could do.
Through an equity raise, and it wouldn't have helped with the balance sheet leverage either. So for a number of factors, we feel that the equity raise is the right way and it's the right size. I don't think a convertible would have met that. And what we didn't want to do as a sort of piecemeal, you know, something this week, something next week, etcetera, etcetera. I think everybody would benefit from some degree of certainty In terms of the aircraft, it's an interesting question canceled versus deferred.
Clearly, when you're going through that size, you start in a position you have a legal contract to take these aircraft. So it is a negotiation, as the context of this backdrop But I would refer you back to the presentation we made at Capital Markets Day in November where we outlined our fleet plans for the about the next 10 years. And if you look at those fleet plans, beyond about 2022, the number of aircraft orders that we had was pretty modest to be honest and much less than many other airlines. So we actually do want to get these new generation aircraft into our business. I think Luis spoke earlier about the environmental benefits and the operating cost benefits.
So for us, it was not a case that we no longer want these aircraft. It was a case of when do we want the aircraft? And hence, the deferral became more appropriate for us than just pure cancellations. And as I say, we do have flexibility with our existing fleet, you know, leases, etcetera, to enable us to smooth that transition. So canceled versus deferred, I think due to the size of the order book beyond 2022, I think the key thing for us was we still want the aircraft.
It's just about when do we want them. And that's why we took that approach.
Thank you. Your next question comes from the line of Alex Paperson from Peel Hunt. Please ask your question.
Good morning, everybody. And enjoy your retirement, William. I'm struggling. I must admit to, imagine you being retired with anyway. Three questions for me, please.
Firstly, just on the future CapEx, you made a comment in the slides about IT spend being reduced. Could you just elaborate slightly on what sort of IT spend that is? Secondly, just on the timing of restructuring costs, would most of those cash costs fall in the fourth quarter of this year? And therefore, is the net cash from operating activities breakeven in the fourth quarter after that, after that exceptional. And lastly, just on the scenarios for the capital increase, with the aggregate downside that the capital rates will be sufficient to deal with that variable because you can mitigate with further restructuring actions.
Well, he's just told me he's retired, so I'd about to take all the questions. In terms of future CapEx, with regards to IT spend, we've been very judicious as we've looked to IT spend. As you know, one of the areas we've ring fenced and not made any cuts in at all is with regards to cybersecurity. So where we've had to be more thrifty is where we've got significant programs. And we've had to look at those, prioritize them and some of them delay, some of them stop.
But none of those that we think are key critical, particularly from a cybersecurity perspective In terms of the restructuring, cash costs and when do they fall? It's a good question. Once again, That's not something that's entirely within our control because it depends on where you get to in your negotiations and consultations. At the moment, our anticipation is they will fall in Q3 rather than Q4, but that's subject to change. And on your 3rd question with regards to the commercial downside scenario, absolutely, we looked at it by operating but more importantly, we looked at it by geographical regions.
So we went through each one of them domestic Europe North Atlantic, South Atlantic, Amiesa, Asia Pac. We went through each one of those and, stressed it with a view to a delayed startup and a significantly delayed startup. And then as an overall position worked out, what we thought the overall trough point was So that's how we approached it from a regional and OpCo basis.
Great. Thank you very much.
Thank you. Next question comes from the line of Mark Simpson from Goodbody.
Yes, thank you. Good morning. A couple of things probably on the CapEx for you, Steve. On the non fleet CapEx, you're cutting that by about 1,200,000,000. I'm wondering, where those cuts are being seen?
Any particular projects what projects are essential to continue to underpin the functionality of the business. So a bit more detail on that side will be interesting. I think we've touched on this through some of the questions previously, the shift in aircraft type within the contracted order book. I'm going to just give us an idea of what the size of your short haul long haul fleet will look like at the end of 20202021 given the revised contract on deliveries. Probably one for Willie, Virgin Atlantic.
I'm kind of interested to know what you think in terms of their competitive position vis a VBA in the light of their efforts to survive, how you see that shaping out on the North Atlantic in particular, And I suppose like most people, really, were sad to leave you, so we'll see you leave IG, but, as Alex said, difficulty you're retiring. Don't you give us a hint to where you may reappear other than at Mary Max Pub?
Well, I'd certainly be at Mary Max Pulp and a few other nice pub in Dublin, but, let me hand to Steve, to deal with the first few questions
and then I'll talk about On the non fleet CapEx, it's a good question. In terms of, where our priorities, I see our sort of I see the IT portfolio spend in sort of 3, maybe 4 simplistic buckets. 1, I touched on cybersecurity So I won't go there again. Another area that we are keen to progress is getting off legacy systems and legacy infrastructure. So we need to continue to move along that path And the third area where you do get far more ability to flex up or down is where you're looking at the sort of innovation and business development.
And I think the key thing for us there is once again, capital discipline, which of the projects are going to give us the best return and how quickly are they going to give us that return. One of the things that's been very helpful is we brought John Gibbs in as the new CIO probably about a year ago now. And John has really sort of revolutionized what we've been doing with IT spend And so one of the interesting facets of this is, when you look at a reduction in IT spend, you might think that therefore means by definition, we're doing less IT. I think one of the things John has enabled us to do is be far more efficient with our IT spend which has also helped us. So, you know, John has really reinvigorated that area.
He's taken it forward. We do have ambitious plans but at the same time, we are trying to cut our cloth accordingly. In terms of short haul versus long haul fleet, I'm going to have to leave you to do the maths on that one. So you'll have the Capital Markets Day slides from November. You'll have seen the fleet retirements.
And I think we've given you the fleet deliveries in this deck. So a little bit of single arithmetic should be able to get you to the answer on that one.
Virgin. But before I actually comment, just to reinforce what Steve said about IT, I think one of the great things that John has done since he came in is to be able to retarget where we're spending our money in a sensible way. And, this pause in activity has actually given us an opportunity to avoid doing certain things, thereby save money, but more importantly, put us in a position where we can make better structural moves going forward. So Steve is quite right. It's not that we're just cutting spend on IT, we're spending the money in a much more efficient manner.
And I think John has made a very significant difference in the business since he joined On Virgin, I always felt that they would be rescued. I didn't believe that they would disappear. And it's clear that they're going to focus on their, what I suppose was their, their traditional core activity, which was transatlantic. So still, heavily influenced by decision making in Atlanta. And I think that will continue to be the driving force between what happens with Virgin, but we fully expect them to be a consistently strong competitor against BA, not the most efficient, as I've said, but they provide strong competition and that will continue to be the case going forward.
That's great. Thank you.
Thank you. Next question comes from the line of Jamie Robotham from DB. Please ask your question.
Good morning guys. Sorry to prolong the call. 2 hopefully quick ones from me. Firstly, in response to Andrew's question about the reawakening needs to happen on the transatlantic for cash breakeven in Q4. Willie, you said obviously it's based on the capacity guidance of ASK is down 46% year on year in Q4.
Can I just push you for more thoughts on what you've assumed in that best case for the transatlantic because I'd have thought it's quite binary, either President Trump reopens the board or he doesn't, and presumably a view on this and when that happens determines whether or not you'll be ramping up your services? So any extra insight on what you've assumed there would be helpful? And then secondly, Slide 36 gives us IAG's downside scenario for ASKs next year. Down 35% versus 2019. Is there a base case equivalent for ASK's 2021.
Apologies if I've missed that. Thanks.
So on the transatlantic, I don't think it's quite as binary as you say because we are actually flying into North America at the moment. But the restrictions in place on who can fly into North America. So the flights are operating We're operating significant passenger and cargo flights. They're typically operating with low seat factors. They are all cash positive at the moment.
Our view is that we're not going to see a total reopening. So it's not on or off. What we'll see is a gradual reopening with certain markets being open and some being restricted. That's the sort of assumptions we have at the moment. So that we will continue to serve the destinations that we're currently serving.
And as you know, passenger operation into the U S are restricted to certain gateway airports at the moment. I think all of our one of those airports we currently serve So, it assumes a gradual reopening and a staged reopening with, certain cities being served and other cities still being closed for operation. So it's not quite the binary situation that you suggest, whether it's either all those are all open. And Stephen?
Yes. So your question about base case versus the commercial downside case, For 2020 full year, the base case was 59% as you can see. And the downside case was 66%. And for 2021, the base case was negative 24% versus negative 35% on the commercial downside case. Those are all of those figures of us is at 2019.
We outlined some of that in the IMR document that we've issued this morning. But I would just hasten to add, as I described earlier in the presentation, are an awful lot of assumptions that go into that commercial downside case over and above the ASKs, not least of which unit revenue which is then built on the regional buildups, what the fleet financing assumptions are, what the cost mitigations are. So there's a danger of looking at it just from one perspective, just ASKs, there's a multi faceted set of assumptions to get to a commercial downside case.
Thank you. And your next question comes from the line of Guilherme Makedo from Kaxia Bank. Please ask your question.
Hello, good morning. Glenn Sampari from Casa Bank API. So first of all, thank you, William and Tony for all these years and the work that you have done. And I have two questions, quick ones. Sorry for coming back for the rights issue.
Question regarding timing and apologies if I missed any of your previous comments. Can you guide us through our thinking in doing the device issue in September? Instead of waiting until having more visibility on the recovery. And then just to confirm, based on the currently available information, you believe to be comfortable with organically deleveraging the balance sheet from the equilibrium, which is post rights issue? And third, how should we think about the potential to renegotiate the leasing of Aeropa or changes in the scope of the deal?
Thank you very much.
Okay. Maybe I'll let Luis address the area, you may have missed his earlier comments. So I'll let Luis answer that question. Steve will talk about the rights issue. I'm sorry, can you repeat your second question because it didn't quite catch what you said there?
Yes, you mentioned before that one of the objectives of the right tissue was to recalibrate the balance sheet to levels that you believe are comfortable for you apart from getting more liquidity. Do you believe that after doing this $750,000,000 or up to $2,750,000,000 rights issue. You are in the equilibrium situation with which you are able, with organic deleveraging after that. Thank you very much.
Okay. That's great. Thank you. So Luis, over to you on Air Europa.
Yes. We have an agreement that we closed last 4th November. The agreement is in place what we are trying to do is to renegotiate that agreement because we understand that the current environment, it doesn't make sense to do the transactions, the transaction, sorry, with the conditions that, we agreed So we are now in the middle of the negotiation with the other part. And as I explained before, if we can arrive to a place, where the transaction makes sense for us, we will do it. We are sure that this operation gives a strategic and financial value for the group.
But, also, we are conscious of, the situation that we have right now and that, the price that we agreed last November is not valid anymore in this context?
On the other two, questions. In terms of the timing, the timing is interesting on this transaction because it's a more elongated process than maybe say UK right issue. The this is primarily done under the Spanish regulation. And so although we are announcing it today, it won't be until mid September that we can basically launch this. So that's quite a long period of time.
So In terms of timing, we've had to factor that in. And because of that long period of time, we've also had to put a standby underwrite in place because of market volatility and also our key reference Kattar Airways has also given us an irrevocable commitment. So when we think about timing on this transaction, it takes longer than a normal UK rights issue. And one of the things we wanted to do was to, as you've touched on bolster, the balance sheet and bolster the liquidity in case there is a prolonged downturn. In terms of how we're feeling about the balance sheet and the level of leverage, clearly this makes a big step in the right direction.
It offsets largely the increase in debt or net debt that we've incurred during Q2. I think it will take time to return to investment grade. That's not going to happen quickly, but this is a significant step in the right direction. And it also by re equitizing the balance sheet like this also gives us other options that we wouldn't have if we hadn't gone this route and maybe we just raised more debt. So I'm comfortable would be the wrong word.
I don't think this time is a comfortable time in any way, shape or form. But I think it's the right way forward. And I think it puts us in a much stronger place and gives us more flexibility.
Okay. Thanks very much. So I don't see any further questions. So the operator could just confirm that there are no further questions. Okay.
Thank you. So, can I just take this opportunity once again, too? Thank you all. I promise you're not going to hear from me again. I appreciate all your support over the years and, I'm delighted to be, handing over to Luis on 8th September.
And I know he will look forward to answering your questions in the open and honest way that we've always done since we've created IAG. So thanks very much for everything and good luck to all of you.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.