Good day. Thank you for standing by. Welcome to the Half Year 2023 International Airlines Group Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Luis Gallego, CEO. Please go ahead.
Thank you very much. Good morning, everybody, thank you for joining the IAG results presentations for the first half of 2023. With me today, I have Nicholas Cadbury, our CFO, as well as members of our management committee, including the CEOs of our main airlines. We have had a strong start to the year, reflecting that our airlines are based in large markets, with good demand for our services. We have recorded a record profit both for the half year and the second quarter, with operating profit for the first six months of EUR 1.26 billion, which is also a big increase compared to this time last year. Specifically, our Spanish businesses are performing very well, with a record profit at Iberia.
Iberia's margin in the second quarter was just under 18%, compared to 8.7% in second quarter 2019. At the same time, we are continuing to invest in our customers and operational performance, where the operating environment is currently challenging. Bookings are looking strong for third quarter, due in particular to a strong leisure demand. Financially, we expect net debt and leverage to continue to come down as we generate more profit and positive free cash flow this year. I will now hand over to Nicholas to talk you through the financial results for the period.
Thank you, Luis, good morning, everybody. I'll just start with the profit bridge for the first half of the year, highlighting both the drivers of the improvement in profit since last year, then the results by each operating company. On the left of the slide, you can see that the increase in revenue has been the biggest driver, combining the restoration of capacity with strong unit revenue growth. That is slightly offset by cargo revenue, where yields are actually still 20% higher than 2019 levels, there is a significant supply and demand imbalance across the market. The other revenue growth came from across our loyalty, our MRO, and our BA holiday businesses. Non-fuel and fuel absolute costs reflect the higher level of flying activity and also the higher hedged fuel prices in the half.
You can see on the right that all of our airlines have significantly improved their profit year-on-year, which I will come back to later. This slide shows the key operational and financial metrics for the half. At the bottom of each box is the Q2 variances versus 2022. The 31% increase in the ASKs compared to the H1 2022 was driven by a recovery in all airlines, especially in the first quarter, when we were annualizing the Omicron constraints at a 20% improvement in ASKs in Q2. Passenger RASK was up 18% in the half and up 14% in Q2 versus last year, with very good growth in unit revenues across all of our IAG airlines, reflecting the strong demand. Fuel CASK was up 5.7%.
Fuel spot commodity prices were actually lower year-on-year. We benefited last year from hedges put in place before the Ukraine war sent prices higher. Non-fuel CASK for the half was in line with our guidance, down 7% year-on-year. In the quarter, non-fuel CASK was down only 2.5% lower than our full year run rate expectations, due to additional disruption costs and investments we made in resilience. These added around 2%-3% to our CASK. Despite this, we are still comfortable with our previous guidance for the full year of non-fuel costs being down 6%-8% on 2022.
As a result of these metrics, we've delivered a record operating profit in the half, at EUR 1.3 billion, and a margin of 9.3% in the half, and a margin of 16.3% in the last quarter. With this good profit performance and a strong inflow in working capital, our net debt has come down again to EUR 7.6 billion, and leverage is now 1.5 times, significantly lower than this time last year. Moving on to the summary of our operating units for the half, you can see it has been a good financial half for all of our businesses. Aer Lingus has returned to a profit after a loss-making first quarter, reflecting the more seasonal aspects to its activities.
British Airways has made a big step up in profit comparisons to last year, driving both revenue and unit cost benefits year-on-year. Iberia has had an exceptional start to the year, making a record profit of EUR 372 million and an 11% margin, following strong demand across the South Atlantic. The increase in non-fuel CASK year-on-year, largely related to the MRO and handling business. Like Aer Lingus, the Vueling result is also more seasonal, but they performed very well with EUR 96 million profit for the half. Finally, we have given you more detail on the loyalty business again, and you can see how it just makes an important contribution to the group's profit at a good margin of 25%.
This next slide just shows you how our operating profit of EUR 1.3 billion reconciles to our statutory post-tax profit of EUR 921 million. I'll just draw your attention to the fact that we are now starting to get much better financial income on our cash, where we're earning around 3.5% in Q2 at an increasing rate compared to our current average cost of financial debt of around about 5%. Moving on to our cash flow, we've generated a net EUR 2.4 billion cash flow inflow in the half. You can see that this has been achieved by the EUR 2.2 billion EBITDA and a positive deferred income of just under EUR 2.4 billion as we built strong Q2 revenue.
Offsetting this, is our continued investment in our fleet, customer propositions, and IT programs, with EUR 1.3 billion of CapEx and EUR 225 million of ETSs purchased in the period. As mentioned earlier, our net debt at the 13th of June was EUR 7.6 billion. We expect to continue to benefit from the positive EBITDA across the year, with a large proportion of the working capital unwinding in the second half, in line with normal seasonal trends. We maintain our previous capital guidance around about EUR 4 billion for the year, with 19 more aircraft expected to be delivered in the second half, compared to 11 in the first half. Given the recovery of the business and our strong liquidity, we're starting to focus on reducing our gross debt. In July, we repaid a EUR 500 million euro unsecured bond.
At the year-end results, we gave guidance that net debt would be flat year-on-year. At this point, when we gave this guidance, consensus operating profit was around about EUR 2 billion. As we said at the Q1 results, we expect net debt to reduce in line with any operating profit improvements above this level. We show in the next slide, at results in February to remind you of the manageable debt maturity profile over the next few years. As mentioned, we may look for opportunities to repay some of our gross debt in the second half if the markets are favorable. Moving on to our fuel hedging position, we're around about 67% hedged for the remainder of this year, and just over 40% for 2024.
As the commodity price has been so volatile over the last year, and the last few months even, we've shown some scenarios of our total fuel bill at different levels. Turning to recent trading, this slide shows the Q2 ASKs and PRASK growth across all of our regions compared to 2022. I won't go through these individually, you can see our core markets of South and North America and Europe are showing a strong performance overall. We've shown very large ASK growth in Asia Pacific, reflecting that the market was substantially closed last year, we've now opened up flying to China, Japan, Singapore, and Australia. Lastly, for me, what does that mean for the rest of the year? We continue to see strong demand in the third quarter, which is 80% booked.
We have less visibility into the fourth quarter, which is very typical for this time of year, and so far for Q4, we're seeing no sign of weakness, and our booking curves are actually slightly ahead of normal years. This is due to the strong leisure demand that books further out. Although, with a higher mix of corporates in Q4, we expect this to normalize as we go through the rest of the year. Our capacity expectations for the year are unchanged at 97% of 2019 ASKs, with the main area of shortfall coming from BA's Asia network, with growth at each of the other airlines. Our non-fuel CASK expectations continue to be in the range of 6%-10% as previously guided. Finally, as mentioned a couple of slides ago, we expect net debt to continue to reduce year-on-year.
On that note, I will now pass you back to Luis.
Thank you, Nicholas. I will now spend a few minutes talking about the strengths of the group and its business model, and highlighting some of the work we are doing to deliver our strategy. Firstly, I would like to remind you that IAG has a unique structure based on driving high and sustainable returns in our operating companies. A big part of that is the way we actively manage our portfolio to maximize value. I think if you look at these results, you can see the benefits of that portfolio approach in the balance of success we are having in our core markets. We are investing in our fleet, our cabins, the service delivered by our people, both on board and elsewhere, and in our digital offerings.
We have historically improved the efficiency at all our airlines, and our transformation program is designed to do exactly that over the next few years. Finally, we recognize that our sustainability agenda is essential to the future of the business. The result of all this is that we are very focused on driving long-term sustainable value for our shareholders. One of the major drivers of long-term success is the leadership positions that we have in our hubs and major markets. We continue to invest to ensure that our market positions are strengthened. On the North Atlantic, from London, British Airways is now flying the equivalent capacity of its pre-pandemic schedule. However, the market dynamics are slightly different, as we have less premium capacity than we flew, we flew before due to the retirement of the 747 fleet.
We are focused on that market as we restore our fleet capacity, which will drive an increase in business class seats with an associated revenue benefit. Aer Lingus has a strong position in Dublin, particularly addressing its core U.S. market, balancing efficiency with an attractive and value-oriented product, and they are expanding their network to places like Cleveland and Hartford. On the South Atlantic, this is a slightly different market to the North Atlantic, where we feed the Madrid hub and compete with other carrier groups from across Europe. Iberia is focused on building its market share, such as adding frequencies to destinations like Bogota and Mexico City. Finally, Vueling and LEVEL contribute both to our strong leadership position in Barcelona, but also through LEVEL to the North and South Atlantic proposition.
We are currently investing a lot in our fleet, which drives better customer product, is more efficient, and is more reliable. On the left, you can see that we have now mostly restored our narrow-body fleet to pre-pandemic levels, with a few more to come, still at British Airways. On the right, you can see that both British Airways and Iberia are still recovering their wide-body fleet after the retirement of their old and inefficient 747 and A340 fleet respectively. Our announcement last night means that we can accelerate that recovery process with BA's firm order for six 787s, and the addition of one A350 to Iberia. It is worth noting that this year, Iberia has been delivering a large part of its long-haul growth through greater utilization, as Vueling has done in short-haul.
In the boxes above each chart, you will see that over 40% of both narrow body and wide body are more efficient new generation aircraft, which is over 240 aircraft. At this moment, we are also recognizing that for many of our customers, we would like to improve our operational performance. It's not helping that the European aviation environment is extremely difficult. Weather-related cancellations have increased by over 200% on 2022 at BA in the first half. The Ukraine conflict has cut EU airspace by 20%, which has a knock-on impact in other parts of European airspace. We have also seen sustained amounts of industrial actions, ATC strikes in France, Italy, and Germany, as well as strikes earlier this year by some Heathrow staff.
Iberia continues to be one of the world's most punctual airlines, and Vueling is proving very resilient. On-time performance at both BA and Aer Lingus have suffered. The situation compared to last year is different. At BA, the core operation is more stable, with significant recruitment being the biggest part. The main focus this summer has been on recruitment, managing the supply chain, and the use of wet leased aircraft in both long-haul and short-haul fleets. Elsewhere across the network, we have a number of initiatives that are focused on delivering a resilient operation this summer. Aer Lingus have focused on removing bottlenecks, such as checking for U.S. connections. At Vueling, it has mostly been about using data and systems to have a more joined-up approach between planning and on-the-day delivery.
They are Europe's second most punctual low-cost carrier, despite their significant exposure of French ATC. At Iberia, one of the most punctual airlines in the world, they are looking to improve even on this performance with investment in additional resources. We believe that this, as well as a large number of other initiatives, will deliver better performance for our customers. As well as in our fleet and operations, we are continuing to invest in the customer proposition for all points of the customer journey. Part of that is to ensure that our premium products are attractive and support the demand from both leisure and business travelers in the future. Both British Airways and Iberia are implementing new business suite products with 55% of BA's Heathrow-based long-haul fleet now onboarded with the new product.
BA is also enhancing and developing its lounges and lounge products, such as the new JFK Terminal eight lounges, but also at Heathrow Terminal three, Newark, and Chicago. All of our network airlines are investing in an enhanced food offering for both premium passengers and also economy passengers. We continue to invest in IT and digital, and our major investment in moving systems into the cloud is continuing. From a customer perspective, from a customer service perspective, sorry, we are rolling out digital capabilities such as live chat, baggage tracking, customer pre-flight messaging, and online menus. We are investing in our customer service with a new bigger call center that is equipped with a new CRM and better telephony systems. Our loyalty business continues to do well, as a high-growth, capital light, and cash generative part of the group.
We continually innovate to create ways for customers to engage with Avios, and in particular, we do this as we invest in our proprietary technology. On the collection side, we are working on both the airline and non-airline side, such as, through airline and financial service partners. We are also making it more attractive for our members to redeem their points. British Airways has now released Avios-only reward flights to seven popular destinations. We are also seeing growth in redemption at BA Holidays, with around 20% of bookings now using Avios to save money. Moving on to our people, they remain core to our business. In the first half of the year, we have recruited 7,000 people across the group. We are also investing to ensure we have a good supply of pilots into the future, with career schemes at both Iberia and British Airways.
We are targeting better diversity at senior levels of our organization. Most importantly, we are in the middle of negotiations with a number of our employee groups, and we hope to agree this over the next few months to the satisfactions of all parties. We are working towards ensuring that we can reach long-term sustainable agreements that allow us to be competitive with other airlines and to be able to invest in the business for the future. Finally, sustainability continues to be a long-term part of our strategy. Firstly, it is important to say that IAG has a positive impact in the economies where it operates. We asked PwC to assess this based on 2019 data. The results show the important contribution IAG is making in the U.K. and Europe, the job it is supporting, and the way it supports tourism.
This amounts to a direct and indirect contribution of EUR 70 billion in GDP and supporting more than 600,000 jobs. During the first half of the year, we continued to make progress on some of our key sustainability initiatives. We are actively advocating for policies to support the production of Sustainable Aviation Fuel, including with the design of the SAF mandate and supporting supply incentives. We continue to work towards our targets, target of using 10% SAF by 2030, securing more supplies of SAF, such as the investment we announced earlier this week with Nova Pangaea in the U.K. Don't forget the investment in fleet we talked about earlier, where the latest generation aircraft are around 20% more fuel efficient than previously.
The modern wide bodies that we are currently receiving are up to 40% more efficient than the 747s and A340s they are replacing. To summarize, this has been a good start to the year, delivering a record first half profit. We are looking forward to delivering another strong quarter in the summer, which is now almost 80% booked and finishing the year positively. We will continue to invest in our group-wide transformation program that is creating a more efficient business and opening up additional revenue streams. As a result of the good financial performance, we expect to generate sustainable free cash flow this year and to continue to deliver year-on-year. Looking beyond 2023, we are convinced that IAG's unique business model and attractive markets can deliver sustainable benefits for all the stakeholders in the long term.
Now we are ready for your questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. To ensure everyone has the opportunity to ask a question today, please limit yourself to just two questions. Please also ensure that you are close to your microphone and not on loudspeaker. This will help with ensuring that your audio is clear and your question is understood. Thank you. Press star one, one again. We will now take the first question. The first question comes from the line of Stephen Furlong from Davy. Please go ahead.
Oh, hello, thank you for that. Okay, maybe two questions, please. Can I ask about sustainability? The excellent efforts you're doing there. My understanding is that if CORSIA isn't kind of further developed and other more countries are, become part of it, then there's a provision for, in the EU, for, ETS long-haul to fall into ETS in 2027 onwards. I'm just wondering what you think of that, and you-- are you worried about that, that long haul will have to pay more allowances? That, that's the first question. Then a kind of a particular one on Gatwick. I'm just maybe it's, my understanding is in Gatwick, a BA wants to expand, and the slots that it gave back in the pandemic, whether in-house to Vueling or, or to easyJet.
Maybe you can just talk about what are the plans there for the slots that you gave back. That would be great. Thank you.
Thank you. Good morning. Yes, as you said, we are pushing to have CORSIA as the solution and the global solution that we need in aviation. In parallel, we have the ETS rules that are going to apply to the intra-European flights. You know that the allowances are going to be reduced. We are pushing that this ETS scheme can in some way help the production of staff that, as you know, we have a shortage, and the staff that we have, is very expensive. SAF is the only sustainable solution for long-haul flights.
We have a commitment, commitments of $865 million in order to comply with our commitment of 10% Sustainable Aviation Fuel by 2030. In U.K., what we are asking the government is to have a mechanism to stabilize the price in order to guarantee the investment in the plants that are needed to have this 10% of SAF. We are going to continue leading this transition to a sustainable aviation, and trying to change the policy that we have in Europe and U.K. more oriented to the stick, to the carrot that they are using in the States, and it's helping more to the development of the industry.
About the second question about Gatwick, maybe, Sean, you can answer about that?
Yeah, David, yeah, on Gatwick, Euroflyer is now up and running, obviously, at a fairly significant scale. We have set up a separate airline operating certificate. We're operating about 18 aircraft there this summer. Our plan would be to get that up to about 26, and we do have arrangements to take slots back, from people we have leased them out to, particularly easyJet, over the coming years to enable that. That's simply headroom, and, you know, capacity for wedding current operation, which again, has increased, and it's performing very well.
Okay. Thanks, guys.
Thank you. We will now take the next question. It comes from the line of Savi Syth, from Raymond James. Please go ahead.
Hey, good morning, everyone, and, and thanks. If I might, just if you could provide a little bit more color on business and premium demand trends. I know you mentioned it, but basically, you know, essentially business, just where, where is it trending relative to the past? The second question that's tied to that then is just, I know your plan, as you kind of thought about this kind of coming out of COVID, was that business kind of recovers to maybe 85%. We've kind of definitely been surprised at how strong premium leisure has been. What are the implications for earning seasonality going forward, like on a long-term basis? Do you, do you kind of expect it to be pretty similar to kind of pre-pandemic? Thank you.
Okay. Good morning. Corporate traffic is recovering more slowly than we thought at the beginning of the year. It's true that business travel is recovering at different rates across our airlines and the different regions. We see a correlation between business travel and people returning to the office. For example, our Spanish airlines are seeing a stronger recovery in business travel if you compare with the British Airways or Aer Lingus. It's true that summer period is not a peak period for business travel, the recent trends show that BA revenue was around 69%, and volumes remain around 60%-61% of 2019 levels. Iberia, they see something different. Revenues closer to 95% and volumes of 82%.
We see also a difference in the rate of recovery between the different type of business trips. For example, long-haul business trips over two days trips have been recovering faster than the recovery of short-haul day trips. If we look specifically to British Airways, for example, since the end of COVID, business volume has recovered each quarter. In the period from the second quarter of 2022 to the first quarter of 2023, the average increase in volume comparing with 2019, was 10% per quarter. From second quarter of 2023, we didn't see any recovery, and the volumes are plateau at 61%.
It's true that the volume of flight cancellations don't help, we see that things are not improving recently. We are more optimistic about the future because for the third quarter, BA is forecasting to reach 68% of corporate traffic if we compare with 2019. That's a seven-point improvement if we compare with the Q2. Mainly, it's going to be due to less, less disruption. Also, we need to take into consideration that in 2019, we had a strike, it's important also the underlying growth. When we look, for example, at September, bookings are coming, business bookings are coming well and are ahead of the expectations that we have.
As you can see, things are coming back, are coming back slowly. Are we going to reach the 85% that we said? We think we are going to come back there, but it's going to take more time than we thought originally.
That's super helpful. Just on the kind of earning seasonality at tops there, that, I mean, if it even does have an impact?
Yes. In the group, we have different airlines. Seasonality is different in the different airlines. For example, we see now that this slow recovery of corporate traffic is having a bigger impact, for example, in Aer Lingus, and now we have a more seasonal airline. In the case of British Airways or Iberia, we don't see that this is affecting to the seasonality of the company.
Very helpful. Thank you.
Bye-bye.
Thank you. We will now take the next question. From the line of Jarrod Castle from UBS, please go ahead.
Thank you very much, and good morning, everyone. Just a question. You say that summer is 80% booked. Do you think that's the right number? Or, or are you missing out on potential yield uplift for close-in bookings? Then just related to pricing, you know, there's obviously been some comments from US Airlines on pricing weakness. Maybe it's US Airline specific or those airline specific. Do you think some of that will come Europe's way, I guess, in, in the future? Then just lastly, new Heathrow CEO starts, I think, at the beginning of October. You know, I guess, what, what would be on your hit list in terms of, you know, things you'd want done differently at Heathrow or things reinforced?
And, you know, I guess just the health of that relationship at the moment and, and going forward. Thanks a lot.
Sorry, to get the first one. Just, yeah, just in terms of the 80% book for the summer, yeah, I think we're looking at the right number there. It's, it's, it's slightly ahead of where we were a year ago in terms of booking trend, and I think you'd expect that kind of a slightly mixed, bigger mix of leisure that we're seeing. Of course, during the summer period, you have a much less dependent on, on corporate travel. I think at the moment, you're seeing actually those short-term bookings are being filled by leisure at the moment, so we feel quite comfortable. As we said earlier, we're not seeing any signs of weakness and a similar sort of trend in, in yield that we saw in Q2 as well, across that as, as, as well.
Okay. About the question about Heathrow. I think we welcome the new CEO. For sure, we are going to try to continue improving the relationship with the airport. At the end, is what is going to be beneficial for the customers. I am sure that we will talk about a lot of things, main topics, I'm sure will be the Heathrow charges that, you know, have been a battle, and we continue with the battles because we are operating in one of the most expensive airports in the world. When you see the experience of the customer, is not one of the best, to be polite.
Also another topic is the electronic travel authoritation, authorization that you know, that we are talking about that now. It's something that can be a big problem for the connecting traffic in Heathrow if we compare with other hubs in Europe. I don't know, Sean, if you want to add anything.
Yeah, no, I, I think, that would be one thing we'd work with Heathrow to have it alleviated, because I think having an ETA for transfer customers doesn't make sense.
Mm-hmm.
We need to work together on that. As Luis said, I think we need efficient and, you know, very much, you know, improved infrastructure and delivery for customers, and we need to make sure that the charges sustain a competitive position for Heathrow. We'd work with Thomas in the same way that we've worked with the previous regime on delivering that.
I think you asked also of the weakness in general in the unit revenues. As we said before, we don't see that. I think we are - we see for the third quarter, a similar trend that we had in the second quarter. Unit revenue increase compared to the 2019, similar to the one we had in the second quarter. It's true that we see a decrease in the last quarter, but it's not linked to any weakness. It's linked more to the normal seasonality effect.
Okay. Thanks very much.
You're welcome.
Thank you. We will now take the next question. From the line of Jamie Robison from Deutsche Bank. Please go ahead.
Morning, gentlemen. Two from me. I was gonna ask about Q3 yields, but you just covered that. Instead, just looking at S`lide 20, big difference in on-time performance between BA and Iberia. I think that probably has a lot to do with Heathrow, which you just talked about a bit, the differences there versus Madrid. Maybe you could just expand a bit on what you can do to improve on-time performance further at British Airways. The second question relates to IAG as a platform for consolidation. Just wanted to get a sense for how ambitious you're feeling in the current environment. Obviously, Air Europa has agreed subject to antitrust. I think the Portuguese government said a process for TAP will take place before October, and presumably, there are other lower profile opportunities around Europe. How great-
is IAG's appetite in this current phase of industry consolidation, please? Thanks.
Okay. Starting with the OTP, it's true that we have two different behaviors in British Airways, Aer Lingus, and Iberia and Vueling. I think the environment that we are operating in Europe is very difficult this summer. As I said before, we have strikes, ATC problems, ground handling. We have less airspace as a consequence of the situation in the Russian invasion of Ukraine. We are having problems with weather, including thunderstorms, high winds, et cetera. We are having issues that, you know, in all the industry, supply chain issues. British Airways and Aer Lingus are particularly impacted. It's true that we are managing better the situation in Spain.
I think, in the case of Iberia, it's a process that has started long time ago, and they changed the company to become one of the most punctual airlines in the world, and they are managing better the situation. It's true also that during the COVID, in Iberia, was possible to maintain all the employment, so they have the people that they had before, they have the right skills. In the case, for example, of BA, they have hired a lot of new people for, for this summer, and you always need a period in order to improve the performance.
In any case, when we look at, for example, at the number of cancellations in BA this summer, and we compare with last year, the late cancellations have been reduced 40%, flying 20% more flights. Our ambition is to improve punctuality in Heathrow, in Gatwick, in Dublin. It's true that the environment is not helping, but we know how to do it, because as you said, we are having very good operation in other airlines of the group. About, about the platform for consolidation, yes, we continue. We created IAG as a platform in order to consolidate the European aviation, because we think it's needed.
For that reason, new companies joined the group in the past, and we always are looking to opportunities to develop the group. In the case of Air Europa, is something that we closed in November 2019, and we are even with COVID in the middle, we continue trying to do this operation that is critical for the development of Madrid's hub. That, as we have seen, in these results, is a, a hub, that is, growing, and I am sure is going to be a big support for the group in the future. That operation, we are still in the pre-notification phase with the European Commission, and we are in the process now of submitting the, the, the information.
We are talking with the potential partners for remedies, and we are working trying to demonstrate the consumer benefits that are going to come with this operation. Also trying to show that Madrid needs a hub to compete with the bigger hubs in Europe, and that the European airlines, we need to have the size to compete also in a global world, where you have the U.S. carriers that are... Yes, they have concentrated the market, or you need to operate to compete with Chinese carriers, Gulf carriers, et cetera. That, as you said, is something that we are analyzing, but we need to wait until the privatization process will start probably in October.
At that point, we will determine if it's something interesting for the group or not.
Thank you.
Uh-huh.
We will now take the next question. From the line of James Hollins from BNP Paribas. Please go ahead.
Hi, yeah, morning. 2 for me, please. 1 on pilots, the other on British Airways. On the pilots, I guess for Nicholas, I was wondering in your cost guidance, what you're assuming on BA, Aer Lingus, Vueling wage increases, and any more detail on where we are on those negotiations. Perhaps while we're on pilots, whether the Iberia pilots are agitating for a pay increase or despite them having a long-term deal? For Sean, read a very interesting article in the Sunday Times about for an interview with yourself. Wondering on, on this platform, you might discuss a little bit more detail on some of those issues you were talking about British Airways, whether it's staff morale, some of the cost required to improve the business, back-end, front end, et cetera, key focus.
I'd just love to get a bit more on this platform from you, Sean. Thank you.
James, just starting on pilots. we're.
As you know, we've agreed for the next three years with Iberia, our, our, our CBA, so that's in a, in a good place overall. You can see we're operating the company's operating incredibly well at the moment as well. This is the season where we, we start, you know, we're in negotiations with most of our other airlines, at the moment with our, with our pilots and our, and our cabin crew as, as well. I think it right now, it would just be kind of inappropriate for me to kind of comment specifically on, on any of those deals as, as, as well. We're gonna be expecting a, a robust flying pattern over the, over the summer holiday.
Really the guidance I'm gonna kind of refer you to, is the guidance that we've given you before, which is kind of, you know, we think overall with both employee and our supplier costs and our ownership costs, we're down about 6%-10%, year-on-year over-overall. I think that's, as far as I can go on that overall.
In relation to BA, yeah, I think we are kind of midway through transforming the company, I think there's a lot of progress being made, maybe if I kind of structure this in four key components. I suppose the first thing is, is leadership, and the kind of people we have driving the transformation. We have brought in, I think, a lot of very, very strong leaders to really accelerate the pace of improvement in the business. More recently, we have a new director at Heathrow, Tom Moran, who joined from Thameslink, and, you know, he's a very, very impressive and experienced professional, who I think will really help with the Heathrow challenges that Luis has spoken about. I think secondly, is resourcing. We've made significant progress on, on rebuilding the resources in the company.
We've added 3,000 people alone, you know, in the first half, in advance of this summer. You know, we've recovered about 13,000 more people since the start of the end of the pandemic. The resources are getting there. You mentioned morale. I think we are seeing significant improvements in employee engagement. We're putting a lot of work into making sure the people have the right skills, the right training, and the right tools to do the job on the day. Make sure really, that we support all of our frontline operational people in looking after our customers, and that's trending very much in the right direction. If we look at investment, you know, we have, as Luis mentioned, significant fleet deliveries coming, and the great news is they all come with new product. The Club Suite is very, very well received.
I think it's in the top four business class experiences globally. We now have 55% of our Heathrow fleet has the Club Suite. That will rise to 63% by year end. We start reconfiguring the 787-8s and 9s next year. I think the hard product will work. That's going very well. We've also put significant investment into our contact centers. We've had a new site in Delhi, a new site in Bucharest, and a new site in Kuala Lumpur. We've increased our call handling capability by about 30% year-on-year. Finally, it's putting in some foundations on tech and experience. A lot of work going in to migrate out of our data centers into the cloud.
We'll be complete with that next year. We're redeveloping BA.com and looking to transform the digital experience. Again, we have a new leadership team leading that program in British Airways. There's a lot of foundations going in, a lot of progress being made, and, you know, very exciting developments that will begin to impact the business positively in the next 12 months or so.
Okay, thanks, Sean.
Thank you. We will now take the next question. One moment, please. The next question comes from the line of Guilherme Sampaio from Caixa Bank BPI. Please go ahead.
Hello, thank you for taking my question. Two, if I might. The first one, coming back to bookings again, if you could provide some view on how are bookings performing across your key geographies, and if you could provide some granularity on gross bookings and cancellations? The second question, if you could update us where your NDC volumes are at the moment, and to what extent these are being channeled through the GDS? Thanks.
To just with bookings, I mean, we're, we won't go into individual geographies overall. I think we've already said that we've seen the kind of continuation of Q3. There's been similar trends of Q2, with the kind of no weaknesses in there. We've seen our, particularly in our, in our core markets of North America, South Atlantic, and across Europe, continues to be, to be strong. All leisure, leisure destinations, again, continue to be kind of holding up very, very well.
It's, you know, the only area where we are, where we're kind of cut on capacity rather than bookings at the moment, is, is flying east, and that's just because we don't have the number of planes flying across to the, to the same number of destinations, the same number of frequencies that we had in the, in the Far East at the moment. That'll take us two years to get back up to that sort of level of capacity. I think that's, that's where it is on that bookings. The next question was on kind of cancel, cancel- cancellations overall. Which you'll see, I think if you look at cancellations overall over the last kind of this year versus last year, actually, you'll see the kind of level of cancellations overall, is, is down.
We've still got still higher than we would like them to be, of course, but we're still kind of focusing on making sure they, they kind of continue to kind of come, come down overall. What-- There was another question as well, which I missed, actually.
On NDC, if you could update us, where are your volumes, right now, in terms of the overall volumes, and to what extent these volumes are being channeled through the GDSes?
I don't think we, I don't think we disclose the actual levels of GNDS that we do, kind of, specifically overall, but it's in a, kind of, increasing share of our, of our business overall. You know, pleased with how that's kind of going at the moment.
Direct.
Yeah. The direct side has continued to grow as a, as a proportion of our business, both, both for leisure and for corporate.
Okay, thanks.
Thank you. We will now take the next question. From the line of Harry Gowers from JP Morgan, please go ahead.
Hey, good morning. Two questions if I can. The first one is on disruption. There's been, I guess, increased noise around potential disruption in the last few weeks, especially in places like Gatwick. How confident are you, you can complete your Q3 capacity without large delays or last minute cancellations? Are you relatively confident in the system in general or your major airports? Just second one, just going back to the corporate travel point, because it sounds like you think the slower recovery versus expectations this year is probably more cyclical in nature rather than a higher structural impact. Is that the case? It sounds like structurally you still expect those corporate volumes to get back to around 85% of 2019 levels. Thanks.
Yeah, I'll just start on the corporate one. I'm not sure about cyclical overall. I think in some sectors you've seen it probably a bit more cyclical. I think kind of you've seen in the finance sector has been a, you know, the beginning of the year was a, was a bit subdued. Probably levels, level of kind of transactions that were going on actually, but we've seen that kind of recover a bit lately overall. I think, I think it's just a steady growth back. It's, it's particularly correlated to kind of when people are working at, working from home and as they're coming back into the office as well. You've seen Spain recover almost back to 100%.
If you go back to offices in Spain, they're back to a normal standard spend, where if you go to Ireland, it's still kind of Mondays and Fridays are pretty, pretty work from home. So that's. It's kind of correlating with that at the moment. You'll see in the U.K., as you work from home, it's gonna continue to, work from office is continuing to improve, and so it's gonna improving with that, that base as well. As we said, we're starting to see Q4 very, very early, but we're starting to see kind of, kind of encouraging signs from making bookings on the, on corporate travel.
Just on, on disruption in the UK airports. You know, we're the 29th of July, we're in peak summer, we've already been in peak summer as well in June, which is a very big period for North Atlantic. I think July, we've seen improved reductions in, in disruption compared to June, we expect that to carry on as we head into August. I think Gatwick, our operation is obviously smaller than some other operators out there, I think we're, you know, not seeing the level of disruptions to the BA operation at Gatwick as you may see overall at the airport. That has some specific challenges in relation to air traffic control capacity that we monitor closely. At Heathrow, as we said earlier, I think our resourcing picture is much better.
We obviously are vulnerable to the external environment and the airports we do fly to in Northern Europe as well, are, are seeing similar levels of, of challenge. We are focusing on the things we can control, particularly supply chain, technical resilience and resourcing. We do see them, you know, being stable and getting better as, as we look into August.
All clear. Thank you.
Thank you. We will now take the next question. From the line of Andrew Lobbenberg from Barclays. Please go ahead.
Oh, hi there. Can I ask, let's just stay at Gatwick and inquire what, what your attitude is towards the ambitions of the airport to get their second runway there? Then can I have a couple on the North Atlantic, please? Obviously, there's, there's great demand and, and your product is great, but part of the thing that's helpful is, is that Norse is, is a great deal smaller than, than Norwegian was before the pandemic. Next year, Norse is expecting to take 5 787s back from Air Europa, and meanwhile, we've got the valiant people at Global Airlines expecting to put 4 A380s on the North Atlantic from Gatwick. What do you think about the ambitions of these disruptors?
The final one on the North Atlantic is, you know, how do you see the developments at American as a partner, as a feed provider for you, in the Northeast U.S., given that the partnership with JetBlue has fallen down? Thanks.
Okay. I start with the North Atlantic situation. 75% of the market now in North Atlantic is between the three joint businesses that we have. If we look at the traffic between Europe and US, in the second quarter, the capacity was -2% versus 2019. In the third quarter, quarter is going to be +1% versus 2019. The traffic, even with the exit of Norwegian, has recovered the situation. It is true that when we look at specifically to the London Heathrow, US market, the situation is that in the second quarter, we have 11% more capacity than we had in 2019, and in the third quarter, we are going to have 13% more capacity.
It's true that what is happening is part of the traffic from Gatwick is going to Heathrow. When you see London, considering together Heathrow and Gatwick, we have in the second quarter, minus 1% of capacity, and in the third quarter, we expect +4% of capacity. That capacity that Norwegian left, the other actors, we are replacing, and then we have the same capacity that we had in 2019. The situation is different, for example, in Spain, where the traffic in Spain, U.S. in the second quarter was minus 13%, and in the third quarter is going to be similar, so to be minus 14%.
In this environment, we have also British Airways, that they have less premium seats that they had in 2019 because of the retirement of the 747. We have other competitors that they are adding more premium seats. When we see the situation with British Airways plus American Airlines, we are slightly above the market share that we had in 2019. That's the situation that we have in the market. Talking about American and JetBlue. We are sure that we can continue working with American and trying to develop the network without this agreement between American and JetBlue. I don't know if you want Sean to add something.
Yeah, I, I think, you know, the Northeast is an important market for us. Andrew, you know, being a hub carrier based at Heathrow and having hubs at Madrid, you know, we can drive an awful lot of traffic behind our gateways and, you know, feed it into terminating traffic at places like Boston and New York. We've never really built our model on, on huge amounts of behind feed in those markets. I think American does give us really strong frequent flyer presence, and it gives us, you know, good feed over Philadelphia, as a Northeast gateway, as well as connections over Chicago and Dallas in the Southwest.
Yeah, wait a second. No mic on.
At Gatwick, yeah, I think that we, we've seen Gatwick obviously launched their plans, and they're seeking TCO. We'll evaluate that closely. I think, you know, two or three considerations will come into play. One will be cost, and I think they're making a pitch that it is a very cost-efficient form of airport expansion. I think secondly, it would be, you know, wider community impact. Again, I think, you know, the numbers and community impacts look very manageable in terms of noise envelope. You know, we, we'll evaluate it. Gatwick's an important gateway for us, and, you know, I think the case is, is one which I'm not surprised they've made and could give us opportunities in the future.
Okay.
Thank you. We will now take the next question... From the line of Neil Glynn from AIR CONTROL TOWER . Please go ahead.
Morning, everybody. If I could ask three quick ones, please. The first one, following on from some of the comments on staffing and resourcing. The headcount in the first half of the year was actually higher than pre-pandemic, while capacity was obviously a little bit lower. Just interested on the outlook for the future there and how you think about productivity on the labor cost side, going into 2024, notwithstanding obvious negotiations afoot. Second question on Iberia, a very impressive performance, of course. Could you give us a bit of detail in terms of the strength of flows from Europe versus LatAm originating, which may be helping their long-haul business? To what extent is the capacity deficit on Europe, LatAm, crucial to Iberia's current performance?
Then the final question, unless I've missed it, I don't think you've confirmed a capital markets day date yet. If that is the case, could you update us on your thinking as to when it might be appropriate? Thanks.
Just to get the capital market day away. Yes, we're, we're still focused on that. Yeah, we're, we're just gonna make sure we get through. We're just focusing on delivering a successful summer first, and then we'll come back and announce that this get us to the summer, April.
Okay, talking about the hiring and productivity, your first question. Across the group, we recruited last year, 17,000 people, and this year we are in the range of 7,000. We have enough people to support the operation. As I said, the problem we are having is more a problem linked to the difficult environment we are operating. Of the 7,000 people that we have hired in 2023, 4,000 were in BA and 1,800 in Iberia. It's critical what you said, that we need to increase our productivity in this environment of higher costs because of the inflation we are having, and that's what we are trying to close in the different agreements that we are negotiating right now.
The, the best way to reduce the, the cost for fuel is productivity and also utilization of the aircraft. That's something that, for example, you were asking about the performance of Iberia. They are doing very well. They're, with less aircraft that they had in, in 2019, they are increasing the utilization, and because of that, they are managing very well their cost. In a similar way, Vueling, they are doing that in the, in the short-haul. I don't know, Fernando, you want to comment something about the question about the traffics in Iberia?
Yeah, the recovery in the Latin America market has been driven basically because the ramp-up in the capacity in Iberia has been stronger than our competitors in the last months, in the last years. The capacity is 98% versus 2019, significantly ahead of our competitors that are about 60%, 17%. That, that's one of the reasons because we have recovering and performing very, very well in Latin America market.
Yeah, I think you've seen actually the EU capacity actually is the one that's kind of suffered overall EU to South America. Madrid to South America has remained fairly strong, actually. Yes. You're seeing particularly strong bookings coming from Latin America and from North America at the moment into Iberia and into British Airways.
Yes, also one thing that is helping Iberia in the results, apart they are doing a very good job, is the customer base is more exposed to the VFR traffic and to the leisure segments. Madrid and Spain, they are or they have increased the attractive for other countries. We have more than 50% more luxury hotels rooms in Madrid, if we compare with the situation we had 10 years ago. That's helping. We have a lot of people that they are coming to Madrid to live. That's something that is increasing also the premium leisure traffic, that is a traffic that was not very strong before.
Thank you. We will now take the next question. From the line of Conor Dwyer from Morgan Stanley. Please go ahead.
Thank you very much. It sounds like visibility is reasonably good for the rest of the year and certainly better than earlier.
We can't hear you, Conor. You sound like you're underwater.
Ah, okay. Is that any better?
That's better. That's better.
Okay, cool. I'll continue to talk loudly. It sounds like visibility is reasonably good for the rest of the year, and certainly better than earlier when you initially gave an EBIT guided range. I'm interested to hear your thoughts on why not giving an explicit guidance range now. Is it maybe perhaps elevated recession concerns through the winter? Any information on that would be very useful. The second question is more for Sean. The steps you talked about that were helpful in terms of BA turnaround, but I was wondering if you could elaborate on developments for the BA app in terms of the customer experience. What sort of changes should we expect there, and any sense of timing on that? Thank you very much.
Yeah, you're right. We've got, we've got good visibility into Q3 at the moment, with 80% booked. We've got less visibility into Q4 than into Q3. As you saw, as we said, it's looking promising so far with no signs of weakness overall. I guess, I guess just in terms of guidance overall, we're keen to kind of get people focused on kind of the medium to longer term on the, on our performance overall, you know, delivering good returns and good margins over that period, and less on the, on the kind of short-term performance overall.
I mean, I think we've given good outlook in terms of, you know, consensus is, is just under EUR 3 billion at the moment, and those who have come out more recently, around about EUR 3 billion or even a bit higher. We've had a good Q2, I think we've kind of shown you, hopefully, that there's good Q3 bookings, and good Q4 bookings with no signs of weakness. We've given you good, kind of hopefully good, cost guidance as well at the moment. I think we've given you, hopefully, all the components to help, kind of, for you to, to make your own judgments off the back of that.
Yeah, in relation to the BA app, we've built up a team of about 200 tech developers, headed up by a guy called Mark Locke. Mark has joined us from Tesco. We're aiming to launch what I would call a minimum viable product prototype towards the end of the year, and probably trial that on one of our short-haul businesses, potentially at Gatwick. We will be looking to transform how we merchandise and retail and move to more shopping basket capabilities. We'd also like to incorporate dynamic pricing far more effectively than we do today. Also, make sure that the digital experience is very similar and gives you the same booking flow and product experience, no matter what channel you book through.
Whether it's through .com, mWeb, mobile app, or even using a contact center, it's the same offering and the same product is, is offered up to you. We also want to integrate two very important components. One would be ancillaries, so that they're available in terms of, you know, upselling. Secondly, loyalty as a currency, and to make sure that that's far more easily convertible in the booking flow than it is today. It's very exciting. I think we're midway through the development phase, and towards the end of the year, we'll be able to share more about what we are doing in that space.
Great. Thank you very much.
Thanks, Conor.
Thank you. We will now take the next question. From the line of Tobias Fromme, from Bernstein. Please go ahead.
Good morning, Tobias From Bernstein here. Two for me, please. The first is on Air Europe. I appreciate you've answered it to a little extent, but maybe could you shed some color around what would be possible remedies from the purchase of Air Europe? Do you have any steer on annual profit expectations? Secondly, the departing London Heathrow CEO recently said that, first of all, corporate travelers are now accounting for only 30% of traffic, down 4 percentage points versus pre-pandemic. He also said that there might be a softening in leisure demand going into H2 2023. Does this match your expectations? Thank you.
I answer the first one about Air Europa, maybe, Sean, you can comment about the second one.
Air Europa, as I said before, we are still in the pre-notification phase. We are engaging with potential partners to do this operation, we presented some partners. We had some challenge about that. Now we are trying to identify, to identify more partners that can be satisfactory for the European competition authorities. At this time, we are not disclosing who they are. I think as I said before, the, the, the most important part is to try to demonstrate that this operation is going to be good for the customer, is going to be good for Madrid hub, for developing the network, and in order to compete in Europe and in the, in the global world.
Sorry, I missed the question on Heathrow. Sorry, you cut out a bit. Sorry.
Yes, yes. Sorry. No worries. Essentially, it's the departing Heathrow CEO said that corporate travelers are down 4 percentage points versus pre-pre, pre-COVID in terms of overall traffic. Secondly, he also said that there might be a softening in the leisure demand in H2 2023. I was just wondering whether this is in line with your expectations as well?
Well, I think, I think we've covered the corporate travel, that we are seeing, seeing that down, overall. So, so, again, we say it's been flat over the last quarter, but we do see some very early signs for, for Q4, that it's picking up a little bit. We'll, we'll, we'll wait to see how that, how that comes through in Q4 overall. In, in leisure, we're not seeing, we're not seeing that, leisure softer.
No, I think in leisure, all the surveys and credit card spending reports show that consumers, after the COVID, are giving priority to holiday traffic over all areas of spend. I think it's more important now after COVID, taking annual vacation than it was before. The segment of visiting friends and relatives, as I said before, in some markets is very, very resilient. It was even during the, the, the pandemic. To be honest, we see that the situation, for example, in U.K., the economic situation now is a little better. Employment levels in U.K. are high, and because of that, we don't see any... Also, because the recent developments in economy, we don't see any impact in the leisure traffic.
In the Spanish and Irish economies, economies, they are also in good shape. They have lower levels of inflation. If we you compare, and higher GDP, if you compare with other countries. I think also that in the case of British Airways, the demography that we have is different to, to other carriers. I think we are more exposed to customers with high average incomes. What we see is they are, they are also less affected by mortgage rates that, you know, they are increasing, no?
The demographic of the customers is also they, they are if we compare with other competitors, we have 15% of our customers are over 65, and that customer profile is less impacted by the rising of mortgage costs, for example. Leisure intakes in British Airways are 115% in revenue and 93% in volume, if we compare with 2019. The health position remains strong. It is particular strong in the short-haul intakes, where we have 121% in revenue versus 2019, and 100, around 100% in volume.
We've also, if you look at the BA customers, about 65% of them come from London or Southeast-
Yes
... as well. Which tends to be the wealthier parts of London, and a good proportion come from the, you know, the, the, the main wealthy parts of London as well.
Yes.
No one's immune, no one's immune from a downturn, but I think, you know, we do feel that they should be protected more than, more than most.
Great. Thank you.
Thank you. We will now take the next question. From Muneeba Kayani, from Bank of America. Please go ahead.
Good morning, everyone. My first question is just on your medium-term outlook. I think in the past you've said that you expect margins to kind of be at the lower end of the 12%-14% range you were doing pre-pandemic. If I look at 2Q, you're actually 2 percentage points above 2Q of 2019. Are you just being conservative? I heard you on some of the investments that are needed on the business. Kind of if you, you could just revisit that range and how you're thinking about that, and risks to upside, downside. Secondly, on your balance sheet, leverage at 1.5, net debt actually at similar levels to where you were at year-end 2019. How are you thinking about dividends and/or share buybacks at this point? Thank you.
Just in terms of our, of your, in terms of medium targets, so the company's operated at kind of 12%-15% margins, you know, over, over a number of years before the kind of COVID hit. You, you, you're right, we had a very good margin in Q2. Q2 and Q3 tend to be our kind of highest margin periods, and Q1 and Q4 are slightly softer as a softer demand for travel globally on those areas. We, so the tends to, to dilute that overall. You can see our, our margins just below 10% for the, for the first half overall. So we think kind of towards the bottom end of that is, is probably a good place to, to aim for.
We think that kind of takes account of probably the higher inflation that we've had in across the industry in that, and actually also kind of making sure that we're investing in our customer and our IT in particular, at a good pace as well. That's the reason why we think we're kind of going towards the, that end as well. In terms of our balance sheet, yeah, we're, we're, you know, the good performance we've had in profit has really enabled us to, to deleverage our debt faster than we probably could have imagined a year ago, which is, which is, we're very, you know, good, very pleasing overall. You can see that the net debt, as you say, the net debt right now is similar to as it was in, at the year end in 2019.
That's a bit kind of not quite looking at the same thing. It's a bit deceptive that, 'cause you've got working capital movements, and you tend to have kind of a EUR 2 billion adverse working capital movement in the second half of the year. Our net debt will go up from this level, but as we said, we think it'll be lower than it was at the year end. We reduced net debt by about EUR 1.4 billion last year, and then we think we'll get a good reduction again this year as well. Continue to move in that trend. I think our priority, at the moment, in terms of when you think about dividends and share buybacks, we're very focused on getting back to paying a dividend for our customers.
The, the near term priority is, one, is about continuing to pay down that debt, so we make sure we've got sustainable, debt leverage within the investment grade. The second thing that we've talked about is actually investing in our customer, and particularly around about, getting back to the same levels of fleet that we had, in 2019. We've talked about EUR 4 billion of kind of capital, spend over the next few years, to get to that as well. They're the kind of key priorities that I think, you know, our shareholders will want to do as well. What the debt delevering does, though, it does allow us to think about kind of dividends sooner as well.
We'll give, we'll, we'll comes higher at the front of mind, but at the moment, our priority is about deleverage and, and those capital spends.
Thank you.
Thank you. We will now take the last question from the line of Ruairi Cullinane from RBC Capital Markets. Please go ahead.
Yes, good morning. I had a couple of questions on the unit revenue trends, which show on Slide 14 of your presentation. Firstly, very strong performance in Europe since Rana particularly called out the bank holidays in the U.K. I was wondering if you had a particularly strong performance in, in the U.K. or in the month of May? Secondly, Africa and the Middle East lagging in terms of year-on-year cross growth. Would you just attribute that to the above average capacity growth or anything else? Thank you.
Um-
Go, go, sorry.
Yeah, I think we did see an improvement in leisure unit revenue in May as a result of having the additional bank holiday. You know, that would have been consistent with what others were reporting. I think one of the things which is worth noting, year-on-year in Africa, Middle East, we had kind of restored operation to those markets last year, and they had performed very, very well, because of the scale of VFR traffic that they're exposed to. I think we did see probably a quicker recovery last year in those markets, compared to what you would have seen in the North Atlantic. I think the unit revenue comparisons, generally, you know, stack up well compared to the rest of the network. It's just that the baseline was better last year compared to this year.
Thank you. I would like now to hand back over the conference to CEO, Luis Gallego, for final remarks.
Oh, thank you. Thank you very much, everybody. I hope that you can have some rest, this summer, and we'll see you after that. Thank you. Bye-bye.
That does conclude our conference for today. Thank you for participating. You may now disconnect.