International Airlines Regulatory News (IAG)

NINE MONTHS RESULTS ANNOUNCEMENT

International Consolidated Airlines Group (IAG) today (October 27, 2017) presented Group consolidated results for the nine months to September 30, 2017.

IAG period highlights on results:

· Third quarter operating profit €1,455 million before exceptional items (2016: €1,205 million)

· Passenger unit revenue for the quarter up 0.7 per cent, up 2.2 per cent at constant currency

· Non-fuel unit costs before exceptional items for the quarter down 1.7 per cent, up 2.5 per cent at constant currency

· Fuel unit costs before exceptional items for the quarter down 7.5 per cent, down 8.4 per cent at constant currency

· Operating profit before exceptional items for the period of nine months to September 30, 2017 €2,430 million (2016: €1,915 million), up 26.9 per cent

· Cash of €7,523 million at September 30, 2017 was up €1,095 million on 2016 year end

· Adjusted net debt to EBITDAR improved by 0.4 to 1.4 times

Performance summary:

Willie Walsh, IAG Chief Executive Officer, said:

"We're reporting another strong quarter with an operating profit up 20.7 per cent to €1,455 million before exceptional items.

"All our companies performed well. Passenger unit revenue was up 2.2 per cent at constant currency boosted by improvements in the Spanish and Latin American markets. Our commercial performance was good despite underlying disruption from severe weather and terrorism. IAG Cargo improved in the quarter due to stronger Asia Pacific demand compared to last year.

"We're pleased to announce an interim dividend of 12.5 euro cents per share."

Trading outlook

At current fuel prices and exchange rates, IAG expects its operating profit for 2017 to be around €3 billion before exceptional items.

LEI: 959800TZHQRUSH1ESL13

This announcement contains inside information and is disclosed in accordance with the Company's obligations under the Market Abuse Regulation (EU) No 596/2014.

Enrique Dupuy, Chief Financial Officer

Forward-looking statements:

Certain statements included in this report are forward-looking and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

Forward-looking statements can typically be identified by the use of forward-looking terminology, such as "expects", "may", "will", "could", "should", "intends", "plans", "predicts", "envisages" or "anticipates" and include, without limitation, any projections relating to results of operations and financial conditions of International Consolidated Airlines Group S.A. and its subsidiary undertakings from time to time (the 'Group'), as well as plans and objectives for future operations, expected future revenues, financing plans, expected expenditures and divestments relating to the Group and discussions of the Group's Business plan. All forward-looking statements in this report are based upon information known to the Group on the date of this report. The Group undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

It is not reasonably possible to itemise all of the many factors and specific events that could cause the forward-looking statements in this report to be incorrect or that could otherwise have a material adverse effect on the future operations or results of an airline operating in the global economy. Further information on the primary risks of the business and the risk management process of the Group is given in the Annual Report and Accounts 2016; these documents are available on www.iagshares.com.

IAG Investor Relations

Waterside (HAA2),

PO Box 365,

Harmondsworth,

Middlesex,

UB7 0GB

Tel: +44 (0)208 564 2900

Investor.relations@iairgroup.com

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED INCOME STATEMENT

FINANCIAL REVIEW

Operating profit overview

In the nine months to September 30, 2017 fuel commodity prices rose versus last year however the Group's fuel cost net of hedging was positive.

Strategic overview

On March 17th, IAG launched LEVEL, a new longhaul low cost airline brand that started its operations in June 2017 with flights from Barcelona to Los Angeles, San Francisco, Buenos Aires and Punta Cana. LEVEL is flying two new Airbus A330 aircraft fitted with 293 economy and 21 premium economy seats. LEVEL's trading performance for the period was positive.

Principal risks and uncertainties

We have continued to maintain and operate our structure and processes to identify, assess and manage risks. The principal risks and uncertainties affecting us, detailed on pages 27 to 32 of the December 31, 2016 Annual Report and Accounts, remain relevant for this period and the remaining three months of the year.

Basis of presentation

The Group's performance for the nine month period to September 30, 2017 includes LEVEL's operations since its inception on March 17, 2017. The comparator period does not include any results for LEVEL.

Capacity

IAG capacity (available seat kilometres or ASKs) was higher by 2.2 per cent. This included the launch of LEVEL from Barcelona in June. British Airways increased capacity in the Middle East and launched new routes including New Orleans, Santiago, Oakland and Fort Lauderdale. These were partially offset by lower capacity to Asia Pacific through the discontinuation of Chengdu and gauge changes in Japan, frequency reductions in Brazil, and the introduction of the Club Europe product on Domestic routes. Iberia grew in Spain in Jerez, the Balearics and Canaries and continued to see longhaul increases from routes launched in 2016 with the full effect of new services to Shanghai, Tokyo and Johannesburg and frequency increases in Mexico and Buenos Aires. Aer Lingus continued its expansion across the North Atlantic with the full impact of new routes launched last year to Los Angeles, Newark and Hartford and the launch of services to Miami last month. Vueling had a small capacity reduction as it rebalanced to a less seasonal, more dense and focused network before resuming its growth trajectory going forward.

Revenue

Passenger revenue increased 0.8 per cent compared to the prior period, excluding currency up 3.5 per cent. Passenger unit revenue (passenger revenue per ASK) was up 1.2 per cent at constant currency ('ccy') with better yields (passenger revenue/revenue passenger kilometre) and higher loads. Passenger unit revenues improved throughout the period and were up 2.2 per cent at ccy for quarter 3 benefitting from strong performance across all the regions, in particular Latin America, the Caribbean and Asia Pacific. Our largest markets North America and Europe performed well also and British Airways saw strength in its premium bookings. Passengers carried by the Group rose 3.3 per cent to 80.1 million and seat factor increased 0.8 points to 82.9 per cent.

Cargo revenue for the period increased by 4.3 per cent, 5.0 per cent at constant currency. Despite trading conditions remaining challenging in many regions, the result benefits from a stronger performance in the Asia Pacific region following a weak performance in the same period last year. Cargo volumes grew 5.9 per cent versus the same period in 2016.

Other revenue was up 6.1 per cent, excluding currency benefits up 9.3 per cent. The Group saw higher activity at Iberia's third party maintenance (MRO) and at BA Holidays.

Costs

Employee costs decreased 2.6 per cent before exceptional items for the period. Excluding currency and on a unit basis, employee costs were up 0.3 per cent. Pay increases, variable pay awards and a higher pension charge due to lower AA bond yields were mostly offset by productivity and efficiency improvements. The average number of employees was up marginally for the Group while productivity increased 2.2 per cent with improvements at British Airways, Iberia and Aer Lingus.

Fuel costs decreased 8.4 per cent with fuel unit costs at ccy down 12.4 per cent. Fuel benefitted from lower average fuel prices net of hedging and efficiencies from the introduction of new fleet and improved operational procedures.

Handling, catering and other operating costs rose 2.7 per cent, excluding currency up 8.5 per cent. The increase includes €65 million (c. 3 points) of additional compensation fees and baggage claims related to operational disruption at British Airways due to a power failure over the second May bank holiday weekend. The airlines carried 3.3 per cent more passengers, the higher volumes together with inflation increased handling and catering costs for the period. The Group's costs also rose from higher Cargo volumes and from product redemptions at BA Holidays and Avios with corresponding revenues.

Landing fees and en-route charges were broadly flat, excluding currency up 1.3 per cent. The increase is from higher activity, with flying hours up 0.9 per cent and sectors flown up 0.1 per cent, partially offset by price reductions in Europe and Africa. The Group has also recognised certain elements of airport recharges as a cost in the nine months, rather than against revenues as in prior years, following a change in contractual arrangements.

Engineering and other aircraft costs rose 9.1 per cent, excluding currency up 9.6 per cent. Increases are driven by additional third party maintenance activity at Iberia (c. 7 points) from higher flying hours and price escalation on pay as you go engine contracts.

Property, IT and other costs decreased 2.4 per cent, excluding currency up 2.3 per cent. The increase reflects lower capitalised IT charges reflecting the progress of internal projects and the impact of one-off releases in the base.

Selling costs increased 4.1 per cent, excluding currency up 5.9 per cent from higher volumes and distribution costs.

Ownership costs rose 3.5 per cent, excluding currency up 6.3 per cent. Depreciation costs are down primarily due to the retirement of Iberia's Airbus A340-300s partially offset by IT charges from the new check-in and aircraft boarding system at British Airways. Aircraft operating lease costs are up due to a tax provision release, which benefitted the base, and from additional aircraft on operating lease (Boeing 787-9s and Airbus A330s) in the period.

At constant currency non-fuel unit costs increased 2.5 per cent. Adjusted for non-airline businesses (such as MRO, handling, BA Holidays) and currency up 1.6 per cent, and on this basis improvements were noted at all carriers except British Airways. British Airways' cost performance was impacted by the operational disruption, an increase in maintenance costs and a higher pension charge from the lower AA bond rate.

Exceptional items

In 2017, the Group recognised an exceptional charge of €271 million related to restructuring costs. In the third quarter, €180 million of restructuring costs were recognised in relation to Iberia's Transformation Plan. British Airways transformation initiatives which began in 2016 continued resulting in a €91 million charge.

In 2016, the Group's restructuring charges related to British Airways initiatives were €62 million.

The Group also made changes to the US PRMB (Post-Retirement Medical Benefits) at British Airways during the prior period to bring the level of benefits in line with national trends in the US. These changes resulted in recognition of a one-off gain in employee costs of €51 million.

Under the Business combination standard, gains or losses on cash flow hedges acquired should not be recycled to the income statement but recognised in equity. Following the acquisition of Aer Lingus, IAG continued to unwind the cash flow fuel hedges acquired in the before exceptional items column. In 2016, a credit was recognised in the exceptional column reversing the impact of unwinding the cash flow hedges to reach the total Fuel, oil costs and emissions charges.

Non-operating items and taxation

The total net non-operating charge rose €77 million to €211 million for the nine months compared to €134 million last year. The movement on remeasurement of derivatives not qualifying for hedge accounting was €99 million adverse. The prior year period benefitted from a €30 million gain on the sale and lease back of 12 Airbus A319s. These increases were partially offset by a €40 million reduction in finance costs from lower debt.

The tax charge for the nine months to September 30, 2017 was €381 million (2016: €324 million charge) with an effective tax rate of 20 per cent (2016: 18 per cent).

Profit after tax and exceptional items

The profit after tax for the nine month period to September 30 was €1,567 million (2016: €1,484 million). 

Dividends

An interim dividend of 12.5 euro cents per share was proposed and approved by the Board of Directors on October 26, 2017. It is payable from December 4, 2017 to shareholders who are on the register at December 1, 2017. This interim dividend, amounting to €257 million (calculated based on the current treasury shares position), has not been recognised as a liability at the period end. It will be recognised in shareholders' equity in the year to December 31, 2017.

Exchange rates

Exchange rates were net adverse for the Group. The pound sterling devalued against the euro and the US dollar. The euro was slightly weaker against the US dollar.

IAG's results are impacted by exchange rates used for the translation of British Airways' and Avios' financial results from sterling to the Group's reporting currency of euro. For the nine months, the net impact of translation exchange on operating profit was €115 million adverse, with a decrease in revenues of €974 million and a decrease in cost of €859 million.

From a transactional perspective, the Group's financial performance is impacted by fluctuations in exchange rates, primarily from the US dollar, euro and pound sterling. The Group generates a surplus in most currencies in which it does business, except for the US dollar, as capital expenditure, debt repayments and fuel purchases typically create a deficit. The Group hedges its transaction exposures. The net transaction impact on operating profit was positive by €108 million for the period, increasing revenues by €521 million and costs by €413 million.

The net impact of translation and transaction exchange for the Group was €7 million adverse.

Cash and leverage

The Group's cash position was €7,523 million up €1,095 million from December 31, 2016 with adverse foreign exchange of €321 million.

Compared to December 31, 2016, the Group's adjusted net debt decreased by €976 million to €7,183 million due to higher cash and lower debt. Adjusted net debt to EBITDAR improved by 0.4 to 1.4 times and adjusted gearing improved by 5 points.