International Airlines Regulatory News (IAG)

FULL YEAR RESULTS ANNOUNCEMENT

International Consolidated Airlines Group (IAG) today (February 26, 2016) presented Group consolidated results for the year to December 31, 2015.

IAG period highlights on results:

· Fourth quarter operating profit €540 million excluding Aer Lingus and before exceptional items (2014: operating profit of €260 million), including Aer Lingus €530 million

· Passenger unit revenue for the quarter up 3.1 per cent. Excluding Aer Lingus and at constant currency down 3.7 per cent including approximately 1 point adverse impact from Paris attacks

· Non-fuel unit costs before exceptional items for the quarter up 2.4 per cent. Excluding Aer Lingus and at constant currency down 3.9 per cent

· Fuel unit costs before exceptional items for the quarter down 13.4 per cent, down 23.9 per cent at constant currency

· Operating profit for the year to December 31, 2015 of €2,300 million excluding Aer Lingus and before exceptional items (2014: operating profit of €1,390 million), up 65 per cent, including Aer Lingus €2,335 million

· Revenue for the year up 13.3 per cent to €22,858 million and passenger unit revenue for the year down 3.5 per cent at constant currency

· Fuel unit costs for the year before exceptional items down 6.3 per cent, down 17.2 per cent at constant currency

· Non-fuel unit costs for the year before exceptional items up 4.3 per cent, down 3.9 per cent at constant currency

· Cash of €5,856 million at December 31, 2015 was up €912 million on 2014 year end, including €772 million from Aer Lingus

· Adjusted gearing up 3 points to 54 per cent and adjusted net debt to EBITDAR remained constant at 1.9 times including Aer Lingus

Performance summary:

Willie Walsh, IAG Chief Executive Officer, said:

"We're reporting very strong full year results with an operating profit before exceptional items of €2,335 million including Aer Lingus. At constant currency, passenger unit revenue was down 3.5 per cent with non-fuel unit costs down 3.9 per cent and fuel unit costs down 17.2 per cent.

"Aer Lingus has made a positive contribution of €35 million operating profit since it joined the Group on 18 August last year.

"These results are in line with our recent target and have exceeded our original 2015 operating profit target of €1.5 billion that we set in 2011. It's undoubtedly been a good year but it's also been challenging with extreme volatility in the currency and fuel markets. The benefits gained from lower fuel prices have been partially offset by the stronger US dollar.

"In the quarter, we made an operating profit before exceptional items of €530 million including Aer Lingus.

"We're pleased to confirm that the Board is proposing a final dividend to shareholders of 10 euro cents per share, which brings the full year dividend to 20 euro cents, subject to shareholder approval at our AGM in June."

Trading outlook

In 2016, IAG expects to generate an absolute operating profit increase similar to 2015. Revenue trends in quarter 1 appear broadly in line with those experienced in quarter 4 2015.

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 2014; these documents are available on www.iagshares.com.

IAG Investor Relations

2 World Business Centre Heathrow

Newall Road, London Heathrow Airport

HOUNSLOW TW6 2SF

Tel: +44 (0)208 564 2900

Investor.relations@iairgroup.com

Financial review:

IATA market growths

The air traffic industry performed well benefiting from lower fuel unit costs and reasonable demand growth, despite some softening in the global economic environment. Overall, North America and Europe were the strongest markets, while Africa was impacted by lower fuel prices and Latin America was impacted by weaker currencies in areas such as Brazil and Argentina.

The market growth trend for the industry in 2015 was strong, with a passenger load factor improvement of 0.5 points on a capacity increase of 5.9 per cent. Volumes increased on additional capacity in all regions with passenger load factor improvements except the Middle East which saw a significant increase in market capacity.

IAG capacity

In 2015, IAG increased capacity, measured in available seat kilometres (ASKs) by 8.2 per cent or 5.0 per cent excluding Aer Lingus. With the exception of Africa, Middle East and South Asia, IAG capacity was increased across all regions, reflecting:

· Acquisition of Aer Lingus on August 18;

· Continued expansion at Vueling;

· Restoration of routes as part of Iberia's Plan de Futuro; and

· New destinations, shorthaul seat densification and larger aircraft at British Airways.

IAG Passenger load factor was 81.4 per cent which was higher than the IATA average of 79.7 per cent and one point higher than last year.

Market segments

While the Domestic and European markets were very competitive our passenger load factors improved in both regions, but remain still lower than the European average reported by IATA, influenced by the higher dependency of our shorthaul fleet on connectivity and stronger seasonality of our networks.

North America continues to represent the largest part of the IAG network and with the highest passenger load factor. Excluding Aer Lingus, capacity was flat year over year, with a slight decrease at British Airways impacted by the introduction of new fleet such as the Boeing 787 and Airbus A380, offsetting an increase at Iberia from additional capacity to Miami, New York and Los Angeles. IAG passenger load factor for North America improved 0.9 points, ahead of the year over year increase reported by IATA.

Latin America and Caribbean capacity increase reflects additional frequencies to Mexico by both British Airways and Iberia. Iberia has three additional destinations: Cali, Medellin and Havana. Passenger load factor in this region increased and was three points ahead of the industry average.

Africa, Middle East and South Asia decrease is driven by reductions in North and West Africa due to weaker demand resulting from falling fuel prices, political unrest and Ebola. Flying was ceased to Entebbe by British Airways, and reduced in Senegal and Gambia by Vueling. Additional capacity was deployed to South Africa and new services launched to Ghana and Cape Verde. Passenger load factor improved 0.7 points.

In Asia Pacific, the capacity increase is driven by the full year impact of up gauging last year to Hong Kong with the Airbus A380, Hyderabad and Chennai. In 2015, a direct flight to Kuala Lumpur was added and the Singapore and Haneda routes were expanded. Passenger load factors increased to 83.2, the second highest region on the IAG network.

Acquisitions

The 2015 performance includes Aer Lingus from August 18, 2015. Since the acquisition date, Aer Lingus contributed 3.2 points of the Group's 8.2 point capacity increase, €622 million (3 per cent) in revenues and €35 million (1.5 per cent) before exceptional items in operating profit. The following review includes these results, the comparative period excludes Aer Lingus.

Revenue

Passenger revenue

Passenger revenue for the Group rose 14.2 per cent for the year on a capacity increase of 8.2 per cent, benefiting from the stronger pound sterling and US dollar.

At constant currency ('ccy') and excluding Aer Lingus, passenger unit revenue decreased 3.7 per cent. This decrease in passenger unit revenues was from lower yields (passenger revenue/revenue passenger kilometre) partially offset by a 1.0 point improvement in load factors.

The passenger unit revenue reduction follows a pattern of industry growth in a falling fuel cost environment, allowing the airlines to increase margins despite lowering fares.

At ccy, passenger yields were down at British Airways and Iberia with pressure on fares from lower fuel prices particularly on oil related routes. Lower yields were also noted from economic uncertainty and weakening of currencies throughout Latin America, Africa and the Middle East. At the same time revenue performance still remained strongest in our main key market, North Atlantic. At Vueling yield pressure was less prominent, down 1.5 per cent, reflecting its relative strength in its domestic market. Aer Lingus yield improved since acquisition with a strong performance across the North Atlantic. Together, the Group carried 88 million passengers, an increase of 11 million from 2014, with passenger load factor improvement across all four carriers.

Cargo revenue

The airfreight industry experienced another challenging year with capacity exceeding demand. IAG Cargo continued its focus on strategic partnerships, with an increase in its capacity share agreement with Qatar Airways and a new agreement with Finnair cargo. Cargo volume measured in tonne kilometres (CTK) decreased 2.9 per cent with a reduction in yield of 3.9 per cent at ccy. Despite a decrease in CTKs, IAG Cargo grew its volumes in Constant Climate and Prioritise premium products improving its net contribution to the Group.

Other revenue

Other revenue includes the BA Holidays programme, third party maintenance and third party handling. Excluding currency, other revenue improved 2.5 per cent, primarily from an increase in activity at BA Holidays partially offset by a decrease in third party activity.

Expenditure before exceptional items

Employee costs

Following sterling and dollar strength, employee costs rose 13.4 per cent. At ccy, and on a unit basis employee costs are down 3.5 per cent. The Group employed an average of 60,862 people (measured in average manpower equivalent 'MPE'), an increase of 2.3 per cent versus last year. Excluding Aer Lingus, average MPEs are down 0.6 per cent on 5 per cent ASK growth. Increases were primarily from Vueling growth offset by headcount reductions flowing through from Iberia's Mediation Agreement. Employee unit costs improved at Iberia from the reduction in employees in addition to growth. British Airways employee unit costs increase slightly from salary awards and pension costs. Vueling also sees higher unit costs with the crew collective agreement and the impacts associated with opening international bases, increasing allowances and overnight costs. Productivity increased 5.8 per cent for the Group, with improvements at each airline.

Fuel, oil and emissions costs

Total fuel costs for the year increased by 1.6 per cent. At ccy, and on a unit basis fuel costs are down 17.2 per cent from lower fuel prices net of hedging, and from improved unit consumption. The foreign exchange impact on fuel costs, net of hedging was adverse c. 12 percentage points for the Group, against the pound sterling and the euro. Fuel unit costs were reduced 6.3 per cent in euro terms. Consumption improved c. 2 percentage points with new generation aircraft and improved operational procedures.

Supplier costs

Total supplier costs for the year rose by 12.6 per cent. At ccy and on a unit basis, supplier costs were reduced by 4.5 per cent. The supplier unit cost improvement reflects the strong airline cost performance and continued benefits from the Group initiatives, including GBS procurement, synergies and maintenance.

By supplier cost category

Handling, catering and other operating costs rose 5.6 per cent at ccy reflecting additional BA Holiday activity (c. 3 points), higher number of passengers carried and inflationary price increases. These factors were partially offset by an improvement in operations year over year, which reduced costs related to disruption.

Landing fees and en-route charges were higher by 15.2 per cent at ccy. Excluding Aer Lingus1, the increase was 7.3 per cent, due to additional flying hours, with sectors flown up and a marginal average inflationary price rise.

Engineering and other aircraft costs were down 3.7 per cent excluding currency impacts. During the year a €35 million credit was recognised with the renegotiation of engine manufacturer contracts; by contrast, in the prior year, a €28 million provision for the obsolescence of spare parts was recorded (c. 5 point year over year improvement). The underlying movement reflects more aircraft and higher flying hours, partially offset by less third party maintenance.

Property, IT and other costs are down 4.4 per cent excluding currency due to cost improvements including IT initiatives and one-time benefits.

Selling costs decreased 2.3 per cent excluding currency. Additional costs were incurred related to higher passenger numbers and from initiatives in new markets, offset by lower commissions paid and improvements in supplier contract terms.

1 The impact of Aer Lingus was significant on Landing fees and en-route charges from its shorter stage length, with proportionally higher block hours and sectors than the Group's.

Ownership costs

The Group's ownership costs were up 12.5 per cent, with 9 points of adverse currency. During the year the Group reviewed the useful lives and residual values of its fleet, realigning by aircraft type and to each airline's retirement plan. The principal impact was accelerated depreciation of Iberia's owned Airbus A340-300 fleet, extending the useful lives of British Airways Boeing 777 fleet and adjustments to the Airbus A320 fleet, with a total net credit of €36 million. The underlying rise in ownership costs reflects new replacement aircraft and an increase in total fleet.

Operating profit

The Group's operating profit, before exceptional items, for the year was €2,335 million, a €945 million improvement from last year. This increase reflects the Group's drive towards achieving a competitive cost base with improved productivity and non-fuel cost savings. The macro economic environment was challenging, impacting passenger unit revenues but improving total unit costs and generating a net currency benefit. Our adjusted operating margin improved by 3.4 points to 11.2 per cent.

British Airways

British Airways operating profit was £1,375 million, a £400 million improvement over prior year on capacity increase of 2.0 per cent. Progress in the year was based on non-fuel unit cost improvements and from fuel benefits partially offset by weaker yields including on oil related routes.

In pound sterling terms, approximately half of the passenger revenue weakness was offset through non-fuel unit cost savings. Non-fuel unit cost savings were achieved in supplier contract terms, including maintenance and through IT initiatives. British Airways' adjusted operating margin improved 3.7 points to 12.2 per cent.

Aer Lingus

For the full year, Aer Lingus operating profit was €124 million. Excluding exceptional items*, an improvement of €72 million over last year. Capacity was increased 5.4 per cent, primarily in the longhaul.

In euro terms and influenced by a strong US dollar, Aer Lingus increased its unit revenues by 4.8 per cent with both yield and seat factor improvements. The strong dollar was also partially responsible for a lower fuel unit cost saving and for the 3.1 per cent increase in non-fuel unit costs. Efficiencies were achieved, particularly in employee unit costs.

Overall Aer Lingus improved its adjusted operating margin by 2.9 points to 8.9 per cent.

* Aer Lingus 2014 comparative results exclude the cost of pension settlement which is considered exceptional in nature.

Iberia

Iberia's operating profit was €247 million, up €197 million versus last year, achieving an adjusted operating margin of 7.0 per cent. Iberia made significant progress on its Plan de Futuro, improving its cost base and recovering routes previously withdrawn. Capacity for the year was up 10.2 per cent, with a flat unit revenue performance in euro terms, driven by currency benefits from a weak euro and improvements in seat factor. On the cost side, non-fuel unit costs improve with substantial employee cost savings from lower MPEs and through supplier initiatives, including finance and IT.

The turnaround of Iberia is leading to a profitable and efficient new airline capable of growing in its strategic markets and starting to achieve positive returns for the Group with a positive profit after tax of €155 million*.

Vueling

Vueling's operating profit was €160 million with an adjusted operating margin of 11.7 per cent, up 0.2 points versus last year. Vueling continued to expand its network increasing capacity by 14.2 per cent while maintaining unit revenues broadly flat, a strong revenue performance. Non-fuel unit costs were adverse, impacted by the crew collective agreement signed in 2014, allowances attributed to the opening of new bases and additional aircraft. Supplier unit costs improved and 2015 also saw further progress on fleet flexibility and harmonisation.

Vueling continues to be the low cost carrier growth tool for the Group, expanding its network at a higher rate and increasing its presence in the intra-European point to point traffic in areas such as Rome and Paris. Even with this ambitious growth Vueling achieved one of the highest RoICs of the Group.

* Excludes intragroup dividends received and profit on the sale of the Iberia plus (to Avios).

Exchange impact before exceptional items

Exchange rate movements are calculated by retranslating current year results as though they had been generated at prior year exchange rates. The reported results are impacted by translation currency from converting results from currencies other than euro to the Group's reporting currency of euro. From a transaction perspective, the Group performance is impacted by the fluctuation of exchange rates, primarily pound sterling, euro and US dollar. The Group exchange rates used and the estimated impact of translation and transaction exchange rates on operating profit before exceptional items are set out as follows. At constant currency, the Group's operating profit before exceptional items would have been €2,246 million, €89 million lower than the reported result.

The Group hedges its transaction exposures but not any potential impact from translation.

Exceptional items

For a full list of exceptional items, refer to note 5 of the Financial statements. Below is a summary of the significant exceptional items recorded.

In 2015, net exceptional charges at the operating profit level were €17 million (2014: €361 million). The exceptional charges included in Property, IT and other relate to the Aer Lingus acquisition costs of €33 million and a legal settlement at British Airways from the 2006 cargo cartel claim. The exceptional credit in Fuel, oil and emissions reflects the impact of recording Aer Lingus fuel cost at the hedged price in the pre-exceptional column, rather than at spot price as in the reported column.

In 2014, exceptional charges were recognised relating to the restructuring provision of €260 million, a currency charge of €180 million, impairment reversal of €79 million, gain on sale of €83 million and deferred tax credit of €413 million.

Non-operating costs

Net non-operating costs after exceptional items were €517 million, up from €201 million last year. The increase is due to:

· €120 million additional losses partially unrealised on derivative instruments not qualifying for hedge accounting; and

· €75 million incremental net financing costs, including the debt raised for the acquisition of Aer Lingus and from the translation of sterling financing costs.

Taxation

The great majority of the Group's activities are taxed in the countries of effective management of the main airline operations (UK, Spain or Ireland, with corporation tax rates during 2015 of 20.25 per cent, 28 per cent and 12.5 per cent respectively). The Group's effective tax rate for the year is 20 per cent (2014: 22 per cent).

Although the Group continues to offset prior year tax losses and other tax assets against its current year taxable profit, in 2015 the Group paid corporation taxes of €245 million (2014: €118 million). This represents 13.6 per cent (2014: 14.3 per cent) of the Group's accounting profit before tax.

Profit after tax and Earnings per share (EPS)

Profit after tax before exceptional items was €1,539 million, up 77.3 per cent. The increase reflects a strong operating profit performance. Diluted earnings per share before exceptional items is one of our key performance indicators and increased by 77.6 per cent.

Dividends

The Board is proposing a final dividend to shareholders of 10 euro cents per share, which brings the full year dividend to 20 euro cents per share. The final dividend will be paid, subject to shareholder approval, on July 4, 2016 to shareholders on the register on July 1, 2016.

Liquidity and capital resources

The Group's equity free cash flow improvement in 2015 was in part due to the increase in EBITDA from stronger operating results and secondly from lower capital expenditure ('CAPEX') spend.

In 2014, the Group's CAPEX reflected a significant level of investment, in excess of a typical year and the Group's target of less than €2.5 billion. This was due primarily to the timing of aircraft delivery payments. In 2015, the Group took delivery of nine new aircraft, two Airbus A380s, five Boeing 787-900s, one Airbus A320 and one Embraer E-190.

The use of cash in working capital reflects higher prepayments including fuel, a reduction in payables primarily from lower fuel prices, and a seasonality impact from the timing of the addition of Aer Lingus.

Pension and restructuring payments increased from the Iberia restructuring plan and from foreign exchange.

The acquisition of Aer Lingus net of its cash and deposits was a cash outflow of €438 million. In contrast, in 2014 funds were received from the sale of Amadeus.

Financing and refinancing are discussed in the following section.

Adequate cash levels are maintained by each operating company. The cash balance increased by €912 million versus last year.

Net debt and adjusted net debt

Capital risk management

IAG's objectives when managing capital are to safeguard the Group's ability to continue as a going concern, to maintain an optimal capital structure in order to optimise the cost of capital and to provide future returns to shareholders. The Group monitors capital using adjusted gearing and adjusted net debt to EBITDAR.

Cash net of exchange was flat versus last year including the payment of an interim dividend and partial financing of the Group's acquisition of Aer Lingus. Regular net refinancing was broadly balanced with a slight decrease in debt of €121 million.

The Group's regular net debt reduced by €507 million from the addition of Aer Lingus, reflecting its strong cash position and its mix of operating versus financing leases.

IAG launched two tranches of convertible bonds totalling €1 billion to finance the Aer Lingus acquisition, of which €118 million is recognised as equity.

Capitalised aircraft lease costs rose from the addition of Aer Lingus and from an increase in leased aircraft at British Airways.

Adjusted net debt rose to €8,510 million, however financial headroom improved as adjusted net debt to EBITDAR remained flat at 1.9 times.

The Group generated sufficient equity free cash flow in 2015 to support the recommendation of an interim and final cash dividend of €407 million for its shareholders with equity free cash coverage of 2.8 times.

Capital commitments and off balance sheet arrangements

Capital expenditure authorised and contracted for amounted to €16,091 million (2014: €11,604 million) for the Group. The majority of this is in US dollars and includes commitments until 2022 for 118 aircraft from the Airbus A320 family, 29 Boeing 787s, 43 Airbus A350s, 14 Airbus A330s and 2 Airbus A380s.

IAG does not have any other off-balance sheet financing arrangements.

Strategic framework

Our mission is to be the leading international airline Group. This means we will:

· win the customer through service and value across our global network;

· deliver higher returns to our shareholders through leveraging cost and revenue opportunities across the Group;

· attract and develop the best people in the industry;

· provide a platform for quality international airlines, leaders in their markets, to participate in consolidation;

· retain the distinct cultures and brands of individual airlines.

By accomplishing our mission, IAG will help to shape the future of the industry, set new standards of excellence and provide sustainability, security and growth.

IAG's six core strategic objectives are:

· Leadership in IAG's main cities;

· Leadership across the Atlantic;

· Stronger Europe-to-Asia position in critical markets;

· Grow share of Europe-to-Africa routes;

· Stronger intra-Europe profitability; and

· Competitive cost positions across our businesses.

Principal risks and uncertainties

During the year 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 87 to 93 of the Annual Report and Accounts 2014, remain relevant. The economic conditions in our main markets remained robust in 2015 but there is more uncertainty as we move into 2016 with the combination of low commodity prices and reduced China growth impacting African and South American economies. We have also seen an increase in the risk of financial loss, disruption or damage to our reputation as the frequency and sophistication of cyber attacks on corporates increases; as a result we have increased the resources we devote to cyber defence.

INTERNATIONAL CONSOLIDATED AIRLINES GROUP S.A.

Unaudited Full year Condensed Consolidated Financial Statements

January 1, 2015 - December 31, 2015