Good day and welcome to the IAG Quarter One Results conference call. At this time, I would like to turn the conference over to Willie Walsh, CEO. Please go ahead, sir.
Thank you, good morning, everybody. Thank you for joining us on the call for our Q1 results. I'm pleased that we're reporting another strong quarter performance with an operating profit of EUR 280 million. It's up from EUR 160 million last year, with improvements in all of the operating companies. We also saw the continuation of the positive trends in unit passenger revenue at constant currency and also improved non-fuel unit costs. We're maintaining our guidance for the year despite the significant increase in the fuel price. Our current fuel prices and exchange rates, we still expect our operating profit for 2018 to show an increase year-on-year. Both passenger unit revenue and non-fuel unit costs are expected to improve at constant currency.
We've added a small update in relation to Norwegian Air Shuttle to confirm that we have had contact with the Norwegian Air Shuttle board regarding a possible offer, but have not reached any agreement. As a result, we're currently considering all of our options in relation to Norwegian Air Shuttle. I'll hand over to Enrique now, who will take you through the details of presentation. Then I'll come back and say a few words before we take your questions. Enrique?
Thank you, Willie. As Willie said, our operating profit for the first quarter has been EUR 280 million, which represents a very significant improvement over the results of the same quarter last year, EUR 120 million improvement. Margin of operating profit has reached 5.6%. These are very high margins for all of our operating companies. As a whole for the group, it represents a 2.3 percentage point increase in margin against the same figure last year. Our capacity has been growing by 4.1%, slightly below the forecasted figure. That's mainly because of some weather disruptions, especially in British Airways and Aer Lingus. The figure of our RPKs, our demand figure, has been growing by 6.1%, a significant improvement in terms of seat factors. It means that on our strategic markets, the balance between the capacity that we are deploying and the demand is performing positively.
Of course, it's showing in passenger unit revenue figures. The figure for the quarter in constant currency terms has been an increase of 3.5%. Still, we are doing some work on trying to understand how much of this improvement is related to the change in Easter holidays against last year. As you know, this year, Easter holidays was more skewed towards the month of March, so first quarter. If we take the passenger unit revenue constant currency figure for the first four months, so including both March and April, and we compare it with last year's figure, the passenger unit revenue improvement would be still growing at 2.4%. The underlying trend, apart from the positive impact of the Easter holiday different timing, is still positive.
When we come to the non-fuel unit cost metrics, we have achieved a positive reduction in terms of non-fuel unit costs of 0.9%. This has to do with, first, lesser third-party activity on our MRO Iberia business and also with British Airways holiday figures. If we strip that one out, the underlying non-fuel unit cost trend is also negative for the first quarter of the year, minus 0.3%. When we get a little bit of an insight into Q2, this non-fuel unit cost performance is going to very probably keep on being positive because as you remember well, we will be rolling over the disruption that occurred in June for British Airways, that created quite sizable increases in non-fuel unit cost.
Also, we will be starting since the month of April, to account for the savings that we will be achieving on the new pension fund schemes for British Airways. Of course, we have to talk also about fuel. Fuel has been a tailwind and probably will be a tailwind further on through the year. In terms of our impact, as we will see in further pages, it has been sizable in constant currency terms, around 10% unit cost increase. It has not been so important in EUR terms. That's because the dollar weakness that we are accounting for in this first quarter of the year. That's probably something that will be also extending to the next months, because the strength of the dollar last year was both in Q1 but also in Q2.
If we get into the following page, where we are recording the different sources of contribution to our improvement in operating profits for the first quarter. We are recognizing, on one side, a positive Forex impact, as I told you, and I mentioned around the weaker dollar against Q1 last year. Of course, we are having to highlight the very significant contribution on passenger revenues. As you see, it's not so much in volume terms, is of course, in price terms, 156. If we compare that one with the fuel cost negative impact, just I would say the sense of the size of the bus will be giving you an idea of how much we are recovering of the fuel cost, which is over-recovering in this specific case, on the fuel cost increases.
We are also mentioning the lesser level of third-party revenues that we are accounting in basically the area of third-party MRO activity in British Airways. That has been partially offset by, we have to mention, a stronger cargo contribution, stronger cargo performance for Q1 in respect of last year, which is a continuation of what we have seen in the previous quarters. We also have to mention, as a positive contribution, the improvement on non-fuel unit cost performance. We will be talking a little bit more about it in the following pages. Coming back to unit revenue performance, here we are bringing a chart that you are used to. You know well on one side, capacity increases and changes. On the other side, unit revenue performance.
As you see in the right of the hand circle, we can acknowledge that unit revenue performance has been positive or very positive in all our main strategic markets. We need to talk especially about three of them. On one side, North America, North Atlantic. On the other side, very positively, Latin America. Thirdly, again, I mention on the intra-European traffics. Starting with North America, North Atlantic performance, an increase in unit revenues of 3.8%. As you know, I think we need to fine-tune the figure because we are investing in growth, both in LEVEL and Aer Lingus. That means opening of new routes, which will have a maturity phase until they get to full contribution. If we were to talk just on like-for-like routes that we have been operating, the improvement in unit revenues at North Atlantic would be reaching 5.1%.
The underlying market is strong between our basic hubs and the North Atlantic destinations. British Airways is up 5%, Iberia 4%, so strong performance. I think the best in the chart is Latin America. Latin America, as you see, has had an improvement and increase in unit revenues of 8%. It is both Iberia and British Airways. The two operation companies have been achieving very significant improvements. Of course, we have to mention Argentina, we have to mention Brazil. Very specially, we have to mention for British Airways, Santiago de Chile, which has had an excellent performance through the quarter. The Caribbean destinations have also been performing positively. In Europe, also positive unit revenue performance, 4.3% against the capacity increase of 6.5%. There, the balance is still working between capacity and demand.
We have to say that the whole of the group, the four companies, have been improving their unit revenues in Europe through this first quarter. Less relevant, but also positive improvements in Asia Pacific, especially in the case of Iberia and Tokyo, and also improvements in Africa, Middle East, and South Asia. A little bit of a reference on domestic. You see that the figure in terms of unit revenue improvement is lower, it is 1.6%. It is very much influenced by Vueling growth, especially to the Canary Islands, which, as you know, is a long route and that brings and drags down unit revenues average for the whole of the group. If we follow to the next page, where we have a little bit of an additional reference to non-fuel unit costs.
The message at the top of the chart is very clear, non-fuel unit cost under control. This is because really we have been improving our unit cost performance both on the employee side, on the supplier side, and on the ownership side. If I have to summarize the underlying reasons why, it has to do with what we call efficient growth. Probably the best way to summarize efficient growth is how we've been performing in terms of employee productivity. The level of average manpower through the period, first quarter against last year, has remained basically flat, and the capacity has been growing by 4.1%. Productivity has been improving more than 4%. Also to mention, ownership cost improvements. This is a combination of better utilization, especially at Vueling, also Aer Lingus.
Also we've been able to reduce the asset value of some of the assets that we're working with, especially in Iberia, the case is for the A340-600, which we have been operating in the past on a lease base. As we have asset value guarantees on those aircraft, we've been able to repurchase them to operate them at a very low ownership cost. If we follow through the fuel chart, is there where we basically are recognizing the impact of what we have seen in the market in the last couple of weeks. We've been seeing a few market fuel prices increasing to a level of $700 per metric ton of kerosene. Probably that's part of that increase that has to do with temporary tensions and political type of turmoil around some of the countries, some of the producers.
There may be also underlying strength in that market. We are referencing our figures to the $700 per metric ton. On that type of reference, and using a dollar-euro rate of 1.21, our fuel bill will be growing to EUR 5.4 billion, which is an EUR 800 million increase over last year. Of course, part of that increase has to do with growth, with the 7.8% growth in terms of ASK that we'll be producing this year against last year. Getting into the ROIC page. Again, it's very significant improvements against last year and against the figures that we disclosed by the end of February.
We have to be, I would say, transparent enough, recognizing that as we are using the four last quarters, we are probably over-recognizing a little bit the Easter holidays, because this year was mainly March, and last year was split between March and April. After saying that, the figures and the improvements that we're accounting for and recognizing are very significant. As a group, operating margin Q1 2018 has been 6.9%, again, a very significant figure, 2.2 percentage points above last year. It represents, in terms of ROIC of last four quarters, a 16.7% figure. As you know, improvements are across the board. In the case of Aer Lingus, very relevant, and this is mainly related to Easter holiday impact in Aer Lingus in year 2018. As you see, operating margin has been improving by 11 percentage points.
Its operating profit for the quarter has been quasi breakeven, which is a very positive figure for Aer Lingus in this low seasonal first quarter. For Iberia, it is also improvement in margin, 2.4 percentage points, and ROIC has been reaching 13.2%. For British Airways, operating margin Q1 has been 9.9%. I make a little bit of stop here because those type of levels were the ones that British Airways were considering for average full year targets just maybe eight years ago. Achieving these margins in the first quarter is very relevant. For Vueling, also an improvement of 3.3 percentage points, and ROIC last four quarters, 13.6%. A little bit of a snapshot on our basic financial position and balance sheet metrics.
Gross debt since March last year has been reduced by EUR 1.3 billion, and that is basically having to do with the regular repayment of our balance sheet debt. Cash and cash equivalents since March has been basically kept at the EUR 7.5 billion level. We have to consider here that the figure of March 2017 was very positively affected by Easter Holiday, so it was including most of the sales cashed in for the Easter Holidays, but of course not the costs of the travel, because the costs of the travel were basically accounted for in the month of April. The EUR 7.4 billion is again a very high figure for March 2018. It reflects an on-balance sheet net debt, which is negative, so cash positive by nearly EUR 500 million. Aircraft lease capitalization has been gradually increasing, reflecting the increased number of leases in our fleet structure.
Even accounting for those, the adjusted net debt has been reduced by EUR 500 million, the adjusted net debt to EBITDA figure has been coming down from the 1.5 times to 1.2 times. That has been recognized also by rating agencies, and Standard & Poor's has been the final one to attribute British Airways with investment grade rating for their debt. Finally, a little bit of a review, which you already know about, on the positive consequences of the new pension fund schemes that British Airways team has been able to agree with unions and pension fund trustees. I would say, a very positive outcome for the company and also for the group. As you know, the NAPS scheme has been closed for future accruals. The BARP scheme has been closed for future contributions since 31st of March 2018.
These would be representing not only improvements both from the point of view of the balance sheet and also from the profit and loss account, but it would mean a much lower level of volatility and exposure for British Airways and the group to changes in interest rates, inflation, et cetera. A quick reminder of the figures will show that on the income statement, one-off net exceptional gains have already been improving our figures by EUR 678 million. These will have an impact in our income statement for the rest of the year of GBP 60 million sterling from Q2 and into Q4. In terms of our balance sheet, the pension fund liabilities will fall by EUR 872 million. As transition cash arrangements for the beneficiaries of the pension funds we have been allowing cash transition payments of EUR 192 million.
As you know, the triennial revision of the pension fund deficit has only started by the end of March and will be taking some quarters. There is a deadline for finalization, which is end of June next year. We hope that these agreements, these initiatives, will result, as I told you, in probably lower figures and sure, a much lower level of vulnerability. Now I bring back the word to Willie.
Okay. Thank you, Enrique. Just to reaffirm our guidance for the year remains unchanged at our current fuel prices and exchange rate. We still expect operating profit for 2018 to show an increase year-on-year, and both passenger unit revenue and non-fuel unit costs are expected to improve at constant currency. Finally, before I take your questions, just to give you a snapshot of our capacity plans, which remain broadly unchanged. Some minor changes between Q2 and Q3. We will be reviewing Q4 capacity in the coming weeks, and I'd expect to trim that figure down. The capacity plans that we have are perfectly justified by the returns that we're generating and by the demand that we're witnessing in the market. With that, I'll hand back to the operator, and we'll start taking your calls.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll now take our first question from Daniel Roeska of Sanford C. Bernstein. Please go ahead.
Good morning, gentlemen. Congrats on the excellent result this quarter. Three questions, if I may. Maybe Willie, could you expand a little bit on your last capacity comment, looking towards Q4, turning that, could you talk a little how you see the sector in 2019, if fuel prices remain high, how you would think about your capacity deployment next financial year? Secondly, on Brexit, just a short follow-up question. Any update on ownership structures for Aer Lingus or Iberia in that context? Any update on the U.S.-U.K. Open Skies progress? Lastly, I'll touch on consolidation outside of Norwegian. If we exclude that for just a second, with high fuel prices, more consolidation may be likely. What would you be looking for in terms of a target in the European market?
What criteria would you be looking for if you were thinking about acquisition in the European space in more general terms? Thanks.
Thank you. In relation to capacity, we keep that under constant review. We're very pleased with the capacity that we're witnessing from the industry. As Enrique said in the presentation, the Q1 results clearly demonstrate that the capacity that we've put in was very much below what the demand was in the quarter. We believe that that's going to continue through the year. Obviously with the higher fuel price, we would expect some people to trim back Q4 capacity, and we'll be looking to do the same. We'll have a view on year 2019 later on. On Brexit, as you know, we've not made any changes to the Iberia structure that's been in place for some time.
In relation to Aer Lingus, we didn't put an ownership and control structure similar to BA and Iberia in place, but we have one ready to put in place if necessary, and we'll continue to monitor that situation. On the discussions between the U.K. and the U.S., I've had regular dialogue with the Secretary of State, Chris Grayling, who remains confident, and I share his confidence, in relation to that issue. He's reported good and constructive dialogue with his counterparts in the U.S. You've seen our comment in relation to Norwegian. We have had some contact with the board. I haven't seen it yet, but I understand Norwegian has issued a statement to confirm that contact didn't go anywhere. We'll have a look at all of our options in relations to Norwegian, but we're not actively looking at anything else.
What we do expect to see, and I think a number of people have said this, is some of the weak carriers are clearly looking even weaker. With the fuel price where it is, I suspect the challenges that they face are just going to increase. I wouldn't be surprised to see a few of these weaker carriers slip further into difficulties and potentially see some exits from the market in the latter part of this year. We're not actively pursuing any other issues, and we're not considering anything. As I've said already, we're going to consider all of our options now in relation to Norwegian, given that the initial contact we've had with them has not led to any agreement.
Okay, thanks. Very clear.
We'll take our next question from Savanthi Syth of Raymond James. Please go ahead.
Hey, good morning. I limited it to two questions here. Just one, could you remind me your greatest sector exposures from a corporate and business standpoint, and what trends you're seeing on that as you look ahead from a travel spend standpoint? Secondly, I know Vueling's been kind of focusing on growing in Italy. But with Qatar being a big investor of Air Italy, I was just wondering if there was any kind of meaningful opportunity for any of the IAG brands to partner with Air Italy.
Okay, thank you. On corporate and business activity, the demand remains good in pretty much all segments. We monitor the BA activity very closely. The performance in the first quarter and the forward bookings that we have are good. We're not seeing any areas of concern. Some areas stronger than others. But in general, it's a healthy outlook. In relation to Italy, Vueling will continue to look at opportunities to grow organically there. Those opportunities, I think, are increasing with the ongoing challenges faced by Alitalia. We're pleased to see the commission consider again the state aid that was made available to Alitalia. We have objected to that. We don't believe that that's appropriate, and we will keep that situation under review. If Air Italy is looking for some interline or code share or transfer, we're happy to do that.
We've already demonstrated that it's something we can do and will do where we see opportunities to work with other partners. It has absolutely nothing to do with the shareholders in IAG or in any other airline. As we've commented on before in relation to Aer Lingus, we've been pleased to have successful dialogue with Ryanair about transfer passengers at Dublin Airport from Ryanair onto the Aer Lingus transatlantic services. Where it makes sense from a consumer point of view, we're happy to put arrangements in place to facilitate consumers who want to transfer between airlines, and that's regardless of the ownership issue.
If I may follow up just on the corporate one. Actually maybe premium versus economy. Could you elaborate what the trends were in the quarter?
No, we don't do that. You can say it was a strong quarter. As I said, all of the corporate activity has been good, and the outlook that we have for corporate activity remains good.
All right. Thank you.
We'll take our next question from Stephen Furlong of Davy. Please go ahead.
Good morning. Well done on the good results. Just two questions from me. Just on the guidance. The guidance is the guidance. I was just wondering, last year you talked about specifically at this stage of Q2, why you haven't done that this year. Is it just because the environment hasn't really changed? Maybe you're expecting with fuel that an acceleration or improvement in the peak summer. Secondly, on costs, which were very good in Q1, I know you've guided down for the year just as you did at the full year. Were you surprised that they were kind of benefiting faster? I certainly got the impression it was going to be Q1, maybe slightly up and then down for the rest of the year. Maybe it's just phasing. Thank you very much.
Thanks, Stephen. Yeah, as you say, the guidance is the guidance. I think in Q2 of last year, we just started seeing trends that we wanted to highlight, that's why we specifically made an additional reference at Q2. I don't have anything to add other than, I think it is positive that we're saying with the significant increase in the oil price, we continue to hold our guidance and expect our operating profit to improve during the year. On costs, the Q1 performance was better than planned. I think credit to all of the airlines for that. We've been clear. We have a long-term goal in relation to non-fuel unit costs. It's not going to be an even achievement through the quarters and through the years.
We're very confident that that longer-term goal of reducing by 1% per annum on average over the period is a goal that we will achieve. There's good focus in all of the airlines, you should expect to see that continue through the year. It's not going to be an even achievement through each of the quarters during 2018.
Very clear. Thanks, Willie.
Take our next question from Neil Glynn of Credit Suisse.
Good morning. If I could ask three quick ones, please. Enrique, you mentioned the productivity strength of performance in the first quarter, which I've noticed. Employees were flat year-over-year in the first quarter, driving that. Just interested, can you hold employees flat for the rest of the year, or how do you think about headcount developments as the business grows? The second question, into the second quarter. I guess the second quarter should be helped by the U.S. point of sale given the seasonality of the business. Just interested to what extent Q3 might be in any way vulnerable given a greater reliance on U.K. and Europe, given I think the U.S. might be a stronger point of sale right now. Finally, can you confirm if a transaction proceeds, would the buyback currently planned be influenced in any way by that?
Let me deal with the last question, and I'll hand over to Enrique to comment on the others. Our intention continues with the stated objective to do a buyback of EUR 500 million regardless. It's not going to influence whether we do or don't proceed with Norwegian. The reason why I included it in the bullet point, I didn't specifically make reference to it in my opening remarks. Just to reaffirm that it is our intention to do that buyback this year. Enrique.
Yes. Productivity you can expect to see increases for the full year, and significant increases. You have to take into account that we are planning for a capacity increase of 6.8%, and that will allow the four operating companies to manage efficiently their workforces. The number of employees is not going to be remaining flat, but you're going to be seeing sizable improvements in productivity through the year.
On Q2 and Q3, we're not expecting or seeing or anticipating any changes to the behavior in terms of booking profiles. We haven't seen any changes, and the forward booking activity that we have in Q2 is in line with what we would have expected. Obviously we've less visibility into Q3, but what we do have is not showing any signs of change. I don't think we'll see a change in the sort of normal patterns that you would expect in Q2 and Q3.
Great. Thank you.
We'll take our next question from Jarrod Castle of UBS. Please go ahead.
Thanks, good morning, gentlemen. Coming back quickly, I've got three. One on cost control, if you could give some color in terms of the operating units. Is the bulk of it coming from BA or is it equally split? Secondly, on page 10. In which unit would LEVEL be currently based on that slide? As and when will you start to split it out? Lastly, IFRS 16. I don't think you're kind of adjusting for it yet. Can you give an idea at this point, what it would mean for balance sheets and obviously when you're talking about operating profits, the adjustments there? Thanks.
In terms of cost control, non-fuel unit cost performance, it has been positive for all the airlines. Of course, with some special tailwinds for airlines that have been growing faster through the quarter, especially Aer Lingus, Vueling, and Iberia. That's basically something that will be continuing through the following quarters. If I jump to IFRS 16, we are still on the process of reevaluating its impact in our accounts. The early findings that we are reaching is the impact is not going to be sizable, both in terms of liabilities and in terms of operating profit. Of course, operating profit will be closer to the one that we have been calling adjusted operating profit, just to reflect that type of difference. As a whole, what we're seeing is impact is going to be low or moderated.
In relation to page 10, LEVEL doesn't appear in that. You see it in the IAG figure, but it's been stripped out of the Iberia figure. It will in due course, you will have more visibility around it, but it's a small entity at the moment, growing this year. Its performance is reflected in the IAG, but not in any of the other opcos.
Yeah.
Related to LEVEL, whether or not you do Norwegian, does that have any impact in terms of your growth plans for LEVEL? Can you say?
What I can say is that we approved at the IAG board the acquisition of two additional aircraft for LEVEL yesterday. We're continuing to look at options for LEVEL's growth. We're not in any way changing our approach-
Delaying
Delaying or slowing down. We continue to look for opportunities. We are continuing to see good opportunities for LEVEL, and are looking at additional European cities. The performance out of Barcelona is very positive, particularly as I've said before, into Buenos Aires. We've added capacity in there. The performance that we're witnessing in terms of advanced bookings out of Paris is also very positive. We're not changing our approach to LEVEL.
Thanks very much.
We'll take our next question from Andrew Lobbenberg of HSBC. Please go ahead.
Oh, hi there. Can I ask about some of the aircraft types that are delivering some challenges? The NEOs that are being delivered with a bit of delay, I think, to most participants in the industry. To what extent is that affecting you, and how are you addressing that? On the 787s, and the engine issues on them, how is that affecting you? Are you affected by the ETOPS issues? I think there's some stuff on the wires yesterday about Qatar perhaps helping you. Finally, can you talk about the industrial relation situation at Vueling, where SEPLA are taking some industrial action, though it's not having too much operating impact. How quickly do you expect to close that out? To what extent are you concerned that drags into the summer? Does it impact bookings? Does it impact the unit costs? Thanks.
Okay. On NEOs, we're clearly very disappointed with the performance of Airbus. I've made my disappointment known to them directly. They understand the frustration that we're experiencing. It's not impacting on our plans because we have flexibility within the existing fleet. We're looking at covering NEO delays with existing CEOs and some options for extensions on CEOs. I'd prefer not to do that. It hasn't as yet had a major impact. It's causing our teams to have to work a lot harder in rejigging their schedules. It clearly is not as attractive to operate with a CEO as it is with a NEO, particularly in the current fuel price environment. It's a very frustrating position for all airlines to be in who are dependent on Airbus to deliver these aircraft. We are having ongoing discussions with Airbus in relation to these issues.
On the 787s, yes, we've had some impact. We expect those impacts will be increasing as we go through May, June, and July, and we hope that it will be fully resolved in August or by the end of July going into August. We're able to rejig our schedule to some degree, to cover off the ETOPS issue. That hasn't been a particular problem for us. Clearly the availability of 787s and Rolls-Royce 787s, and it's impacting, as you know, on pretty much all Rolls-Royce powered 787s, will see us with a number of 787s unavailable through that May, June, July period. We are in discussion with a number of carriers, which includes Qatar. They've been very flexible and helping us with regard to lift will be subject to approvals from the regulatory authorities.
We've not concluded anything, Qatar have indicated that they should be able to assist us. With additional aircraft if required. On Vueling, yeah, I'm not concerned about this at all. I think it'll be resolved when it will be resolved. It's not having any impact on bookings. The team of Vueling are managing the disruption extremely well, and they're clear they're prepared to have negotiations on sensible issues. On other demands, there's no way that they or we will accede to some of the demands that the trade union has made. We recognize that there are some pay-related issues that we need to address and want to address, and we're happy to have that dialogue with them. It's not an issue of concern.
It actually isn't on the IAG Management Committee agenda, so it's being dealt with by Javier and the team at Vueling, and I think it's being dealt with extremely well. We've left it to him to address, and I'm confident that he will handle the situation. His performance and the performance of his team has been excellent, so it's not an issue of concern to us.
Cool. Thank you.
We'll take our next question from Damian Brewer of Royal Bank of Canada. Please go ahead.
Good morning, everybody. Three questions. First of all, just looking particularly at that RASK differential between Aer Lingus, LEVEL, and the North Atlantic. When you look at the business as a whole, could you give us some idea of what the mix of sort of relatively immature routes was in Q1 and what that'll look like in Q2 and Q3? Secondly, on the frequent flyer program, you've indicated back in November at the Capital Markets Day and again after the Q4 report, that there were changes in the offing. Could you give us some idea of when we might get more on those, and whether you're still thinking of the sort of dynamic pricing approach you've thought of in the past? Very finally, on capital allocation, I know you highlighted the NEO issues, but it appears Airbus seems to have issues with a dearth of A330 orders.
Is that having any influence on the way you're thinking about capital allocation and the next growth step for LEVEL? Thank you.
Thank you. We don't give a breakdown of the various routes, but just to say, on Aer Lingus and LEVEL, the important point that's sometimes missed, clearly not missed by you, but missed by some people is that although they operate at a lower unit revenue, they're operating at a significant lower unit cost. That's the model. You've seen the presentations from Stephen Kavanagh and this virtuous cycle that he talks about, the value carrier model, which is driven off continuing reduction in his unit cost, which enables him to be more price competitive, and it's proven to be very successful. You can see the performance of Aer Lingus in terms of their ROIC in the first quarter. On Avios and frequent flyer, you've seen some changes already.
The Avios Travel Rewards Programme has been closed, and the people in that have been migrated into the BA Executive Club. You're beginning to see some of the changes that we had envisaged coming to reality. There's a lot of work going on behind the scenes. We will give a further update on that, but that's the first noticeable change that you should have seen in relation to Avios. On capital allocation, I'm pleased to say we haven't changed our view. We're taking advantage of some specific niche opportunities that are available to IAG and may not be available to others. That's, I think, a feature of the aircraft types that we have in our fleet and the flexibility that we have within the operating companies to access aircraft, both new and secondhand, at very attractive pricing.
We're very flexible in terms of the aircraft models that we will consider for LEVEL and indeed for the airlines within the group. I think there's some unique opportunities open to us, and we will be disclosing some of that in the near future. We continue to be in dialogue with Boeing and Airbus on wide-body aircraft, very constructive dialogue with Boeing, and we'll be meeting them again in the coming days actually to continue to progress that. We found them, that's Boeing, to be particularly constructive in the dialogue that we've been having with them of late. That also applies to the engine manufacturers. We've had some very good dialogue with GE, both in relation to wide-body and narrow-body engines. It's clearly frustrating that we see some delays in these programs.
I have to say, on the other hand, we are seeing some opportunities that we're taking advantage of, and you should expect that to continue through this year.
Okay. Thank you very much.
We'll take our next question from Anand Date of Deutsche Bank. Please go ahead.
Yeah. Hi, morning, everyone. I just had a quick one on BA management. Clearly, getting the pension stuff sorted is a very big tick, and that's been occupying a lot of their time. At the IAG board, what are you now charging them with? Obviously, there's a lot of cost that has to come out, and they've got the program, but is there anything else in particular that you would now ask them to focus on? Thank you.
Thank you. I'm not going to let them speak, but Alex and Steve are actually sitting here today. You can hear the laughter and the apprehension as they wait to hear my answer. No, at the IAG board, we're very pleased with the progress that has been made in relation to the pension issue. We know we still have issues to manage in relation to that. There is still a significant deficit that needs to be addressed. I think the progress in recent months has been a significant milestone and a very positive one. They are tasked with continuing to make progress, particularly in areas like their cost base, but also in terms of operational performance and customer satisfaction. They're doing an extremely good job on both of those. Our Q1 performance in terms of punctuality was very good.
That's despite the sort of challenges they face with aircraft issues. The Net Promoter Score performance continues to improve. They're doing what we want them to do, and we expect that to continue through the year. I think the guys are now breathing again, so I'll leave it at that.
Can I ask a follow-up as well? It's IAG level. With the introduction of hand baggage-only fares on the transatlantic and the U.S. guys going down the basic economy route, does that mean that the antitrust JV needs to be renegotiated at all? Does it just slot in exactly the same way as it always has in the past, i.e., do product changes mean you have to negotiate the structure or not?
No, it doesn't, because it's a metal neutral approach. These issues apply across the JV. We clearly have dialogue with the regulators in relation to bringing Aer Lingus into the joint business. That's a separate dialogue. It's not in any way impacted by changes in the model. As you know, the introduction of these basic fares or hand baggage only are designed to give more choice. That's exactly what we see. We see people are choosing these fares, and then many of them decide to take advantage of the additional purchase opportunities. I think it's a positive feature for consumers and is generally very welcomed by consumer groups and by competition regulators. I don't see it having any impact.
Okay, great. Thank you.
We'll take our next question from Mark Simpson of Goodbody. Please go ahead.
Morning, guys. Just a few small tidy-up questions. On the other revenue line, just want to confirm that's down to Iberia's MRO activities rather than anything else. On the BA trimming of the FY 2018 growth forecast, any regional bias to that? LEVEL, obviously, one of the things that surprised you on the launch was the extent of the ancillary spend you were seeing per pax. Has that leveled out in any way? Is that still growing as you begin to understand that product better? Just wondering if you could talk about that. A final quick question. Just want to clarify on the dividend 25% payout policy, and given the size of the exceptional items this year, is that on a clean basis or reported basis?
Okay. On the other revenue, yes, you're absolutely right. It's Iberia MRO.
Third-party revenues. Yes. That's the sole matter of difference between this year and last year.
On British Airways, no, there's no regional bias in relation to any of the capacity changes that British Airways has made. On LEVEL, we're continuing to see very good performance in terms of the ancillary revenue. In fact, the LEVEL financial performance out of Barcelona has been very encouraging. There's still work for us to do there to fully exploit that model. What we've seen so far is very encouraging, and it is ahead of plan. We're applying some of the learnings that we see on LEVEL to the other operating companies, which is helpful as well. On the dividend, what we say on dividend is the underlying profit after tax.
Yes.
Clearly these exceptional items don't interfere with that. We've said it's the underlying profit after tax.
You have to take into consideration that these improvements, both in balance sheet and income statement, are not so much cash related. They are non-cash related.
more likely to influence decisions about buybacks at a later stage in the sense of your balance sheet strength?
Yeah.
Could be.
We'll consider all of these issues at the appropriate time, but we're not making any change, and that's why I just wanted to reaffirm that we have that intention to do the EUR 500 million buyback this year.
Yeah, fine. All right. Thanks.
We'll take our next question from James Hollins of Exane. Please go ahead.
Yeah, good morning. Three for me, please. The first one just on whether you'll be seeking compensation from Rolls-Royce for those Trent issues on the 787, and maybe just discuss whether effectively this whole process with the Airbus A320s as well will cost you money, whether it should be net neutral, obviously ex operational rejigging. The second one, do you think Q2 constant currency RASK will be up or will Easter mean it's not? The third one, Willie, if you can keep this to a yes or no answer, because obviously we're all keen to get ready for the big Seagulls v Manchester United game later. Can Norwegian execute its current growth program as a standalone business? Thanks.
Okay. On compensation, we're definitely going to be pursuing compensation from Rolls-Royce. We're very frustrated by their performance. I've made that absolutely clear. There's no question that their performance is unacceptable, and we want them and expect them to do a better job, but we are pursuing them for compensation. The same applies with any of these deliveries. We do have contractual terms, which cover some of this, but in some cases, we're going beyond what's in the contract, and we expect these suppliers to respond to our demands because clearly they've got to factor in the ongoing relationship that they want to have with us. We do have options and we're going to exploit those options and deal with our tiers of suppliers if we don't get the response that we expect.
On Q2, we don't break it down, but obviously, Easter does have an impact and that's why Enrique sort of gave you the outlook and the performance over the first four months. You can see that there is a big Easter impact in March and some Easter impact in April. If you want to look at the first four months, it's been a positive trend. We're not going to give you sort of quarter-by-quarter RASK performance.
Although the first half will be positive.
Yeah. On the third question, I have to give a yes or no answer. You better ask the question again then.
Yeah, I will. Can Norwegian execute its current growth program as a standalone business?
No.
All right. Thanks.
We'll now take our next question from Johannes Eron of MainFirst Bank. Please go ahead.
Yes, hi. I have three questions, if I may. Firstly, we had a lot of one-off costs in the last couple of quarters. Just, can you confirm that the Q1 results are free of any, those one-offs? Also, in terms of the Q2 cost performance, what will be the impact of the IT outage not reoccurring in Q2 in terms of year-over-year unit costs? Secondly, I understand that the Spanish route charges will decline by 12% next year. Just trying to understand how significant that will be for Iberia and Vueling for the 2019 budget. Lastly, any new thoughts on what can be done in Vienna organically after the Niki deal did not happen? Thanks.
On the one-offs, every quarter has a lot of non-comparable issues affecting their cost performance. In general terms, they offset each other. This quarter, we have had disruption in terms of weather, we have had some abnormal level of passenger compensation and disturbance in terms of our operations. It hasn't been affecting materially the cost levels of the quarter. The only one to reference, as we said, is the lower MRO activity for third parties in the case of Iberia against the same quarter in last year. Next quarter, as I advised you, we are going to have a couple of new issues. One is we'll be rolling over the disruption costs that British Airways suffered in June 2017. The other one is we'll be starting to account differently for the pension fund obligations because of the new agreements that we have in place.
That's something that you will be seeing in the full quarter results by the end of July.
All of those were in our plan for the year.
Yeah.
There's nothing additional in that. On Vienna, yes, we are looking at opportunities at Vienna, and we're continuing to actively pursue that. We see a number of slots have become available following the acquisition of NIKI by others, and they have returned a significant number of slots to the slot pool and we are looking to take advantage of. I don't know why they returned them. Probably they haven't been able to operate them, but there are slots there that we think are attractive and therefore we are continuing to look at an organic opportunity at Vienna. We see that as an attractive market, and we may or may not do something soon, but we're certainly looking at that as an opportunity. Sorry, in relation to Spanish charges, 2019, we'll be looking at that later.
My experience there is these charges decrease in one place and increase somewhere else, the net results never materializes in a reduction. They look interesting headlines, but I've yet to see any significant benefit from them. Clearly, that's something we will be looking at in terms of the Vueling and Iberia cost base in 2019. We've not had a detailed analysis of that. We've had a high-level analysis, but not a detailed analysis. We'll be doing that in the coming months. We normally do that in July and August.
Okay, fair enough. Thank you.
We'll take our next question from Sathish Sivakumar of Bank of America Merrill Lynch. Please go ahead.
Morning, guys. Couple of questions. Where do you see year-on-year trends around yield and forward booking for next few months? Secondly, on the FX side, what will be the full year FX impact at the current spot rates?
Okay. We don't give guidance in terms of yields. Just let me repeat what I said earlier. The current trading performance is good. We see good underlying demand in all segments. The premium or business corporate activity remains good, as does the leisure activity, and that's at all points of sale. We're not seeing anything that is causing us concern or surprise in any parts of the network at the moment. I would say that our general commercial outlook remains encouraging.
Yes
for 2018. Obviously, we've got very limited visibility into the fourth quarter. As I said earlier today, we have good visibility on second quarter and some visibility on third, but we don't really, at this stage, have any real visibility on fourth quarter.
On the Forex front, it's going to depend on the dollar behavior and the sterling behavior, as you can imagine. At these levels of dollar-euro rate, we expect to have probably a moderately positive impact in terms of transaction net impact. We may be having a moderately negative impact in terms of translation. As a whole, they are going to be more or less compensating each other. If we can expect a net at this moment in time, which is very early in the year, could be a moderate net positive impact.
That's very helpful. Thank you.
Once again, if you would like to ask a question, please press star one. We will now take a follow-up question from Anand Date of Deutsche Bank. Please go ahead.
Hi, morning. Sorry, there's one I forgot to ask as well. It might not be so much a Q1 question, but on LEVEL, I think you said in the past that 90% of the bookings are from brand-new customers to you. There's no cannibalization of Iberia long-haul. I just wanted to check that, A, that's still the case. Secondly, I'm just trying to figure out, do you guys see this as just a nascent new market that you're opening up? Or do you think there's potentially substitution from people taking their city breaks short-haul or anything like that? Is it just incremental pure demand, or is it coming from somewhere, not necessarily your businesses, but somewhere else? Thank you.
Yeah. Very good question. The situation we see is the same as before. We're not seeing any cannibalization. That has surprised us, but there's absolutely no evidence of cannibalization. It's clearly something we'll be looking at now in greater detail as we expand out of Paris. Even with the expansion that we've seen in Barcelona, there's nothing there that indicates. In fact, Buenos Aires-
One of the main performing routes for Iberia in this quarter in South America has been Buenos Aires. At the same time, with similar levels of RASK improvement as the ones that LEVEL is achieving. No sign at all of contamination in that respect.
I think the evidence we have so far is that this was underlying demand that wasn't being served, so that there was a clear demand for this service if the price was right. I think there is some substitution from short-haul to long-haul. We're not seeing it in any bookings that we have. I think when we look at the customer profile and we do some of the research with the customers, I think they have been influenced by the opportunity to take a short break to a destination that they wouldn't have looked at previously. In the main, this is stimulating a whole new market, and that's why we remain very encouraged by the performance of LEVEL and the reason we're continuing to look at the growth and possibly accelerate the growth of LEVEL in the current environment.
Great, thanks. Interesting. Thank you.
We'll now take a follow-up question from Neil Glynn of Credit Suisse. Go ahead.
Hi there. Sorry about the follow-up. I just wanted to make sure we're all on the same page with respect to CapEx expectations for 2018. Enrique, would it be possible to confirm the gross number for this year as you currently see it?
Yes. I think no major changes, with the exception of the unplanned impact. We don't know yet how much about the deferrals in the final delivery dates of neos. In principle, it's a net figure of around EUR 2.8 billion for 2018 as we planned.
Great. Thank you.
As there are no further questions, I'd like to turn the conference back to your host for any additional or closing remarks.
Okay. Thank you very much. As I said at the beginning, it's a strong performance in the first quarter. We're pleased with the performance of all of the companies within the group and pleased to be able to maintain our guidance for the year. Obviously, if there are any developments on any of the issues, we will disclose that as and when required, but I'm not expecting or anticipating any announcements in the weeks ahead. Thank you very much and look forward to talking to you at our next call.
That concludes today's call. Thank you for your participation. You may now disconnect.