International Consolidated Airlines Group's (ICAGY) CEO Willie Walsh on Q1 2016 Results - Earnings Call Transcript

International Consolidated Airlines Group (OTCPK:ICAGY) Q1 2016 Earnings Conference Call April 29, 2016 4:00 AM ET

Executives

Willie Walsh - CEO

Enrique Dupuy - CFO

Analysts

Neil Glynn - Credit Suisse

Andrew Lobbenberg - HSBC

Stephen Furlong - Davy

Jarrod Castle - UBS

Oliver Sleath - Barclays

Michael Kuhn - Societe Generale

Andrew Light - Citigroup

Douglas McNeill - Macquarie

Mark Simpson - Goodbody

Suzanne Todd - Morgan Stanley

Edward Stanford - Lazarus

Andy Jones - RBC

Operator

Good day and welcome to the IAG Q1 2016 earnings presentation conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Willie Walsh. Please go ahead sir.

Willie Walsh

Good morning everyone, thank you for joining us call. As usual I will hand over to Enrique Dupuy to take you through the presentation on our Q1 results. Enrique?

Enrique Dupuy

Thank you Willie, good morning everybody. So we are presenting today a set of results for the first quarter of the year 2016. As you know the first quarter is probably one of the weakest quarter for the year. So these results we are bringing in today have I would say a special positive significant. So talking about our operating profit, we have been reporting pre-exceptional items EUR155 million. This represent on a pre-Aer Lingus, pre-exceptional basis EUR181 million, it represents also a reported improvement of EUR130 million, although as you will see further on the real like-for-like improvement is about EUR200 million. These results have been produced on a capacity increase, which is on a reported level close to 12%, 11.9%. If we do the pre-Aer Lingus adjustment; we get to an underlying non-Aer Lingus companies of the group, capacity increase of 4.8%, which is very much in line with our expectations. In terms of demand, the increase has been 13.8%, which basically will be showing an improvement in our load factor levels for the quarter of 1.2 percentage points.

Talking about unit revenues and unit costs. On the revenue side, we see a reported unit revenue performance of minus 3.6%. There is currency benefit out of the strong dollar, so we make that correction and we also correct about the contribution of Aer Lingus which has a different stage length from the average of the group. We will be getting to a unit revenue like-for-like comparison with last year of minus 4.9%. Getting to the unit cost, the reported figure is minus 6.1%. Of course affected again by the same way by this dollar strength and making the same type of corrections and including of course the positive impact of fuel prices of the hedges.

We will be getting to a reduction of minus 9.3% against last year, so basically doubling the reduction in unit revenues. When we get on the passenger unit revenue figures, what we see is a reported figure of minus 3.5%, which again correcting by Forex and Aer Lingus participation would be getting us to a minus 5.2%. We’ll be talking about this figure later on in the presentation. On the ex-fuel unit cost arena, we are reporting an increase of 1.3%, of course again Forex included and Aer Lingus included, stripping off, carving out those two effects we get to type of underlying improvement of 0.5%.

So let's go a little bit though the operating profit bridge and the picture how it shows. Here is basically where we explain how we’ll be getting out of the reported change of EUR120 million through a Forex negative impact of EUR60 million and also a first quarter negative impact of Aer Lingus of 2016. Aer Lingus is seasonal, so this figure is normal in the first quarter of a year better than the last year as we will explain you afterwards. So after these two adjustments that you see on the right-hand side of the chart, we get to Q1 net like-for-like improvement of EUR216 million.

We will compare that improvement with last year, which was EUR180 million, around EUR180 million, you see we’re getting a similar level of improvement as we were getting on the first quarter of last year. When we have a closer look through the whys and how's of the improvement, we see that in terms of capacity movement there is a balance situation last year, the operating profit was just EUR26 million. So there is a balance situation in terms of capacity, big movements have to be with unit prices and unit costs. More relevant of them all of course is the unit cost reduction after hedges and in constant currency terms of the fuel bill which is worth more than EUR430 million.

On the other side of the balance, of course we have the unit revenue reduction constant currency terms which would be worth about EUR224 million. So about 50% of the fuel cost improvement that we have been achieving through the quarter. It's also significant to mention and I will go a little more in detail on further slides, the employee improvement, which is basically having to do with activity as improvements as I will tell you and across the four companies of the group. So maybe then coming into the cost slide, slide number 5.

Again we try to build up as I told you previously the way we can get to the minus 0.5% out of the reported plus 1.3% and it has to do with again a negative Forex impact that it's about 0.7 percentage points and also about Aer Lingus negative impact of 1.1 percentage point. Just for the purpose of understanding Aer Lingus negative impact on the cost side, of course they are a very lean efficient and effective companies in terms of cost but because of the shorter stage length, shorter than the average they are bringing these average in negative impact into the rest of the group. Having said that, we go through the cost type of chart and we recognize there the significant improvement that we are bringing. Again on the employee cost side, big figure to retain there is improvement in productivity for the groups has been reaching 5.9% in the first quarter. And unit cost reduction in terms of employee cost is in the range of plus - more than 3% reductions, so good news on that front.

On the supplier side, we have benefit coming from stage length increase both in handling/catering landing fees, we have a negative landing fee increase in terms of fees in terms of price and that is a combination of a positive performance last year and negative this one. The negative has basically to do with overflying fees on the space, airspace of Russia, which as you know for us is very significant under Far East routes. Also up to some extent landing fee increases in Japan, so this is one off one quarter effect that will be getting diluted through the remainder of the year. The rate of increase also in engineering, it has to do also in the case of Vueling with a little bit of base effect and in the case of Iberia it has to do also with increased works for third parties which of course we get the revenue contribution at the other side of the line.

In terms of selling costs also good news, our selling costs are remaining quite pleased, quite stagnant on the increase of capacity performance. So that’s why we are getting this unit cost improvement on the selling side. Ownership has to do of course with how we are trending in terms of new fleet financing. And as you know because we've been telling you before we are trending towards more sale and operating lease back solutions that will be increasing our operating lease percentage in the ownership cost and probably decreasing the depreciation element. So as you see it has to do with this impact and of course with the global impact of the improvement of the average age of our fleet and deliveries of new generation aircraft.

So coming to page number 6, where we have the chart the same as previous quarters where we can explain the movement, the main movement in the fuel bill. We are basically showing a very consistent chart with previous ones. For the quarter that’s how we are facing now, Q2 will be getting dollar-denominated after hedging fuel decrease of 20% and as you see the dollar element in that equation is not going to be changing this time very much the final reduction will be slightly above 30%. And that pattern of reduction you will see them again through Q3 and Q4 and again entering into next year with percentages of decreases which are close to the 20% level. The scenario, the exercise the example that we have been making this time on the final fuel bill due to these movements in after hedging fuel costs and dollars we’ll be concluding on a final figure in the range of EUR4.8 billion and after having moved slightly both the price of the underlying fuel marketplace and also of the dollar euro rate. So basically similar pattern as we saw in previous quarters and more information, good information and good prospect about year 2017. So we’re moving now to page number 8, where we are reflected movement in capacity for the next quarter, which is Q2 and what we expect will be the full-year figures for year 2016.

So as you see in Q2 we’ll be reflecting lower level approach especially for the non-Aer Lingus integrated group of companies and that's getting to 3.7%. We have to remind you that Q2 last year was a little bit of a peak in capacity growth through the year. So the comparable in this case with Q1 this year is in some way easier in terms of capacity increase just reaching the reference 3.7%. For the full-year, we are expecting to reach 4.9%, again on a IAG pro-forma basis, so taking into account both in the base and in this year the impact of Aer Lingus. This figure on our - I would say previous exercise was 5.2%, 5.3% so that's the level of capacity adjustments that we are now foreseeing to be implemented quickly through the next couple of quarters. The split by companies as you’re seeing Q2 will leave both British Airways and Iberia grow in the range of 2% and having Vueling in the range of 14%, Aer Lingus at the level of 7.7%. Full-year Figures are not very far away from this one. You see again, British Airways 2.6, Iberia slightly above 4.4, Vueling around 15%, Aer Lingus around 11%.

Moving to the basic causes and moves in capacity on the different networks and to different company, so this is page 9. What we are seeing is basically network changes on the different carriers, for Iberia it’s going to be and we are referring to Q2 still, is going to be about the impact of Havana we told you about it, Cali and Medellín. For British Airways is about Kuala Lumpur of course, we’ve been talking about Kuala Lumpur for a while now, it’s about San Jose in California, it’s about Lima and the new service from Gatwick to JFK Airport. In the case of Aer Lingus is basically driven by the new route to Los Angeles. And for Vueling it’s most of the growth out of Barcelona into new destinations.

So, you see in this case, Q2 will be showing a higher proportion of new destinations and network changes into our basket of capacity movements that’s something slightly above what we have seen in previous quarters and it's showing a little bit of higher level of what we’ll be calling investment into new routes. The rest of the moves basically that we attribute to frequency changes, aircraft gauge improvements et cetera have probably lesser level of significance. So this is going to be Q2 and through Q2, Q3, we will be implementing some of these adjustments in capacity that we've been telling you about and that basically will be rendering the adjustment benefit through Q3 and especially Q4 so the end of the year.

So maybe now we can move to the next page, which is 11 where we traditionally show the movement in terms of capacity and in terms of unit revenues. So what we are seeing is basically a lower unit revenue reduction and more intention revenue reduction that we saw in Q4 last year and basically it’s concentrated into two areas, on one side North America, North Atlantic and in the other side Asia-Pacific. When we talk about North Atlantic, we basically will be telling you about two different periods. So on the first year, which includes both January and February, we are seeing similar trends and similar I would say underlying reduction as we saw in Q4. [indiscernible] too much we basically are recognizing people reduction and of course it has to do with two main impacts, on one side is the holiday which of course traditionally depresses the corporate travelling, the business travelling and again it has been the case in March this year, especially important in the case of British Airways but also affecting Iberia.

The second significant move, significant change has had to do with Brussels impact. As you know Brussels impact will be accounting for 10 days out of 21 days in March, is about 10% of the period of the whole quarter. So it has had a significant impact on these 10% of the period. It’s difficult for us and we are not going to try to do it. Difficult for us to differentiate how much is exactly due to Brussels, how much is exactly due to Easter holidays, how much is exactly due to underlying corporate slight downward trend that we are seeing in some sectors, again especially fuel of course and a little bit of financial institutions. So this is basically the reason why North America unit revenue reduction is getting to 7.1. And very much also behind Asia-Pacific unit revenue reduction, a big one. In this case, also related to capacity increases. Capacity increases basically having to do with top tier routes, especially Canada, with Beijing, with Shanghai and of course with Kuala Lumpur. So practically half of the Asia-Pacific capacity increase that we are recognizing is due to Kuala Lumpur, say starting up route.

So apart from these, I would say mentioning on North America and Asia-Pacific, unit revenue trends. The rest is looking very much the same shape as Q4. So we see of course Africa, Middle East suffering from low fuel prices in oil destinations, in oil related countries. We’ve been adjusting capacity there and in terms of unit revenues, we’ve been stopping the bleed. And that’s more stable now trend into the remainder of the year. Even Latin America, we see a more stable trend. Of course, there is still weakness is Brazil and Venezuela, slightly weakness in Mexico as well. But we see strong performance in Argentina, we see stronger performance as well in Central America and the Caribbean.

And in terms of Europe and domestic, we also see I would say similar trends as the one that we recognized in Q4. In the case of Europe, maybe stronger unit revenue trends for the Spanish companies. In the case of the domestic, probably better performance has been in this case for British Airways.

So moving to page number 12, where we are basically analyzing a little bit of the different trends in the different products, nothing new, everything expected. We see a weaker trend in the case of premium traffics. Again, same reasons in the long haul, has to do with corporate weakness, Easter holidays and Brussels. In the short haul, we see basically weak trend in the case of Iberia, and quite I would say is stable on in the case of Vueling. So for Iberia, it’s basically domestic traffics and very specially Canary Islands. Canary Islands has also longest stage length than the rest of the domestic network for the case of Iberia. That’s also trending down the average of unit revenues for the Spanish company.

In non-passenger, slight weakness has to do again with cargo revenues, which are rolling over the strong period that we had last year. The whole sector had last year because of the port strikes happening in Q1 [indiscernible].

So when we get to page number 13, I think again is recognizing strong performance, good news at IAG level. So both including and excluding Aer Lingus, we are reaching a level of return on invested capital of 13.7%, signature account. The four previous quarters of Q1 and three behind that’s very strong performance is getting closer to what we told was going to be the average of the period, 16%, but remember we are on the first year. So this is a very significant improvement. It’s about 4 to 5 percentage increases in Q1 in terms of operating margin. So we are satisfied by these growth performance. We are also satisfied because three out of our four companies are reaching a 12.6% ROIC performance in this first quarter and Iberia is lagging behind, but we are confident that through the remainder of the [indiscernible] actions and efforts, they will be getting to very similar figures.

If we get to page number 15, where we are analyzing our, I would say, balance sheet and financial ability. We are recognizing that since December last year, we have been improving our in balance sheet gearing from 27% down to 25%. This is basically because improvement through the quarter on our cash and cash equivalents positions. This is seasonable impact. You have to take into account that the booked and not flown revenues that we got at December into the two first quarters of a year seasonally are always lower than the ones that we get in the month of March. So this seasonal adjustment is bringing cash improvements of circa EUR1 billion for the Group. Good news, but it’s nothing really extraordinary.

When we get to global comparisons, taking into account operating leases, our adjusted gearing has been remaining at 54%. Our adjusted net debt to EBITDAR has been improving slightly from 1.9 times to 1.8 times. So as a summary, a very stable and strong balance sheet that we are keeping through this year 2016.

Finally, page 17, basically summarizes the outlook guidance that we want to share with you in this occasion. It’s basically about the messages that we have been explaining to you through these presentation. So revenue trends in quarter two affected by Brussels, affected by some softness in underlying premium demand. Part of that underlying premium demand is Easter and there is also a lot about having to do with corporate underlying softness. As a result, IAG is taking already some actions in terms of moderating its short-term capacity growth plans basically in areas of the world where there is underlying weakening of demand.

The Group also expects and reconfirms its expectations of reducing its underlying ex-fuel unit costs by 1% for the full year. So on these grounds consequently, we are still expecting to generate an absolute operating profit increase similar to the one that we were achieving last year.

Thank you very much. And we are now open to your questions please.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Neil Glynn from Credit Suisse. Please go ahead, sir. Your line is open.

Neil Glynn

Good morning. Three questions for me please. The first one, with demand falling like it has been on the Transatlantic, arguably this is biggest test for the Transatlantic joint ventures that we have had over since their emergence. Just wondering whether you think - whether it’s from an IAG American perspective or more broadly in the market is there a significant room for improvement in Transatlantic JV mechanics to help with pricing and commercial performance in this kind of environment.

The second question, obviously unit revenues are suffering from demand, but ex-fuel unit cost declines are also moderating with the lower hanging fruit having been picked to a degree, I think makes your performance look a little more like your peers than it has done in the past. So just interested in your perspective as to how do we ensure or how do you ensure the margin gap is preserved or even widened into the medium term?

And then just maybe more of a housekeeping question on the fuel slide. I think that the 2016 numbers are based on $400 per metric tonne, but as we look towards the end of this year, the forward curve is getting well above $450. So just interesting how should we read the second half and also particularly 2017, is there some recognition of the forward curve within the year-on-year deltas on the slide? Thank you.

Willie Walsh

Okay, Neil, just to correct you, demand is not falling and the Transatlantic demand is continuing to grow, it’s not growing as fast as maybe people has expected. So the situation on the Transatlantic in Q1 was definitely impacted by the events in Brussels, following on so closely from the events in Paris and a bit of Easter. But the softness in premium is in line with what we had mentioned previously. I think the mechanics of the joint business work well in all scenarios. So we are very comfortable with the Transatlantic performance. We expect the Transatlantic to continue to perform well for us. And we are looking at a third quarter performance that should be particularly strong. In relation to our ex-fuel unit cost, there is still a lot more that we can do and we will do and I think the gap between us and - I think you called them peers, I am not sure that’s a term I would use, but I expect that to continue to widen. We have quite a number of initiatives on track and we will accelerate a number of those to ensure that we offset any softness that we see in the revenue line with an improvement in the cost performance. Hence the reason that we are comfortable that our bottom line performance will remain in line with our expectation, which in fact will mean some additional margin growth in the current year.

And fuel - just to remind you that the fuel chart is a scenario. We’ve not given you a forecast of our fuel bill. We have given you all of the information that you require and you can plug in the figures based on the data we have given you in the chart that we have shown in the presentation, which will enable you to make your judgment in relation to fuel. However, what we do see is that given the hedging position that we have, this year, our fuel bill will be in line with our internal expectations. And also as Enrique said, we are looking at a continuing tailwind on the fuel bill going into 2017 as the hedges that we have put in place continued to be effective, and the lower oil price even taking the current forward curve into account. So we still see some significant benefits accruing to us in 2017 as a result of the reduction in the oil price. So all in all I would describe the general environment that we are seeing at the moment in Q2 is being impacted we believe largely by a number external events, including some uncertainty around rates. But I think there is certainly anecdotal evidence to support some corporate activity being softened as a result of that. But Q3 for us looks good and you should expect us to continue to take measures in relation to our cost performance to offset any underlying softness that we see in the revenue environment.

Neil Glynn

That’s great. Thank you, Willie.

Operator

Thank you. We will now take our next question from Stephen Furlong from Davy. Please go ahead, your line is open. My apologies. The question will come from Andrew Lobbenberg from HSBC. Please go ahead, your line is open.

Andrew Lobbenberg

Good morning, guys. Sorry, Stephen. I wanted to just ask about the performance by operating company, because you haven’t given us I think the unit cost and unit revenue metrics this quarter. But if we look at the operating margin performance of the different companies, it looks to me like we have had quite a sharp increase in the operating margin at British Airways year-on-year and we have got a reasonable reduction at Vueling. And given that you have been discussing the softness of premium, the impact on Brussels and Paris on US and Asian bookings, but slightly counter-intuitive to make us feel if that would be impacting the yield performance at BA. So quite keen to understand whether there might be any pressure from the operating margin at Vueling in the quarter and what’s giving us the really good performance at BA please?

Willie Walsh

Thank you, Andrew. I should say - by the way, I must invite you to celebrate my 55th birthday later on this year because I understand you think I would be departing sometime around that, which I won’t be, but I will be around so we can have a drink and discuss all of these finer issues at that stage as well. But we don’t break out the performance of the operating companies in the quarter. We will be doing it as half year and full year and giving you all the detail.

But I think the performance of all of the operating companies in the quarter was in line with our expectations. In fact, Vueling - without going into the detail, Vueling performance was slightly ahead of our expectation for the first quarter. And the operating companies all performed broadly in line with a little bit of up and down, but Vueling was actually ahead of our Q1 expectations. And in relation to British Airways, the - as we said, generally in all of the companies, the first two months, January and February revenue trends were very much in line with our Q4 revenue trends. But the March trend was definitely impacted by Easter as we would have expected, but much more so I think by the events in Brussels. We will have a better view on all of that as we go through this quarter. Aer Lingus has taken some pricing action on the Transatlantic. To address that, they moved a little bit ahead of the other companies. We are looking at trends in the third quarter being very much in line with what we would have expected to see. But certainly second quarter has been disrupted by a number of external events. But we don’t see that continuing into the third quarter and will be happy to give you more details on the OpCo performance at the half year presentation.

Andrew Lobbenberg

Glad, you’re sticking around mate. [indiscernible].

Willie Walsh

You’re welcome.

Operator

Thank you. We will now take our next question Stephen Furlong from Davy. Please go ahead. Your line is open.

Stephen Furlong

Great. Yeah, question on - I just want to go back to the Transatlantic maybe Willie you might just talk about the supply demand dynamics. Some of the US airlines talked about a lot of supply on the Transatlantic, but I think it ameliorates a bit and certainly in Heathrow as you go into the peak summer. And then on the demand side just some comments on the way the exchange rates are moving and the flows of traffic between the point of sales, US to Europe, Europe to US and just really on that dynamic that will be great. Thank you.

Willie Walsh

Yes, thanks, Stephen. You are quite right. When we look at the supply dynamic across our network particularly at Heathrow is it’s benign. We are cycling over still in the second quarter some significant increases that went in last year from Delta, but that washes out as we go through May. Third quarter supply out of Heathrow will actually be slightly down on last year given the change in gauge of a number of the operators. On the London market, we have seen some additional capacity principally coming in from Canada, more so than the US and then in Europe, yeah, there is - I think Europe has seen more capacity from Europe to the US, but the core markets from an IAG point of view we believe the supply situation is actually okay as we go through this year with demand very much in line with our expectations in the third quarter, disrupted in the second quarter and we saw that across all of the operating companies on the Transatlantic, but third quarter demand environment continues to be very much in line with what we would have expected.

So generally we are comfortable, in fact very comfortable with what we see on the Transatlantic. The softness in premium are in segments that we expected to soft. The banking sector has been weakening for some time and that hasn’t surprised us, but we have a pretty diverse customer segment base on our premium cabins and we are comfortable with that. Any capacity adjustments that need to take place if they do we can do that relatively easily. So overall I would say Transatlantic continues to be a good and strong performance part of our network.

Stephen Furlong

Okay, great. Thanks.

Operator

Thank you. We will now take our next question from Jarrod Castle from UBS. Please go ahead, sir. Your line is open.

Jarrod Castle

Thanks. Good morning, gents. One for Enrique first, but just on the fuel retention, I think you said that about half of it was retained. Do you have any kind of expectation in terms of how much retention will occur during the rest of the year? Should we expect that level of retention to kind of fall? Secondly, some of your peers are talking more about kind of consolidation and the likes of Lufthansa with low cost et cetera and I think Willie at the full year results you said there is nothing you are really looking, but you will continue to evaluate opportunities as and when. Any kind of thoughts for the industry and yourselves. And then just lastly, I think from October ICAO will put out a draft document looking at a global mission scheme for airlines and just interested to get your thoughts and kind of any views on how that is progressing and potential impact for the industry. Thanks.

Enrique Dupuy

Yes, as you know, because we have been quite explicit about it. We don’t believe so much in the percentage of fuel retention as a driver, so we believe in demand capacity in the different markets and also competition moves as the real driver of the way we can improve and optimize our unit revenues, but on top of looking behind, looking to the part exercise, yes, we think this quarter has been about 50% retention and that’s a level that probably we should keep or improve for the full year with ups and downs as we told you Q2 is going to be softer than the average, Q3 will be stronger than the average, but as a whole I think somewhere above 50% would be reasonable to be expected. Again not as an intention, not as a driver, but as a consequence of our actions in terms of capacity and unit revenue optimization.

Willie Walsh

I was pleased to read comments from customs board in relation to consolidation. You’ve heard me talk about this for some time. I believe consolidation will benefit the industry within Europe and I think there are some things that make sense to various different airlines around Europe and what makes sense to Lufthansa doesn’t necessarily make sense to us, but that doesn’t mean what they are doing is wrong. In fact, I think what they are suggesting is absolutely right for them. We have said that we don’t see any particular options for us at this stage, but we are continuing to keep an open mind and continuing to evaluate potential options. We are not actively involved in anything at this stage, but I do firmly believe that we will see further consolidation in Europe as we go through 2016 and some moves may unlock some other moves. So we are ready to take advantage of any opportunity show the right opportunity come along.

In relation to we are optimistic that ICAO, we are very optimistic that ICAO will agree on a global mechanism to apply to the airline industry. We are actively involved in the process through IATA. We have got strong representation on the industry groups dealing with this from an IATA point of view and as you know the IATA AGM is being held in Dublin in June. I take over as Chairman of IATA after that AGM and we will be pushing for the industry to agree on a global economic mechanism, market based mechanism and we are very optimistic that this will be achieved at the ICAO assembly in September, October of this year.

Jarrod Castle

Thanks very much.

Operator

Thank you. We will now take our next question from on Oliver Sleath from Barclays. Please go ahead. Your line is open.

Oliver Sleath

Good morning, everyone. Thanks for taking my questions. Three from me please. Firstly, on demand and supply and how you think about managing it, I hear what you say about demand still growing and being resilient in markets like the Atlantic, but there does seem to have been across the industry a weak pricing environment for over a year now. When you think about managing the business, do you believe it is important try to get IAG back to flatter unit revenue trends over time or do you tend to focus on the fact that profit margins are still going up and you're growing with naturally lower revenue units like Aer Lingus and Iberia and therefore you would expect some level of yield softness within the business. Second question on maintenance, I believe the group maintenance initiative under these you might be reporting back, I just wonder if there is any initial findings you could share with us. Presumably you would be looking hard as a move towards more outsource maintenance and any potential timing on that? Lastly just on the remedy slots at Heathrow I think there were some headlines about a few other careers looking at taking that up on the UK domestic, do you really think that will count anything and can you relatively easy hand those slots back from BA to somebody else if they want to have a go at it? Thanks.

Willie Walsh

Thanks, Oliver. I think one of the things that sets us apart and has set us apart is our focus on our cost performance which clearly is important in an environment where there is uncertainty about revenue and we will continue to do that. So I think what’s different through this if you want to call it a cycle, I'm not sure it is, but in the past, airlines would have relaxed under, call it, performance as they witnessed an improving revenue environment and only now is you see a sort of softening revenue environment with a focus on cost. We focus on cost right throughout the cycle and we will continue to do that. So where we can influence price in terms of being a price leader we will be seeking to clearly maximize the strength of our position then. But I think we've got a good mix of the airlines within the group.

The mix we have with the lower cost enables us to be competitive in any environment. And we're confident that we can continue to grow our margins and indeed on the - through the cycle basis maintain significantly higher margins than we would have seen historically. So I think the dynamics of the business are very different, much more positive from our point of view than they would been. That doesn’t necessarily apply to all airlines, but I think you're seeing widening gaps between those that will be resilient through the cycle and those that have continued to try and adopt the traditional boom and bust the approach to their business.

On maintenance, there is nothing new to add to that other than the analysis that we are doing on maintenance. It’s very comprehensive and has opened up quite a number of potential options for us. So we're absolutely clear that this represents further opportunity for IAG in terms of improving our cost performance while maintaining our high standards of performance in this area. But there are several options that are available to us, all of those options are being fully evaluated, most of them have been fully evaluated and we’d be moving later on this year into the implementation phase of the plans that we have on maintenance. So a lot of work to do there and the implementation of the changes will take place over some considerable time.

In relation to the remedy slots, I think it's fair to say that the speculation in the media is interesting, but to be honest that's all I have. I have no insights into whether the suggested approach by Flybe is accurate or not. So all I have is the media speculation that you have. I think it’s fair to say that Flybe’s brand in the UK is much stronger than the previous brands whatever they were called, yeah, Little Red or Virgin. I think the Flybe brand could definitely be a much stronger brand in the domestic markets. So if they are interested in doing it, I'm sure they will move forward and make an application, but I don't know whether they have made an application.

In relation to handing over the slots they do require them. Yes, we've made full [indiscernible] within the way we operate to be able to hand those over without any difficulty if somebody does come in and make an application for the slots that are approved by the trustee dealing with that, but it's very much in the hands of the trustee. We don't have any direct involvement in the decision to grant the slots if anybody applies for them.

Oliver Sleath

Great. Thanks, Willie. Very clear.

Operator

Thank you. We will now take our next question from Michael Kuhn from Societe Generale. Please go ahead. Your line is open.

Michael Kuhn

Hi, good morning. Michael Kuhn, Societe Generale. Also three questions and mostly about capacity and you have capped your plan by like 20 bps, 30 bps, could you give us some more details where you capped and maybe whether that's more wide frequency or aircraft size and also in that context in the case of further demand weakness over the second quarter, how much more could you cut and let’s say what is your capacity range in different scenarios over the over the course of this year. And then I know it’s difficult terms, but I mean Brussels is like five weeks away now and April almost done, how did the months go and did you see some kind of reverse Easter effect or maybe just some more additional comments on the current trading? Thank you.

Willie Walsh

The capacity reductions, we use all of the normal levers if you like within the business. So we've got frequencies in some areas, we’ve eliminated certain services. So the areas where we’ve cut back on frequency principally into Brazil where BA and Iberia have cut back on frequencies to Sao Paulo and Rio de Janeiro and there would be some further reductions in frequencies as we go through the year. We’ve also taken a decision in Iberia to cancel some services, so Luanda, Lagos, Accra, Istanbul, we’ve now canceled those services, so that’s leading to some of the capacity reduction and we have flexibility within the fleets, because most of those that destinations in it that have, in fact all of the destinations I mentioned for Iberia are operated by short haul aircrafts, so we have got quite a bit of flexibility in the fleet to return aircraft on lease. And that's the critical issue we talked about historically about having flexibility to adjust capacity.

So we’ve got quite a few levers that we can still exercise. We don't see any real capacity reductions in the third quarter other than route cancellations that I have talked about because we see those as just being structurally weak markets from an Iberia point of view. But if we need to reduce capacity in the fourth quarter there is quite a bit of scope within all of the airlines to reduce capacity and take aircraft out of the fleets give the flexibility we have around the operation leases. So I think we are in a good position there.

On Brussels, the one thing I would say we're still not back to a full schedule on Brussels. So Brussels airport is still not operating at its full capacity. So there is some underlying capacity issues in the Brussels market. Still too early to call to be honest with you because normally we would expect things to recover to what we would call normal patterns in about five to seven weeks. I think because of the proximity of the Brussels to Paris, that might be slightly extended. So I wouldn’t call this at this stage. We believe that it is having an impact in the markets that we talked about and that those trends are likely to continue through the second quarter, but the good news from our point of view is the third quarter trends at this stage appear to be very much in line with what we would have expected to see in the third quarter. So I don't know whether everything will have washed through. We finished the second quarter but certainly it looks like that is the case when we analyze our third quarter booking profiles.

Operator

All right. We will now take our next question from Andrew Light from Citigroup. Please go ahead. Your line is open.

Andrew Light

Thank you. Good morning. Just three questions. First of all, on Aer Lingus, can you give us an update on the integration and the opportunities you see there as you go forward? And secondly on British Airways, has Alex Cruz given you any heads up about what he thinks he can do in terms of new opportunities there. And then thirdly, how are you thinking about the long haul low cost threat particularly at Gatwick where Norwegian obviously has some ground plan to get WestJet and that kind of the routes and I heard even JetBlue are considering Atlantic operations.

Willie Walsh

I think the integration has gone extremely well. We are very pleased with the performance and very encouraged by the trends that we've seen in Aer Lingus, so I would say there is most of the work that needed to be done has actually been completed ahead of schedule. The next big integration issue will be Aer Lingus coming into the joint business on the Transatlantic. That requires some systems, changes, all of these expected. So the next two sort of big bases for Aer Lingus will be Oneworld entry and joint business on the Transatlantic, but the business is performing ahead of expectation and the integration where we needed to do some work has gone very smoothly and is ahead of plan. So nothing, but positive news in relation to Aer Lingus.

Alex sent me a text message to say, he’s looking forward to talking to me about business, but he is sitting here opposite to me, but he hasn’t opened his mouth to tell me anything yet, but he’s smiling, so I think he has some good news for me. I won’t ask him to say it publicly, but we’re expecting great things from Alex, there is no pressure on him, but very pleased with Alex and Steve, the move into BA has gone very, very well.

And on long-haul low cost, this is something that we’ve watched with great interest. We believe we have the best low cost long-haul operator out there and that’s Aer Lingus and they’re doing exceptionally well, very profitable, much more profitable than Norwegian. I think there is strong evidence to support that both on a historical basis and current operating performance. So we’ve got options available within the group. The competition we see here is what we had expected to see. So with the development of aircraft like the 737 Max and the A321 neo, you would expect more and more people to look at narrow body operations on the Transatlantic, but there are options that are available to us as well.

So, there is nothing that we’ve seen there that changes our view or requires us to change our approach. We can compete very effectively with Norwegian. We’re operating from Gatwick with British Airways and as you know, we’ve announced a Gatwick JFK service as well. So the market I think is fine. The demand remains good. There is plenty of room for everybody, but the difference between those that are putting this long haul low cost label on their operations and us is that, we’ve already proven we can do it and do it profitably. And I’m not sure that the others have actually demonstrated they can do that, but there are some interesting issues in relation to the customer proposition that providing us with some encouragement and some ideas as well.

So, I think it’s an area that GLC has some more competition and some potential service innovation issues as we go through 2016 and into 2017 from an IAG point of view.

Andrew Light

Thanks. Can I just ask on Aer Lingus, what’s your expectation of timing of entry into Oneworld and JBA?

Willie Walsh

It’s not finalized yet, but we always took a view that it would take somewhere between 12 to 18 months. So I haven’t seen anything that would make me change that view, but Aer Lingus can continue to operate efficiently. What we’re doing however is looking at future plans on the basis of Aer Lingus being part of the Transatlantic joint business. So some of the new Transatlantic destinations, maybe some capacity adjustments increases that we’ll be looking at from Aer Lingus are predicated on their involvement into joint business, because that gives them opportunities that wouldn’t have been available to them as the standalone operator on the Transatlantic even though they’ve had good relationship with United and with JetBlue in terms of feeds and the benefit of the Transatlantic joint business is significantly greater than anything they could have achieved on their own. So the plans going forward assume that they will be in the joint business sometime in 2017, but an exact date has not yet been agreed.

Operator

Thank you. We will now take our next question from Douglas McNeill from Macquarie. Please go ahead. Your line is open.

Douglas McNeill

All covered. Thanks. We can move on.

Operator

Thank you. We will now take our next question from Mark Simpson from Goodbody. Please go ahead. Your line is open.

Mark Simpson

Yeah. Thanks. Yeah. Not many questions left, but a couple. Just on cost, probably missed the clarification about the unit cost inflation of landing and route cost now up 17% year-on-year, just wondering if you could just run past what’s expected on that front going forward. What was good was obviously employee unit cost down 2.5%, I’m wondering on that, if there’s any update on what you’re planning with regards ground staff at BA. And then finally, obviously clearly confident about Q3, I’m just wondering if you can give us some feel for forward bookings, how that comes year-on-year to everywhere and also kind of I guess expectations. So if you could cover those, that would be great.

Enrique Dupuy

Okay. Yes. On unit cost, landing fees, the big increase quarter against quarter has to do basically with the compounding of two effects. On one side, we had last year a reduction in the cost basically due to release of provisions that we had for increases that may have happened that year and that has been combined with a real increase happening in the year 2016 and it’s very much related to overflying of Russia and on a lesser extent to landing fees in Japan. So that’s the combination of two one-offs that will be basically fading out through the remainder of the year.

Willie Walsh

And in relation to employee cost performance and productivity improvement continues to be good and there is clearly more scope for us there, but we have no significant and new initiatives, nothing new to add in relation to any of the operating companies at this stage, but particularly directly in relation to the question you asked about BA ground handling, no new initiatives, so nothing to talk about in relation to that. And on Q3, our forward bookings are in line with our expectation and matching the increase in supply that we’ve put in there.

So at this stage, Q3, all of the trends we see are very much in line with what we had expected to see for that quarter. There is nothing that we can point to that would cause me to make any comment. So it’s - looking to the network, it’s very much in line with what we would have expected to see and clearly shows an increase given that we’ve increased the number of seats that we have in the markets in the third quarter.

Mark Simpson

Is it fair enough to say, given the previous guidance, and you always were suggesting that Q2 would be weaker than say Q3, but because Q2 seems to be weaker than previously thought, but actually Q3 is looking to be stronger than you had previously thought, so it’s obviously balancing out an unchanged guidance for the year?

Enrique Dupuy

Well, the thing I’ve said about unchanged guidance is something that we’re going to accelerate some of the cost initiatives as well. So some of these issues, I think you’ve got to look at sales help. We see softness in the revenue, we address that and address that quickly by looking for additional cost reduction opportunities for us or accelerating cost reduction initiatives that we had in the plan. But I always felt that there was some potential upside in the third quarter. I didn’t have any visibility about the impact of the Brussels tariff event, but when we look at Q3, there is certainly good reason for us to be optimistic about the Q3 performance and I expect that to be very strong relative to historical Q3 performance.

Q2 will be a good quarter for us relative to our historical Q2 performance, but it’s not going to be as strong as we had expected for the reasons that we’ve already outlined. And Q4, we continued obviously to get the benefit of the fuel rate reduction in the fourth quarter and the general environment that we see, although it’s very, very early. So I wouldn’t say too much about the demand environment in Q4, but we don’t see anything in terms of the supply given the visibility we have at this stage to cause us to change our view in relation to the fourth quarter, but clearly as we go through the year, we’ll give you an update in relation to performance in those quarters.

Operator

Thank you. We will now take our next question from Suzanne Todd from Morgan Stanley. Please go ahead. Your line is open.

Suzanne Todd

Thank you. I’ve got two questions for Enrique please. First on the excessive tax rate for the full year, could you give us some guidance and I know in the first quarter, it was quite low at 16%. And secondly, to come back on your comments about domestic spend on the Canary has been quite weak. Can you give some more color on why that is? Is this the consumer demand is more weaker, is that pricing reaction to competition, just some more color on that please.

Enrique Dupuy

Sure. The tax mix on the first quarter is naturally, I would say, below the average share we expect for the year, because in the first quarter, we have both companies still on losses and companies that are already on profit. So the mix gets especially benign. It’s a 16%. What we expect for the full year is something more in range of 20% and 21%.

In terms of the domestic spend at the Canary Islands, we are seeing strong demand there, also significant competition and basically the effort of the group is to keep I would say, our market share there and our connecting traffics into the rest of our network. So there is a lot of, I would say, competition taking place there, but because we’re using on the Canary Islands our low cost tool in Iberia, so Iberia Express, we’re still making a reasonable amount of money on those routes and competing very efficiently with others as Norwegian European or even Ryanair. So we’re happy and we’re still, I would say making some very significant money in these routes, but of course in terms of unit revenue impact, because of competition and also because of stage length, it creates a negative impact.

Operator

Thank you. We will now take our next question from Edward Stanford from Lazarus. Please go ahead. Your line is open.

Edward Stanford

Hi. My question has been covered. Thanks.

Operator

Thank you. We will now take our next question from Andy Jones from RBC. Please go ahead. Your line is open.

Andy Jones

Good morning. Thanks for taking the question. It’s more of a follow-on on Spain, but with particularly regard to BA Holidays, I think we’ve seen a bit of a leisure shift towards Spain ahead of the summer, I was just wondering how you’re positioned to use BA Holidays, is there a tool to kind of maybe gain some advantage over your competition in that market?

And then the second question on capital, I mean, given the - have you got any changing thoughts on what cash might be generated above the dividend, be it more CapEx, pension paydown, debt reduction or high payout, given the changing environment that you see of the first quarter? Thanks.

Willie Walsh

Yeah. BA Holidays is performing very well and we’re pleased with its evolution, I think there is more to come. I think one of the issues, although we’ve seen strong demand into Spain, securing additional hotel rooms in the current environment is difficult. So there is upside, but I think everybody is scrambling to get those last few rooms, but BA Holidays certainly has seen a very strong performance and continues to develop getting us good reasons to be optimistic about the potential for BA Holidays into the future as well.

In relation to CapEx, no change to our CapEx plans in relation to cash generation. Clearly, we’re continuing to do very well there, strong cash generation within the business. I think the issues you’ve talked about are issues that will be relevant for us to discuss internally and with our board towards the end of this year. So we’ve got no change to plans, although I expect our cash generation this year is going to be stronger than we had budgeted for, we don’t have any new significant issues to highlight with you at this stage, but clearly, when we come to capital markets in November, we’ll talk about that in more detail.

Andy Jones

Great. Thank you very much.

Operator

Thank you. We will now take our last question from [indiscernible]. Please go ahead. Your line is open.

Unidentified Analyst

Yes. Thank you. Just one follow-up from me on the comments you made regarding the Canary, I was just wondering if these trends are potentially improving going into the summer and my thought is regarding the influx of lesser traffic coming into Spain because of the events, the events that happened in North Africa and Turkey and so on.

Willie Walsh

Yes. They are and they’ve seen seat factors. As I said, one of the - maybe the limitation or possibly the only limitation will be hotel beds being available, but the general environment on the Canary Islands is competitive. As Enrique said, we’re pleased with our performance, because we’re competing in that market with our low cost both Vueling and Iberia Express and given the cost base of both of those being significantly lower than some of the competitors, the environment I think is generally very positive for us, while being potentially negative for some of our traditional competitors on that route. So it’s a market that has seen a lot of capacity, but we’re pleased to have been able to utilize the low cost arms of IAG to be very competitive in that environment.

Unidentified Analyst

But in terms of supply and demand, I mean, is demand going into the compensating for the capacity increase that we’re seeing on these routes?

Willie Walsh

Yeah. The aircraft are definitely full and so the demand is particularly strong. We expected that to be the case in the third quarter, but as I said, I think the limitation in providing additional capacity, if we were able to do that, will be hotel beds in the Canary Islands, because I think pretty much everything is booked out at this stage, but there is good demand on the routes with very encouraging seat factors across our - all of our operations, because we’re flying there from - with our four of the airlines in the group operation to the Canary Islands and seeing good demand.

Operator

Thank you. There are no further questions in the phone queue. I’d like to turn the call back over to you Mr. Walsh for any additional or closing remarks.

Willie Walsh

Okay. Thank you very much everybody. Clearly, we’re pleased with a strong financial performance in our first quarter. I’m pleased to be able to maintain our guidance that we’ve given you for the full year and look forward to talking to you at our half year results. Thank you very much.

Operator

This will conclude today’s conference call. Ladies and gentlemen, thank you for your participation. You may now disconnect.

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