International Airlines Regulatory News (IAG)

SIX MONTHS RESULTS ANNOUNCEMENT

International Consolidated Airlines Group (IAG) today (July 28, 2017) presented Group consolidated results for the six months to June 30, 2017.

IAG period highlights on results:

· Second quarter operating profit €805 million before exceptional items (2016: €555 million)

· Passenger unit revenue for the quarter up 1.5 per cent, up 4.0 per cent at constant currency

· Non-fuel unit costs before exceptional items for the quarter down 0.3 per cent, up 3.5 per cent at constant currency

· Fuel unit costs before exceptional items for the quarter down 10.4 per cent, down 13.2 per cent at constant currency

· Operating profit before exceptional items for the half year €975 million (2016: €710 million), up 37.3 per cent, including the adverse foreign exchange impact for the half year of €44 million

· Cash of €7,944 million at June 30, 2017 was up €1,516 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 a very strong performance in quarter 2 with an operating profit of €805 million before exceptional items which is up from €555 million last year.

"The underlying trend in unit revenue improved, benefitting partially from Easter and a weak base last year.

"Non-fuel unit costs before exceptional items are up, at constant currency. These costs include the financial impact of the power failure which affected British Airways' customers.

"In June, LEVEL started longhaul flights from Barcelona to four destinations. Sales continue to be well ahead of our expectations. We've ordered three additional aircraft and are considering other European bases for the operation."

Trading outlook

At current fuel prices and exchange rates, IAG expects its operating profit for 2017 to show a double-digit percentage improvement year-on-year. The Group expects second half passenger unit revenue (passenger revenue per ASK) to show an increase versus last year, at constant currency.

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

Operating profit overview

IAG's operating profit for the six months to June 30, 2017 was €975 million before exceptional items, an improvement of €265 million from last year. British Airways made a profit of €741 million before exceptional items (2016: €631 million); Iberia made a profit of €84 million (2016: loss €6 million); Aer Lingus made a profit of €59 million (2016: €42 million) and Vueling's loss was €6 million (2016: loss €54 million).

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.

Operating and market environment

In the first half of 2017 fuel commodity prices rose versus last year however the Group's fuel price net of hedging was positive. Exchange rates were net adverse for the Group. The pound sterling devalued against the euro and the US dollar. The euro was also weaker against the US dollar, although to a lesser extent.

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 six months of the year.

Basis of presentation

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

In order to provide additional information on non-operating items included in the Income statement, the Group has included an additional line to separate the unrealised movements on open derivatives from realised gains and losses. Comparative information has been aligned to this format.

Capacity

In the first six months of 2017, IAG capacity (available seat kilometres or ASKs) was higher by 3.0 per cent with increases across all regions. British Airways increased capacity in the Middle East and launched new routes in quarter 1 2017 (Santiago de Chile and Oakland). These were partially offset by lower capacity to Asia Pacific through discontinuation of Chengdu, gauge changes in Japan and the introduction of the Club Europe product in domestic. Iberia grew in Spain in Jerez, Balearics and Canaries and continued to see longhaul increases from routes launched in 2016 with the full year effect of Shanghai, Tokyo and Johannesburg and frequency increases in Mexico and Buenos Aires. Aer Lingus capacity was increased through the annualisation of its expansion across the North Atlantic. Vueling grew in Spain partially reducing its seasonality and strengthening its share. Passenger load factor rose 0.9 pts to 80.9 per cent.

Revenue

Passenger revenue increased 0.4 per cent compared to the prior period, excluding currency up 3.7 per cent. Passenger unit revenue (passenger revenue per ASK) was up 0.7 per cent at constant currency ('ccy') with slightly lower yields (passenger revenue/revenue passenger kilometre) more than offset by an increase in volumes. Passenger unit revenues improved throughout the period and were up 4.0 per cent at ccy for quarter 2 benefitting from strong performance across all the regions, in particular Latin America and the Caribbean and Asia Pacific. Our largest markets North America and Europe also performed well and British Airways saw strength in its corporate bookings. Passengers carried by the Group rose 4.6 per cent to 48,806 thousand and seat factor increased 0.9 points to 80.9 per cent.

Cargo revenue for the period increased by 2.6 per cent, 2.5 per cent at constant currency. Despite trading conditions remaining challenging in many regions, the result benefits from strong performance in the Asia Pacific region following a weaker performance in the same period last year. Cargo volumes grew 5.0 per cent versus the same period in 2016.

Other revenue was up 7.1 per cent, excluding currency up 9.2 per cent. The Group saw higher activity at BA Holidays, and in Iberia's third party maintenance (MRO) and handling businesses. Customer redemption of Avios loyalty points also increased.

Costs

Employee costs decreased 3.9 per cent for the period. Excluding currency and on a unit basis, employee unit costs were down 1.0 per cent. Pay increases and a higher pension charge due to lower AA bond yields were more than offset by productivity and efficiency improvements. The average number of employees rose 0.3 per cent for the Group while productivity increased 2.7 per cent, with improvements at British Airways, Iberia and Aer Lingus. Vueling employee unit costs increased as they focus on reducing seasonality and improving operational resilience.

Fuel costs decreased 9.3 per cent, with fuel unit costs down 14.6 per cent at ccy primarily from lower average fuel prices net of hedging. The Group also continued to benefit from the introduction of new fleet and from improved operational procedures.

Handling, catering and other operating costs rose 4.6 per cent, excluding currency up 11.2 per cent. The increase includes €65 million (c. 5 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. In addition, the airlines carried 4.6 per cent more passengers and the Group's non-ASK businesses BA Holidays, handling and Avios grew, with related revenues and costs.

Landing fees and en-route charges were broadly flat, excluding currency up 2.1 per cent. The increase is from higher activity, with flying hours up 1.8 per cent and sectors flown up 1.1 per cent, partially offset by price reductions in Europe and Africa. The Group has also recognised elements of airport recharges as a cost in the half year, rather than against revenues as in prior years, following a change in contractual arrangements.

Engineering and other aircraft costs rose 12.8 per cent, excluding currency up 11.5 per cent. Increases are driven equally by additional third party maintenance activity at Iberia and from higher flying hours, and price escalation on pay as you go engine contracts at British Airways.

Property, IT and other costs decreased 0.9 per cent, excluding currency up 4.3 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 1.0 per cent, excluding currency up 2.6 per cent due to higher volumes.

Ownership costs rose 5.4 per cent, excluding currency up 8.3 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 9 additional Boeing 787-9s and 10 Airbus A330s.

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' non-fuel unit costs were adversely impacted by the operational disruption and higher maintenance costs described above.

Exceptional items

In 2017, the Group recognised an exceptional charge of €77 million related to the British Airways transformation initiatives.

In 2016, the Group made changes to the US PRMB (Post-Retirement Medical Benefits) 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 during the period.

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

The total net non-operating charge rose €91 million to €192 million for the six months compared to €101 million last year. The movement on remeasurement of derivatives not qualifying for hedge accounting, realised and unrealised, was €100 million adverse. This was partially offset by a reduction in finance costs of €40 million following a lower debt.

Taxation after exceptional items

The tax charge for the six months to June 30, 2017 is €139 million (2016: €134 million charge) with an effective tax rate of 20 per cent (2016: 20 per cent).

Profit after tax and exceptional items

The profit after tax for the six month period to June 30 was €567 million (2016: €554 million).

Exchange rates

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 six months, the net impact of translation exchange on operating profit was €71 million adverse, with a decrease in revenues of €734 million and a decrease in cost of €663 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 net transaction impact on operating profit was positive by €27 million for the period, increasing revenues by €398 million and costs by €371 million.

In summary, during the period the devaluation of the pound sterling against the euro was partially offset by the strengthening of the US dollar against both the euro and the pound sterling. The net impact of translation and transaction exchange for the Group was €44 million adverse.

Cash

The Group's cash position was €7,944 million up €1,516 million from December 31, 2016. British Airways' cash position was €3,708 million, Iberia €1,317 million, Aer Lingus €1,158 million, Vueling €906 million and the parent and other Group companies €855 million. 

Compared to December 31, 2016, the Group's adjusted net debt decreased by €1,135 million to €7,024 million and adjusted net debt to EBITDAR improved 0.4 points. Adjusted gearing improved by one point.

INTERNATIONAL CONSOLIDATED AIRLINES GROUP S.A.

Unaudited Condensed Consolidated Interim Financial Statements

January 1, 2017 - June 30, 2017

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

CONSOLIDATED BALANCE SHEET

CONSOLIDATED CASH FLOW STATEMENT

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

1. CORPORATE INFORMATION AND BASIS OF PREPARATION

International Consolidated Airlines Group S.A. (hereinafter 'International Airlines Group', 'IAG' or the 'Group') is a leading European airline group, formed to hold the interests of airline and ancillary operations. IAG is a Spanish company registered in Madrid and was incorporated on April 8, 2010. On January 21, 2011 British Airways Plc and Iberia Líneas Aéreas de España S.A. Operadora (hereinafter 'British Airways' and 'Iberia' respectively) completed a merger transaction becoming the first two airlines of the Group. Vueling Airlines S.A. ('Vueling') was acquired on April 26, 2013, and Aer Lingus Group Plc ('Aer Lingus') on August 18, 2015.

IAG shares are traded on the London Stock Exchange's main market for listed securities and also on the stock exchanges of Madrid, Barcelona, Bilbao and Valencia (the 'Spanish Stock Exchanges'), through the Spanish Stock Exchanges Interconnection System (Mercado Continuo Español).

The condensed consolidated interim financial statements were prepared in accordance with IAS 34 and authorised for issue by the Board of Directors on July 27, 2017. The condensed consolidated interim financial statements herein are not the Company's statutory accounts and are unaudited. The Directors consider that the Group has adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the interim financial statements.

The basis of preparation and accounting policies set out in the IAG Annual Report and Accounts for the year to December 31, 2016 have been applied in the preparation of these condensed consolidated interim financial statements. IAG's financial statements for the year to December 31, 2016 have been filed with the Registro Mercantil de Madrid, and are in accordance with the International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and with those of the Standing Interpretations issued by the IFRS Interpretations Committee of the International Accounting Standards Board (IASB). The report of the auditors on those financial statements was unqualified.

In order to provide additional information on non-operating items included in the Income statement, the Group has included an additional line to separate the unrealised movements on open derivatives from realised gains and losses.

The financial statements for the prior year include reclassifications that were made to conform to the current year presentation.

2. ACCOUNTING POLICIES

The Group has not adopted any standard, interpretation or amendment in the six months to June 30, 2017 which has had an impact on its accounting policies and has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. The following standards are effective for periods beginning on or after January 1, 2018:

IFRS 15 'Revenue from contracts with customers' effective from January 1, 2018. IAG is currently in the process of finalising its accounting policies under the new standard. It is anticipated that the main changes on adoption will be as follows:

· Passenger revenue - revenue associated with ancillary services that is currently recognised when paid, such as change fees, will be deferred to align with the recognition of revenue associated with the related travel.

· Cargo revenue - interline cargo revenue will be presented gross rather than net of related costs as IAG is considered to be principal rather than agent in these transactions.

· Other revenue - loyalty revenue associated with the redemption of Avios points with third parties will be presented net of the related costs as IAG is considered to be agent rather than principal in these transactions. In addition, revenue associated with maintenance activities and holiday revenue with performance obligations that are fulfilled over time, will be deferred (with the related costs) and recognised over the performance obligation period.

The Group expects to apply the standard on a fully retrospective basis and does not expect a significant change to its financial performance or position on adoption of the standard.

IFRS 9 'Financial Instruments' effective from January 1, 2018. The standard amends the classification and measurement models for financial assets and adds new requirements to address the impairment of financial assets and hedge accounting. IFRS 9 will allow the Group to hedge specific risk components of its fuel purchases, such as crude oil price risk. It also requires movements in the time value of options (currently recognised in the Income statement) to be recognised in Other comprehensive income. These changes will result in a reduction in the gains and losses on derivatives not qualifying for hedge accounting recognised in the Income statement. The standard also requires the Group to make a policy choice on whether gains and losses on equity instruments measured at fair value should be recognised in the Income statement or Other comprehensive income, with no recycling. The Group is currently in the process of finalising its accounting policies under the new standard. The Group does not expect any significant changes to its financial performance or position or its hedging activities on the adoption of the standard.

2. ACCOUNTING POLICIES continued

IFRS 16 'Leases' (not yet endorsed by the EU) effective from January 1, 2019. The new standard eliminates the classification of leases as either operating leases or finance leases and instead introduces a single lessee accounting model. The Group is currently assessing the impact of the new standard. Interest-bearing borrowings and non-current assets will increase on implementation of this standard as obligations to make future payments under leases currently classified as operating leases will be recognised on the Balance sheet, along with the related 'right-of-use' asset. There will be a reduction in expenditure on operations and an increase in finance costs as operating lease costs are replaced with depreciation and lease interest expense. Foreign exchange movements on lease obligations, which are predominantly denominated in US dollars, will be remeasured at each balance sheet date, creating volatility in the Income statement.

3. exceptional items

(1)Employee costs

British Airways has embarked on a series of transformation proposals to develop a more efficient and cost effective structure. The overall costs of the programme principally comprise employee severance costs. Costs incurred in the six months to June 30, 2017 in respect of this programme amount to €77 million, with a related tax credit of €15 million.

During the six months to June 30, 2016 the Group made changes to the US PRMB (Post-Retirement Medical Benefits) to further bring the level of benefits in line with national trends seen in the US. This scheme is accounted for in a similar way to a defined benefit plan, so any reduction in benefit results in the recognition of a past service gain when the plan amendment occurs. This change has resulted in a one-off gain in employee costs of €51 million in the period, and a related tax charge of €10 million.

In the period to June 30, 2016:

(2)Pre-acquisition cash flow hedge impact

Under IFRS 3 Business combinations, 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 reported fuel expense. For the six months to June 30, 2016, a credit of €28 million was recognised as an exceptional item, reversing the impact of unwinding the cash flow hedges to arrive at the total Fuel, oil costs and emissions charges. A related tax charge of €4 million was also recognised.

4. Seasonality

The Group's business is highly seasonal with demand strongest during the summer months. Accordingly higher revenues and operating profits are usually expected in the latter six months of the financial year than in the first six months.

5. Segment INFORMATION

a. Business segments

The chief operating decision maker is responsible for allocating resources and assessing performance of the operating segments, and has been identified as the IAG Management Committee (IAG MC).

The Group has a number of entities which are managed as individual operating companies including airline and platform functions. Each airline operates its network operations as a single business unit and the IAG MC assesses performance based on measures including operating profit, and makes resource allocation decisions for the airlines based on network profitability, primarily by reference to the passenger markets in which the companies operate. The objective in making resource allocation decisions is to optimise consolidated financial results.

Based on the way that the Group treats its businesses and the manner in which resource allocation decisions are made the Group has determined its operating segments. British Airways, Iberia, Vueling and Aer Lingus have been identified for financial reporting purposes as reportable operating segments. Avios and LEVEL are also operating segments but do not exceed the quantitative thresholds to be reportable and management has concluded that there are currently no other reasons why they should be separately disclosed.

5. SEGMENT INFORMATION continued

a. Business segments continued

The platform functions of the business primarily support the airline operations. These activities are not considered to be reportable operating segments as they either earn revenues only incidental to the activities of the Group or are not reviewed by the IAG MC and are included within Other Group companies.

b. Geographical analysis

Revenue by area of original sale

5. SEGMENT INFORMATION continued

b. Geographical analysis continued

Assets by area

6. FINANCE COSTS AND INCOME

7. TAX

The tax charge for the six months to June 30, 2017 is €139 million (2016: €134 million), and the effective tax rate is 20 per cent (2016: 20 per cent).

The tax charge is calculated at the domestic rates applicable to profits or losses in the main countries of operation.

8. EARNINGS PER SHARE AND SHARE CAPITAL

8. EARNINGS PER SHARE AND SHARE CAPITAL continued

The number of shares in issue at June 30, 2017 was 2,132,988,743 (December 31, 2016: 2,132,988,743) ordinary shares with a par value of €0.50 each.

In February 2017, the Group announced its intention to carry out a share buyback programme of up to €500 million, as part of its corporate finance strategy to return cash to shareholders while reinvesting in the business and managing leverage. The programme started on March 6, 2017 and will complete by December 29, 2017. During the period to June 30, 2017 the Group purchased 31 million shares, amounting to €203 million. The outstanding payment obligation of the share buyback programme totalling €297 million is included in Trade and other payables in the consolidated Balance sheet.

9. Dividends

The Directors do not propose a dividend for the six months to June 30, 2017 (June 30, 2016: nil).

The final dividend of 12.5 € cents per share for the year to December 31, 2016 was approved at the annual general meeting on June 15, 2017. This final dividend, amounting to €262 million, has been recognised as a liability at June 30, 2017 and was paid from July 3, 2017.

10. property, plant and equipment and intaNgible assets

Capital expenditure authorised and contracted for but not provided for in the accounts amounts to €12,876 million (December 31, 2016: €14,022 million). The majority of capital expenditure commitments are denominated in US dollars, and as such are subject to changes in exchange rates.

11. IMPAIRMENT REVIEW

Goodwill and intangible assets with indefinite lives are tested for impairment annually (in the fourth quarter) and when circumstances indicate the carrying value may be impaired. The key assumptions used to determine the recoverable amount for the different cash generating units are disclosed in the Annual Report and Accounts for the year to December 31, 2016. For the six months to June 30, 2017 there are no indicators that the carrying value may exceed the recoverable amount.

12. NON-CURRENT ASSETS HELD FOR SALE

The non-current assets held for sale of €23 million represent five Airbus A340-300 aircraft. These are presented within the Iberia operating segment and will exit the business by December 31, 2017.

Assets held for sale with a net book value of €15 million were disposed of during the six months to June 30, 2017, related to the sale of the Group's investment in Propius Holdings Limited ('Propius'), resulting in no gain or loss.

12. NON-CURRENT ASSETS HELD FOR SALE continued

At December 31, 2016 the non-current assets held for sale of €38 million represented €15 million for the Group's investment in Propius and €23 million for five Airbus A340-300 aircraft. These were presented within the Aer Lingus and Iberia operating segments respectively.

13. financial instruments

a. Financial assets and liabilities by category

The detail of the Group's financial instruments at June 30, 2017 and December 31, 2016 by nature and classification for measurement purposes is as follows: