International Consolidated Airlines Group's (ICAGY) CEO Willie Walsh on Q3 2017 Results - Earnings Call Transcript

International Consolidated Airlines Group SA ADR (OTCPK:ICAGY) Q3 2017 Earnings Conference Call October 27, 2017 4:00 AM ET

Executives

Willie Walsh - Chief Executive Officer

Enrique Dupuy de Lome Chavarri - Chief Financial Officer

Analysts

Jarrod Castle - UBS, London

Stephen Furlong - Davy

Neil Glynn - Credit Suisse

Mark Simpson - Goodbody

Damian Brewer - Royal Bank of Canada

Anand Date - Deutsche Bank

James Hollins - Exane

Michael Kuhn - Societe Generale

Operator

Good day and welcome to the Q3 2017 IAG 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.

Willie Walsh

Thank you and good morning, everyone. So pleased to announce another strong third quarter this year. All of our companies are performing well with improved operating profit and margins and clearly, we were very pleased to announce our interim dividend yesterday of EUR 12.5 per share which is 13.6% upon the EUR 0.11 that we announced this time last year.

So I'm going to hand over to Enrique now to take it through the standard presentation. Enrique?

Enrique Dupuy de Lome Chavarri

Thank you, Willie. Good morning, everybody. So as we have said, another strong set of results for a Q3 with an operating margin of EUR 1455 million which is exceeding last year figure by EUR 250 million, a similar improvement as a one that we recorded on Q2. This time, we have had a combined positive FX impact worth EUR 37 million embedded in the EUR 250 million for that mentioned.

So differently from last quarter, this quarter we have seen a low level of capacity growth for the group. And then here two of our companies still growing and I'm mentioning Aer Lingus and Iberia. The other two companies reducing slightly as British Airways capacity or more intensively as the case is for Vueling. So a low capacity increase for the full group.

Passenger unit revenues in constant currency terms have improved by 2.2% and this is close to the underlying trend that we mentioned three months ago, the one we thought prevailing at Q2. When we aggregate to this passenger unit revenue performance or all the revenues which have been strong as you will see especially in the case of cargo and Iberia third party business on MRO. We will be reaching a constant currency total unit really improvement of quiet a 3%, 2.9%. So this is also a strong performance for the group in Q3.

On the cost side, the out total constant currency non-fuel unit cost increase account for 2.5%. Again here we have to mention that if we carve out the costs that are not related to waste case, so in this quarter especially Iberia third party MRO business, we will be get into an underline non-fuel unit cost increase constant currency terms of 1.4.

When we bring into consideration the performance of fuel, our total unit cost has been decreasing in constant currency terms by point 0.3%. So combining total unit revenues and total unit costs our operating profit margin has been improving by 3.4 percentage points to Q3 in respect to the same period in last year. And even if we don't consider the fuel cost improve savings, so operating profit before fuel costs have also increased by 1.7% if we compare them with the same result in 2016.

Getting now to a bit of a closer explanation of our operating profit is next chart. We are showing basically passenger revenues and mostly related to the passenger price and mix has been responsible of a very significant part of the whole improvement for the quarter, EUR 1 million to EUR 9 million. Together we've already mentioned, non-passenger revenues again related to cargo improved revenues on Iberia MRO business.

Fuel costs on in terms of price has also been still a tailwind for our performance in this third quarter. And then on the ex-fuel cost side, we will be mentioning in the following chart impact having to do with our employee costs, our supplier costs and our ownership costs. As a whole together with this positive foreign exchange currency improvement of 37 million is how we explained at 2015.

So get into the ex-fuel unit cost analysis, we start with the employee costs. And here we have to mention that as I already stated both in very special in Vueling but also in British Airways, capacity has been decreasing through Q3 and that's part of the responsibility of higher unit cost performance. The rest has to do mainly basically in the case of British Airways with extraordinary low interest rate cost through the first quarter at first half of the year which have been the ones that we have been using as a reference for the calculation of pension fund charges. So with very low interest rates cost as a reference and pension fund charges in British Airways have been increasing.

Through the remainder of the year and probably through quarter one next year, we will probably we are seeing a reverse in this trend because already interest rates preference interest rates AA bond yields have been increasing since as the reference that we have been using. The other significant reason behind these employee costs have been above the variable pay awards. So last year of course on a perfect situation, variable pay awards were very low at this point of the year. This year we've been accruing variable pay awards bonuses and that's the main reason that we are increasing our labor costs in British Airways. For both Aer Lingus and the Iberia, labor costs in terms of unit labor costs have been improving through Q3, and again to a combination of efficiency and growth.

The rest of the cost that I think we will be mentioning have to do on one side with engineering and engineering costs again very much to do with the increase in work spin done by Iberia for third parties which had been also picking into Q3.

Talking about selling costs, there is also an interesting couple of performance. So basically this quarter three, we're recording the initiation of our new distribution model basically have been the new distribution model with some of the income on the GDS especially Saber [ph]. The other source of increases in selling costs have to do with our intensification of our commercial efforts on point of sale the U.S. Point of sale in the U.S. has been proven to become a very interesting source of increase yields for which sales and for the group but selling costs at the other side of the ocean are higher.

Finally, ownership costs have been improving, although there is a combined effect of lower depreciation costs and higher leasing costs which result on a moderate increase. On out earn rates, the increase is practically zero which take into account constant currency terms, there is a deterioration. So it would change into the next slide and get into the fuel scenario.

Basically what we are seeing for Q4 is still and mild improvement in euro terms at actual market prices in the prices of fuel and also in the value of the dollar. And these mild improvements in euro terms will also probably be the question for the first quarter in 2018. Since then, we will be seeing a more breakeven situation against the similar periods on year 2017.

So basically what we have to say is we are headed for the last quarter of the year at 84% and we are seeing total fuel business for a year which will be close to EUR 4.6 billion.

Getting to our capacity developments, as we show in the chart and have been advancing, both Iberia and Aer Lingus were growing through Q3, Iberia 5.7%, Aer Lingus 10.5% and again Vueling was reducing their capacity by 6.6% and this compares with the eruption and difficulties effects Vueling to the last year same quarter. British Airways has been basically flat, slightly negative 0.5%, to Q2, also affected by hurricanes and weather developing conditions basically over September.

What we are seeing for a Q4 is coming back to growth scenario, 4.3% which will be making for a full year at 2.7%. Talking about the different companies, we will be seeing Aer Lingus growing 11% in Q4, Vueling coming back to growth 9.4%, Iberia 4.9% and British Airways staying at that 0.9% increase capacity level.

So the pattern of growth that we have foreseen for Q4, it's probably more balance in terms of frequency increases and the opening of new routes. So specially in the case of Aer Lingus and also Vueling, the balance would be maybe more towards increases in frequencies that's also the case for Vueling with a 12.3% of frequency increases, if we compare them with the opening of new routes.

Opening of new routes for British Airways will have to do with Santiago de Chile, New Orleans, Oakland and Fort Lauderdale. In the case of Iberia, it mainly has to do with the level routes, so you know about Oakland and Los Angeles and Punta Cana and Buenos Aires.

So we get to capacity and unit revenues. So capacity as I have been explaining has been 0.9% for the group. There has been an increase capacity both in North Atlantic and South Atlantic and this has as a very much to do we increase capacity and growth that both level and Aer Lingus have been achieving through the period.

In the case of domestic performance in terms of capacity has been modest increases and Europe has been experiencing a significant reduction minus 3% basically related to Vueling capacity adjustments.

Asia Pacific has been mightily reduced by 1.3% and Middle East and South Asia has been improving capacity by 2.6%. In terms of unit revenue performance, both the domestic and European networks have been improving significantly unit revenues. And that is very much to do with the strong routes between Spain and Europe through the quarter.

Asia Pacific has had a very strong performance in terms of unit revenues as well and we have to mention here basically strong performance of Japanese routes port for British Airways and Iberia and also stronger performance of China. Most of China routes have been improving unit revenues I guess the same period last year. Worth to mention a very significant improvement in unit revenues in Latin America. This one is basically related to the south cone countries, so it has to do basically with Brazil recovery but also Argentina, Chile and also Colombia and this is basically affecting Iberia level and British Airways as well.

The North America performance appears to be slightly negative, but then we have to take into account that the unit revenue here is basically affected by the averaging of the growth in Aer Lingus and the level. As you know, the average unit revenues of these two companies are significantly below the average of the group and that's why the mix is getting effected. Without considering level impact and Aer Lingus and also the opening of new routes the North America, unit very performers who have been positive are slightly above from the 1% level.

If we follow now the performance by our different products and segments of business, we have to take into consideration in the long haul, the strong performance of premium traffics. And this basically affecting British Airways and Iberia and it is something that has to do with the strong performance of our corporate and business travelers segments of business. And I have to say that something that we have are seeing also flowing into Q4.

Long haul non-premium, again we have to mention to the, I would say averaging negative impact of both Aer Lingus and level which economy class content into their flights, it's much higher than the average.

If we get into the short haul business, again we need to recognize the strong performance of both Iberia and Vueling and this is again having to do with the strength of Spanish market and also into European markets we have to say.

On the non-passenger side, again the significant improvement that has to do with cargo performance and this is the second strong quarter of cargo performance through year 2017, also again Iberia MRO business.

So if we get to the performance in terms of operating profits and ROIC, which we regularly show in this chart, we have to recognize a significant improvement across the board. So if we make this reference to adjusted operating margin, lease adjusted that operating margin, for the group it has been improving by 3.6% points and reaching in Q3 a margin of 23.1%, which is what I would say a record margin for the group.

In terms of ROIC and then referring to the last four quarters, we also are getting record figures 16.3% which is one 1.2 percentage points above the same reference last year. And then when we go through our different companies, we are recognizing significant improvements across the board. I think we need to mention very specially the 11 percentage points of improvement in operating margin for Vueling in Q3. And we have to record this improvement is greater and I would say significantly greater than the full that we were accounting for poorly in Q3 last year because of the heavy eruption in their operations. So Vueling is achieving ROIC figure of 13.7% versus 9.7% in the relevant period last year.

For Iberia again 2.7% improvement in operating margin and again 1.5% improvement against ROIC last year and up to 13.5, for British Airways quite a 2% improvement in operating margin and reaching 16% at the level of ROIC and Aer Lingus holding ROIC at 22.9% even through these very significant growth in terms of ASKs. So very profitable for Aer Lingus.

Getting to below the operating profit line, there's no major issues or surprises this quarter, so we see a positive and a negative in reference to last year Q3. The negative has to do with last year, we had an extraordinary gain having to do with a sale on leaseback transaction on our 18 and 19 fleet, creating some positive capital gains. They are negative last year and positive this year has been ForEx. And as I told you ForEx impact for the group has been turning positive against of course a negative situation prospective in Q3 year of 2016.

So as a whole, profit before tax and pre-exceptional has been reaching 1,436 million, so a 22.5% increase against last year. Tax ratio has been getting into 20%, so very similar to last year. Profit after tax improving to 1.46 this is pre-exceptional again. And fully diluted earnings per share pre-exceptional for a period improving by 19.4%, so very strong improvement figures on these metrics through the quarter.

Balance sheet again improving our financial strength. In balance sheet, net debt carrying to a very low figure of 55 million, after including notional value of aircraft leases amortizations, we are getting into and adjusted net debt of EUR 7.183 billion. And when we get to adjusted net debt to EBITDA, the ratio has been falling since the beginning of the year from the sourcing 1.8 to the 1.4 at the end of September. So again a very strong performance in terms of deleveraging our balance sheet.

So as a whole, the guidance for year 2017 full year at current fuel prices and exchange rates. We are expecting an operational profit for the full year to be around EUR 3 billion before exceptional items.

So thank you, William.

Willie Walsh

Okay. Thank you very much, Enrique and now hand back to the operator and we'll take your call.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We can now take our first question from Jarrod Castle from UBS, London. Please go ahead.

Jarrod Castle

Good morning and thank you. I just had couple of questions. Firstly just on the guidance for around 3 billion, just given the performance that you did last year in Q4 and the current run rate, I mean that would suggest over 3 billion, so just a bit of color for why you kind of sticking around the 3 billion mark rather than over the 3 billion mark?

Secondly, you spoke a little bit about the U.S. point to sale and I'd be interested to get some color in terms of how the marketing relationship works in the U.S. with American Airlines and what costs they pay versus what costs you pay for the marketing efforts?

And then lastly, any further update on your views when it comes to Airberlin and now Monarch? Thank you.

Willie Walsh

Thank you. Obviously, our guidance is our guidance and I'm not going to add any color to it. So we're clear in terms of the challenges if you like that we face in the fourth quarter. Fourth quarter is going to be good and so we're expecting positive unit revenue. The one thing I would say and Enrique mention this in relation to third quarter is the bonus provision, so clearly our performance this year is better than our performance last year. And last year, we would've released provisions as we went through the year and this year clearly, we're making provision for bonus payments. So that is a difference between this year and last year.

In terms of the U.S. point of sale, the point that Enrique is making is that's the distribution charges that we have in the U.S. are higher than we would have in the U.K. and this is the if you like the structure of the arrangements with the GDS is it's not a uniform charge. So as we switched the point of sale and have more volume being sold in the U.S., it comes at a higher cost of distribution. So this is a good could be a charge it's nothing to do with the joint business versus the GDS charge that we would have in the U.K. which is significantly lower. And that's the difference in the cost of distribution it's a GDS cost.

And in relation to Airberlin, we as you know, we said publicly that we did make a bid for part of Airberlin principally to parts that went to Lufthansa, it those Nicky that we were interested in. And we're not participating in any of the residual aspects of Airberlin. And I understand from media reports that's something going on between Airberlin and you suggest, and I think that maybe one or two with other parties involved in that, but we're not involved in this. We're clearly going to watch with interest how the competition regulators view the Lufthansa acquisition of Nicky in Austria and the residual parts of Airberlin in Germany to see what remedies they believe are appropriate. I have seen comments from the Austrian government. So there's going to be I think a lot of interest in how competition regulators assess this situation. But in general we're now just observers to the process, we're not soon any way involved in the process.

Jarrod Castle

And any comment from Monarch, please Willie.

Willie Walsh

Yeah, sorry, Monarch. We are interested in the SLOT, we did have conversations with the unit administrator. We are aware as everybody is now that ACO has determined that the administrator doesn't have the right to sell those lots and that that is being now challenged through judicial review. I'm not sure whether that process will be able to run in time. Our understanding is the SLOT conference that will distribute our sign the SLOT will be done in early November. So we will we see what happens there. But if there are SLOT available at Gatwick, we're certainly interested in SLOT whether that's through an acquisition from the administrator of the Monarch Group or through allocations from the SLOT pool at Gatwick. So we will be making a request for additional SLOTs at Gatwick through the normal process as well as looking at the alternative of purchase of SLOT from the administrator if that situation changes.

Jarrod Castle

Okay. Thank you.

Operator

Thank you. Our next question is from Stephen Furlong from Davy. Please go ahead. Your line is open.

Stephen Furlong

Good morning. Enrique, just give me some color, just talk about the competitive dynamics on the Transatlantic market both inbound and outbound premium and non-premium and U.S. Airlines have been fairly positive on the market?

And then just secondly maybe for Willie, I mean you might touch on it next week, so but obviously the returns of cost all the airlines are very good and have record levels. Do you think that's a kind of broadly, where do you think we are in terms of cycle of the markets really in terms of returns? Thank you.

Willie Walsh

Okay. We're very positive but the transatlantic as well, corporate activity is good, and I think slightly stronger than we had expected. The issue as Enrique pointed out is the dilutive effect of the growth in Aer Lingus and LEVEL. Aer Lingus is obviously now higher proportion of our total capacity and revenue on the Transatlantic and will continue to grow at as a strong pace significantly ahead of what BA and Iberia will do. And clearly, we're committed to growth in level which is proven to be very attractive.

We will announce towards the end of November early December where the three additional aircrafts for LEVEL will go. And we won't be announcing that at Capital Markets, I think it's probably going be the end of November or early December. So we think the Transatlantic performance has been good. The demand environment is good. U.S. point of sale is good. U.K. corporate activity is good. Right across the board, I think this is a positive situation. I think it is facing increasing competition out of Ireland butt that competition is clearly struggling from a profitability point of view. When you compare that to what Aer Lingus is doing with very strong growth and maintaining margins in fact growing its operating margins, maintaining its - like it just shows you the difference between Aer Lingus' model and other airlines that are trying to compete with them.

And in terms of returns, yes, we will talk more about this next week at Capital Markets Day, but our view is that still more to come here. We don't believe we're anywhere close to the peak in terms of margins. We said ourselves challenging like targets and operating margin targets. We're clearly exceeding those and exceeding those that by some distance at the momentum. And we believe that there is more to come, and we'll give you visibility and color around this when we talk to you next week.

Stephen Furlong

Great. Thank you, Willie.

Operator

Thank you. Our next question is from that unit [indiscernible] from Bernstein Research. Please go ahead.

Unidentified Analyst

Good morning, guys. Two questions for me please. First on the Intra European market where you slowed down ASK growth or not growing, competitors are growing lot faster intra Europe and I think the two parts of the questions, number one how you think about your Intra European exposure in the next one to two years and how important do you think Pan-European point-to-point proposition is for you in the medium to longer term?

And then the second question on international, we talked about North America, maybe towards China and especially also Asia Pacific and what will be your outlook in terms of capacity growth there, how much do you think will you accomplish with organic growth, how you're thinking about partnerships joint ventures on those routes especially to China maybe through Qatar as how are you viewing that market also on a more medium-term outlook? Thanks.

Willie Walsh

Okay. I think some of the questions you ask would be better addressed next week, but let me just talk about Intra EU. We made it clear that we were going to correct some of the network issues that Vueling experienced last year which led to like a cascade effect of disruption following the air traffic control strikes that particularly impact them given the number of their flights like go through French airspace. I think you can see that this year in fact ATC regulations in Europe this year were higher than last year and yet Vueling's performance significantly better. They've outstripped the competition at Barcelona and direct competition from Ryanair, Easyjet and Norwegian in terms of punctuality and regularity. So it shows the strength of the network and clearly that's also now reflected in the strength of their profitability in that quarter.

And while some of our competitors are pursuing higher growth. They're also doing is at a ridiculous cost. They're facing increased disruption. In the case of some of them they're having to do it at the expense of wet leasing which I don't think is sustainable. And we're very clear that this is a growth market for us, but we're going to grow in a manner that is positive from a profitability and margin point of view.

So I see lots of airlines pursuing rapid growth at ridiculous cost. It's not a sustainable situation and we're not going to participate in that. We learned from our experience that while the growth figures may look impressive, the property profitability figures look very quaint impressive. I think you'll find more and more airlines will do what we've done this year and we'll calibrate to what it is they can do within their own means. So we're aware of - at particular strong airlines in the low-cost segment in Europe is out there desperately looking for wet lease capacity for next year. So desperate that they're actually asking us for capacity.

So when I see this going on, I really do question why some of our competitors are pursuing the growth that they're doing, because they clearly can't do it within their own resources and will incur very significant additional cost to sustain this. On China and the rest, we'll talk more about this and next week, but China for us is about organic growth and we're doing some co-sharing with other carriers into China, but we're not looking at any joint ventures at this stage.

Unidentified Analyst

Thanks Willie. See you next week.

Operator

Thank you. Our next question from Neil Glynn from Credit Suisse. Please go ahead.

Neil Glynn

Good morning. If I could ask two questions, please. Firstly, did the headline pricing on the Transatlantic is getting some attention this morning, but it does seem the pricing underlying looks actually quite similar to your U.S. peers despite their product upgrades, but the investment in U.S. point of sales which is on a couple of prevail and concerns. One, is part of that investment designed to bridge the gap until you make a final decision on the next generation for club world or conversely does it help absorb challenges in U.K. point of sale given consumer spending question mark? So just interested in your views on that given they are topical concerns at the moment.

And then the second question, just interested in your take on capacity plans for Latam versus APAC at the moment, clearly both markets are enjoying recovery, how do you weigh up the opportunities there and who's best to serve them whether at the Iberia level or British Airways?

Willie Walsh

Okay. Thank you. Your pricing on the transatlantic underlying is good. As Enrique, said if you strip out to dilute the fact of Aer Lingus and level of recognizing as well as three share which launched three new transatlantic routes that are in this quarter the revenue performance is positive slightly over 1%.

So where - we see this as a solid market, solid performance. We have outlined in general terms our plans to upgrade the product on the transatlantic some of those upgrades have already started with the new catering proposition in sub world and feedback from that it's extremely positive. We will get further detail of the cabin configuration that you see when we get the presentation, Alex will have plan that next Friday, and other initiatives that we're doing.

So that this is a very important segment for us, but it's one that's performing very well, and our positioning is one that we're very comfortable with at the moment. Some of our competitors have decided to prove their product offering, but just by term of the media hype around especially having got as much of their operation. So we're competitive and we believe going forward will be more than competitive both in terms of the product, the network and the overall customer proposition.

And on LATAM, yes, the market is good, the economic environment is positive. Iberia clearly has very strong position and good growth opportunities. And so level as we've seen with the performance of winners Irish has been stunning, so really pleased with that.

So I think we see underlying demand in Latin America being very positive. We were a bit bearish on the economic situation in Brazil, and I think that was - we were cautious, and you know maybe we were a little bit behind others, but the Brazil environment is certainly more positive this year than we thought it would be, and as Enrique mentioned for things that in Argentina, Colombia and Chile as well. So I think the growth opportunities principally Iberia level, but there is some BA growth opportunity as well.

Neil Glynn

Understood. Just a follow-up on that how concerned are you for next year that that's the market as a whole throws a lot more capacity into a recovering LATAM market?

Willie Walsh

No. We're not concerned that, in fact, I think we've been quite positive about the trends that we've seen so far, this year and what we see for next year. That clearly will be more capacity. But the underlying demand I think continue to be very strong and will justify the capacity. So we're not seeing any evidence at this stage of activity that would be considered irrational, I think everything that we've seen so far and based on what's been publicly stated in terms of next year, it looks perfectly rational to us, given our take on the underlying economic environment there and the impact that that's going to have on demands to 2018 and 2019.

Neil Glynn

Thanks, Willie.

Operator

Thank you. Our next question is from Mark Simpson from Goodbody. Please go ahead.

Mark Simpson

Good morning. Three questions, one of you could give us your view on capacity growth looking out of the medium to 2018, 2019. Then if you'd be willing to do that by brand as use of currently look at that. CapEx this year and next maybe just not an update overseas if had a bit of a CapEx holiday this year, just wondering has any changes into next. And then I think probably Aer Lingus as a component of that XBA, Iberia North Atlantic yield decline. Could you just tell us what the yield development is being Aer Lingus over the last quarter and how do you see that shaping up into next year?

Willie Walsh

Okay. Well, your questions I think are more appropriate to next year we're going to have line all of those. So we'll give you this ability in terms of capacity CapEx. Just in relation to Aer Lingus, the Aer Lingus unit revenue on the transatlantic clearly declines this year versus last year, that's the plan with the capacity that they're putting in there the profitability of Aer Lingus has improved, so Aer Lingus model is very clear. The value proposition that they have involves them being able to continue to reduce their unit cost, which is what they've been doing.

So they've had a very strong unit cost performance and that enables them to be even more price competitive and that the fascinating think about Aer Lingus, as Aer Lingus goes into these new transatlantic markets and is profitable from the very beginning, it's not the traditional model of where they need to be on the market for some time to move to route to profitability and that I would say unique feature of the Aer Lingus at business model. But it's really a strong feature of the Aer Lingus have business model that they can launch these new roots and be profitable from day one.

So as we mentioned that does have a dilutive factor on the reported unit revenue. But that is business model that Aer Lingus has, and there's no model that we support, and it's the reasons why you've seen Aer Lingus not going to have the park in terms of the root that they've reported so far, and that will continue to be the case with Aer Lingus. So it is sustainable, so there is a lot of work to be done there, but the business model that they have is sustainable in this have proven to be very effective.

Mark Simpson

Just following up, can you identify specifically on the unit cost front where the biggest wins have been seen and why that structurally is so successful?

Willie Walsh

We will talk more about this, but I'm not going to educate my competitors and have to do it. But clearly you guys got a very effective aircraft model that works extremely well for them and that is sustainable because of how they can use the 321-LOR, so the combination of the A330-200, A330-300 and going forward the A321LR given their geographic position is something that for us demonstrates that the model is a sustainable win for them.

Mark Simpson

And so it's aircraft type as the same with the successive level?

Willie Walsh

There's a loss, but aircraft type is one of the positives that are Aer Lingus have, but it's performing well. They work hard to do it, it's a very impressive model, but there's a lot of hard work behind the scenes. But their cost base is competitive and the aircraft utilization that they get in going forward that the aircraft utilization they will get, so the asset utilization, the asset turns the capital that they have invested in the business. Take this important parts of the business model and they're all very effective.

Andrew Crawley

I guess the neighbors of Iran air force so long as also have them to be really efficient and lean lane to survive that's how they're getting there?

Mark Simpson

That's great. Thanks very much.

Operator

Thank you. Our next question is from Damian Brewer from Royal Bank of Canada. Please go ahead.

Damian Brewer

Hi, good morning. Few questions please again sorry coming back to the North Atlantic? If I can ask questions slightly different way obviously did the tax FX raise down 3.1%. But given the mix of businesses could you give us a feel for what the unit cost tax filled in Transatlantic given the growth of Lebanon Aer Lingus, and also given the comments from American Airlines yesterday. Could you give us a little bit more flavor elaboration on what happened with the premium versus non-premium cap and rest?

And then the second question just probably one term recap, again going back to that sort of balance sheet slide, the lease utilization of the business is going up clearly some do it level and some the other expansion there, but could you talk a little bit more about how you're thinking more generally about lease versus buy either for Q3 or more structural context? Thank you.

Willie Walsh

So unit cost performance on the transatlantic are going to go back to what I said, if you look at Aer Lingus the business model is since the unit revenue reduction, but that unit costs reduced greater than the unit revenue, which increases the margins, and that's what they've done same with level the unit cost reduction is very significant. The unit revenue clearly is lower, but they have reduction in unit cost as ways the reduction in unit revenue, and that leads to margin growth. And that's what we see on the transatlantic for us.

The premium demand, so mentioned earlier we've seen goods premium particularly UK corporate activity, so the general comment I would have on the transatlantic that the market is performing strongly capacity overall, we think is benign in an overall context certainly in the markets that we're operating in. And in the Aer Lingus context clearly there has been growth there from competitors, but also significant growth from Aer Lingus, the Aer Lingus growth is probably outstripping to competitors' growth, and they're gaining market share and they're doing so well improving their margins.

So overall, we're pleased with the way the North Atlantic is operating. And many of the underlying trends and comments that you hear from American are similar to ours. What is different in our model is the operation of Aer Lingus and level that's different to if you like to traditional transatlantic network of British Airways and Iberia, American and United Delta all of these. But it's appropriate for the markets in which they're operating in, and is clearly a successful model as we have had demonstrated. In terms of balance sheet. Enrique?

Enrique Dupuy de Lome Chavarri

Balance sheet and lease probably there something that we will expand on the Capital Markets Day because it's more of strategic type of question, but very, very briefly as you know we have a general guideline around new deliveries 50-50, but this one is every time fine-tuned through basically three considerations. On one side, is about flexibility needs in each fleet.

Secondly, it's about residual value exposures that we need to control and mitigate. And thirdly, is always about the rationale, financial rationale over buy or rent decisions. So these three pillars other words that we used to fine tune is general rule of a 50-50 proportion. We will tell you more on the Capital Markets Day.

Damian Brewer

Okay. Thank you. Can I just come back to Willie's response on the North Atlantic? Could you - again could you say more in the fee X the growth impacts in North Atlantic result [ph] 1%, was the differential of the premium traffic versus the average similar to Q3 2016, or actually above or below in Q3 2017?

Willie Walsh

It was from memory of it slightly above from memory, but the bottom line of the transatlantic is that we said that the unit revenue declines constant currency our profitability improved.

Damian Brewer

Okay. That's great. It's very helpful. Thank you.

Operator

Thank you. Our next question is from Anand Date from Deutsche Bank. Please go ahead.

Anand Date

Hi, morning, everyone. I was wondering if you could update us on the on the BA pension situation, I know you like to show some the couple of other large UK corporate in BT saying some interesting things, but what they're looking to do. So just wondering if anything you can comment on that?

And then secondly, might be a bit more capital markets day. On the cost side, is sort of so BA in particular the lower, if lower growth is kind of the way forward to be needing to reassess the rule of thumb for the group sort of minus one is what we aim to do every year, and separately if we're going to have to keep, if we need to keep axing out other revenues and other costs. Is there something you're looking to do with that going forward? Thank you.

Willie Walsh

Okay. That there's not a lot of concern pension, because we're in consultation and clearly that's an ongoing process and we will continue for a number of weeks yet. And I think we I need to respect that consultation, so would be inappropriate for me to comment in relation to that. On the cost we - cost targets that we have for the group continues, and it is a target, there will be years where we want to achieve in double and years when we will exceed, but what we're saying is that we set ourselves a target for a non-fuel unit cost reduction in our 1% annually.

The business plan that we've just completed and approved by our board includes that target enough we believe that that is achievable. It is something that we are focused on, and as you said it's one that we look at to be like over a period of years, we're not driven to do it in any one year, because we think that there will be years when it's appropriate for us to have a different actual target or not, but the 1% non-fuel unit cost reduction through our business planning cycle it is still the target that we have for the group, and that has not changed.

Anand Date

And then just sorry on the other revenue other cost?

Willie Walsh

Oh, yeah sorry, on other revenue yeah, we're conscious, that this is something that we talked about quite a lot, and we said the two main areas that impact on the non-fuel unit costs that are non-ASK related to our British Airways all the days and Iberia MRO and both of these are profitable parts of the business.

So we'll continue to give you color around this and we continue to debate internally whether there's a better way of stripping it out to give you the clearer visibility on the underlying non-fuel cost performance that is related to ASK. So we'll have a continuing look at this it is a challenge we have internally, and we accept that it's something we comment on every quarter, but we will give you more detail when we talk to you at Capital Markets next week.

Enrique Dupuy de Lome Chavarri

One of the problems we have to deal with is especially with an MRO, third party revenues is, it's basically a very opportunistic approach. So we really aren't filling the gaps of our scheduled maintenance programs for a different feeds through third party business. So that one really difficult to plan for in the medium long term, but we are trying to find solutions to get to more type of smooth performance in terms of projecting revenues and costs and I will - we'll be getting back to you with our solutions.

Anand Date

Okay. Great. Thanks very much.

Operator

Thank you. Our next question is from James Hollins from Exane. Please go ahead.

James Hollins

Hi, morning. Two for me please just if you could update us on the mixed fleet cabin crew deal or I think some of that it seems to be coming to a successful conclusion, just let us know where we are on that. And second one is just interesting on obviously the Aer Lingus growth along all has been pretty sort of the mix effect dilution on overall rush. Should we expect something similar earnings for to Europe next year from Vueling growing proportionally much more than then BA and Iberia achieve around 10%, is that sort of dilution impact can be quite significant or relatively minor. Thank you.

Willie Walsh

Thank you. The growth stations with the night officials concluded, I think a couple of weeks ago and just go to a ballot with a strong recommendation for acceptance, so we are we remain positive in relation to the fixed fleet issue. In relation to the E.U. growth next year, I think bone comment I would make is that, we see the capacity environment being more positive next year because of obviously the consolidation that has taken place and the comments not some of our competitors have made around pulling back on capacity plans because of internal issues.

So we don't think that the Vueling growth next year will be as significant as what we've commented on in the transatlantic. So we think Vueling will be able to grow in an environment that should exist in Europe next year that would be generally positive for efficient carriers who can operate their capacity plans within their own means. So as I said I think for us, were looking at improving profitability in our intra E.U. operations next year.

James Hollins

Thank you very much.

Operator

Thank you. Our next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

Yes. Hi, good morning. Three questions for me too on the cost side, one on the revenue trends. Firstly, on the unit cost development going to next year, I would we have to think about this after this year was not as good as say minus 1% target. So any update on the facing of blender for 202, the measures in MRO and also indeed all the other messes you gave us at the past couple of market days.

And secondly, on labor obviously union talks are still going on at Aer Lingus. Can you please give an update on those especially in the Aer Lingus pilots have pretty ambitious team? And then lastly, which will be able to give us the RASK performance of BA only on the transatlantic in Q3? Thanks.

Willie Walsh

No, we don't spit out the unit revenue performance by operation company, so when our courage goes out, in terms of the unit cost that back to what I said, lot of the plans that we've announced, we're very clear that these and our initiatives are bearing the cost now. But we'll see the benefit in the future, so as you've seen in Q3 we made provision for the second phase planned for to do with Iberia and we'll see the benefit of that plan coming through over the coming years, it's not a 2018 or 2019, it's actually through to I think 2021, 2022 that we see the delivery of that.

I go back care again to reinforce the comment, we continue to have a target in the business for non-fuel unit cost reductions of 1%, we won't achieve that every year and it's clearly easier to achieve in a year where you're pursuing stronger growth. This year our growth was pulled back quite a bit from what we would have traditionally seen. But we believe it's achievable. And if you look at it through a cycle what you'll see is that we will not just achievable, we believe can exceed it.

So we think it's a relevant target, it's easier for some of the airlines in the group than in others, but it's an appropriate target and it's one that we're sticking to and you see evidence of that when we talk to you next week Capital Markets Day.

And in relation to labor issues, I don't want to comment these are ongoing issues, but we remain confident in relation to our ability to address these issues and to reach gulf agent agreements with our labor groups. So we'll tell you when the results of these come true and the actions that we're taking, but were more positive in relation to the initiatives that we have.

Unidentified Analyst

Thank you.

Operator

Thank you. [Operator Instructions] We will now take our next question from [indiscernible] from Raymond James. Please go ahead.

Unidentified Analyst

Hey, good morning. I have three questions from me. First one, just I know you've mentioned that the business trends on the transatlantic just wondering generally, if you can comment on kind of the recovery and business demand and maybe how - where we are in the recovery versus the declines that we've seen more recently.

The second question I know this the pilot issues that we've been hearing at one of your competitors seem to be more of an internal item that just wondering as you look at the next kind of two to five years, are you - how comfortable you are with a supply of a pilots for the various businesses, and if you see any issues there?

And then the last question just on giving a comment on Spain and being strong and getting to the land issue hasn't really had an impact but just wondering that what your thoughts are on that from a demand perspective as well as from a good corporate perspective? Thank you.

Willie Walsh

Thank you. At the transatlantic, the only issue that we've commented on in terms of transatlantic business demands was probably the referendum on Brexit, so in the lead up to that probably going back to May 2016 through to maybe the end of the year. But certainly through October, November of 2016 we saw softening UK corporate activity, but that has recovered and as fully recovered. So we're back to what I would describe as normal levels of corporate activity outside of the Atlantic and it's generally a positive environment.

On pilot I started in this industry 38 years ago, the pilot I heard then that was a shortage of pilots. 38 years later I still haven't seen those, we're not seeing any issue in terms of supply all of our airlines are recruiting pilots, there's plenty of capacity in the markets, good quality we haven't seen any issues. I don't think anybody is to be honest with you, I think the issues are specific to airlines that have pursued strong growth where they need captains.

So that it's not a pilot issue for some people it may not have been able to get their copilots promoted fast enough to fill that left-hand seat and that's you know I think the bottleneck and it's probably specific to a number of airlines, but we've not seen any issues. And looking forward, I don't see any issues developing to be honest with you based on what we see in terms of supply in the markets and our projected demand, but we have not encountered any challenges recruiting pilots into any of our airlines in the group.

And Spain I think it's fair to say that there has been some impact in Barcelona, but it's really pulled down the rate of growth where it was still ahead of last year, but maybe it's not as strong as it would have been. So it's having described it as being in impacting at the margins it's not say of any significance at this stage. And we believe that Barcelona will continue to be a very attractive destination energy, very attractive origin and are absolutely committed to our strong presence at Barcelona through all of the airlines in the group, which are particularly true of well in Barcelona is there hope airport. So where we're clearly watching it like everybody else but we're not really seeing any issues at this stage.

Unidentified Analyst

Appreciate the comments. Thanks.

Operator

Thank you. Our next question is from Michael Kuhn from Societe Generale. Please go ahead.

Michael Kuhn

Good morning, gentleman. Two questions also from me. Firstly, on current trading, how do your current forward load tractors compare with the same point of time one year ago? And the second one probably, but unpopular question still Brexit negotiations don't seem to progress that well, how do your current contingency plans look like and what vote from your point of view be a best-case outcome and a worst-case outcome maybe a few thoughts to share here? Thank you.

Willie Walsh

Current booking trends are in lines like a heads of last year, so there's certainly that we're not seeing any trends there that would cause us to comment, so everything we're seeing at the moment is perfectly in line with what we would have expected to see and with the issue that mentioned, but Barcelona slightly less and maybe we were seeing what we've been seeing very strong growth at Barcelona, we still positive.

In terms of Brexit, they'll be an outcome and that will continue to fly so we're not looking at best case worst case whatever the outcome is we will manage our business and manage it without any difficulty and it's the great thing about the airline industry, we've got plenty of practice of managing these sort of things, so we're confident that the negotiations around aviation will be dealt with and will enable us to operate exactly as we have been it may and it has required some other airlines to do different things you've seen with flight for UK ALC easyJet apply for an Austrian ALC.

We don't need to do that so we're not making those sort of contingency plans because, we have a structure in place that would be appropriate so we don't need to do anything on that level and we will leave this to the politicians to resolve it, but I'm confident that there will be a comprehensive agreement between the U.K. and the air travel and we'll wait to see what the details of that are but it something that we believe will enable us to continue to operate as we currently do and isn't in any way interfering with any of the plans we have for the group.

Michael Kuhn

Great. Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from Anand Date from Deutsche Bank. Please go ahead.

Anand Date

Yeah hi sorry everyone just a couple of follow-ups on NDC could you update so I think we start to see the cost comes through from that and one of your competitors is very bullish on the prospects I think your technology of BA is actually better. But you just aren't they always thinking and what kind of timeframe just thinking of the benefits starts come through?

And then on cash flow it feels like for this year, you should have an excess you know I have a EUR 500 million and the acquisitions you might seem to be available when really make much redundant in that with Brexit and maybe on the cycle. Can you give us a sense of where you stand on just sit with your own balance sheet at this point in time or just still likely to come out in February? Thank you.

Willie Walsh

Thank you, Anand. And you see what we're seeing is with one of our GDS suppliers, we're back to ROIC rate as of the 1^st August and that goes to what Enrique said about the increase in distribution charges. We are clear that the transition in flows and increasing costs and it partly behind what we see in our non-fuel unit cost increase. And that's exactly as we had expected.

So this is in the short to medium term is not a cost reduction issue in fact it will add to our costs. And I think that's what you seem to GDS is saying that it's not going to impact on their revenues that they'll see revenues increase which is what I would expect to see, but it's short term and the situation changes and it's very much developed into what we want which is a revenue and customer proposition which will be much more positive for us going forward.

So yeah, I've thing very clear, we'd like to have a relationship with the GDSs, but we think the traditional model is no longer fit for purpose and we need a model that works to the future and not one that's structured around the past. And we remain confident that our actions in initiatives and this will be a positive for the group looking at the medium to long term. And cash flow, we say this all the time, if we have an excess of cash and we are not clear on something that is specifically positive for the group in terms of the use of that cash, then it goes back to our shareholders and that's something that's we will discuss with you when we release our full year results at the end of February which is consistent with what we did last year.

I think in terms of the share buyback this year, we've completed about 430 million of the 500 million, so we expect that to clearly be completed before the year-end. And if when we release our full year results, we're still in a situation where we have an excess cash. And we do have an excess of cash, let's be honest. Well then, we will tell you what we're going to do with that. And it's not something that we're going to use then it's shareholders' cash and they only debate and as the manner in which that gets returned to shareholders. So as we said we look forward to having that discussion with you in February.

Anand Date

Yeah Willie, sorry just on NDC issue, so we know that yeah, I wasn't clear costs to go up in the short term but in terms of getting that back on for the flexible pricing, upgrading people, giving more things that they can buy, does that to start to offset in year one or is this little more longer-term revenue benefit?

Willie Walsh

Yeah, it's probably a year or two, so we see this as an investment in the first year and return from the second year onwards. So as the transition cost, there is - we've already had some investment in the technology, but we would see this a payback starting in the second year and then we'd not changed the view in relation to that.

Anand Date

Okay. Clear. Great. Thank you.

Willie Walsh

Thanks.

Operator

Thank you. So we'll conclude to this Q&A session. I would like now to turn the call back to the speaker for any additional of closing remarks.

Willie Walsh

Thank you. So good quarter for us, strong underlying demands, we pleased with Transatlantic performance, place that we're pursuing the growth that we're doing in a very efficient way with margin improvement in all of the groups and clearly, we've already exceeded our long-term targets for ROIC in operating margin and we're clear that this is sustainable and will grow on into the future. And we look forward to talking to next Friday at Capital Markets Day. So thank you very much for joining the call.

Operator

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.