Good morning, everybody, welcome to the IAG year-end results. I'm Nicholas Cadbury, the chief financial officer, I'm joined by Luis Gallego. You may be asked why he's on screen and not here. Unfortunately, Luis has broken his leg, so he's sitting at home and making a speedy recovery though. Luis is gonna introduce the call today. I'll then go through the financials, then I'll hand back to Luis to give a more in-depth kind of around the strategy, then we'll open up to Q&A. Luis, over to you.
Thank you very much, Nicholas. Good morning, everyone, and welcome to the IAG year-end result presentation. We are joined today by Nicholas and also by the IAG management committee. As Nicholas said, I'm very sorry not to be there with you face-to-face, that I had a sports accident, and I needed to have leg surgery. It's clear that when you are 54, not all sports are good, but lesson learned. Firstly, we would like to acknowledge the one-year anniversary of the Russian invasion of Ukraine. Our thoughts today are with the people of Ukraine, and we would like to express our best wishes, support. Moving on to our results. In 2022, there has been a strong recovery in demand following the removal of COVID-related travel restrictions, particularly from Q3.
To meet this demand, we had to restore almost 90% of our pre-pandemic capacity at the end of the year. To drive this recovery, during the year, we focused on strengthening our hubs. We quickly recovered operations in our main hubs in Madrid, Barcelona and Dublin. We were very focused on building operational resilience and stability at Heathrow. The hub that, as you know, we experienced the largest number of challenges. We also took a 20% stake, equity stake in the Madrid-based Air Europa. We have now signed an agreement to acquire the remaining 80% subject to obtaining the necessary regulatory and other approvals. In 2022, we continued to invest in our customers, cost efficiency and sustainability targets, including the delivery of 27 new fuel and environmentally efficient aircraft. We placed orders to...
for a further 109 aircraft. I am pleased to report that we also improved our carbon efficiency with our carbon intensity 7% better than it was in 2019. As we have highlighted in previous presentations, we remain committed to generating long-term shareholder value, and we are confident in returning to pre-pandemic levels of operating profit over the next few years. In 2022, we generated EUR 1.2 billion of operating profit before exceptional items, a huge improvement on the EUR 3 billion loss we reported last year. The strong demand, particularly for leisure travel, has enabled this rapid recovery in our financial performance. We saw good cash generation during the year that has driven a reduction in net debt and reinforced our strong liquidity position.
This momentum has continued, and so far in 2023, we have seen a strong forward bookings again, especially in leisure bookings, with business bookings remaining stable. We are mindful of the uncertainty in the macro environment, and that we are still very early in the year. However, we expect a further recovery in profitability this year and expect a chief operating profit of between EUR 1.8 billion and EUR 2.3 billion, including a seasonal operating loss of around EUR 200 million in the first quarter. This is based on current fuel and FX rate and assuming there is no deterioration in the economy. We also expect net debt to be broadly maintained at EUR 10.4 billion for our leverage ratio to continue to reduce in 2023.
It is in our DNA to focus on discipline, capacity deployment and cost efficiency. We will remain focused on doing so this year. Throughout IAG's history, we have been committed to generating long-term shareholder value to service our four key stakeholders: our customers, our employees, our investors, and the society. We have a clear ambition. We are very confident of returning to our pre-COVID-19 levels of operating profit and further strengthening our balance sheet. This, in turn, enable us to continue to serve our stakeholders in the future as we have done in the past. I'm confident that is underpinned by a proven business model and investment case. You can see here the IAG investment case that enable us to generate long-term value for our stakeholders. It is as valid today as it has been in the past.
We have a unique structure with six opco CEOs and six IAG senior members of the management meeting every week to share best practices, allocate capital and resources, and to make decisions in the best interest of the overall group. This was particularly invaluable during IAG's recovery. Our investment case is simple. We have a portfolio of world-class brands-Have leadership positions in major hub cities, and we allocate capital to the best returning opportunities across our portfolio.
We have a competitive cost base, and IAG's unique structure allow us to improve the efficiency of our airlines through sharing best practices and resources, our transformation programs, and by driving innovation. We are also focused on securing our long-term future through our aviation leadership on sustainability. I will come back later to explain what we have done in 2022 in each of these areas to improve IAG and drive value. Now I will hand over to Nicholas, who will take you through our financial results in more detail. Thank you.
Thank you, Luis. I'll now focus on the quarter four. You've got in your RNS this morning, the full year results. I'll try and go through this quite quickly, as you already got the information already. This slide summarizes our core financials. On the top of the chart, you can see the strong financial recovery that we saw in the summer continued into the fourth quarter in both capacity and in profit. On the bottom half of this slide, you can see the liquidity on the right remains very strong at EUR 14 billion, and the net debt reduced since last year-end, which I'll go through in more detail later on in the presentation. This slide shows our P&L for the IAG for the fourth quarter, and I'll talk about the comparisons versus 2019.
The strong demand resulted in a significant recovery, with pre-exceptional operating profit reaching EUR 486 million. Despite not getting back to 100% capacity, we achieved operating margins of 7.6%. There is a lot of information on this slide for you to peruse at your own leisure, I just wanted to pick out some of the kind of key points. Firstly, revenue was up 3%. This was driven by the strong passenger unit revenue up 16% and yields up 18%. Both BA and Iberia on their performance in the summer, continued on their performance in the summer with passenger unit revenues in quarter four increasing by more than 20%. Cargo revenue continued to perform well, although cargo demand and yields softened from previous peaks as supply chains around the world continue to normalize.
Other revenue also increased by 3%, driven by the continued good performance from BA Holidays and IAG Loyalty. Fuel unit costs were up 37% due to commodity prices increasing and the strengthening of the US dollar. The year-on-year commodity spot price increased by 50%, although our hedging limited this year-on-year increase to 41%. Non-unit fuel costs increased by 20%, a CAGR of around about 6%. The main driver of the increase was our supplier unit costs, which were up 27% over the last 3 years. This is higher than the underlying run rate due to a number of factors that I'll just take you through. Firstly, about a quarter of the increase was due to inflation, offset by our transformation efficiency program.
Secondly, about a fifth of this increase relates to the lower capacity flown. Thirdly, about a fifth explained the growth of, was explained by the growth of non-airline businesses such as IAG Loyalty and BA Holidays, which I mentioned earlier, had a record year. Lastly, there was a number of one-offs in non-recurring costs such as IT accounting adjustments and also the move into the new JFK Kennedy terminal in New York. Employee unit costs increased by 13% compared to 2019, but in absolute terms were down compared to 2019, predominantly due to the lower capacity, with most of the inflation offset by efficiencies. This slide shows the profitability for businesses for quarter four. We included the details that we showed last time in the appendix overall.
You can see that the profitable IAG performance was driven by British Airways and Iberia. In particular, Iberia's profits were higher than those reported pre-pandemic, with profits at EUR 18 million. British Airways showed strong recovery from last year, although profits were down compared to 2019, reflecting 20% lower capacity. Aer Lingus and Vueling are more seasonal businesses, with Aer Lingus reporting a small profit and Vueling a small loss, but both showing good performance in their unit revenue and non-unit fuel costs. Turning to cash generation, our cash position remains very strong, increasing almost EUR 1.7 billion during the year. Going from left to right on this slide to point out a few highlights, the single biggest impact on our cash flow was, of course, our profit recovery with EBITDA of EUR 3.3 billion during the year.
We also had an inflow of deferred revenue of a little over EUR 1 billion as we still see restoring capacity at good yields and maintain strong forward bookings. Other working capital and operating movements were also positive as we grew the business. Capital investment of EUR 3.9 billion was as we previously guided. We financed all of our aircraft in the year. Lastly, we saw an inflow of a little over EUR 1 billion relating to the settlement of derivatives, which relates to the hedging of our primary US dollar-denominated debt.
This strong cash flow, together with our uncommitted facilities, improved our liquidity position further to EUR 14 billion at the end of December. We also have financing in place for all of our 25 aircraft delivered for our OEMs during 2022. We extended our multi-opco RCF out for 1 year to 2025. This slide shows our net debt that reduced over the year by EUR 1.3 billion to EUR 10.4 million. In the last quarter, the reduction of EUR 700 million was driven partly by the continued strength of forward bookings and partly by foreign exchange, which saw a favorable movement of around about EUR 600 million. We expect the level of net debt to be broadly maintained by December 2023. Leverage ratios to continue to reduce in 2023 as we continue to improve our profitability.
One of the key focuses is to balance improving our balance sheet strength and investing in our business. This slide details our CapEx and delivery of new aircraft last year and for 2023. The capital is in line with previous guidance, with a continued step-up in our investment program primary, but not exclusively, due to our fleet, with CapEx of EUR 4 billion and 29 aircraft delivered, deliveries expected in 2023. These new fuel-efficient aircraft will help us make further progress towards customer costs, customers, cost efficiencies, and our sustainability targets. Turning to our debt maturity, this chart shows a year-on-year split of when our financial debt becomes due for repayment.
You can see that over the next three years, with the level of cash and liquidity we have, that we're in a very good position to either refinance or repay the upcoming maturities. This slide shows our current fuel hedging position. We currently have around about 56% of our expected consumer consumption hedged for 2023. At current fuel forward prices and spot foreign exchange rates, our expected fuel bill for 2023 is expected to be around about EUR 8.1 billion overall.
In summary, from the financials, we are pleased that the strong financial recovery that we saw in the summer continues into quarter four, resulting in a significant profitability in the fourth quarter and for the full year, with all our businesses performing well and revenue metrics continuing to be positive in all of our airlines. We balanced investing in the business with strengthening our balance sheet with a EUR 1.3 billion reduction in our net debt and a strong focus on costs, giving us a very good flexibility over the next few years. I'll now hand back to Luis, who will give you a little bit more detail on the strategy achievements this year. Luis.
Thank you very much, Nicholas. I assume you have seen that we have signed an agreement with Globalia to acquire the remaining 80% of Air Europa. The transaction is summarized on this slide. This agreement will enable Iberia Madrid hub to compete on an equal footing with other European hubs and consolidate its position in the South Atlantic. I believe the rationale remains highly strategically compelling, and we will share more details on this with you at the capital market event later this year. During 2022, we focused on restoring the networks of our world-class brands. These charts show market data and highlight all the main markets we serve have recovered from the beginning of the pandemic.
These charts show how unit revenue in red and capacity in blue for the entire markets between Europe and these regions have changed since the first quarter of 2020. All of our main markets have seen demand recover strongly from their low point during 2020. While several capacity remains below pre-pandemic levels in all our main markets due to the strong demand, we have seen pricing recover faster, reaching and then exceeding pre-pandemic levels since summer 2022. Asia Pacific has seen the slowest recovery due to the COVID-related travel restrictions remaining in place longer. Asia Pacific is a relatively small market for us, we are optimistic for this region given the recent easing of restrictions, in particular in China. British Airways recently announced the resumption of flights to Shanghai in April and Beijing in June this year.
The next few slides step through how we are serving our customers, our people, and our society. Firstly, looking at our customers. This slide shows how we have been increasing the breadth and depth of our airlines networks to serve our customers better. All our airlines have not only reopened routes that were closed during the pandemic, but offer our customers new destinations that were not previously served. For example, Iberia has opened new routes to Dallas and Washington DC in the US. Vueling has opened 27 new destinations, including new airports in the Middle East and Africa. British Airways has started flying to Portland. Looking to this year, Aer Lingus will be opening a new route to Cleveland. British Airways will be opening routes to Cincinnati, Aruba, and Guyana.
Iberia will be increasing frequencies to some of its more popular South American destinations. This slide gives a flavor of the investments we have made for our customers in 2022. Investment that we have long on board and also on the ground. Aer Lingus has introduced a new short-haul seat and improved the food in its long-haul business class cabins. British Airways has continued to roll out its best-in-class Club Suite product, move into a new terminal at JFK, New York, and significantly improved the food in both short-haul and long-haul. Likewise, Iberia has introduced a new business class suite, upgraded in-flight entertainment, and made improvements on ground handling. Lastly, Vueling has continued to roll out digital products that make the airport experience as smooth as possible.
This focus on investing in our customers' experience will, in turn, drive customer perception scores and long-term loyalty. IAG Loyalty was our brightest spot during the pandemic. Its performance in 2022 continues this positive trend, reporting an operating profit of GBP 240 million in 2022, representing a record profit contribution to the group and an increase of over 30% on 2019. The infographic on the left, Loyalty Flywheel, demonstrates the virtuous cycle that drives value for both our customers and the group. It is based on driver deeper customer engagement by investing in airline and non-airline products and service for our customers. This year, we have continued to grow our customer base with American Express, introduced our co-branded Barclaycard, and allow customers to earn Avios points through Uber.
This increased engagement translates into greater customer loyalty, higher financial returns, which then enables future investment in additional products and services, driving additional value loss for the group and our customers. Running a on-time airline is one of the most important things our customers value and one of the main drivers of the customer NPS. As you know, last summer, the industry in Europe and North America faced a significant challenge in rapidly ramping up operations after a period of low utilization following the removal of most travel restrictions. Despite these challenges, the operational performance of our Spanish airlines was particularly pleasing. Iberia has been recognized as the most punctual European airline last year, with Iberia Express ranked third and Vueling fourth. The challenges were, however, particularly difficult for operations in Heathrow.
Whilst Heathrow actively focused on building operational stability, and our operational performance improved through the summer, the on time performance was not as good as we would have liked. We have a plan to build the next generation operations at British Airways, with the box on the bottom right giving some examples of the things we are focusing on. This includes investing in digital tools for our teams and our customers, redesigning processes, and working with the airport on shared initiatives. We believe this will deliver the service that the customers value and deserve. Our people are central in our business and key in delivering for our customers. To get the business up and running again, we have recruited 7,400 colleagues in British Airways, and we are making good progress on recruiting another 4,300 before the summer.
The pandemic and inflation have created pressures for both our people and our businesses. The collective bargain agreements we reach with our people and their elected representatives have to balance support for both our people and ensuring that our business remain competitive in their respective marketplaces. We have closed agreements for 2022 with all our employees groups, with the exception of Vueling cabin crew and Iberia Express. Some of these agreements are multiple year agreements, and some agreements include links to the achievement of productivity and profit targets. Diversity and inclusion remains a core guiding principle of our business. I am happy that the percentage of women in senior management positions in our business has increased to 34%, demonstrating continued progress towards our 40% target by 2025.
We have also continued to invest in our people through new digital tools and ways of working that allow them to do their jobs better and more efficiently and serve our customers better. We continue to be a leader in the sustainability agenda for the aviation industry. We are on track to deliver our 2025 and 2030 climate targets. Our disclosure on our progress has been recognized by the Carbon Disclosure Project that awarded IAG with an A rating for its climate action and transparency. IAG was the only European airline group to receive this rating and one of the 283 global companies out of 15,000 in all sectors. This placed IAG in the top 3% of all the companies. There is a long way to go before reaching net zero. We are focused.
We have 192 new fuel-efficient aircraft deliveries in the next five years. Over 7,000 of our management have carbon-linked incentives. We are achieving new partnerships for sustainable aviation fuel. We also saw our investment in ZeroAvia fly its first trial commercial aircraft powered by hydrogen. We are mindful of the uncertainty over the global macro environment. So far, in the last five weeks of 2023, we continue to see a strong forward bookings, particularly demand for leisure travel. It's true that business bookings remain stable. Over the past five weeks, forward bookings have fully recovered to 102% in terms of passenger numbers. All the geographies you can see on this slide have seen continued improvement with both forward-booking passengers, volume, and revenues.
We will continue to restore capacity in 2023 and expect to be above 2019 levels by the fourth quarter. However, while Aer Lingus, Iberia, and Vueling is expected to be above 2019 levels of capacity for 2023, BA will still be flying less capacity that they did in 2019, reflecting the retirement of a significant number of wide-body aircraft during the pandemic. To conclude, after a strong recovery in 2022, so far in 2023, we are seeing strong demand, especially in leisure. We expect a further recovery in profitability in 2023, but we are mindful of the macroeconomic uncertainties. We continue to progress towards our customer, cost efficiency, and sustainability targets and expect a similar level of investment in 2023 as in 2022.
We are committed to generate long-term shareholder value and are confident of returning to pre-COVID-19 levels of operating profit over the next few years. Before your questions, this is going to be the last results presentation for Andrew Light. I would like to thank Andrew for his hard work and his help during this year. These years, sorry. We are now happy to take your questions.
We're now ready for Q&A. Somewhere there's some mics. Whole 12-member management committee at your disposal to...
Thank you. Good morning. It's Jarrod Castle from UBS. Just on Air Europa, can you give a bit of color on the net debt levels that you might be taking on? If you can't, can you tell us why you can't give it at this point in time, please? Secondly, just, I guess, another one for the CFO. What is the right level of gross cash on the balance sheet now when you look at the composition of the EUR 10.4 billion of net debt? Thanks very much.
The first question was about Air Europa. Air Europa has got financial debt of about 600 million euros on its balance sheet at the moment, which is mainly made up of Spanish government debt. We have. It's got about 50 airplanes in its fleet. About 49 of those are operating lease at the moment. The kind of value of the leases that'll be on the balance sheet will really depend on when the closing is and also the kind of the size of the fleet at the moment. We'll kind of share a bit more detail of that later on when we know a bit more detail on it overall.
In terms of the kind of cash on the balance sheet, I guess at the moment, as finance director, you can never have enough cash on the balance sheet. I think what we're trying to do is make sure that we can see through the next few years, particularly when we've got high capital expenditure as we're repleting at the moment. Our kind of goal overall is to get back to kind of leverage that we had kind of pre-pandemic, which is round about 1.8 times overall net debt overall. That's where we're aiming for. The amount of debt that we've got kind of repayable over the next 3 years, as you saw on the slide earlier, is very manageable overall.
We've got a bit more debt that's payable in 2026, we're making sure that we've got enough cash on the balance sheet to make sure we can, one, afford our capital, but two, that we can refinance or pay down some of that debt when it comes to 2026. Ideally, you kind of longer term, you hold about 20%-25% of your cash on the balance sheet of revenue.
Thanks.
Thank you. Good morning. Neil Glynn from AIR Control Tower Research. I have two questions, please, if I may. The first one, you've touched on business travel, demand or bookings stable. When I think of that in combination with your guidance for 2023, which suggests up to 70% of 2019 EBIT recovery, it just makes me wonder in terms of how you think about the stage of recovery of EBIT towards those kind of 2019 levels and what the gap is to get full recovery as you see it. Is business travel further recovering the missing link or is there more to add there? Then 2nd question with respect to Loyalty and MRO.
We've seen, it seems to be a building trend that other airlines are seeking to monetize those types of assets in some way. There's obviously progress in loyalty that we continue to hear about, but I'd love to hear your thoughts on what the best way to either monetize or maximize value from an IAG perspective, there is in loyalty. Thank you.
Luis, do you want to take that last question?
Thank you. Yes, you can take the second one, and I take the first one, Nicholas, please.
I was just gonna talk about the kind of in terms of business to business and the recovery, profitability and recovery. I mean, we've always said that, in the last few years we've said that we think business will get back to about 85% of where it was pre-pandemic. Now it might do better than that, as some of the American airlines have seemed better than that at the moment, so it could do. That's our working assumption that work from home will kind of have that sort of impact. Let's hope it's better than that. We do expect that leisure will outperform where it has gone.
That trend of people kind of traveling, we think will fill up that space, from where, kind of going forward overall, fill up the capacity overall. We think we're in a good position where we are. We're not quite back at full capacity in terms of the number of aircraft we are, so we think we're in a good position right now to maximize that kind of demand versus the yield. I guess in terms of the stages we see, we've obviously had quite a lot of kind of capacity coming back.
We expect it to sort back to a nearly full capacity this year, probably full capacity the year after, and we'll probably get back to our full fleet size back at back end of 2025 overall. We've got a transformation program which will help kind of offset our cost base overall. We expect we've seen quite significant cost base increases since 2019. If you look at it on a CAGR basis, actually it's quite, not quite, not quite so dramatic. It's quite impressive, particularly on employment. Actually, over the next three years, we'll see what we can do, see if we can smooth that cost base out. Look forward to get back to profitability in the next few years.
To add some flavor to the business channel bookings, they have remained around 65% by volume year to date, which is a similar level to the business volume that we have in the last quarter of the year. We still see weaker sector in like technology and pharmaceutical. It's true that on business channels that are the channels that the small and medium enterprises they use are the strongest. BA is a little behind Iberia. The last quarter, BA Corporate was 56% of 2019 in volume, and 70% in revenue. Iberia Corporate was 70% in volume and 86% in revenue. I think we see some moderate positive recovery in pharma in February.
We hope it will continue at during the year. As Nicholas said, we consider, our hypothesis is that we will have a comeback of business traffic of around 80-85% of the capacity that we had previously in 2019. Maybe, Nicholas, you can comment about loyalty and MRO and monetize those businesses.
With both of those, we think that they're, you know, really big opportunities for our business, particularly Loyalty. First time we've disclosed what the profitability is of Loyalty. Hopefully that's helpful going forward. We put that flywheel in, which is kind of hopefully shows that as we invest in the business, as we invest in new products, you know, we've launched Barclaycard, we've launched Uber this year. We've got a great business with American Express, as we can keep driving that, particularly while we're getting back to full capacity, while we're driving more customers into that system, to that flywheel.
We think there's an awful lot of, kind of growth still to come from it overall. It's not just kind of growth that drives into Loyalty, but it drives back into the, particularly into British Airways and Iberia. It's kind of that virtuous circle of going forward. We think that's best placed sitting with our IAG at the moment overall. MRO is a smaller part of the business for us overall. Actually right now, whilst, you know, MRO, maintenance has got a huge focus in the industry, particularly across supply chain actually, we think it's kind of quite a competitive advantage having it as part of IAG right now, for us.
Hi. It's Andrew Lobbenberg from Barclays. Can I ask on the net debt? Forgive me, I was out of the market in the 3Q. I think you significantly outperformed on the net debt performance in that last quarter. Obviously you've explained the EUR 600 million gift on FX, what else was there in terms of working cap that gave you such a surprise to give you the better performance? Thinking about the net debt of being flat this year, you've given us the CapEx, the financing plans by aircraft. Just so we get a feel for it, what % of the CapEx will be sale and leasebacks? Those 350s are quite expensive birds. Then if I can cheekily claim that as one question-
That's two. That's two. Definitely two.
As you will then. Go on then. Answer them.
Can I answer those? Otherwise, just as we'll get confused between. Shall I take those? Just in terms of sale and leasebacks at the moment in the marketplace, we tend to do about 50/50 sale and leasebacks, financial lease. It'll probably be a little bit higher on sale and leasebacks this year. Probably about 55%-60% on sale and leasebacks overall. In terms of the debt, I've never heard of FX as a gift that keeps giving. Overall, if you actually look across the year, actually on our net debt, it's been the FX has had a kind of EUR 500 million downside on our, again, increased our debt overall. It's just in the quarter that it was, the, it was a gift.
So it's a two-way gift, should I just say overall. The reason we were ahead was, as I said earlier, actually it was the better performance. We had stronger bookings in kind of going forwards than we anticipated overall. That has the benefit. There were high yields and therefore you kind of get better deferred income coming into your kind of cash flow as well. We also had a program to try and improve our kind of working capital around our receivables and our payables over the last year as well. That's kind of given us some benefit as well. They were the kind of two key things.
That's brilliant. Can I just stay with you and just ask, in terms of the flat net debt guidance-
Yeah
for the year ahead, what are you assuming for working cap? Because as you just described, you had a real big focus...
Yeah
on working capital
Yeah, good question.
hold that in.
Yeah.
Is it fair to expect working capital inflows again next year, or is that too much to hope for?
As long as the business is growing, you tend to have a kind of net positive working capital. We're not quite back up to 100% of capacity next year, as long as we have a good Q1 in 2024, you'd expect to have a small one. It won't be as big as the one we've just had because it's a much smaller increase in capacity year-on-year.
Okay.
Muneeba Kayani from Bank of America. First question on your guidance. Can you explain a bit on what's your assumption on unit costs for this year and, you know, the main line items on staff costs, supplier costs, in there? Just on loyalty, great performance this year. How should we be thinking about that growth going forward? What potential do you see there?
To talk about guidance, that we would think we were quite brave, I think, giving out guidance. Actually, I think we were the first European airline to give out guidance. I know the Americans are by quarter, but actually we thought we were quite brave. Giving out too much detail, we're a bit, kind of, hesitant of in terms of. We're not gonna break down unit costs. I think if you look at our, you know, where consensus is, most people have got unit cost up about 10%-15%, non-fuel unit cost up about 10%-15% over the next year. That's where we are on that. In terms of loyalty, you can see we've had a record-breaking year this year.
We're expecting, Adam, to keep driving that business, being forward. It's had a very successful this year because partly because we signed on some of the new contracts as well. I don't think you'll get such a large increase as well, but we're expecting that to be a steady increase. Adam, I don't know if you have anything you want to add.
We think there's great potential for this business, what Nicholas said earlier on. We still think that, you know, our objective is to grow double digit this year. We continue to believe that's possible. We think the opportunity is significant going forward.
A follow-up, please, on the unit cost. That number was versus 2019.
Correct.
And-
Correct.
Year on year, kind of, it would be down?
I think if you backwards apply that, I think it's about 6%-10% reduction, I think. That's where that's based on consensus.
To clarify, we are considering that in 2023, we are going to be in the range between 10%-15% higher unit cost that we have in 2022, and it's around a carry out of 3%.
Hi. Morning. James Hollins from BNP Paribas. Both my questions are for Sean. The first one's on Heathrow slots. Perhaps run me through a couple of news stories recently and your thinking on, I guess, maintaining slots. One is your wet leasing plans, and also what happens to the Flybe slots. That was question one. The second one was, where are we on BA pilots deals? Do the sort of whopper pilot deals in the US impact your negotiations with pilots on BA? Thank you.
We're.
Yeah, I think, sorry.
Sorry, Luis, you want?
No, I was going to say that you can expand on this. Flybe slots, you know that Flybe went into administration on 28th of February. We have been working to try to recover these slots. Now we achieved the winter slots recently also. We received approval to have the summer slots back. What we are going to try to do now is to operate them. That's the reason we are looking at alternatives to fly ourselves or also to have others that can fly the slots for us. Please you are going to expand on this.
Yeah. I think the Flybe slots are at about 42 per week, so it's a small proportion of the wider slot portfolio we have. We've got the winter slots back and the summer slots back. They're available in the future for people to apply for their remedy, but the remedy would have to be operated on the basis of domestic operations to Manchester and Edinburgh. We'll have to wait and see if somebody else comes and applies for it. That process will take a while, and it wouldn't be actually exercisable for this summer. In relation to broader wet leasing, wet leasing is part of a lever we're using to kind of rebuild, you know, the scale of capacity reintroduction for BA is quite significant.
I think we're taking, you know, between 4 - 6 planes over the summer to complement our core network of about 280. I think when you put it in the context of the fleet we have, it's not unusual, but it is a transition rearrangement for summer 2023. In relation to pilots, we concluded a deal back in November. We have an anniversary coming up on the 1st of June. Those discussions are about to start, but I think it would be premature really to give any sense of where that would head. We wouldn't obviously just look at what's happening in the US. I think we'd look at our own competition and deals that are done across the group and also what's happening in a European context.
Sorry, Sean. Thanks, Sean. I was wondering if you retain the Flybe slots. No one else wants to bother trying to replicate Flybe. Can you use them for different routes?
We can use them for across the network, yes, once they're not applied for by anybody else.
Including this summer?
We can use the discount for different routes, yes.
Thank you very much. Thank you.
Thank you. Alex Irving from Bernstein. two from me, please. First of all, in the context of your discussion around shareholder value, there used to be a lot of talk about a 15% ROIC hurdle rate for investment. Is that still in place? If not, what's replaced that, please? Secondly, also for Sean, regarding Heathrow for the summer, we had capacity caps in 2022 imposed by the airport. How confident are you that Heathrow is in a position to serve the amount of traffic that you want to put on in this summer schedule?
Well, I take the last question first maybe. Heathrow, if you look at our recruitment, and these are the variables we control, we've got about 7,400 people in BA at the end of December. That's up to about 9,100 at the end of February. Our recruitment actually begins to tail off in the next couple of months because we're getting the resources in the door and training that we need. In terms of our operability, we're in a very good place and a much, much better place than we were this time last year. We've done a lot of great process improvement to kinda speed up referencing and training. We are seeing the benefit of that in the BA business.
I think if you look at HAL, and the wider airport ecosystem, they will say that air side pass issuance is now very close to what it was in 2019. That's my barometer for how are the handlers, the caterers, the cleaners, and the security staff doing. I think there is sort of a training learning curve that resources would have to go through. In terms of numbers of people in BA and in Heathrow, it's certainly tracking in the direction to support, the summer that we need.
Just in terms of return on-.
Yeah, I think.
Go on, go on, Les.
Yes, please, Nicholas.
Go on.
No, no. Mark, please.
Just in terms of return on capital, yes, we still have return on capital hurdles in place. I think it's one of the probably the strengths coming into the company is seeing actually how we monitor our capital allocation across the group. I think it gets real vigor everywhere, which has been really great to see. We'll probably come and talk about that and answer that question more specifically, Alex, in the capital market day later this year. That's right, Harry.
Thanks. Yeah. Good morning. It's Harry Gowers from JP Morgan. I've got two if I can. First one is just on the Q1 operating loss guidance. Maybe seasonally pre-pandemic, IAG might have made a positive operating profit in Q1. Is it just a function of the lower capacity and lower business travel still relative to 2019, or is there anything else at play? Second one on Air Europa. Maybe some regulatory headaches around the deal last time. Presumably you wouldn't have gone ahead if you weren't confident that you can get approval. Is that the case, and could there be any remedies that potentially come with it? Thanks.
I'll ask Keith.
Okay.
Go on, Les.
No, no. I was going to say about the outlook for Q1. We have a very positive start of 2023. We still don't have the capacity that we had in 2019 in the first quarter. That's one of the reasons that the unit costs are going to be higher. We have a very strong leisure demand that is helping. As we said before, business traffic is still lagging behind. Those are the main reasons of the loss of EUR 200 million in the first quarter. About competition approval for Europa.
you know that we have started this process in November of 2019. We have tried to do the operation in different ways. We have closed an agreement with Europa, and we need to start a competition approval process. We know that it's going to be a long process. Last time when we abandoned the deal, there was uncertainty in the market. We had Omicron and we then we weren't sure about the, how was going to be the recovery of the industry. Now we see that things are coming back strong. I think that we are going to have a similar approach, but with more certainty about the future. I think we are going to work hard to try to close this deal within the next 18 months.
Satish.
Good morning, everyone. This Satish from Citigroup. I got two questions here. Firstly, on the transformation program, if you could actually give some building blocks there, where are you going to extract the cost savings? Is it mainly on the staff or the supplier side? When are we going to see the benefit come through? Is it in 2024 or 2025? The second one is around the booking systems, basically. As we see this mix shift on the premium from leisure customers versus the business, obviously business comes in more closing bookings, which would give you a better yield. How are you going to, like, manage the transition on your booking systems? Are you starting to update your systems to factor in that increase in leisure booking coming in on the premium segment? Yeah. Thank you.
Nicholas, please.
Yeah. On the transformation, we're gonna hold a capital market day this year. We'll come and give you a little bit more detail on that overall. I think what you'll see there, take an example of our employee CASK, the employee CASK was up around about 13% over the last three years. We kind of in the script, we said that that was all due to our Capacity. Actually you're seeing quite large, kind of inflation, going through labor actually, but we've been able to drive the efficiency to offset that. That's the kind of thing that we've been doing overall. It's, we know it's hard work. Every single line counts on the P&L. We'll come back and talk a little bit more about it in the capital market.
Booking system. Do you wanna talk about it?
Yep. Just in terms of British Airways, I think, yeah, we are obviously amending our booking systems. If you look at the unit revenue in the fourth quarter, it was up 20%, and that accommodated strong leisure and a reduction in business traffic. So the mix had changed, and I think what you do is tend to kind of take earlier bookings from the leisure market to offset the fact that the business market within the month of travel doesn't come in to the extent that it used to. That's working very well. I think what I would say is the vast you know, over 50% of BA's premium revenue has come from leisure historically. That's growing. You know, that change happened actually after the 2008, 2009 global financial crisis.
We've already played very strongly in premium leisure, and we continue to grow that segment and loyalty in BA Holidays is helping. Also with leisure bookings, you do tend to have better materialization factors, and it books direct, and you tend to have better ancillary opportunities. I think the strength of the leisure booking and the channels we get it through, gives us some incremental opportunities that we wouldn't have had if we had the mix back in 2019.
Morning. Morning, Jaime Rowbotham from Deutsche Bank. No one's talked about yield yet, so I'm gonna give that a go. The yield premium versus 2019 narrowed a bit in Q4 relative to Q3. What drove that? Did those stronger than expected forward bookings that led to the nice working cap suggest that the premiums can widen again versus 2019 as we go into next summer? Secondly, I guess linked to that, you know, you've given a profit range. You've alluded to a CASK ex fuel range of +10% - +15% versus 2019. Presumably underpinning this EBIT guidance range, there's a yield range that you have in mind as well. Anything you can share there on the back of commenting on the current outlook, please.
I think about the first question about the yield. The PRASK in the fourth quarter was 16% higher at the end of fourth quarter of 2019. You can compare that with a 22% higher in the third quarter. It's true that it's a little lower, but fourth quarter in general is more dependent on business traffic that the third quarter. It's also true that we still have more capacity in our more leisure-focused of course, like Aer Lingus and Vueling. We hope that as BA is going to recover the capacity, we are going to have an opportunity there. We need to take also into consideration that we have less premium seats in BA that we have before. During COVID, we rounded the 747s. We are not going to have the same premium capacity until we receive the new aircraft, and that can take several years.
On the, on the guidance on, we've given you the capacity, the profit range and the cost range. If you give me a little bit of wiggle room just to not give you the yield, that would be appreciated overall as well. I think what we've also said that we expect to see a significant part of the profit increase happen in the first half of the year. Of course, we've seen that strong yield kind of go right, you know, right now. We had a very strong yielding Q3 as Luis said. Q4 is really a little bit more kind of uncertain really, kind of how business come back. You know, lots of press in terms of the uncertainty about the consumer environment out there.
We're probably a little bit more measured about what it looks like there.
Very much. Conor Dwyer from Morgan Stanley. Just a follow-up on the employee unit cost. You attributed the higher 13% due to the lower level of capacity. I think it's reasonable to assume that once capacity does indeed return to 100%, you can get that back down. By the time you do indeed get to 100% that inflation will have kicked that to more reasonably maybe mid-single digits ahead of 2019. On the corporate numbers that you've been kind of indicating, about 70% of pre-COVID levels there. That seems kind of flattish to what we saw in Q3. I'm just kind of wondering, you know, if the assumption is 15% down structurally, what still kind of needs to happen for that number, for that gap to be closed? You know, we haven't had restrictions in place for most markets other than Asia for quite some time at this point. Thanks.
About the labor cost, as you say, when we recover the capacity, we are going to improve the employee unit cost. It's true that we are closing agreements that in an environment of high inflation, but we are mitigating this with productivity measures. The objective that we have is when we recover 100% of the capacity that we have in 2019, employee cost is going to be similar to the employee cost that we have in 2019. That is a huge challenge in this current environment, but that's the objective that we have.
The second question was about business to business and kind of what's coming back. I think it's about the kind of confidence you see in the underlying businesses overall. You'll start to see every single month from May when the markets opened, you saw a steady recovery month on month on month. I think when it was kind of in Q4 when there was quite a lot of press about the kind of consumer uncertainty, I think you kind of saw customers budgets being tightened overall, and I think you saw that kind of flapping instability kind of happening overall.
That continued into January. Actually in the last few weeks, we started seeing that kind of increase coming back. It's sector by sector as Sean said earlier. Actually we've seen a stronger recovery already happening in Spain already compared to the UK as well. I think it was just about confidence, the business coming back overall so.
More questions if you have that third question, you can ask it. Okay, Alex.
Can I ask a very, slightly technical one, please? During the pandemic when the deal for Air Europa was at first called off, there was a break fee, I think, Alex said EUR 75 million that was deductible against any future deal for Air Europa. Is the EUR 400 million gross or net of that EUR 75 million, please?
All these processes started in November 2019 with a deal for EUR 1 million. After the pandemic, we changed the agreement. We wrote an agreement for EUR 500 million. We broke that agreement, and because of that, we paid the break fee of EUR 75 million, and we said that we will consider that amount for the future. You know that after that, we acquired 20% of the company for EUR 100 million. Now we have been negotiating the remaining 80%. This negotiation is in a different context that we had before because as we are saying, demand is very strong, business are recovering. Air Europa is more focused in leisure traffic, and leisure traffic is doing very well. These EUR 400 million are additional to the amount that we paid in the past.
I'll also try a follow-up. Just with respect to the Air Europa transaction, obviously TAP is on the menu for one carrier eventually. Does this mean that you've enough on your plate that there's no interest in TAP, or how should we think about that?
I think, I think several years ago we tried to close a joint business agreement with LATAM, because we wanted to develop one very important market for us, since the South Atlantic market. That deal was not possible, as you know very well, and we started the negotiations with Air Europa. We hope we can conclude this deal now. This group has been always a platform for consolidation, and we believe that the industry must be consolidated, and we are always looking at other alternatives. I'm not going to talk particularly about that, but we are going to explore any option that can make the group stronger. Doing Air Europa operation doesn't stop us to do other possible M&A activities.
Right. It's Jarrodd from UBS again. Probably the best visibility for the industries from packaged holidays. Be interested to hear about BA Holidays, how much of the summer season has been sold, and whether or not competition from easyJet and Jet2, you know, are starting to hurt. Thanks.
Plus 73% of the summer season. Bookings are very robust. I won't give specific guidance, but the unit revenue projections are positive. In 2022 BA Holidays broke through the GBP 1 billion. Very strong business. High loyalty. I think 91% of people who use BA Holidays will say they'll book again. The experience in terms of net promoter scores are very good as well. What you're seeing in Leisure, you're seeing in BA Holidays and, as I said, the January sale has been very, very strong.
Hi, it's Andrew Lobbenberg again from Barclays. Can I ask about fleet? The 777Xs, their arrival is unclear, it's probably polite to say. How does Sean plan to fly his people around? What are you planning to fill the gap given the uncertainty of the delivery time? I imagine you don't wanna wet lease, that's expensive.
We've got, we got Lewis.
No, no, I was looking. Maybe luis you can answer.
We've got quite good delivery schedules. I think we kind of anticipated kind of right at the beginning of the year some of the delays that were gonna happen in the marketplace actually. We've got good deliveries into BA. We took two deliveries right at the year-end. We took taking six wide body deliveries this year, and I think another six wide body deliveries next year, actually. We'll be back up to full kind of capacity by the end of 2025. Anything you want to add on that, Sean?
I think we're ahead by 25 in terms of number of hulls compared to 19. As Nicholas said, that factor is in the latest profile of the 9X.
Yeah. It's James Hollins again. Three for me. Only joking. There is 2, though. CapEx and CapEx in 2024, please. Then your capacity guidance for Q1 has gone up, mainly I think all due to LEVEL. Capacity's exploded there in terms of guidance. Just wondering what's happening. Thanks.
CapEx. CapEx in 2024 is likely to be relatively the same as it is in 2023 overall, before it starts coming down and normalizing again. 'Cause we still, if you remember, we delayed a lot of the CapEx from 2021, and that's been delayed over these 3 years overall, and as we're refleeting. It's over those three years is when you get the kind of peak CapEx overall. You're right, LEVEL had a good run. Fernando runs our LEVEL business overall, and it's had a very strong demand, particularly on across the South Atlantic overall.
Yes. I, adding something to LEVEL, the presentation level, we are considering a very reduced base, so it's not very significant. We are adding, when you add one aircraft, it's you are adding 25% of the capacity.