Good day, and welcome to the Q3 2018 International Consolidated Airlines Group SA Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Willie Walsh, Chief Executive Officer. Please go ahead, sir.
Thank you very much, and good morning, everyone. Thank you for joining us. We're pleased to report a good set of results for the third quarter. And I think this is particularly the case when you look at the significant foreign exchange and fuel headwinds that we faced to $111,000,000 of foreign exchange and $268,000,000 of fuel of course, some of that fuel bill increase was as a result of increased activity. Operating profit of 1.46 1,000,000,000.
That's an operating margin of 20.4 percent, good results in all of the airlines. And the figures that we released today actually, absorbed the cost of the startup operations of level at Paris and at Fiena. If you look at the 9 months, our pre exceptional net income grew by over 9% versus a year ago. And we see continuing strong return on capital, trailing four quarters at 16.1%. And then Rick, I will take you through the details of that in his presentation and in a few moments.
You will have seen yesterday or the day before, we reported that we had completed the second million share buyback program. That was 65,000,000, nearly 66,000,000 ordinary shares, representing 3.2% of share capital And the board yesterday approved a interim dividend of per share. Looking at the full year, you may have seen our guidance. We're now saying that at current fuel prices and exchange rates, affects its operating profit before exceptional items for 2018 to show an increase year on year of around 1,000,000 from a 2017 base of 1,000,000,000. And both passenger unit revenue and non fuel unit costs are expected to improve at constant currency for the full year.
I'm going to hand over to Enrique now who'll take you through the detailed financial presentation, and I'll come back then after he's done that to finish up and give you an opportunity to ask questions. Thank you, Willie. Good morning for all of you. As Woody has just said, our operating profit for Q3 this year has reached 1,460,000,000 which is 10,000,000 better than last year. And we're proud of our performance basically because this result has been done on significantly challenging circumstances, which you basically all know.
So we're talking about higher fuel prices significantly higher than the same period last year. Also this headwind that we were mentioning on the Forex type of impact, which is very much related to the volatility of the dollar against both the euro and sterling. So weaker in the 1st part of the year and also Q2 and then stronger through Q3 and basically end of the quarter. So generating opposite impacts both in the revenue side and on the cost side. Other challenges have been coming from ATC to eruption, which you have in hearing about.
We've been very vocal about it and the way it has been penalizing our company, especially willing, as you well know. Also, engine problems has been creating disruptions for us as for other competitors. So As a whole, the quarter has been challenging, but we have been able to improve our operating profit figures in constant currency terms in EUR 121,000,000. And this is based basically on strong performance on passenger unit revenues, which has been basically following the trends of Q2 and the the guidance that we were giving to you in these last couple of quarters. And as we would insist, Q3 4 is looking similar in terms of our basic trends.
So, it's worth to note that the total unit revenues are higher than the passenger unit revenues. And this is because of our non ASK related businesses as, Iberia MRO activities for third parties but also reached out with holidays, even the cargo business, had been strong for the quarter. And we feel this trend is going to be also flowing into Q4. So 2.4% passenger total 2.7, both figures in constant currency terms. Capacity has been high 6.6%, slightly lower than our plans for more in the range of 7% and it shows that we are following and monitoring very closely capacity versus demand load factors and unit revenue contribution.
That's something that we'll continue doing through Q4 and into the next year. Non fuel unit costs, cost and currency, figure that we are publishing is 0.7 But then we take into consideration the increase in revenues and then costs, of course, on these non SK relates activities. So basically, we are talking about the other revenue business and activities the underlying figure will be closer to 2.3 negative. So saving, and that's a very strong saving figure. Of course, we have to be transferred saying that it includes compensation that we have been receiving.
As other companies on the engine manufacturer issues. So basically we can follow the next page trying to understand the bridge that leads us from last year figure into this year figure in operating profit terms. As we have been mentioning, these headwind coming from Forex, which has impacted negatively our figures by 111 And again, it has to do with how the dollar has been affecting both revenues that were booked on the early part of the year at lower dollar rates and then costs that have been basically affecting our Q3 performance and our end of the quarter working capital position. So that's why there is this big figure that probably will be getting smooth through the remainder of the year. 2nd big message is growth and the contribution coming from our growth, which is close to 100,000,000 of additional margin in relation with last year, a good figure.
And then the 3 other columns have to do with the fuel cost impact and the way we've been recovering this negative cost impact through increased revenues, both passenger revenues and non passenger revenues. So we have been offsetting practically 100% of the negative fuel cost. And passengers have been taken into account 75% of this offsetting exercise, which is a high figure in absolute terms, but also in relative terms against what has been the story, our story in previous years. Finally, our non fuel cost performance has been positive adding another EUR 30,000,000 to the performance of the quarter and allow us to reach this 1,000,000,000 dollars, 46,000,000,000 operation profit and results for Q3. So more flavor on as usual on growth and RASK.
As you see in here in the chart. Basically in terms of, unit revenues, all our sectors have been producing improvements against last year with the exception of Latin America. And this, you need to frame it into significant growth pattern across the board. So basically starting with North Atlantic and South Atlantic you're seeing there, capacity increases in the range of 10% or 8.3%, talking about the North Atlantic and the South Atlantic markets. In respect of the North Atlantic, we have to say, which always has a strong participation in this 10% It's in the range of 6 and also where Lingus, which is close to 3.
Relevant, facts around how we have been producing this capacity growth has to do with the split in terms of, new routes, which represent basically half of this growth. New routes will be taken into account half of the 10%. The other half is basically on routes that we have already been operating. So in terms of, unit revenues, North Atlantic has been positive, slightly positive and better than last quarter. And basically, This performance has to do with the splits of tools that we have been using to execute this capacity growth.
Of course, it's bridge show is, it's bridge show is both Heathrow, but significantly Gatwick it's, doubling. It's also level network expanding. And so this in some way showing the relation between capacity and unit revenues, average unit revenues that we are achieving. If we talk about the short haul markets, I think good data, good set of data. So strong capacity growth because the demand is there.
And then unit revenue has been improved. Very significantly 4.54.2, talking about domestic and Europe. And it's basically across all our companies and basically most of the market that we are operating some very strong performance in market in Spain, but also in Spain to Europe and also in islands to Central Europe in the same way. If we talk now about, Asia Pacific, their capacity has been basically left, left freeze. And there has been an improvement in terms of unit revenues against the previous quarters and the improvement is coming, basically on all the routes were to mention improvements on Tokyo and Hong Kong, which were routes that were a little bit of the laggards as we saw them in Q2.
Africa, Middle East And Asia, a little bit of a lower level of growth, course, has to do with the discontinuation of tehran and a significant improvement in unit revenues. And I would be mentioning basically here the African routes. So South Africa, Nairobi, Lagos and others, have been taking the lead in terms of unit revenue improvements. Latin America, high growth and lower unit revenue performance or negative for the first time in this year and then quite a bit of a consequent quarters. And it's very much related to recent weakness that we have been and noting, of course, in Argentina and also Brazil.
And that we have to say, I'm not getting worse through the data that we have on the fourth quarter of this year. So apparently there has been, of course, a step down because of the valuation, but we don't feel the step down is heading south in this moment in time. So as a whole, good improvement with the RASK of 2.4%, which is a strong one on a capacity growth, which is 6.6, which is also an ambitious one. If we get into now the non fuel unit cost performance. We are seeing and the fuel.
We are seeing fuel increasing in constant currency basis and unit terms by 15%. We are going to be talking more about fuel on the following slide. Non fuel costs, good results in terms of labor costs, employee costs with a minus 4% of course, very much related to on one side productivity improvements. Productivity improvements, strong against last year, third quarter up 4.6% in terms of ASK parent per year, but also the underlying improvement that we've been achieving both through Ascent's project in British Airways, plannedechoturo II in Iberia and other measures in the rest of the companies, very significant again, the improvement in pension fund costs that was achieved through the significant deal that was agreed by the end of the second quarter. In breach share with pension funds trustees.
Supplier costs, the figure that appears here is negative. But I think we need to filter it down. We need to quantify it. Of course, it's affected by disruption, especially in dwelling again. And other matters as selling costs, for example, but also this line of costs is being affected by the increased activity in non passenger related revenues, as I've been talking to you before.
The improvement and increase in activity in both which show is holidays, but also Iberia, MRO, have been dragging this line of costs as well, but also creating additional revenues and margins. Ownership cost increases in constant currency terms. And this is of course having to do with higher CapEx this year. The pace of the renewal of our fleet new aircraft also accelerated depreciation of our old seven forty seven fleet And again, we need to mention disruption and here it comes with additional wet lease contracts that We've had to deal with, having to do with basically ADC and manufacturers disruption. So as a whole, the nonfuel is coming at minus 0.7 In reality, making this adjustment on costs that are basically related to other activities, the underlying 1 is -2.3 And again, this minus 2.3 is positively affected by, the compensations that we have been receiving.
On our agreements with engine manufacturers through the summer. And then let's talk a little bit more about fuel. As you see, the chart the same chart that we reproduce each quarter is showing our expectations for future unit fuel cost evolution in the following quarters. It's at 7 70 Today, we are at 7:40. So really, this has been a difficult chart to complete because fuel price in the market has been so volatile that it was difficult to determine a specific reference to be able to produce a reliable one.
Again, this is basically in the range on the higher end of the range of the prices that we are seeing today. What it's showing is, remember, Q3 2018 has been up 15%. So we are seeing that the following quarters, at this level of prices having probably a similar range of performance in terms of increases in constant currency basis. We're talking about ranges between 14 16 in the following quarters. And my message here again is This is going to be a challenge in the following future in the next year.
It appears as at this level of prices is not going to be representing an additional challenge, an increased challenge to the one that we are basically managing I would say successfully to Q3. The level of hedging that we have for the quarters is expressed in the chart. As you see for Q4, basically it's close to 100% 92%. So it appears as the fuel bill for the quarter is now quite certain. And again, the message for next year is we see fewer costs and prices coming up at the rates that probably are not going to be dissimilar to the ones that we are going to be seeing in this last part of the year.
And then, ROIC. So in terms of ROIC, what we are seeing is a very smooth pattern of evolution, right? So, Roy, for the last four quarters, has been for the group 16.1. The last figure that we disclosed you, end of June was 16.2. So as you see, it's becoming stable figures.
And when we come to the different companies of the group gain stability. So we are seeing, for example, Erlinghaus at a very high 27.9 And last quarters, the similar figure was 27.8. So sustaining as you have been seeing a very high level of ROIC in Airlingu. In Iberia, it has been, again, slightly improving. So 12.3 against a 12.2, the last set of figures that we were showing.
The same for welling. It was 13.1 and now it's coming up to 13.4 The slight reduction is coming in the case of which share with it was 16.9 and now it has been getting down to 16.7. And this basically has to do with the pace of CapEx and the new deliveries of a new generation aircraft that we are receiving through the group. As you remember, it was in the 2018 for IG is a high CapEx year and that's basically increasing the size of our asset base. Forex negative impact has not been helping those numbers, either in this specific quarter.
But the trends, the underlying trends really are keeping in the path that we were expecting. So finally, leverage and have resumed the picture of our balance sheet. So as you see, gross debt has been increasing. And that has to do basically with the new fleet deliveries through the year. Cash has been kept that, figures in the range of EUR 7,000,000,000.
Again, there is a reduction in respect of September last year, but this has to do with the investments that we've been doing throughout four quarters and the relationship between the investments and the borrowing that we have been raising. Also, very much related to specific, outflows that we've been producing, of course, has to do with the Nova dividend payments. It has to do with the completion of our share buyback 500,000,000 that we have just completed a couple of days ago. It has to do with an extraordinary repayment, early repayment of the bridge show is preferred shares that we had in the marketplace. Around 1,000,000.
So we've been efficiently allocating our free cash flow generation through these last quarters. As a whole, we are still very comfortable because our level of leverage adjusted net debt to EBITDAR is being kept at 1.4 times, which is, I would say, a very comfortable level. The same with a level of absolute adjusted debt, which is just 7,500,000,000 with and asset base, which is in the range of 1,000,000,000, okay? So this is my last page and reference and then passing back a floor to Willy. Okay.
Thank you, Enrique. If we just look now at the forecast growth for the year and for the fourth quarter, we're now saying 6.2% ASK growth for the year. If you remember, back in February, we had expected to grow by about 6.7% in the year. And we said 8.4% in the quarter, but the profile of the growth is actually very different to what we had, first set out And there are a couple of things in the fourth quarter that weren't in the base. And I'll just highlight some of those.
We have now reflected in this fourth quarter at the Erlingus wet lease operation of 2 aircraft on London City, Dublin, which was not in the basin, not in our original plans. Also not in the original plants with some growth on the transatlantic by Erlingus. So they've gone through a daily service from Los Angeles and 5 flights a week to Toronto. And you may have seen that Ethiopian who were selling Dublin, Los Angeles on their tech stop at Dublin have now stopped selling Dublin LA. Also, in the fourth quarter of this year and that wasn't in the planner.
The base was the level operation at Vienna with the 4 A321s that were operating there. And just to comment on Iberia in the fourth quarter, the one thing that we do know that may not be obvious or apparent to people is a number of our key competitors on the South Atlantic are facing aircraft issues with the ongoing problems with Rolls Royce powered 787. So we know that a number of our significant competitors will not have their full fleets available to them in the fourth quarter and indeed in the first quarter of next year. And so we're very comfortable with the growth plans that we have in the fourth quarter. And finally, just to reiterate our guidance To remind you, we're now saying that we expect an increase year on year of around 1,000,000 from the 2017 base of $2,950,000,000, with passenger unit revenue and non fuel unit costs, expected to improve our current and currency for the full year.
So on that, I'll now hand back to the operator and we'll start taking your calls and your questions.
You. You. We will now move to our first question from savi Syth of Raymond James. Please go ahead.
Hey, good morning. Just two questions on the North American and Latin America trends. Is just kind of curious what you're seeing in North America, the North Atlantic? It seems like there's a lot of capacity growth in there. And just curious what the expectation is?
It seems like the U. S. That carriers are expecting strong the trends there. And then in Latin America, I'm just curious, given your last comment, is the sense that things are stable at a low level a result of demand stabilizing or is it because the expectation that, maybe some of the capacity will not materialize Thank you.
Okay. Yes, we see the Transatlantic continuing to perform well. The profile of our transatlantic business is clearly different to some of our U. S. Competitors given the nature of the level operation and the Erlingus operation, both of those have strong growth plans this year and indeed next year.
And clearly both of those operate at a significantly lower cost base to the rest of the profile of our business. So Transatlantic, I've described Transatlantic this year has been good, stronger than maybe we had expected. Capacity has been fine. The outlook that we see is, remains good. There's good underlying demand, particularly ex U.
S. I think that's probably benefit our U. S. Competitors a little bit more than us given that they'd have stronger U. S.
Point of sale than us. But overall, there's been very good demand in all cabins The yield environment has clearly been more attractive in the premium cabins than in the non premium cabins since we've been able to passed through price increases, reflecting increased fuel charges. But overall, the performance there has been very good. In LatAm, we've actually seen the situation in Argentina has probably stabilized, The performance in Argentina has actually been stronger than we thought it would be given the significant devaluation of the peso and the situation in Brazil has also stabilized. So we were seeing a deterioration later than we had expected to see, particularly in Argentina, but our view on Latin America is, I think, realistic at this stage.
And as I said, we do know from our analysis of our competitors, fleets, that a number of those will face challenges based on the information that we have, particularly, as I said, with Rolls Royce Power 787s, and the ongoing issues there. So when we sort of analyze the impact of that on our British Airways fleece with 787s and sort of translate our understanding of that onto, the competitor suites We believe that their 787 fleet impact will be significant through this period. And that's why Iberia has flexibility We'll continue to keep this under review, but we believe the capacity that we've put into the market is justified by the continuing demand profile that we we're good to see.
The next question will come from Stephen Furlong of Davy Research. Please go ahead.
Good morning, Enrique. Morning, Willie. So it's a couple of months. Am I math right in terms of fuel next year that depending on your volume growth, which presumably you'll give next week, price would mean the fuel bill is up by 3 digit 1,000,000, that type of range. Just might confirm that.
That I guess it depends on where the oil price is. Secondly, I'm just wondering, Willie, I mean, I know you can't talk about a region per se, but just on long haul low cost or value carriers. Just to confirm, you're happy where the positioning is of level and Erlingus, which I include in there. And this seems to be finally just in the fund of the financing aircraft financing and funding in the market, maybe to comment on that. I know the region was talking about JVs with Chinese lessors.
Thanks very much.
Yes, thanks, Stephen. We clearly give you more detail on, next year, Capital Markets Day next Friday. And as Enrique said, it's moving around quite a lot at the moment. But you've seen the profile in the charge there based on a $7.70 per metric turn. It's not 7 70 today.
It's, I think it was 7:40. 7:40. Yeah. And I looked in And you're getting some yes, you can expect increases related to price in dollar terms ranging around 14%, fifteen percent on the, full, I would say year 2018 figure, And then we'll talk about growth more in detail on the capital market. And on a transatlantic are quite rightly said, the value carrier model and the long haul low cost.
So yes, we're very comfortable with the positioning The Earlingest performance continues to be very encouraging. Our plans for next year, clearly, dependence on the delivery of, 321 LRs and this is an issue and Enrique mentioned it in his comments that we continue to see challenges from the manufacturers principally related to engine, but not solely related to engine. So we continue to review the plans for Erlungus And the Transatlantic next year. The aircraft were due to have been delivered to us earlier than we're now expecting to get them and we're monitoring the situation in relation to any further anticipated delays to delivery. But in terms of positioning of both level and Erlingus, I think we're very comfortable and very pleased.
Paris has been a bit more of a challenging startup than we had expected. And I probably can't comment as to why that is, was anybody The difference there's a difference there between Parises and France and Barcelona is in Spain. And it's been interesting to see some of the, reactions to the start of level in Paris. On financing, yes, you're absolutely right. We heard the comments.
We have very good dialogue with all of the lessors. There's it's an attractive market at the moment for airlines. And we've been fortunate to be in a position to take advantage of that. And we've been, putting in place arrangements for next year as well. So it is particularly attractive I suspect it's more attractive, for us than it is for some of our competitors, and that's clearly opportunity that we have in the short term that we want to fully exploit, but the general environment is good at the moment.
Okay. Thanks, Willy. Thanks, Henry.
The next question will come from James Hollins of Exane. Please go ahead.
Hi, good morning. Yes, 3 for me, please. Just on the first one, Enrique, I think you implied that Q4 unit revenue trends were the same as Q3 or similar. I was wondering if you meant that on load and yield and by region? Secondly, I'm wondering if maybe whether you could confirm you've still not spoken to Norwegian since April?
And also whether, it would change your interest if they were to do it. One of these sort of big deals has been muted with a cash injection from someone else? And thirdly, I was wondering if you could perhaps quantify those engine compensation costs. And before you show me a red card on that one, anything super vague would be fine for me. Thank you.
Okay. I won't give you a red card. I'll give you something super vague. The compensation that we're getting, is offsetting the costs that we're incurring. So I can't give you the quantity.
Obviously, that's subject to confidentiality. But I'm still not happy, because we prefer to have the aircraft. I think we've certainly missed some opportunity as a result of the aircraft not being available to us. And we are concerned about next year. We're already, as I said, seeing delays in the anticipated delivery of the 321 LR.
And that's disappointing for us because we've got a market that we can exploit and we're not getting into that as early as we had wanted. And on the Rolls Royce situation, it's it's disappointing to see that these problems are going to continue into 2019 when we had fully expected to have all of the issues resolved by now. So, we are getting compensation. The compensation is offsetting the costs associated with the non availability of the aircraft. But as I said, I'd prefer to have the aircraft and compensation On the revenue trends, I'm going to be vague again.
So what we can say is, short and medium haul markets are still strong. And that's what we are seeing for the months ahead. And the trends in the long haul are similar to the ones that we have been mentioning. So Latin America has been slightly weaker than in previous quarters. It's not spreading or deteriorating further.
Although we are deploying a significant level of growth there because of the reasons that Willie has been mentioning and the opportunities that we have there for the group. And the North Atlantic market is a very stable one. So really, we have a no, I would say, negative signs there. We are basically deploying the level of capacity that we feel optimizes the contribution that we are getting on that market and the tools that we are using from the different companies of the group. And on Norwegian, nothing new to report, we had anticipated that they would do something in relation to the we know that a number of the lessors have been, interested in the Norwegian fleet.
So that there's no surprise there. I see it as a positive foreigner region, but it's not a surprise to us. It was something that we had anticipated and expected.
The next question will come from Jared Casa of UBS London. Please go ahead.
Thanks and good morning gents. Just back to Norwegian, I think you said at the half year results that if there wasn't a deal to be done, you would sell your shareholding into the market Do you have any kind of cut off date for when you think, okay, enough enough. Let's get rid of our shareholding. Secondly, there does seem like there's a number of headwinds growing for the airline industry and including IAG. Directionally, I mean, do you think next year when you kind of look at kind of the profit improvement, the 1,000,000 of this year, that we should be expecting directionally, earnings pressure on the upside downside or flat?
And then just lastly, any thoughts or maybe it's something for next week in terms of further capital returns?
Yes, I think most of your questions will be better answered next week. So both in terms of capital returns and the outlook for next year We faced headwinds this year and I have to say, I'm pleased that we've dealt with those the headwinds are probably increasing into next year, the ones that we can anticipate certainly in relation to fuel But, I think we've demonstrated that there is flexibility in our business and we've also demonstrated that we responded early to the headwinds, particularly with pricing in anticipation of fuel price increases. So you probably remember, I talked about adjusting the pricing from November of 2017 in anticipation of the fuel price continuing to rise through 2018. And it's it's going to be more challenging, I think, for a number of our competitors. And I think that means we're likely to, see opportunities in these headwinds as well.
In relation to Norwegian, what I said, and it was in relation in response to a question that was asked in August when we did the half year results. I said that, we wouldn't hold on to the shares and that this time next year, that was the the quote that I gave, which suggests by August of next year, we won't hold those shares if we haven't concluded a transaction with Norwegian. I'm not going to give you a specific date. But clearly, if we if we are doing anything, you'll be well aware of that, that the market will be advised So, we're it's not distracting us. It's not putting any strain or stress.
And I think the underlying performance and the results that we're showing today prove that it's not distracting us. We're getting on with our business and it's not something that's weighing on us at all, but it's not going to continue forever. And it certainly won't be the case that if we haven't concluded arrangements by certainly by August of next year and probably before we won't have those shares.
The next question will come from Neil Glynn of Credit Suisse. Please go ahead.
Oh, good morning all. If I could also ask 3 questions. The first one on, on the premium outlook, clearly, there are a lot of market concerns about capacity growth on various markets that you operate in. But can you give us your take on premium or flat bed seat capacity, the outlook for the winter and indeed beyond if you care to opine on it, because it certainly seems to me those capacity growth rates are a lot more modest and manageable The second question on other revenue, it was up 17% or $66,000,000 year on year in the third quarter, which think was a dramatic improvement in performance. Could you help us understand to what extent BA holidays Avios were influential drivers within that run rate.
And then the final question, I know it's difficult to answer, but interested in your own thoughts on contingencies. As we look forward into next year with obviously Brexit looming, Easter being in April, I guess people will start booking Easter trips around year end. How do you think about contingency planning if we don't have any clarity at that point.
Okay. In terms of premium capacity, we are we're very relaxed. I think the premium, demand has been good this year and that's through pretty much everywhere on the network. And in fact, I can't. I'm trying to think, is there anywhere that that hasn't been the case?
And I can't think of anything and everybody's nodding here in the green with me at the moment. So, we're very relaxed about capacity. Yes, it's funny. You talked about concerns around capacity I can't remember the last time, and I've been in this job now 13 over 13 years. I can't remember the last time somebody didn't express concerns about capacity.
So, I look forward to the day when somebody says capacity concerns don't exist. So there's always going to be these concerns. And we understand that. But what I would say is that when we analyze the demand environment that we see and we look at our forward bookings and we analyze the behavior of our competitors looking at the economic environment, we don't see anything that concerns us at this stage. Having said that, however, we are clear that we're in a position where we can respond quickly if there are any changes.
And that's one of the features of our business and it's one of the highlights that we point out at our Capital Markets Day, the flexibility that we have to adjust capacity in the event of any change in the underlying demand. So I remain comfortable with the capacity in all cabins and all regions that we're we're seeing at the moment. On other revenue? Yes, on the revenues, yes, it has been a quite funding performance. You know that there, we are basically taking into account revenues coming from our Bridge show as holiday activities in BA, also the Iberia, both especially MRO 3rd party business, but also handling 3rd party business.
And then very significantly, cargo, and cargo revenues and and then others has adios and a diversified basket of other revenues. So cargo is, again, I would say, performing very strongly through this year 2019 sorry, 2018. And we feel that that's going to be the same for the fourth quarter. This also will be the case for Iberia3rd party MRO revenues, which are going to be still growing through the later part of the year. I guess, Fabios and others will be probably more aligned with the general passenger growth rates that we are seeing in the business.
But again, worth to mention, both our cargo revenues Iberia third party MRO, and even pretty sure with holidays as the main drivers of the improvement. There's nothing to indicate those rate of growth are going to be changing dramatically in the following quarters. And on contingency planning, it wouldn't be continue to believe and strongly believe that the arrangements post Brexit will facilitate the continuing operation of the airline industry as we know it. And we're fully expecting a comprehensive agreement to be reached between the UK and the EU. If there isn't, you've heard the language being used by both parties that would expect a bare bones agreement to apply, which I think will be sufficient for most, it may cause a bit of complexity for some carriers.
We have close dialogue with the UK government, Spanish government, Irish government, as you would expect, given our strong profiles in those countries. And we have ongoing dialogue with the relevant people in the commission as well. So there's a lot of noise out there, and I know a lot of airlines are considering what it is they do, but I don't think we're being unrealistic in our belief that the arrangements that will be in place will be sufficient for everybody to continue to function. And we deal with these sort of if you like, increased bureaucracy or regulatory hurdles on an almost daily basis So we're not being complacent, but we are expecting and planning to continue to fly as normal.
The next question comes from Mark Simpson of Goodbody. Please go ahead.
Yes, morning. 3 questions. First off, cargo, just wanted to go back to that. Clearly, it's being driven by pricing volume still down at 1%. I'm just wondering in that pricing environment, whether that's the reflection of the mix of higher value products.
Can that be sustained as you go into next year? On the handling side, unit costs up a short 5% year on year in the quarter. I know it's a volatile series, but I'm wondering if there's anything specific to that performance in this quarter. And what may reverse that going forward? And then finally, just on kind of fuel surcharges or kind of clawback, on pricing.
You mentioned you've been able to do that on the long haul premium. I'm wondering if you can give us a feel for how you see the short haul economy sort of products next year in terms of being able to maybe claw back on fuel inflation?
Thank you for your questions. Yeah, you're right. Cargo is very much pricing. It's to do with the mix. So we're comfortable with that.
And yes, we believe it can be sustained. Our business is very focused on the premium mix And that's been a successful part of our business. It's not easy for airlines to get into that segment because it does require a lot of investments. The larger cargo operators will do that and we've certainly done that, but we don't see any concerns in relation to that. So that was a, if you like, a strategic decision from cargo leaders taken probably 4 or 5 years ago now.
And I think it's proven to be correct, and we're comfortable with that situation. On handling. Yeah, that's basically, including a bridge hold is a holidays handling costs that are growing with the level of activity. And also, it will be including passenger compensations and other costs related with disruption that we've been going through in Q2 and Q3. So it's volatile.
It's basically bumpy. And hopefully, it will be coming some lower figures in Q4 and Q1. And on short haul, I think the Q3 figures tell you everything you need to know, seen, we've had growth in Europe and domestic with improving RASK in both domestic and Europe short haul has been good. There's good demand. We don't see the demand environment changing and certainly the outlook And we always talk short term here.
We're looking 2, 3 months ahead, but that remains good. So we're very pleased with the short haul performance You know, as I said, the long hole, I highlighted because it's obvious to people, there's, more capacity has gone on, gone into the transatlantic nonpremium segment, but the ability to respond to fuel increases is common. All airlines have to ultimately, prices in or they go out of business and the ones that haven't tried to prices in have gone out business and the ones that don't charge prices and will go out the business. So, you know, it's only a question of how long it takes for people to respond But it hits everybody, it hits, long haul carriers more than it hits short haul carriers, but general environment gives us confidence that that can continue. It's just a question of how quickly we can respond to the change in the fuel price.
I think was there another question you asked or I think that was it? A lot.
The next question comes from Andrew Lobbenberg of HSBC. Please go ahead.
Morning guys. I'm just coming back on the rules compensation. You said that the compensation is offsetting the costs. So there's absolutely no impact on the unit costs. But do we meant to understand that there's some changes in line items and how it's allocated just so I can understand that, that would be great.
And then secondly, just curious about the establishment of the short haul operation of level. In Vienna. It's obviously got up and running incredibly quickly. But, how is the competitive environment now? And with in principle, 4 airlines looking to backfill poor old Nicky disappearing.
How sustainable is that situation and or who do you think will blink? And then just finally, Lingus, the operating margin was down in the quarter and yet commercially, it's obviously a great success. And I imagine they might have some benefits from the industrial relations situations with Ryan. What saw the margin down in the quarter?
Thank you, Andrew. Let me deal with the compensation. Yeah, it's the compensation is in different forms. So it's not all cash. And I can't go into the details office.
Yeah, in general, what I can say is that it's the compensation that we receive is offsetting any additional costs that we're incurring as a result of the lack of aircraft availability. I can't give you a breakdown, I'm afraid, Andrew, but as I said, that's some comfort, but I prefer to have the aircraft and that's we keep pushing the manufacturers to address the situation. In Vienna, yeah, it's exactly as you said, a lot of capacity has gone in there. The point I made in the presentation earlier was we've reflected the costs associated with that in these figures. It's not an exceptional item.
I know, Ryanair has identified, I think 1,000,000 this year as an exceptional cost associated with the acquisition of acquisition and operation of Nicky and have indicated from what I've seen that they expect that to be, breakeven next year. So I think what you've seen is because there was a lot of capacity going into the market late. Clearly, yield was depressed as a result of that. That's not going to continue. So consumers in that market have had a real windfall this year, but I expect the pricing environment to normalize in 2019.
And we're already seeing signs of that. So the demand environment is good. I think yield environment could have been better had, people been able to yield, manage, but you've always got this when you're starting something late and starting something completely new. It takes a bit of time to adjust. So I think we'll know better in relation to that, as we go through 1st and into second quarter of next year.
But we're certainly comfortable with what we see and comfortable with what we believe our competitors are going to do in that market. And Erlungus was principally foreign exchange. If it was dollar related. As you know, they would sell a lot of their transatlantic early the exchange rates then change when they incur the costs associated with that transatlantic operation. So And you follow our link as closely, you would have seen this in previous years with them.
So it just reflects the pattern of transatlantic bookings, particularly given that their strong U. S. Point of sale and the timing of those bookings versus the costs associated with operating those. So that was still a very strong performance from Erlanger.
The next question will come from Damien Brewer of Royal Bank of Canada. Please go ahead.
Good morning. I've already two questions, please. First one, I know Enrique alluded to it, but could you perhaps be a little bit more specific about how much the incremental disruption costs were on the business in this quarter versus Q3 last year, in particular, understanding how much depression that had on the profitability of the business? And then secondly, now you've had the MPS measurements up and running for over a year now. I'm just interested to understand how that's contributed to margin in Q3.
And in particular, not just about what you've invested in, but areas of investments or OpEx you've been able to avoid because customers don't pay for it or don't value it?
Yes, on, the disruption or cost related to disruption, we are not going to be very specific. What we can tell you is the major portion of the impact has been affecting welling. So when you go through well in results Q3, most of the deterioration, if not all, has to do with this, disruption. The second question? Yes.
And then on NPS just to correct you there, we've had NPS open running for many years. What we've had is running for the past 12, 18 months now is a common measurement of MPS across all of the airlines in the group and utilizing that more at the center. So the airline individual airlines have always used it. It is used to understand where we should invest is also used to measure the effectiveness of the investments. And, we, therefore, do make changes to product as a result of the, changing NPS.
I'm pleased with the way. So if I take BA for example, the Q3 performance BA was the leader in terms of MBS improvement in the 3rd quarter It was the leader in terms of long haul and short haul improvements in the third quarter, and in the premium cabins in the third quarter as well. So in all areas where BA has invested, we've seen a positive response in terms of NPS, which is what we would have expected to see. And what's encouraging is we've seen the response being more positive in most cases. Than we had expected.
So that reinforces, if you like that, investments that are being made are getting the right results Now in some cases, we'll make changes where the feedback will tell us that the customer doesn't like it and we'll quickly change it. That's the beauty of this. We can we measure, NPS, actually on a daily basis, and we measure it in oil cabins, we measure it on oil routes, And we use that information to ensure that we adjust the project and make the right investment, but it's it's a very effective tool. And what's particularly useful now is because we have it measured in a similar way across all of the airlines, then we can file one thing on one airline, seeing how the customers respond to that and then, use that on other airlines as well. And we actually sometimes trial the same thing on 2 airlines to see do we get a common approach.
And that's, as I said, the beauty of having a common measurement across all of the airlines. So I think they're very effective to It's reinforcing the decisions that we have taken and we're pleased with the response that we're seeing.
Thank you.
The next question will come from Daniel Roeska of Bernstein Research. Please go ahead.
Good morning, gentlemen. 2, if I may. First on the international joint ventures. Maybe just any comment on progress with South America and LatAm, And also looking into China and Asia, any progress with the partners there? Just it's gotten awfully quiet around this.
So how are you thinking and progressing international JVs? And second question on AVOS, with the switch in leadership, we've also seen quite a number of of job ads out for AVOS. Any color, where you're trying to move AVOS to kind of how you're progressing on your strategy for that bit of the business? Thanks.
We're still waiting for the competition authorities to give us the results specifically Chile, and we sort of keep hearing it'll be in a couple of weeks' time. And we haven't heard the results. So we're patients and we'll wait for that to come through. There's no other activity going on. On the North Atlantic, obviously, we've got the review of Herlingus joining the transatlantic joint business.
And on Asia and particularly China, as I mentioned before, we've had very good dialogue and increasing cooperation with China Southern. We're not looking at a joint venture there. We're clearly open to something if if that makes sense. But the initial stage of that relationship is looking at co chairing, but actually we've had a very friendly and positive response and we're very encouraged by the strengthening of the relationship between and principally British Airways and China SODRIM, but the relationship with China SODRIN also involves talking with IAG about potential strategic developments. But I think it's very early days, and I wouldn't get carried away in relation to that, as I said.
So the early focuses on, strengthening the co chair arrangements between BA and China surgeon and they've proven to be good so far. On Avios, yes, Avios is looking to recruit people with expertise in particular areas, And this will be a feature of the business. So we know that, data is clearly a valuable resource, and we've got a lot of data in Avios. And therefore, we want to recruit the best people to be in a position to analyze that for the benefit of Abios and the benefit of the group. And you should expect to see more of that.
We want this to be done in professional way. We you've seen other companies with strong loyalty programs have invested a lot in that area and we're certainly going to the same. We're also investing in, IT, in relation to Avios. So the profile of the employee mix in Avios will change And it will change to reflect the, exploiting the digital opportunities, but also exploiting the data opportunities and The business is on track. The new leadership there, very clear, and we're very pleased with the strategies that they've articulated for the business.
Thanks. Just a short follow-up on that. So on ABIOS, And what do you think is a reasonable timeframe, before you can kind of more articulate the process that's going on? And share more with the capital markets?
Yes. We will give them it is a new team and we'll give them an Genitik put us. I'm not sure we'll have time in the program that we're doing next week to go into it in detail, but I think as we go through the year, I'm sure the IRR team here will look to set up a specific briefing, which we have done in the past. So they're not disagreeing with me. So I'll take that as that they're willing to do that.
And as soon as we can fit that into the calendar, we'll let you know. But I think there's good stuff there's good stuff to see there. And we certainly shared that with you and Andrew will try and identify an appropriate data.
The next question comes from Jamie Rowbotham of Deutsche Bank. Please go ahead.
Good morning, Willie. Morning, I think it's Jamie here. Three quick ones hopefully. First just going back to that demand on short haul into Europe. I think it's been almost surprisingly strong given what euro area GDP has been doing.
Is there anything you can point to in terms of what's been driving that multiplier to be quite so strong? Secondly, obviously, good to hear about the positive progress of cargo revenues. Is there anything you can tell us in terms of what contribution margins have been like or what you've been managing to do on cost in cargo? And then finally, just to come back to this engine issue, Obviously, I hear the point about competitors on LatAm routes potentially suffering. At the same time though, you're worried about more engine issues next year.
Is point there that you can simply be more flexible with your fleet when it comes to that capacity or you're not using the new Dreamliners there perhaps you could help me with that one?
Yes, you've got it on the engine issue. That's exactly as you know, we've got more flexibility in the fleet that, some of our what have. So, that's, that's why we're, as I said, when we look at our capacity and we anticipate what some of our competitors will do, why we're comfortable with what we see for Q4 and certainly into Q1 as well. Is improving. We don't break it out, but it is improving.
It's going to be incremental investments there? Been a good performance by, cargo. We see that business, you know, how you've heard me talk about this before, there is a disconnect between the cargo capacity available and the cargo volumes, and that's why we focus much more so on the premium end of that, the high value cargo products that need to be transported by air rather than trying to compete in the low, very low yielding often cargo volumes where people have not fully understood the incremental fuel cost carrying that cargo. We're very clear on that. So it's a very focused approach by our cargo teams.
And on short haul, I think it just reflects that there's for demand, it is a bit of a surprise, but, we've not seen any anything unusual there. It's just been a stronger demand environment than we had expected and return on our networks. Yeah. I think it also has to do with where we are, basically operating the way we are concentrating in our basic hub. And networks the way Boeing is coming back to their, famous triangle node, Barcelona West of Spain, Paris and Italy and basically growing through frequencies and from markets that are well known for us in which we really know how to operate and make money.
I think that's basically the case. It's been a good environment. And as I said, that continues to be the case. We looked at our forward booking profile.
Thanks guys.
The next question will come from Michael Kuhn of Societe Generale. Please go ahead.
Good morning, gentlemen, mostly follow ups. Firstly, on the fuel hedging, you're now on higher hedging rates compared with last year, there's trend that we've seen in recent quarters. Is there a tactical component in it? Or do you plan to be generally on higher hedging ratios going forward? Then secondly, as you just spoke about, competitive reviews and joint ventures, CMA recently announced they would review the transatlantic joint venture.
What should we expect? How long will that process take? And is there any reason to assume that they will see things differently compared with the earlier reviews it went through? And then lastly, sticking with Transatlantic, there were some contradicting news on the negotiation progress of the British and the U. S.
Government with regards to future transatlantic flying rights. Can you share any update with us on that topic? Thank you.
On the hedging, we've not changed our hedging profile. We are, looking at the profile we have been into the 3rd year, as you know, we go out 36 months, we were going to, sort of just clarify that bit in our policy, but we've not changed it. And there is flexibility in the policy, and that's why the team have the flexibility to adjust around a central line. So you will always see minor changes in the profile, but there's been no change in the hedging policy that we've, that we've had for some considerable time now. On the CMA, I honestly don't know.
I can't this is the new team, so, and this is a new process. And obviously, it reflects the Brexit impact, if you like, where, a significant number of the transatlantic routes are UK routes and therefore, the CMA has said, we will be responsible. So therefore, they want to have a look at that, but I honestly can't tell you What I can say is that the other competition regulators that have reviewed is, have clearly seen the consumer benefits from the transatlantic joint business. And that continues to be the case. So we're very clear that consumers have had significant benefit as a result of the transatlantic joint venture.
And on the I haven't really seen you said some contradicting statements on the UK, U. S. I haven't seen that, but then I talked to the U. K. And U.
S. Officials. So, they haven't given any contradicting use to me. There's probably been contradicting stories in the press written by people who aren't close to what's going on. So, I'm very confident and I've had this for a long time that, there will be a an open skies agreement agreed between the U.
S. And the UK to replace the U. K.'s participation in the EU U. S. Open skies agreement.
And I've seen nothing absolutely nothing to suggest that that won't happen. In fact, everything I've seen just strongly reinforces the view that that will happen.
Our next question will come from Penny Butcher of Morgan Stanley.
To labor. I think you have pointed out obviously the benefits of the pension deals flowing through the numbers this year. Just could you remind us where we stand in terms of timetable for the next round of wage negotiations for, I guess, both pilots and cabin and ground stuff, and how that sort of process might look into next year given I guess, a very clear pressure point from the market in terms of wage inflation through several industries that have been reported and quarters? Thanks.
Thanks, Benny. Yes, those negotiations, I take you specifically relating to Bridge share those negotiations, have already started. The BA figure 2018 was actually quite highly because it was based from memory on the December inflation figure of 2017, which was 4.1% if I remember correctly. So, I think we've been ahead of the market in terms of wage increases in British Airways for 2018, but the negotiations have already started and they'll continue as they normally do and the rest of the company into into 2019.
Okay. Maybe just as a follow-up, just to understand is are you looking for sort of a longer duration set up of agreement within BA? I mean, a 2 year or a 3 year type structural deal, or are you happy to just run the rolling salary type agreements?
Yes, we're always flexible in this. We done 1 year deals. We've done 3 year deals. We've done everything in between. So it's a process of negotiation and it's managed by British Airways.
And we don't involve ourselves in those negotiations. That's responsibility of Alex and his team at BA So they will decide amongst themselves. They'll advise us as to what it is they're doing, but I would expect them to follow the similar pattern to what they've done before. And they typically are 18 months to 2 year deals, and I think they've done recently.
Great. Thank you very much.
Next question will come from Rishika Sabiani of Barclays. Please go ahead.
Hi, good morning. I also just one follow-up remaining. I wanted to ask about the trajectory on the unit cost base. You've clearly had a strong and a consistent year this year in terms of reducing those unit costs But once that pension tailwind starts to annualize and correct me if I'm wrong, but I think you've got some OpEx investment in fleet and product plans for next year. How should we think about the trajectory going forward?
Thank you.
Thank you. What we say and what we'll continue to say is we have a, if you like, a target of a 1% reduction in non fuel unit costs on an annual So we won't we won't achieve that every year. We'll exceed it in some it'll be depending on the profile, and that remains the same. So you'll see us next week capital markets. We're just going to I'm telling you now what we're going to say next week, we're going to reinforce that, that remains the target for the business and it's a target.
It's a 1% per annum target reduction in non fuel unit costs. And see no reason to change that. Some years, as I say, will be better than that. Some years will be shy of that, but overall, that's what we aim for, and that's what we'll continue to aim for. We will
now take our final question from Alex Patterson of Investec. Please go ahead.
Good morning everyone. Congratulations on the results. I have three questions, please. Firstly, with to your announcement yesterday on the cyber attack, or on the is there any more that you can say on that specifically? Can you say what was different between the two attacks and which part of your billing and payment systems are in sourced and which are outsourced?
Secondly, on the dividend, you've increased the interim by 2 should we expect a similar increase for the final? And lastly, on ATC, is there or can you be optimistic that they are there won't be a repeat of this year in next summer, I. E. Do you think there is progress being made on overflying and resolving some of the staffing issues?
On the cyber, it has nothing to do with the billing and payment. Systems. So I think what I could say, and obviously I have to sort of preface my remarks by saying it's an ongoing criminal investigation. So I probably can't close everything that I'm aware of, but there's been a very, very detailed forensic review and analysis working with cybersecurity experts. We have had 2 different companies working with us and these are world leaders in this area.
We've been working with the National Cybersecurity teams and the National Criminal Agency. So this has been a very detailed analysis. We know, we know when it happens. We know how it happens We know where it happened. We know what they did when they got access.
We don't know who it was, and that's obviously not for us. That's for the, the crime agencies to further investigate. But we've got a very detailed understanding of what happened. It was the same. So this was a, if you like, a single attacker or a single group, but it was a single attacker doing different things over a period of time.
The what we disclosed yesterday was, as I think the release said, We've no conclusive evidence to show that the data was exfiltrated, but we do have evidence to show that the data was viewed. So being cautious, we believe it's appropriate that we advise our customers that, that was the case. We've had regular, an ongoing contract with the ICO and obviously we'll continue to do with that. And they will produce, because I think it's clearly their responsibility, but they will produce a public report, which will will detail all of the issues that have happened. So this is something clearly that we will try and be as open as possible, bearing in mind, as I said, that it is a criminal investigation.
We apologize to our customers don't want anybody to face this and we'll share information with others so that hopefully they can, they can avoid the the issues that we have seen. On the final dividend, we'll report the final dividend when the board has assessed that. So, As you know, this is a board decision, which will be taken at the appropriate time. And on ATC, now what I would say is, no, I'm not confident we'll see any material change. Next year.
And our assumptions are that we'll see continuing ATC disruption through 2019. And that's, if you like, embedded in the plans that we have for 2019, The level of that disruption is unknown, but we are anticipating that there will be, ATC disruption. I would hope that we won't see as much disruption as a result of industrial relations strikes. And if we do see strikes that the authorities will have implemented the contingency plans that have been talked about to minimize the disruption for overflights. And I think that that's the one possible bright light on the horizon.
But in terms of the underlying manpower issues, we don't see that being resolved in 2019. We that's more a 2020, 2021 timeframe.
That concludes today's question and answer session. Mr. Walsh, at this time, I will turn the conference back to you for any additional or closing remarks.
Hey, thank you. Well, as I said, we're pleased with a good results for Q3 and the outlook for the rest of the year. And we look forward to seeing all of you as many of you as possible when we meet next Friday at Capital Markets Day. So thank you for joining the call and look forward to talking to you next week.
This concludes today's call. Thank you for your participation. You may now