International Consolidated Airlines Group S.A. (OTCPK:ICAGY) Q2 2022 Earnings Conference Call July 29, 2022 4:00 AM ET
Luis Gallego Martin – CEO and Executive Director
Nicholas Theodore Cadbury – CFO
Sean Liam Doyle – CEO and Chairman of British Airways
Conference Call Participants
Sathish Babu Sivakumar – Citigroup
Alexander Irving – Sanford C. Bernstein
Jaime Bann Rowbotham – Deutsche Bank
Carolina Botacini das Dores – Morgan Stanley
Harry J. Gowers – JPMorgan
Gerald Nicholas Khoo – Liberum Capital
Luis Gallego Martin
Good morning, everyone. I’m very pleased to say that this morning, we reported our first profit since the start of the pandemic. We continue to restore capacity, flying 78% of 2019 levels in terms of available seat kilometers, up from 65% in the first quarter and broadly in line with the guidance.
We achieved a pre-exceptional operating profit of €287 million, substantially better than more than €1 million loss 1 year ago. All businesses were profitable at the operating level, including for the first time since the start of the pandemic, Vueling, Aer Lingus and British Airways.
Revenue recovered to 88% of 2019 levels, almost 5x higher than a year ago. Liquidity was at its highest ever level of €13.5 billion at the end of June compared to €12.4 billion at the end of March. Liquidity has been boosted mainly by positive EBITDA of €777 million and a strong booking activity raising deferred revenues.
Net debt ended the quarter at €11 billion, lower than €11.6 billion at the end of March.
And demand continues to be very strong with bookings currently running at a rate of around 90% of 2019 levels in terms of volume and around 95% in terms of revenue. These bookings, we need to consider that we are not flying or we are flying very reduced capacity to Asia Pacific because of the strict commit travel restrictions.
Premium leisure revenue is particularly strong and has almost fully recovered to 2019 levels. Business channel bookings have recovered to around 60% in volume and 70% in revenue. It’s usual at this time of the year, it’s difficult to see the last quarter of the year, and we have limited visibility set the key holiday periods. And we can say that we don’t see signs of weakness in demand.
Overall, for 2022, we plan capacity to be around 78% of 2019 levels. This is slightly lower than the 80% that we previously planned because, as you know very well, British Airways has reduced the capacity for this summer in order to enable operational resilience of Heathrow Airport.
For the third quarter, we are operating capacity at 80% of 2019 levels rising to 85% in the fourth quarter. We are operating an almost fully restored network in North Atlantic in the third quarter, but with a slightly lower capacity at 92% compared to 95% that we previously explained to you.
In terms of the outlook, we expect for the third quarter that unit passenger revenue exceeds the improvement of 6.4% that we had in the second quarter compared with 2019. And because of that, we expect operating profit to be substantially higher in the third quarter than in the second quarter. Also, we expect to be profitable for the full year of 2022 with an operating cash flow significantly positive, although net debt is likely to be higher by the end of the year.
And now I will hand over to Nicholas for the finance presentation.
Nicholas Theodore Cadbury
Thank you, Luis. Good morning, everybody. I know it’s been a busy morning this morning. So thank you very much for your time, and it’s good to be here presenting IAG’s results in person for the first time for me. I’m even more pleased that IAG has today reported its first operating profit and profit since Q4 in 2019. We saw improved trends across the quarter, with June being the strongest month. And as Luis has just told you, we expect this momentum to continue into the third quarter, leading to significantly improved operating profits compared to Q2.
We’ve changed the presentation format this quarter to give you more detail of the drivers of the performance in the quarter, particularly by the individual airlines. And hopefully, this shows you the strength of the portfolio. I’m not going to go through every single bullet point on the right-hand side of each of these slides. The new format really is for me to pull out key points and for you to take away the detailed peruse at your own leisure. However, I will pick out some of the key points.
As in the previous quarter, we have provided both the comparisons versus last year and versus 2019, although I will focus my comments on the movement compared to 2019.
Firstly, we’ve seen strong revenue metrics across all airlines with each airline reporting positive unit revenue except for Aer Lingus, which I’ll come and talk about in a bit. At the IAG level, passenger revenue recovered to 83% driven by the capacity at 78% and passenger unit revenue up 6% due to the strong yield improvement up just under 11%. Passenger unit revenue was strongest at Iberia and Vueling, driven by the Spanish domestic and the LatAm markets. Cargo posted another strong quarter with revenue increasing by around 50%, a slightly smaller increase than we reported in the last quarter with COVID restrictions in China, impacting freight volumes from Asia. Other revenue increased 14% compared to 2019, driven by good performances of British Airways Holidays and IAG Loyalty.
Moving on to costs. Our nonfuel unit costs increased by 21% compared to an increase of 32% in Q1. A large part of this increase reflects the fact that our capacity isn’t fully recovered to 2019 levels. But half the increase is also explained by two additional factors. Firstly, FX, which relates to the translation of BA and Avios into euros and transaction currency differences that explains around 7% of the increase. A further 4% is explained by the growth of non-passenger business costs for cargo, BA Holidays, MRO and handling. These costs have grown strongly, but do not generate or move in line with ASKs.
Employee unit costs were up around 11%, an improved performance compared to the increase of 32% we reported in Q1, which, if you remember, was impacted by staff being recruited ahead of the summer season peak. Fuel costs were up nearly 35%, driven by the increase in fuel prices seen since the invasion of the Ukraine in February this year. Year-on-year, commodity spot prices increased over 150% in Q2, although our hedging limited the increase in our effective price to 45% year-on-year.
And finally, the impact on disruption of the group was limited to around GBP 15 million in the quarter. The proactive approach we took to manage our schedule, particularly at British Airways minimized the impact of the reduced capacity, although, of course, there was a lost opportunity revenue as it reduced the capacity we had to sell to customers during a period of very high demand.
Looking at the airlines turning to Aer Lingus, I’m pleased that Aer Lingus also reported the first operating profit since 2019. Aer Lingus was one of the most impacted IAG airlines during the pandemic, with Ireland relaxing COVID-related restrictions slower than most of other countries. So it’s very pleasing to see the progress that we had across the quarter. In capacity, if you remember from last quarter, Aer Lingus had recovered only 69% of 2019 capacity, following a strong work-from-home environment. This has now jumped to 86% in the second quarter.
As a result of the slower opening of the travel market, passenger unit revenue declined around 10% due to lower load factors and a decrease in passenger yield just under 4%. The yield did, however, include a change in accounting treatment between revenue and costs, but without which, the passenger unit revenue would have only been down around about 3%.
Short haul leisure has been a strong segment overall, with Aer Lingus seeing significant yield increase into European leisure destinations and short haul cities that are also seeing a pickup compared to last quarter, which was previously an area of relative weakness. North America unit yield revenue was down, but improved across the quarter as the travel restrictions were lifted. So overall, an encouraging performance from Aer Lingus.
This slide shows British Airways performance. British Airways returned to profitability and saw good momentum across the quarter despite the capacity constraints at Heathrow that have been well publicized. Looking firstly at costs, BA nonfuel costs were up 31% in the quarter. A significant proportion of this reflects the slower buildup of capacity.
There was also three other factors that impacted unit costs: Firstly, the currency difference that I spoke to earlier, which relates to the strength of the U.S. dollar against sterling; secondly, there was a one-off benefit in 2019 of around €30 million; and lastly, the good growth of BA Holidays, the cost of which are reported in supplier costs. These three items increased nonfuel cost by about 9%.
Moving into revenue. Passenger unit revenue increased around 6%, driven by an increase in yields of 11%. This was driven by the performance of long haul premium and, in particular, premium leisure with high yields offsetting slightly lower load factors. Long haul and non-premium performed strongly with higher unit revenue. In short haul, we saw good momentum across the quarter with unit revenues turning positive compared to 2019 in the month of June. And business revenue gradually improved, reaching almost 60% across the quarter.
Iberia had a very good Q2 with all its business areas, MRO, handling and the airlines generating operating profit. Indeed, Q2’s operating profit has recovered to 70% compared to 2019 despite the airline only having capacity at 87%. Passenger unit revenue increased just under 10% with positive unit revenue in every month in the quarter and yields up nearly 14%, driven by the strong Spanish domestic and Atlantic demand. These high yields more than offset the lower load factors. So into costs, nonfuel unit costs increased 8.5%, again, partly relating to the capacity not being fully restored.
I’m pleased to say that Vueling fully recovered its 2019 revenue and capacity, driven by strong demand domestically and good yield management. The ancillary performance was particularly strong in Q2, increasing by 65%. Whilst the ramp-up of the new bases at Paris Orly and London Gatwick diluted the overall performance, both bases are outperforming expectations. The new base in London Gatwick starting operations in the quarter and helping to boost the international capacity restoration.
Turning to our liquidity. Cash and liquidity continues to be a key focus for the company, and our cash position remains very strong, increasing over €1.2 billion in the first 6 months of the year.
I would like to highlight a few of the main drivers of the strong performance. As we’ve just been through, the good operating performance in Q2 has driven positive EBITDA to €554 million over the first 6 months. The single-biggest driver of the strong cash flow in H1 has been the inflow of €2.3 billion of deferred revenue. Most of this increase has come from advanced sales for bookings of flights in future periods. And we’ve also seen strong capital inflows in both Q1 and Q2 and working capital as the business recovers.
As in other years, these inflows are seasonal as we build for the summer peak, and a large proportion of this is likely to unwind in H2 as we hit a lower demand seasonal winter months. As we highlighted previously, gross CapEx stepped up in the first quarter to €2.1 billion. Almost 90% of this CapEx, €1.9 billion relates to fleet CapEx that largely reflects the delivery of 13 aircraft in the half, including seven widebody aircraft as we build back our fleet back to pre-pandemic levels. And a little over 1/4 of the fleet CapEx relates to predelivery payments, some of which were delayed from 2020 and 2021.
This capital spend on fuel and environmentally efficient and effective aircraft represents an investment in the future, allowing us to make progress to a lower total cost of ownership and towards our goal of reaching net zero emissions by 2050.
Proceeds from borrowings saw an inflow of €641 million, which mainly reflects the sustainability link double ETC that Iberia successfully issued in April that financed 2 A350s and 3 A320s, which were delivered in Q1 of this year. And lastly, we had payments of €814 million relating to aircraft leases.
This slide shows our liquidity position, which you can see has risen again to reach €13.5 billion at the end of the half. Our level of liquidity is the highest since the start of the pandemic and represents more than half of the revenue we generated in 2019. As you can see from the chart, our finance facilities of €4.3 million have remained unchanged since the end of the first quarter showing the strong cash performance that I just took you through has been the driver of this increase in liquidity.
Looking further ahead into H2 on the right of the chart, we have shown the three narrowbodies and three widebodies that have already been delivered, and we expect to be financed later this year.
This slide shows our gross and net debt position, with our net debt decreasing over €600 million since the end of the first quarter. This includes €910 million adverse noncash movements, mainly driven by FX movements due to the strengthening of the dollar. The gross debt increased around €400 million due to the financing of new aircraft shown on the previous page. And as we’ve said, at the year end in Q1, we expect net debt to increase by the year-end due to the seasonal unwind of working capital and deferred income and due to the previously communicated around €4 billion of capital across the year.
Turning to our debt maturity. This chart shows a year-on-year split of when our financial debt becomes due for repayment. As a reminder, we have excluded finance from operating leases from this chart. So it just shows our secured aircraft finance and unsecured borrowings.
There are two key points I want to make on this slide. Firstly, there isn’t significant variability in the amounts due before we get to 2026 when the U.K. EF loan becomes due. And secondly, the two main maturities we have in the next 12 months on the €500 million convertible bond due in November this year and the €500 million unsecured bond due in June 2023. We have a strong cash position, as you have seen, to meet the maturity of both of these bonds. However, should the credit markets improve ahead of the maturity, we would look at some form of liability management exercise as part of our balance sheet improvement planning.
Lastly for me, this slide shows our current hedging position on fuel. We currently have 81% of our expected consumption for Q3 and 65% of expected consumption for Q4 hedged. We also have a little over 1/3 of our expected consumption in 2023 hedge. As we did in the first quarter, we’ve used the market forward pricing curve for jet fuel. Given the variance across the future quarters, we do think this better reflects the potential future impact on our fuel bill. However, for the first time in a number of quarters, we’ve given you an estimate of what our fuel bill could be at current spot rates and forward curve prices for jet fuel and FX. Based on prices at the beginning of July, our estimated fuel cost for the year is expected to be around €6.2 billion.
So in conclusion, we’re very happy to report our first profit since Q4 2019. We saw an improved trend across all months in the second quarter with all our airlines reporting strong revenue and trend metrics. We expect to build this performance into Q3 with substantial improvement in operating profit compared to this quarter and continue to expect to be profitable for the full year. We have an extremely strong liquidity position and have continued to be successful in raising new finance for aircraft across the last 6 months.
I’ll now leave you with Luis now who will tell you a little bit more about the year ahead.
Luis Gallego Martin
Thank you, Nicholas. So the management team continues to be focused on transforming our business to emerge from this crisis in a stronger position and to excel across all aspects of our business.
First of all, I’m going to talk about the product, where we continue significantly enhancing the proposition to our customers. You can see several examples in the slide. British Airways, for example, is continuing to embody more aircraft with the Club Suite product. We are having some delays because of the global seat service affecting the in-flight entertaining system. BA is also in the process of refreshing its catering offering across all its coming on long haul flights and in Club Europe. Iberia launched on the 7th of June, the new business class long haul in-flight as a service. The next-generation A350s with a wider coming will start in Iberia in September, and the first one with a new Club Plus Suite will be available from December 2023. This new business class will have the [Indiscernible] CL Suite with a flight indoors to provide full privacy.
And the next big development will be at JFK Airport where, in December, we expect that Iberia will co-locate with American Airlines at American Terminal 8.
We talk about Loyalty. IAG Loyalty has been critical during the pandemic to maintain our airlines relevance to our customers in a moment where travel has been very low. And not only it have increased the relevance to the customers, it has increased also the contribution to the group’s operating results this year. The most successful development has been the increase in Avios collected by customers from our non-airline partners. This increased by 22% in the second quarter compared to 2019.
Our largest and strongest non-airline partner, [Indiscernible] American Express in the U.K. with whom we increased our remuneration by 54% in the second quarter compared to 2019. BA’s co-branded card with Amex now has 30% more customers than before the pandemic. Our new customer acquisition was 50% higher in the second quarter than in the same period in 2019.
We are continuing to invest in enhancements to the Avios program as the relaunch of the BA prepaid Mastercard. And we are planning more opportunities for customers to collect Avios that we will announce in the second half.
Unfortunately, as you know very well, our industry has continued to face historic challenges as a result of the unprecedented scaling up of the operations and staff services across all the aviation ecosystem.
The U.K. and, therefore, British Airways have been particularly affected, while others, for example, Iberia and Vueling, they have been less affected. Our airline team are being very focused on enhancing operational resilience and improving the customer experience. And I would like to thank those customers affected for their loyalty and for their patience.
BA has made some progress to restore operational resilience, hiring another 4,100 people since the last time we spoke. And they are improving also their referencing process. In particular, Terminal 5 is now a BA terminal only. Heathrow finally reopened Terminal 4 in mid-June, enabling Qatar Airways to move there. And American Airlines and Iberia, they moved to the Terminal 3 on the 12th of July.
But the most important tool that we have to restore operational resilience has been to reduce the schedule. The stable summarize the changes that BA has made for the summer season to the end of October. In total, it has canceled 18% of the flights from the original schedule resulting in a reduction in plant capacity equivalent to 13% of the ASKs.
We announced the majority of the flight capacity reduction at the time that we presented the results in the first quarter, 16,000 flights equivalent to 10%. These were preemptive cancellation in order to protect the completion and punctuality of the majority of BA flights and also to protect our customers. The majority of these flight cancellations were on short haul routes, where we have the best facility to reaccomodate affected passengers. Also, we have some long haul routes canceled again, but we selected those ones with multiple daily frequency. For example, our daily Miami flight was transferred to American Airlines. And we delayed also to start Hong Kong and Tokyo after we have a reduction in the COVID restrictions.
The second run were flight reductions occurred in June, involving 1% of the flights equivalent to 1% of the ASKs. And the third one occurred in early July when the Department of Transport waived the 70-30 slot rule. Because of that, we canceled — BA canceled 7% more flight equivalent to 2% of ASKs because, again, mostly the flights were so-called flight. Despite this amnesty, Heathrow, you know that they imposed capacity cap of 100,000 passengers. But as BA previously cut their capacity, it only had to cancel 0.5% of the flight equivalent to 0.2% of the ASKs.
And in this slide, you can see that the majority of flight cancellations in the second quarter and in the current quarter, in this third quarter, have been preplanned. So the vast majority of the customers, they have been informed and reaccomodated on other flights. However, always happens that we have some unplanned last-minute cancellations for a lot of reasons, baggage, systems failure, staff shortages, technical reasons, et cetera.
This slide shows the unscheduled cancellation within 48 hours of departure for the second quarter. And you can see the major North American airlines and the major European airlines. It’s based on IAG data. And you can see that BA have to cancel 2.9% of scheduled flight in this way. And the average is 2.2%. So we were a little higher if we compare with the average.
Other airlines in the group, they did it much better. For example, Aer Lingus, they had around 1% cancellation rate. And in the case of Iberia and Vueling, you can see that they had virtually no cancellations at all. They were one of the best performance in Europe.
And talking about our people. First of all, I would like to thank our employees for their hard work and commitment during this challenging times. We have a number of people initiatives that we have or we are in the process of implementing. We are managing talent and more proactively at the group level. And also, we are measuring organizational health right across IAG and all the levels, and we continue with all our diversity initiatives. But more immediately, our management teams are in collective bargaining discussions with most employee groups throughout IAG.
Talking about sustainability. IAG continues to lead the global aviation industry towards net zero emissions by 2050. We were the first airline group worldwide to commit to this goal 3 years ago, and we were the first major airline to extend this goal to include the Scope 3 emissions last year.
On the left-hand side of the slide, we show a chart of environmental responsibility ratings by CDP, the Carbon Disclosure Project. IAG, they operated airline worldwide with an A- rating, which we have had for 2 years. The only other airlines with A ratings are our partner, American Airlines and ANA in Japan.
On the right-hand side, we show some recent sustainability actions that we have taken. We were the first European airline group to commit to uplift 10% of our fuel as sustainable aviation fuel by 2030. In our ESG day in May, we announced an increase in our investments and purchase commitments of sustainable aviation fuel from $400 million to $865 million. And now we have secured 25% of our 2030 target commitment at competitive prices relative to the fossil fuel.
In addition, we have increased our investment in the hydrogen electric aircraft developer, ZeroAvia, and we are partnering with Airbus to explore opportunities for direct air carbon capture and storage.
We have made three announcements recently, talking about the fleet, including one yesterday. For aircraft orders, for a total of 109 shareholder aircraft, including 50 Boeing 737s and 59 A320neo family aircraft. These orders are mainly replacement and are already with — in our previous fleet and CapEx plans. They offer strong growth because some of them, they have an average seat capacity higher than the aircraft that they are going to replace.
And this slide shows our total committed aircraft orders and options for all the aircraft as of the end of June on the left-hand side. And on the right-hand side, we show the 37 320neo family orders that we announced yesterday, plus the 50 Boeing 737 orders that we announced in May. We will need to seek shareholder approval for this 87 orders because the value of our Airbus and Boeing orders in a 12-month period excess the London Stock Exchange Class 1 test of 25% of the value of our equity market cap. We will seek shareholder approval at the — an AGM later this year.
In total, we expect to replace around 60% of our current shareholder fleet by 2028. And these orders are going to be instrumental in achieving our net zero emissions target by 2050. Both the Airbus 320neos and the 737 will improve carbon efficiency and fuel burn by up to 20% if we compare with the current generation aircraft. In addition, they will enable us to achieve our intermediate climate change targets.
We have a carbon efficiency target for 2025 of 80 grams of carbon per passenger kilometer compared to 89.8 grams in 2019, a reduction of 1.9% per year. The new order will have a minimum — sorry, meaningful impact also on our 2030 targets for net emissions of 22 million tons, which will be 19% lower than 27 million tons in 2019.
And if we come back to capacity, and as I mentioned at the start of my presentation, we have moderated our planned capacity for 2022, again, from 80% to 78% of 2019 levels and compared to an original plan of 85% that we said earlier in the year. This is almost entirely due to BA reduction in the schedule to build the operational resilience that we have commented before. And now we expect BA to fly 70% of its 2019 level of capacity this year compared to the 74% before and the 80% that we planned originally.
Regarding the North Atlantic area, we have originally expected to get back to 2019 levels in the current third quarter, but reduced this to 95% the last time we spoke in May. And we are now expecting the third quarter to be 92% of the 2019 levels. But we expect North Atlantic capacity to be restored to 2019 levels by January of 2023. The reduction in North Atlantic capacity is mainly frequency. The number of cities that we serve have not changed. For example BA is serving now 34 cities in North America, which is unchanged to the original plan and it’s only two fewer that in the summer of 2019.
Overall, capacity for IAG is expected to be 5% lower in the second half of the year with the third quarter at 80% of 2019 compared to 80% that we previously explained, and the fourth quarter at 55% compared to the 90% that we had before. And demand in the form of forward bookings remains very strong. These graphs, we are used to these graphs during the pandemic, show forward bookings in terms of volume of the bookings that we are having.
All three route areas, you can see, recent peak in the last week of April and first week of May, around the time that we presented the first quarter results. Overall forward bookings over the last 5 weeks have been running at a rate of 85% of 2019 levels in volume terms and around 95% in revenue terms. And this difference reflects the higher pricing levels that we have that we compared with 3 years ago.
Spanish domestic remains the strongest at around 100% in volume terms and 120% in revenue terms. European short haul is also strong at 80% in terms of volume and 100% in terms of revenue over the last 5 weeks. There has been a slight slowdown, as you can see, in short haul bookings in the last 3 weeks, but this reflects mainly the capacity caps that we have in Heathrow.
Long haul continues to lack at 80% volume and 90% revenue. And a lot of the refinance in the long haul with 2019 reflects the closure, as I explained before, of most of Asia Pacific due to COVID restrictions because you remember that Asia Pacific for us in 2019 was 8.5% of our ASKs.
On a like-for-like basis, in North Atlantic, booking volume is running around 95% on a planned capacity growth of 92% in the third quarter and 95% in the fourth quarter.
Premium leisure has seen the strongest recovery in demand so far, in particular, for Iberia. BA’s premium leisure revenue has recovered 85% of 2019 levels in June, while Iberia’s premium leisure has recovered to 120% of 2019 levels. The strongest premium leisure demand is in short haul, North Atlantic and Caribbean routes.
Premium business revenue continues to lack for both airlines that has made steady progress in the recovery. For BA, premium business is now back to 60% of 2019 levels in terms of revenue. The small dip in June that you can see in the slide reflects a very high positive impact in June of 2019 that we had as a result of President Trump visit to the U.K., resulting in a lot of drivers from government and media-related traffic. But it doesn’t reflect a dip in the current demand.
For BA, you must consider again that Asia Pacific is still largely closed and is flying only one route currently to Singapore and Sydney. Asia Pacific, in the same way, it was 8.5% of ASKs in 2019, represented around 50% of VA’s traffic in 2019. On a like-for-like basis, BA’s premium leisure revenue is performing better than BA’s average of 85%. Premium business is performing better than BA’s average of 60%.
For Iberia, premium business revenue has recovered to around 70% of 2019 levels. The most recovered sectors are SMEs, oil, gas and mining, media, also banking is working well. And the least recovered sector is pharma. We expect that the corporate travel will recover — will continue the recovery from the fourth quarter, driven by the pent-up demand and more people also returning to the office.
And finally, the conclusions. So the second quarter has been the first profitable quarter at the operating level since the latest — the last quarter of 2019 as we had expected. All businesses were profitable. Liquidity very strong, €13.5 billion. Net debt reduced slightly to €11 billion due to the strong EBITDA and strong bookings that we have for the future.
Overall capacity for the full year has been reduced slightly from 80% to 78% as a result of the capacity reduction in British Airways. The financial impact of this reduction is minimal, as BA could reaccomodate the vast majority of affected customers in all the flights. Forward bookings continue to be strong, especially in the leisure segment, while the business segment is making a steady progress.
We are aware that the inflationary and recessionary concerns that we have out the operational challenge that we are facing. But we don’t see any signs of weakness in booking behavior although we are, for sure, looking at this very closely.
Our guidance for the full year is unchanged. We continue to expect to be profitable for the rest of the year, particularly in the third quarter and to make a positive operating result for 2022. We also continue to expect operating cash flow to be significantly positive for the full year.
Now we are ready for all your questions.
A – Nicholas Theodore Cadbury
Thank you very much, Luis and Nicholas. Yes, we’re ready for your questions. Unfortunately, we can only take questions in the room and not over the line or the webcast. And I would ask, if possible, could you please contain your list of questions to just two. I see there are relatively few analysts in the room. So if we have time, we can always go to another round after that.
Sathish Babu Sivakumar
Actually, I got 2 questions, I’ll [Indiscernible] 2 here. This is Sathish from Citigroup. So firstly on the booking, you actually said that the booking into H2, into the leisure period like Christmas and then after, actually, you’re not seeing any kind of weakness there yet. And then if you refer to Slide 26 where you’ve actually given the booking forward, so the bookings that we are seeing right now, is it actually related to those periods, and — which means that the yield or the pricing is likely to be up 10% in those off term and the peak leisure period? How does it actually compare versus the other part of Q3 and Q4 in terms of booking trends?
And then the load factor. Obviously, the load factor is still slightly below 2019 levels. Given what we have seen on the capacity reduction on the demand surge, I would actually expected the load factor actually to come closer to 2019 level. So what is actually the disconnect there?
And then within BA, actually, if you could give any color on how the load factors performing versus premium versus non-premium segment compared to 2019 levels. That will be helpful.
Luis Gallego Martin
I think when we see the revenue that we have for the rest of the year, in general, we are above the levels that we passed in 2019. The biggest improvement is yield as we are experiencing now. Load factors are still lagging behind. But the RASK that we can see is above the RASK that we have in the same period in 2019. So we are comfortable with the situation that — and we don’t see any sign of weakness for the future.
If we talk about the load factors through what you say, for example, in the second quarter, the load factor in premium was minus 2 points in the case of [Indiscernible], if you compare with a load factor that we had in 2019. In the non-premium, it was minus 7 points if you compare with what we have in 2019. And in the case of short haul, it was 1 point above. So the big advantage we are having certainly come from load factor comes from yield. And in yields, we are in premium and non-premium long haul around 120%, the yields that we have in 2019. And what is still lagging behind is the short haul where yields are close to 100 levels that we have in 2019. But in general, the three segments in the second quarter and what we see in the future is an improvement in the RASK, mainly driven by the yield.
Sathish Babu Sivakumar
Not all markets. Where are you actually seeing more pressure, why the yields are actually lagging begin there versus the long haul?
Nicholas Theodore Cadbury
I’d say that — I mean you see leisure — holiday leisure destination is very strong. So you can see that through Vueling and Iberia particularly. And actually, British Airways as well, leisure destination is really strong where it’s probably a little bit weaker. It’s kind of city-to-city weekend breaks, it’s where it’s been weaker. But actually, we are starting to see a bit [Indiscernible] there as well.
Alex Irving from Bernstein. Two from me, please. So first in terms of on RASK. Clearly, very strong trends in the quarter. You’re talking about this getting better into Q3. I’m conscious that’s in a capacity-constrained market with pent-up demand. How much of those does driving performance? And where do you think RASK would be likely to stabilize as we move to 2023, 2024? And how does that flex if you remain to stay where it is versus where it was in 2019?
Second question on Heathrow, just digging a little bit. When do you think that’s likely to improve to normal operational performance? I think, yes, the CEO is on record of saying that cap could be in place possibly for a year. Is that realistic in the airport doing enough to restore reliability? And how are you expecting operations there to develop?
Luis Gallego Martin
Okay. The thing about — the first one is a very good question. As I’ve said, we don’t see any weakness in the future, but we understand that there is a risk of recession, for example. But what we see is that, right now, the capacity we are flagging is below the capacity we were flagging in 2019, so we can adjust our capacity. And also the advantage that we are having in RASK can compensate the effect that we can have when a recession arrives. So we are comfortable, and we don’t see any signs that this is going to be weaker for the future.
Talking about Heathrow, I think the problem is not only us. I think it’s a combination of actors in the ecosystem. So if the airport is asked for fuel, it’s ATC. More providers that — so we need to do it very well together, and that’s the reason we are working with them. In order to fix, to give resilience to the operation, we hope that this is going to improve by the end of the year. But when you see still the OTP that we are having, although last week is improving, we still have days where we cannot cope with the volume that we are having there. Maybe Sean, you can.
Sean Liam Doyle
Yes. I think Heathrow will depend on recruitments fundamentally, and I think it’s an ecosystem where the labor market has been tight. To give you a sense, the British Airways, we’ve bought 4,000 people into the business, 3,300 are operational. We need about 7,000 to be in place by the end of December. So the run rate that we have today very much aligns with the recovery we need in our business by year-end. And the rate at which we’re bringing people in is improving every month.
Now that’s British Airways and the things we control, how the need to recruit more people and the need to train more people. And I think one of the things we are seeing is even when security people come in to Heathrow, the speed of processing, passengers and bags and getting trucks through control post isn’t as quick because of an experience lag. So that’s another thing that we got to factor in.
And the third thing is the effect of the wider constraints in third-party ground handlers on operations that we don’t control, but can affect the performance of the airport. So again, we watch closely how the wider Heathrow ecosystem in terms of supply chain is performing. But one thing we are seeing is attrition is falling. Recruitment is picking up and operations are stabilizing, even though they’re not at the level that we would like them to be.
Jaime Bann Rowbotham
Jaime Rowbotham from Deutsche Bank. Two questions on cost, really. Firstly, what do you see as the likely impact on your employee cost of the recent deals that BA struck with the GMV and United unions, along with any further offers you might have to make to staff such as the pilots to avoid strike action?
And then secondly, should the unthinkable happen and this very positive unit revenue environment start to weaken, what will you do on cost? I mean you’ve tried to cut costs against the backdrop of the crisis. Now you’ve got cost inflation because of the environment that we’re in. So just interested in actions that you would take, flexibility that you might have in a weaker unit revenue environment.
Luis Gallego Martin
I think that — do you want to take the first one?
Nicholas Theodore Cadbury
I’ll take the first one, you take the second one. I’m going to do the second one, I was just going to take overall. I think we’re very aware that if the recession is here, I think our brands, particularly our premium brands, are well positioned in that market given our customer segments overall. So I think we’re probably like more protected sort of the low-cost carriers overall from a revenue point of view. But that doesn’t avoid, we have address costs. Hopefully, if you go into that recession, you do see fuel prices fall down, hopefully as well.
I think also, we’ve got quite a big program kind of already in terms of making sure that we make the most of our procurement. So we’ve got the kind of the GBS, our Global Business Services, already kind of brought together across IAG, where we’re really looking at supplier by supplier performance as well. And the investments we’re making in the new aircraft really kind of focus on making sure we take total cost of ownership down overall. So I know that’s a longer term kind of — but it will give you a big advantage over some of those who aren’t doing it at the moment at all.
Luis Gallego Martin
I think we can have also the flexibility. We are bringing a new aircraft. But in the same way that during the COVID, we could postpone the delivery of [Indiscernible]. Now as we said before, we are still below the capacity with us in 2019. So in case something happens, I think we can manage the capacity in a way that all us consider they cannot do.
And talking about the employee cost, I think the pressure that we have, you know very well, is the inflation, labor shortage. And then supplier costs are raising people. They have suffered a lot during COVID. And now they want to come back to where they were plus the inflation that we have right now. So we don’t have any other alternative down to be more efficient, and that’s the reason we have a transformation plan to be more efficient. And that’s the reason we need to be more efficient in the labor cost.
So in the case of British Airways, the projections that we have even with what they are negotiating now on the table is a reduction in the labor cost in the following years. And I think that’s going to be important in order to cope with all the headwinds that we can have in the revenue side and on the cost side, sustainability call, et cetera.
In the rest of airlines, for example, Aer Lingus also, they have a plan to reduce the labor cost in the following years. And Iberia and Vueling, they had a [Indiscernible] scheme that was differing in Spain. So now they are in the process of negotiating the new CBA for the following year. And I hope that’s what they are trying that we can for sure to try to come back where we were before because we want to treat well our people, but we need to be more efficient in order to come back to the results that we had before, and induction productivity is going to be one of the big topics in the discussion.
Carolina Botacini das Dores
Carolina Dores from Morgan Stanley. I’ll pick up from Jaime and talk about cost, and you’re seeing rising interest rates in the level of gross debt keeps going up. So I guess, Nicholas, how do you see? How do you manage? Do you expect to manage the interest cost in this rising rate environment? And on that, what are leasing costs doing?
And my second question is on the evolution of net debt. I guess given the rising yields, an improvement in capacity, we should expect Q2 — second half results to be better than first half. CapEx should be the same, right? It’s half-half. So basically net debt goes up by the working capital swing. Should we expect a full reversal? Or is there someone of that improvement that you think you’re able to keep?
Nicholas Theodore Cadbury
Yes. Just in terms of — starting with the last one. We’ve kind of signaled that you will get a reversal. I think it’d be a large proportion — we said it’s the last proportion of it. It will depend on what the trajectory of revenue is going into. January, February really will depend on what kind of levels of deferred income is. But I think a large proportion of maybe not all of it will unwind. Hopefully, generally, it will be a lot better than it was last — this year overall.
Just in terms of kind of interest rates. I guess, managing interest rates, I guess, it’s being — what we’re seeing in the market, as you know, in the kind of bond market is fairly challenging at the moment. So I think the kind of question is going to be patient, and patient means you’ve got to make sure you’ve got good liquidity to allow you to be patient, which I think we’ve worked ourselves into a really good position to do that and being ready to move when the market and as the market opens again, which I’m sure it will do. But we’re being ready for that.
I think kind of pleasing thing overall is that we are still seeing leasing costs being fairly attractive, not moving kind of as you see kind of the spreads in the kind of other kind of bond markets at the moment. We’re out there because you know we’re doing some aircraft leasing and financing at the moment. And actually, we think fairly attractive rates at the moment.
Harry J. Gowers
It’s Harry Gowers from JPMorgan. If I could dig in some color on the costs as well. So I think in Q2, employee unit costs are up 11% and the supply close that — close to 30%, if I’m not mistaken. So how should we expect them to trend or compress in Q3 and as the year goes on?
And then just more midterm as well. I mean when you get back to 100% of pre-COVID capacity, how should we think about the cost base, especially on the nonfuel side relative to 2019 because you’ve done the restructuring during COVID. As mentioned before, clearly, quite a lot, actually, pressure coming through at the moment.
Luis Gallego Martin
If you see in our first quarter that we were flying 65% of the capacity, our cash still was plus 32% if you compare with 2019. In the second quarter, flying 78% of the capacity, the cash still have increased 21%. So capacity is an important factor. If you do the math, because of the reduction of 22% in capacity, we have an increase of 28% of the cash. So the fixed costs are affected by that magnitude. But if we look to the 21.3% increase in cash, still 10%, we can say, is linked because we have spread the fixed cost in lower ASKs, 6.5% are related to FX mainly and 3.5% are related to business that are not linked to ASKs.
So for example, we have sold more in BA Holidays, or for example, we have done cargo-only flights. We did in the quarter, 108 cargo flights that we didn’t do in 2019. So I think when we come back to the capacity that we have in 2019, the objective is — I cannot tell we are going to come back there because of the inflationary environment that we have right now. But the objective that we have in the transformation plan is to come back closer to the situation that we have in 2019.
Nicholas Theodore Cadbury
This kind of high inflation there, it’s just going to take a year or a bit longer just to get there.
Gerald Nicholas Khoo
Gerald Khoo from Liberum, two from me. Obviously, you haven’t talked about 2023 capacity yet. But given the delays to widebody deliveries, how confident are you that you’re going to have the metal to actually fly that saves the 2023 schedule that continues to recover from 2022? And what sort of contingencies and flexibilities do you have?
And secondly, I think one of the slides you talked about on sustainable aviation fuel, a target of 10% by 2030. I was wondering whether you could clarify, when you say 10%, is that a 10% blend or 100% of your fuel? Or was that a given blend on 10% of your total fuel consumption or whatever? Or what does that 10% actually means?
Luis Gallego Martin
Okay. I’ll talk about the capacity. We are not giving guidance about the capacity. I think with the delivery of aircraft that we have now planned, we have enough for the capacity that we want to fly. Right now, for example, the bottleneck that we have is not the number of aircraft, it’s the restrictions that we have at different airports. And that’s the reason we are cutting capacity in Heathrow to give resilience. But we could fly more aircraft in case it is possible. So 2023, we are not giving any guidance, but we don’t foresee any problem with a number of aircraft.
And about the second question, maybe, [Carolina], you want to answer.
Unidentified Company Representative
Yes. We talk about — we estimate 1 million tons, that 10% or fuel consumption, estimated fuel consumption in 2030. It’s 10% of our fuel to be [sold]. So it’s the volume with 1 million tons estimation.
Gerald Nicholas Khoo
So you mentioned that you wanted to ramp up to 7,000 FTEs by end of the year, right? So just to clarify, that’s for your ramp-up into next year capacity or plans or is just to meet your winter demand?
Nicholas Theodore Cadbury
Yes, that would be to ramp up in the summer as well. So there will be some incremental recruitment on top of that. But we’ll be looking probably at 7,500 to 7,700 for the summer program, but we’d expect to have people in the business of being trained through the winter. And December, our projection will be to get to 7,000. Yes, there will be as we rebuild a bit like we would have had this winter. But as I said, I think the run rate that we’re seeing is encouraging. And the level of interest with 60,000 applications to work for British Airways since the 1st of January, that’s really encouraging.
It’s you margin. I noticed the delivery times of the new Airbus orders. There’s quite a big overlap with the Boeing on the MAXs. I guess, how are you feeling about timing? Do you still need all of that capacity coming in, in the later part of the decade?
And my second question is just to remind us on the repayment of the pension funds liabilities, which are still very low. What is the timing for the — I guess, the revaluation and ramp-up of repayment?
Nicholas Theodore Cadbury
Yes. So just on the deliveries, you’ll see that most all — our deliveries takes us about 60% getting to the replacements that we need to make it by 2030. So most of those is purely just replacement aircraft coming in overall rather than growing the fleet overall. In terms of the repayment liabilities of the pension fund, we’re right at the — hopefully getting towards the end of the triennial pension negotiations shortly. So hopefully, by Q3 or Q4 this year, we’ll be able to talk you through the pension fund.
Obviously, we’ve seen quite big improvements in the kind of — if you look at the accounting purpose, you’ve seen kind of quite a large improvement in the surplus, just in terms of where all the metrics have gone lately. So hopefully, that kind of gives an indication.
Luis Gallego Martin
And about the fleet in the 737 and the 320, they are going to different airlines. We are still deciding where to pull the aircraft, but there is no overlap. So we need all of them in order to replace 60% of our fleet by 2020.
Harry J. Gowers
Sorry, I’ll ask about just three difficult. It’s Harry from JPMorgan. On business travel, that’s 60% bigger in volume I think versus 2019. Obviously, visibility is pretty low at this stage. But any early indications from speaking to corporates where that exit rate could kind of be towards the end of the year?
Nicholas Theodore Cadbury
It’s quite difficult. You always — at this time of year, your September bookings in corporates are always fairly low because no one thinks about booking travel at this time of the year. So I think it’s hard to predict. I think if you saw the — look at the graphs though, it’s a steady kind of improvement every kind of — every single week we go through. So I think we can take kind of confidence from that at the moment. And we’re seeing particularly in areas like kind of finance, so they’ve seen a good recovery.
Two from me as well, please. So first on Air Europa, can we please have an update on where you’re up to, what’s the next decision [Indiscernible]?
And then secondly is on IT. You had a comment on an earlier slide that there were no IT issues on BA [Technical Difficulty]
Luis Gallego Martin
About Air Europa, we don’t have a lot of things to add to the situation we had previously. We said that we gave along in June of €100 million that we want to convert in equity as soon as we said that we needed to deal with different competition authorities. As soon as we can go ahead, we will convert this 20% loan in 20% equity. And then from that position, we always said that we will analyze the possibility to have 100% of the company if everything makes sense for the group.
And about IT. IT, as you know, is a process that is taking time because we need to fix the — all IT that we have mainly in British Airways. So — and we are moving a lot of systems to the cloud. That is going to take time because also before moving the things to the cloud, you need to fix the system. But we are doing things. For example, recently, we have implemented the [Indiscernible] system to do price plans that will replace 3 systems in British Airways. So we are going to have more resilience, and we are doing all that in the cloud. So we are in the process. It’s going to take time. Do we have risk? What we said last time is in the next 18 months, we are still in the process and we need to minimize the risk, but we are still in a legacy environment.