International Airlines Regulatory News (IAG)

SIX MONTHS RESULTS ANNOUNCEMENT

International Consolidated Airlines Group (IAG) today (July 31, 2020) presented Group consolidated results for the six months to June 30, 2020.

The results for the six months were significantly impacted by the outbreak of COVID-19, which has had a devastating impact on the global airline and travel sectors, particularly from late February 2020 onwards.

COVID-19 situation and management actions:

· Most Group aircraft grounded in quarter 2, with small programme of passenger flights for essential travel and repatriation

· 1,875 additional cargo flights operated in quarter 2 to transport critical equipment and essential supplies

· Additional operating procedures implemented to protect customers and staff including facemask use and additional cleaning

· Liquidity boosted by actions including accessing Spain's Instituto de Crédito Oficial (ICO) facility and UK's Coronavirus Corporate Finance Facility (CCFF). Also, British Airways' Revolving Credit Facility extended and additional one-year bridge aircraft financing facilities agreed and implemented in quarter 2

· Multi-year renewal signed with American Express on July 24, including €830 million payment, a significant part of which is Avios pre-purchase

· Cash operating costs for quarter 2 reduced to €205 million per week, with April and May slightly lower than previously estimated at €195 million per week, despite additional cost of operating cargo-only flights

· Current capacity planning scenario for an increase through quarter 3 and quarter 4, to -74 per cent and -46 per cent versus 2019 respectively, but plans highly uncertain and subject to easing lockdowns and travel restrictions

· Based on our current capacity planning scenario, IAG would reach breakeven in terms of Net cash flows from operating activities during quarter 4 2020

· Government wage support schemes accessed in main employee bases and other measures agreed to reduce employee costs due to much-reduced flying programme

· Capital spending for 2020 reduced by €1.5 billion, against the original plan, with 2020 fleet capital expenditure covered by committed financing

· Deliveries of 68 new aircraft due in 2020 to 2022 deferred and certain legacy aircraft retired early, including 32 Boeing 747s and 15 Airbus A340-600s

· IAG expects it will take until at least 2023 for passenger demand to recover to 2019 levels and is restructuring its cost-base to reduce each airline's size, with consultations being undertaken locally as required

· Active discussions remain ongoing with Globalia regarding a potential restructuring of the Air Europa acquisition, taking into account the impact of the COVID-19 pandemic. Any agreed transaction would remain subject to regulatory clearances

IAG period highlights on results:

· Passenger capacity operated in quarter 2 down 95.3 per cent on 2019 and for the six months down 56.2 per cent on 2019

· Second quarter operating loss €1,365 million before exceptional items (2019 operating profit: €960 million)

· Operating loss before exceptional items for the half year €1,900 million (2019 operating profit: €1,095 million)

· Exceptional charge in the half year of €2,137 million on derecognition of fuel and foreign exchange hedges for 2020 and impairment of fleet

· Loss after tax before exceptional items for the half year €1,965 million, and 2020 statutory loss after tax and exceptional items: €3,806 million (2019 profit: €806 million)

· Cash of €6,016 million at June 30, 2020 down €667 million on December 31, 2019. Committed and undrawn general and aircraft facilities were €2.1 billion, bringing total liquidity to €8.1 billion

Proposed capital increase:

· Proposed capital increase of up to €2.75 billion, to be supported by irrevocable commitment from largest shareholder and underwritten, subject to approval at General Shareholders' Meeting in September

Performance summary:

1 The 2019 results include a reclassification of the costs the Group incurs in relation to compensation for flight delays and cancellations as a deduction from revenue as opposed to an operating expense. There is no change in operating profit. The amount reclassified for the period to June 30, 2019 was €63 million. Further information is given in note 1.

2 The prior year comparative is December 31, 2019.

Willie Walsh, IAG Chief Executive Officer, said:

"In quarter 2 we're reporting a record operating loss of €1,365 million before exceptional items compared to an operating profit of €960 million last year. Total operating losses including exceptional items relating to the early retirement of British Airways' Boeing 747s and Iberia's Airbus A340s came to €2,177 million.

"We operated 1,875 cargo-only flights using passenger aircraft in quarter 2 which was an important cash contributor to the Group.

"All IAG airlines made substantial losses. As a result of government travel restrictions, quarter 2 passenger traffic fell by 98.4 per cent on a capacity reduction in the quarter of 95.3 per cent. We have seen evidence that demand recovers when government restrictions are lifted. Our airlines have put in place measures to provide additional reassurance to their customers and employees on board and at the airport.

"We continue to expect that it will take until at least 2023 for passenger demand to recover to 2019 levels. Each airline has taken actions to adjust their business and reduce their cost base to reflect forecast demand in their markets not just to get through this crisis but to ensure they remain competitive in a structurally changed industry.

"IAG continues to take action to strengthen its balance sheet and liquidity position including more than halving its operating cash costs and significantly reducing its capital spending. At the end of June liquidity stood at €8.1 billion. Based on our current capacity planning scenario, we would reach breakeven in terms of Net cash flows from operating activities during quarter 4 2020.

"Subject to shareholder approval at our AGM on September 8, IAG will undertake a capital increase of up to €2.75 billion which will enhance the Group's resilience, balance sheet and liquidity position. We're delighted that our largest shareholder, Qatar Airways, has already committed to support the proposed capital raising. This will best position IAG to continue executing its strategic objectives and capitalise on its existing market leading position and future growth and consolidation opportunities."

Trading outlook

As announced on February 28, 2020, given the uncertainty on the impact and duration of COVID-19, IAG is not currently providing profit guidance for 2020.

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.

Steve Gunning, Chief Financial Officer

Disclaimer relating to capital increase:

The securities offered as part of the capital increase referred to in this document will not be registered under the U.S. Securities Act of 1933, amended and may not be offered or sold in the United States (including its territories and possessions, any state of the United States and the District of Columbia) absent registration or an applicable exemption from registration requirements in the United States. The offering of such securities may also be restricted or prohibited in certain other jurisdictions, including Australia, Canada, Hong Kong, Japan, New Zealand, Singapore, South Africa, Switzerland and the United Arab Emirates.

Forward-looking statements:

Certain statements included in this announcement are forward-looking. These statements can be identified by the fact that they do not relate only to historical or current facts. By their nature, they involve risk and uncertainties because they relate to events and depend on circumstances that will occur in the future. Actual results could differ materially from those expressed or implied by such forward-looking statements.

Forward-looking statements often use words such as "expects", "may", "will", "could", "should", "intends", "plans", "predicts", "envisages" or "anticipates" or other words of similar meaning. They include, without limitation, any and all projections relating to the 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 expenditure and divestments relating to the Group and discussions of the Group's business plan. All forward-looking statements in this announcement are based upon information known to the Group on the date of this announcement and speak as of the date of this announcement. Other than in accordance with its legal or regulatory obligations, the Group does not undertake to update or revise any forward-looking statement to reflect any changes in events, conditions or circumstances on which any such statement is based.

Actual results may differ from those expressed or implied in the forward-looking statements in this announcement as a result of any number of known and unknown risks, uncertainties and other factors, including, but not limited to, the effects of the COVID-19 pandemic and uncertainties about its impact and duration, many of which are difficult to predict and are generally beyond the control of the Group, and it is not reasonably possible to itemise each item. Accordingly, readers of this announcement are cautioned against relying on forward-looking statements. Further information on the primary risks of the business and the Group's risk management process is set out in the Risk management and principal risk factors section in the Annual Report and Accounts 2019; these documents are available on www.iairgroup.com. All forward-looking statements made on or after the date of this announcement and attributable to IAG are expressly qualified in their entirety by the primary risks set out in that section. Many of these risks are, and will be, exacerbated by the COVID-19 pandemic and any further disruption to the global airline industry and economic environment as a result.

IAG Investor Relations

Waterside (HAA2),

PO Box 365,

Harmondsworth,

Middlesex,

UB7 0GB

Tel: +44 (0)208 564 2990

Investor.relations@iairgroup.com

CONSOLIDATED INCOME STATEMENT

1 The 2019 results include a reclassification of the costs the Group incurs in relation to compensation for flight delays and cancellations as a deduction from revenue as opposed to an operating expense. There is no change in operating profit. The amount reclassified for the six months to June 30, 2019 was €63 million. Further information is given in note 1.

2 Included in the average manpower equivalent are 8,182 manpower equivalent on the Temporary Redundancy Plan arrangements in Spain.

 CONSOLIDATED INCOME STATEMENT

1 The 2019 results include a reclassification of the costs the Group incurs in relation to compensation for flight delays and cancellations as a deduction from revenue as opposed to an operating expense. There is no change in operating profit. The amount reclassified for the three months to June 30, 2019 was €40 million. Further information is given in note 1.

 2 Included in the average manpower equivalent are 16,201 manpower equivalent on the Temporary Redundancy Plan arrangements in Spain.

COVID-19 Summary - six months to June 30

The results for the six months to June 30, 2020, were significantly impacted by the outbreak and escalation of COVID-19. In January and most of February the direct impact was mainly in the Asia and Pacific region, with suspension of services to China at the end of January and other capacity reductions in the Asia Pacific region. From late February, as the virus spread across the globe, many governments placed significant restrictions on the movement of people and on travel across international borders. This led to the cancellation of all flights to, from and within Italy and extensive reductions across the whole network, with capacity in the first quarter down 10.5 per cent on 2019.

In the second quarter, due to the impact of the virus worldwide and the associated travel and border restrictions applying in most countries, the Group was only able to operate a skeleton passenger schedule, with capacity operated only 5 per cent of that operated in the same quarter last year. The Group was able to operate additional cargo flights to assist in moving medical items and essential supplies, leading to record cargo revenue for the quarter.

The Group has taken action to preserve cash and boost liquidity. Cost savings have included the impact of employee furlough and equivalent schemes following measures taken by national governments, which were applied from April and these, together with other employee cost reductions and supplier cost reductions, have offset some of the impact of the significant fall in passenger revenue. The Group has also agreed and implemented additional borrowing and facilities. Additional non-aircraft debt of €1,010 million was drawn down in Spain as part of the Instituto de Crédito Oficial ('ICO') facility and British Airways issued commercial paper worth €330 million using the UK's Coronavirus Corporate Finance Facility (CCFF). The main British Airways Revolving Credit Facility was extended by one year to June 2021 and other credit facilities have also been added within the Group. The Group also agreed additional one-year aircraft financing facilities for old and new aircraft, with a total value of €870 million. The Group has agreed to defer 68 aircraft scheduled for delivery over the period 2020 to 2022, and, together with reductions in non-aircraft capital expenditure, has reduced its total capital expenditure for 2020 by €1.5 billion from the level planned at the start of the year.

Commodity fuel prices have fallen sharply since the start of the year and despite some recovery in recent weeks are still only slightly over half the level at the start of the year. The fall in fuel prices has led to significant losses on fuel hedging derivatives, which would normally be offset against lower costs for purchasing jet fuel. The impact of COVID-19 has led to a significant reduction in the requirement to purchase jet fuel, with only a skeleton flying programme operated in quarter 2 and a significantly reduced programme expected for the second half of the year. As a consequence the Group has recognised an exceptional charge for the six months to June 30, 2020 of €1,269 million relating to overhedging, being the losses on fuel hedging derivatives maturing in 2020 for which there will be no matching volume of fuel purchased, together with related foreign currency gains, calculated using the forward fuel curve and exchange rates at June 30, 2020. This overhedging loss has fallen slightly since the €1,325 million at March 31, 2020, as the rise in fuel prices during quarter 2 has broadly offset the impact of expected lower fuel requirements in the second half, in line with latest capacity plans.

The Group expects that it will take until at least 2023 for passenger demand to reach the levels of 2019. As a result the Group has taken the decision to retire legacy aircraft early and stand down some additional aircraft in advance of the end of lease contracts. British Airways expects that it will no longer need to operate any further Boeing 747 flights and hence the fleet and associated inventory has been fully impaired, pending disposal. Similarly Iberia has recognised an impairment in respect of its Airbus A340-600 fleet. For more details on impairments see note 3. These fleet plans remain subject to employee consultation as appropriate and decisions to dispose of the aircraft will only be taken once those processes have concluded.

Strategic overview - other developments

The Group is actively involved in restructuring its cost-base to adjust to significantly lower levels of demand, with demand not expected to reach 2019 levels until 2023 at the earliest. As at the end of quarter 2 a number of employee consultation processes were in progress, but none was sufficiently advanced to result in restructuring provisions being made. As at July 29, 1,600 employees at British Airways had opted to take voluntary redundancy.

Basis of preparation

In light of the COVID-19 pandemic the Group has undertaken scenario modelling, as detailed in note 1 of the consolidated interim financial statements, and the Directors have a reasonable expectation that the Group has sufficient liquidity for the foreseeable future and accordingly the Directors have adopted the going concern basis in preparing the consolidated interim financial statements. However, due to the uncertainty created by COVID-19 and potential for future waves of the pandemic and the impact on travel restrictions and/or demand, the Group is not able to provide certainty that there could not be more severe downside scenarios than those it has considered, including the stresses it has considered in relation to factors such as the impact on yield, capacity operated, cost mitigations achieved and fuel price variations. Whilst such scenarios are not considered likely, in the event that such a scenario were to occur the Group will likely need to secure additional funding over and above that which is contractually committed at July 30, 2020. Refer to note 1 of the consolidated interim financial statements for further information.

Principal risks and uncertainties

The Group has continued to maintain and operate its structure and processes to identify, assess and manage risks. The principal risks and uncertainties affecting the Group, detailed on pages 62 to 69 of the 2019 Annual Report and Accounts, remain relevant and included the risk of pandemic within "Event causing significant network disruption".

As the pandemic outbreak has persisted, some of the principal risks have evolved in impact and likelihood. As a result, additional mitigating actions have been identified and implemented to respond and to minimise the continued impact to the Group and protect its businesses and people. These actions have been discussed with the Board through regular updates and include the results of modelling of potential scenarios, outlining the impact of further stress on the Group as summarised in note 1.

From the risks identified in the 2019 Annual Report and Accounts, the main risks impacted by the COVID-19 pandemic are highlighted below, with business responses implemented by management and reflected in the Group's latest business plan and scenarios. No new principal risks were identified through the risk management assessment discussions across the business.

· Airports, infrastructure and critical third parties. Restrictions at hubs and airports have required capacity adjustments, including fleet adjustments and new operating procedures to recommence flying. The Group has pro-actively worked with suppliers to ensure operations are maintained and the impact to their businesses understood, with mitigations implemented where necessary.

· Competition, consolidation and government regulation. The scale of governmental support and aviation specific state-aid measures have varied in different countries and the potential impact to the competitive landscape is under continuous assessment.

· Data and cyber security. The Group has maintained its planned investment in cyber security, and taken steps to mitigate IT and other risks as a result of remote working.

· People, culture and employee relations. Additional safety procedures have been introduced to protect the Group's staff and customers, in line with industry recommendations. Where possible, the Group's staff worked from home and in line with governments' recommendations. Employee consultations have been undertaken as required and appropriate in relation to restructuring necessitated by COVID-19.

· Political and economic environment. National governments are imposing a range of travel and quarantine restrictions, which will continue to impact Group operations. These are being actively monitored and near-term capacity plans are refreshed dynamically, according to the latest status. The economic impact of COVID-19 is expected to be significant if longer in duration, the Group will adjust its future capacity plans accordingly, retaining flexibility to adapt as required.

· Debt funding and financial risk. Financial markets have not operated normally since the spread of COVID-19, although the Group has been able to renew and extend credit facilities and agree new aircraft leases, as well as introduce additional one-year funding facilities in advance of an improvement in market conditions and the anticipated availability of regular aircraft financing arrangements. The Group has an established process to monitor financial and counterparty risk on an ongoing basis.

The Board and its sub committees have been appraised of regulatory, competitor and governmental responses on an ongoing basis. The Group also continues to evaluate and monitor the arrangements over Brexit as the UK prepares to end the transition period with the European Union on December 31, 2020.

Operating and market environment

Average commodity fuel prices for the six months to June 30, 2020, were significantly lower than the first half of 2019 as prices fell during March and remain well below last year's levels. Foreign exchange rates for the euro and pound sterling against the US dollar were both approximately 3 per cent weaker than the same period last year.

IAG's results are impacted by exchange rates used for the translation of British Airways' and IAG Loyalty's financial results from pound sterling to the Group's reporting currency of euro. For the six months to June 30, 2020, the net impact of translation on the operating result was €16 million favourable.

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 normally 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 a portion of its transaction exposures. The net transaction impact on the operating result was adverse by €68 million for the period, increasing revenues by €51 million and costs by €119 million.

The net impact of translation and transaction exchange on the operating result for the Group was €52 million adverse.

Capacity

In the six months to June 30, 2020, IAG capacity, measured in available seat kilometres (ASKs), was lower by 56.2 per cent with the impact of the COVID-19 pandemic felt across all regions.

Prior to the main impact of COVID-19 from late February onwards, Aer Lingus capacity was broadly flat for January and February with increases in North Atlantic routes, from the route to Minneapolis launched in July 2019, and increased frequencies to Boston and San Francisco, offset by reductions in shorthaul capacity. British Airways capacity was flat for January and February, with increases from new destinations including Dammam, Islamabad and Pittsburgh, offset by COVID-19 related cancellations to destinations in Asia Pacific. LEVEL longhaul capacity growth reflected the annualisation of new routes launched in 2019 to Santiago de Chile and New York JFK and additional frequencies on routes to the French Caribbean. Iberia increased its capacity in January and February primarily on its Latin American routes with a new route to Guayaquil, Ecuador and additional frequencies on routes to Colombia, Peru and Brazil. Vueling reduced its capacity in January and February primarily in Italy as it continued to focus on its core markets, prior to the spread of COVID-19.

During quarter 2 Aer Lingus capacity was driven by cargo needs with flights operating regularly to New York, Chicago and Boston in addition to flights from China carrying back Personal Protective Equipment (PPE). British Airways operated flights daily to a number of US cities including New York, Boston and Washington, mainly for cargo purposes. Towards the end of the quarter, activity in the Caribbean started to pick up with a number of charter flights operating to Barbados and Antigua. Hong Kong is the only destination in Asia Pacific where flights have been operating regularly (with some limited flights to Beijing and Singapore). British Airways operated very limited shorthaul flights, with a small increase in June. Iberia longhaul operations in April and May were mainly for repatriation flights from South America including Argentina, Chile and Peru. Minimum operations were maintained by Iberia for domestic and shorthaul routes to keep main European cities connected including Paris, Brussels and London. LEVEL longhaul operations were cancelled, with the exception of one repatriation flight from Buenos Aires, due to travel restrictions on the routes operated. On June 19, 2020 the operations of LEVEL Europe operating out of Vienna and Amsterdam were ceased. On July 8, 2020, LEVEL France announced its intention to commence consultations with the unions of its employees regarding the proposed cessation of its operations out of Paris Orly. LEVEL Spain operating out of Barcelona remains unaffected. Vueling operations in the quarter were mainly focused on domestic flights, connecting the peninsula with the islands.

Unit measures have been rendered much less meaningful than usual by the significant reduction in capacity operated, particularly in quarter 2, but the unit measures for the six months are included in the commentary below for completeness.

Revenue

Passenger revenue for the six months to June 30, 2020, fell 60.8 per cent from the previous year, with quarter 2 down 96.7 per cent. Passenger unit revenue (passenger revenue per ASK) decreased 13.9 per cent at constant currency ('ccy'), due primarily to lower yields (passenger revenue per revenue passenger kilometre) and lower passenger seat factors from March onwards, associated with the impact of COVID-19.

Cargo revenue was 10.6 per cent higher than in 2019 and was up 11.0 per cent at constant currency, with cargo revenue boosted significantly by the additional flights operated for moving medical equipment and supplies, with an additional 1,875 cargo flights operated in quarter 2. Cargo revenue for quarter 2 was a record €369 million, up from €281 million in quarter 2 2019. Cargo carried for the six months to June 30, 2020, measured in cargo tonne kilometres (CTKs), fell by 37.5 per cent, due to the reduction in passenger schedules, but yields were significantly higher, as the additional flights carried no passengers and had no associated passenger revenue and hence the cost of operating such flights had to be met entirely from cargo revenue.

Other revenue fell by 36.7 per cent and by 39.0 per cent at ccy, as the growth of the Group's non-airline businesses was also impacted by COVID-19 from March.

Costs

Employee costs for the six months to June 30 decreased by €602 million compared with 2019. Approximately half of this reduction was as a result of furlough and equivalent temporary cost reduction schemes, together with reductions to either hours worked or pay in quarter 2. Reductions were made at all levels and in all functions within the Group. Despite all these measures, the reduction in employee costs of 24.2 per cent was outweighed by the 56.2 per cent reduction in passenger capacity and as a consequence employee unit costs at ccy rose 71.1 per cent.

Fuel costs (excluding the exceptional charge for overhedging) reduced by 55.3 per cent, reflecting the reduced capacity operated. Fuel unit costs at ccy were down 1.9 per cent on 2019, linked to continued efficiencies and the net impact of commodity prices across the period and hedging losses versus the previous year.

Supplier costs decreased by 34.9 per cent, linked to volume-related savings due to the lower capacity operated, together with a reduction in non-essential expenditure as a result of COVID-19. The savings were lower than the reduction in volume, reflecting fixed costs and the rapid escalation of the virus in March, which led to capacity falling at a greater level than it was possible to reduce costs. Supplier unit costs for the six months to June 30, 2020, were up 41.0 per cent at ccy.

Ownership costs before exceptional items increased 7.6 per cent on the previous year, in line with the fleet replacement programme. The number of aircraft in service decreased from 598 in December 2019 to 548 at the end of June 2020, with the reduction mainly reflecting the Boeing 747s in British Airways and Airbus A340-600s in Iberia, which will lead to a reduction in depreciation in future quarters, following the impairments described below. The majority of the in-service fleet was grounded from March. Ownership costs before exceptional items on a unit basis and at ccy were up 144 per cent on 2019, as the grounded aircraft continue to have depreciation charged.

Overall airline non-fuel unit costs at ccy were up 66.3 per cent versus a year ago, linked to the significant capacity reduction.

Operating loss before exceptional items

The Group's operating loss before exceptional items for the six months to June 30, 2020, was €1,900 million (2019: operating profit of €1,095 million), representing a deterioration of €2,995 million versus 2019.

Exceptional items

Exceptional items are detailed in note 3. Exceptional items have been recognised in respect of the impact of overhedging in respect of the COVID-19 related capacity reductions, being the net of fuel and foreign currency overhedging (a loss of €1,269 million), and passenger revenue (a loss of €38 million). In additional there is an exceptional impairment expense of €731 million related to fleet and other assets, together with an associated inventory impairment expense of €71 million and expenses relating to contractual end of lease payments also in respect of surplus aircraft of €6 million. An exceptional expense of €22 million has been recorded in respect of a provision in relation to the theft of customer data at British Airways in 2018.

There were no exceptional items in the six months to June 30, 2019.

Net non-operating costs, taxation and profit after tax

The Group's net non-operating costs for the six months to June 30, 2020, were €169 million compared with €88 million in 2019, mainly relating to arrangement fees and interest for new debt and facilities and costs associated with restructuring certain derivative contracts, for which the cashflows have been deferred to 2021 or later.

The tax credit for the period was €104 million before exceptional items (2019: tax charge of €201 million), with an effective tax rate for the Group of 5 per cent (2019: 20 per cent). The effective tax rate in the period was different to the expected rate of 20 per cent due to not recognising tax credits in respect of certain current and prior period losses and deductible temporary differences, and due to the cancellation of the UK rate reduction and its impact on UK deferred tax balances.

The loss after tax and exceptional items for the six months to June 30, 2020 was €3,806 million (2019: profit after tax €806 million), driven by the impact of COVID-19 on operating profit, together with the exceptional items relating to the overhedged position on fuel and the impairment of fleet assets, which were also the result of COVID-19.

Cash and leverage

The Group's cash position of €6,016 million was €667 million lower than December 31, 2019. Net debt at the end of the period, including the debt associated with right of use assets, was €10,463 million compared with €7,571 million at December 31, 2019. Net debt to EBITDA, based on the 12 months to June 30, 2020, was 4.2 times, versus 1.4 times at the end of December 2019.

Other recent developments

On July 24, 2020, the Group announced that IAG Loyalty had signed a multi-year renewal extending its worldwide commercial partnership with American Express. Under the agreements, American Express will make a payment of approximately €830 million (£750 million) to IAG Loyalty, a significant part of which is a pre-purchase of Avios points that American Express will utilise in the UK and worldwide for its British Airways co-branded cards and Membership Rewards Programme.

Having reached nine years in office last January (the maximum term recommended in the UK corporate governance code), Antonio Vázquez has announced his intention to retire in early January 2021, stepping down from his position as member and Chairman of the Board of Directors. On July 30, the Board unanimously approved the appointment of independent director Javier Ferrán as his successor.

Antonio Vázquez will continue to chair the Board of Directors for the remainder of 2020 subject to his proposed re-election as director being approved by the next IAG's Annual General Shareholders Meeting. This will enable him to support the succession of the Group's Chief Executive and allow for the orderly transition of chairman.

INTERNATIONAL CONSOLIDATED AIRLINES GROUP S.A.

Unaudited Condensed Consolidated Interim Financial Statements

January 1, 2020 - June 30, 2020

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

CONSOLIDATED BALANCE SHEET

CONSOLIDATED CASH FLOW STATEMENT

At June 30, 2020 Aer Lingus held €40 million of restricted cash (2019: €42 million) within interest-bearing deposits maturing after more than three months to be used for employee related obligations.

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 December 17, 2009. 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 30, 2020. The condensed consolidated interim financial statements herein are not the Company's statutory accounts and are unaudited.

The same basis of preparation and accounting policies set out in the IAG Annual Report and Accounts for the year to December 31, 2019 have been applied in the preparation of these condensed consolidated interim financial statements, except for those in note 2. IAG's financial statements for the year to December 31, 2019 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.

The prior year Income statement and Balance sheet include reclassifications that were made to conform to the current period presentation as follows:

· In September 2019, the IFRS Interpretations Committee ('IFRIC') clarified that under IFRS 15 compensation payments for flight delays and cancellations form compensation for passenger losses and accordingly should be recognised as variable compensation and deducted from revenue. This clarification had led the Group to change its accounting policy during the fourth quarter of 2019, which previously classified this compensation as an operating expense. Accordingly, the Group has reclassified the comparative six months to June 30, 2019 to reflect €63 million of compensation costs as a deduction from Passenger revenue and a corresponding reduction within Handling, catering and other operating costs; and

· Deferred tax assets arising on the restriction of surpluses to reflect minimum funding requirements of the British Airways APS and NAPS defined benefit schemes, as detailed in note 15, previously recognised within Employee benefit assets in the Balance sheet at December 31, 2019, have been reclassified to be presented net within Deferred tax liabilities at both December 31, 2019 and January 1, 2019 to conform to the current period presentation. At December 31, 2019, the reclassification had the effect of reducing Deferred tax liabilities by €282 million, reducing the Employee benefit assets by €210 million and increasing the Employee benefit obligations by €72 million. At January 1, 2019, the reclassification had the effect of reducing Deferred tax liabilities by €372 million, increasing Deferred tax assets by €131 million, reducing the Employee benefit assets by €365 million and increasing the Employee benefit obligations by €138 million. There is no impact to Profit after tax for the period, Other comprehensive income for the period, Net assets or the Statement of changes in equity in any period presented.

Going concern

As detailed in the Financial Review at June 30, 2020, the Group has cash of €6.0 billion and a further €2.1 billion of committed and undrawn general and aircraft facilities. Liquidity was boosted by, amongst other actions, accessing Spain's Instituto de Crédito Oficial (ICO) facility and the UK's Coronavirus Corporate Finance Facility (CCFF). In addition, one-year bridge financing facilities for old and new aircraft were agreed. These actions raised an additional €2.2 billion of liquidity in the period. The Group also has a large and valuable portfolio of airport landing rights. Nevertheless, given the economic uncertainty of the COVID-19 pandemic, the Group has modelled two scenarios in its assessment of going concern over the period to December 31, 2021, referred to below as the Base Case and the Downside Case.

The Base Case takes into account the Board's and management's views on the anticipated impact and recovery from the COVID-19 pandemic on the Group's operating companies and overall business across the going concern period. The key inputs and assumptions underlying the Base Case include:

· capacity recovery modelled regionally (and in certain regions, by key destinations), with capacity (measured versus 2019) gradually increasing from the reduction of 95 per cent reported in quarter 2 to 46 per cent lower for quarter 4 2020 and still down 24 per cent on average for 2021;

· passenger unit revenue per ASK, although recovering is expected to remain at levels below those of 2019 over the going concern period, which is dependent on, amongst others, the weighting of shorthaul versus longhaul, business versus leisure and premium versus economy; and

· the Group has forecast securing 80 per cent of the financing required that is currently uncommitted to align with the timing and payments for aircraft deliveries. This is a conservative assumption against the level of financing the Group has been able to achieve recently, including over the course of the COVID-19 pandemic to date.

1. CORPORATE INFORMATION AND BASIS OF PREPARATION continued

The Downside Case applies further stress to the Base Case to model a more prolonged downturn, with a deeper and more gradual recovery relative to the Base Case. The Downside Case is representative of a second wave of outbreaks of COVID-19 on a regional basis, which models a more acute impact on the longhaul sector, with the domestic and European shorthaul sector recovering faster than longhaul. In the Downside Case capacity would be 67 per cent lower than 2019 in quarter 4 2020 and 35 per cent lower averaged across 2021, with the first two quarters of 2021 approximately down a further 25 per cent versus 2019 than in the Base Case. In reviewing the Downside Case the Directors have also considered further sensitivities for adverse experience and external factors. The Directors consider the Downside Case to be a severe but plausible scenario.

The Group has modelled the impact of mitigating actions to offset further deteriorations in demand and capacity, including reductions in operating expenditure and capital expenditure. The Group expects to be able to continue to secure financing for future aircraft deliveries and in addition has further potential mitigating actions it would pursue in the event of adverse liquidity experience.

Furthermore, to add resilience to the liquidity position of the Group, including for the period beyond the next 12 months, the Directors have resolved to undertake a Rights Issue during the second half of 2020 for an amount of up to €2.75 billion, which is expected to be fully covered by underwriting and irrevocable commitments. The Rights Issue will be subject to approval at the Company's Annual General Meeting on September 8, 2020 and would be expected to be completed by the end of September.

Having reviewed the Base Case, Downside Case and additional sensitivities, the Directors have a reasonable expectation that the Group has sufficient liquidity to continue in operational existence for the foreseeable future and hence continue to adopt the going concern basis in preparing the interim financial statements.

Due to the uncertainty created by COVID-19 and potential for future waves of the pandemic and the impact on travel restrictions and/or demand, the Group is not able to provide certainty that there could not be more severe downside scenarios than those it has considered, including the stresses it has considered in relation to factors such as the impact on yield, capacity operated, cost mitigations achieved and fuel price variations. Whilst such scenarios are not considered likely, in the event that such a scenario were to occur the Group will likely need to secure additional funding over and above that which is contractually committed at July 30, 2020. Sources of additional funding are expected to include regular financing arrangements for aircraft, an extension of the CCFF commercial paper until March 2022, and the Rights Issue referred to above.

However, if such funding were not secured against aircraft, the UK Government withdrew its CCFF programme or if the Rights Issue were not approved and executed as anticipated, the occurrence of a more severe downside scenario and the Group's ability to then obtain additional funding represents a material uncertainty at July 30, 2020 that could cast significant doubt upon the Group's ability to continue as a going concern.

The financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.

2. ACCOUNTING POLICIES

New standards, interpretations and amendments adopted by the Group

The following amendments and interpretations apply for the first time in the six months to June 30, 2020, but do not have an impact on the condensed consolidated interim financial statements of the Group:

· Amendments to references to conceptual framework in IFRS standards;

· Definition of a business (amendments to IFRS 3 'Business combinations');

· Definition of material (amendments to IAS 1 'Presentation of financial statements' and IAS 8 'Accounting policies, Changes in accounting estimates and errors'); and

· Amendments to IFRS 9 'Financial instruments', IAS 39 'Financial instruments: Recognition and measurement' and IFRS 7 'Financial instruments: Disclosures', which conclude on phase one of the IASB's work to respond to the effects of Interbank Offered Rates (IBOR) reform on financial reporting. The amendments provide temporary reliefs which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate.

The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

2. ACCOUNTING POLICIES continued

New and changes in accounting policies

Government grants

Government grants are recognised where there is reasonable assurance that the grant will be received. Loans provided and/or guaranteed by governments that represent market rates of interest are recorded at the amount of the proceeds received and recognised within Borrowings. Those loans provided and/or guaranteed by governments that represent below market rates of interest are measured at inception at their fair value and recognised within Borrowings, with the differential to the proceeds received recorded within Deferred income and released to the relevant financial statement caption in the Income statement on a systematic basis. Grants that compensate the Group for expenses incurred are recognised in the Income statement in the relevant financial statement caption on a systematic basis in the periods in which the expenses are recognised.

Critical accounting estimates, assumptions and judgements

Judgement and estimates in the determination of the impact of COVID-19 on the interim financial statements

The Group has applied judgement in evaluating the impact of COVID-19 on the estimation uncertainty of determining cash flow forecasts as part of approved business plans. These cash flow forecasts underpin the following areas of these interim financial statements:

· The going concern basis of preparation (refer to note 1);

· Hedged forecast transactions, predominantly of fuel and foreign currency, are no longer expected to occur and accordingly the associated hedges de-recognised (refer to note 3 and note 17);

· The long-term fleet plans for each operating company and accordingly number of aircraft permanently stood down and impaired at the balance sheet date (refer to note 3 and note 10);

· The value-in-use calculations used in each of the cash generating unit (CGU) impairment assessments (refer to note 11); and

· The recoverability of deferred tax assets (refer to note 7).

3. exceptional items

1 The exceptional charge to Fuel, oil costs and emissions charges of €1,269 million represented by an expense of €1,372 million relating to fuel derivatives and a credit of €103 million relating to the associated fuel foreign currency derivatives, and the exceptional charge to Passenger revenue of €38 million relates to the derecognition of hedges of the associated fuel derivatives and the foreign currency derivatives on forecast revenue and fuel consumption. These losses have arisen from the substantial deterioration in demand for air travel caused by the COVID-19 outbreak, which has caused a significant level of hedged fuel purchases in US dollars and hedged passenger revenue transactions in a variety of foreign currencies to no longer be expected to occur based on the Group's operating forecasts prevailing at the balance sheet date. The Group's risk management strategy has been to build up these hedges gradually over a three-year period when the level of forecast fuel consumption and passenger revenues were higher than current expectations. Accordingly, the hedges for these transactions has been derecognised and the losses recognised in the Income statement.

The related tax credit was €204 million, with €7 million being attributable to the charge to passenger revenue and €197 million being attributable to the fuel expense. Further details are given in note 17.

3. exceptional items continued

2 The total exceptional impairment expense of €731 million is represented by an impairment of fleet assets of €729 million and an impairment of other assets of €2 million. The fleet impairment relates to 55 aircraft, their associated engines and rotable inventories that have been stood down permanently and 6 further aircraft which have been impaired down to their recoverable value at June 30, 2020, which includes 32 Boeing 747 aircraft, 15 Airbus A340 aircraft, 4 Airbus A320 aircraft, 4 Airbus A330-200 aircraft, 2 Boeing 777-200 aircraft and 4 Embraer E170 aircraft. Of the fleet impairment, €635 million is recorded within Property, plant and equipment relating to owned aircraft and €94 million is recorded within Right of use assets relating to leased aircraft. Subsequent to these impairments, all assets are held at their recoverable amounts. The exceptional impairment expense has been recorded within Depreciation, amortisation and impairment in the Income statement.

The impairment expense has arisen from the substantial deterioration in current and forecast demand for air travel caused by the COVID-19 outbreak, which has led the Group to re-assess the medium and long term capacity and utilisation of the fleet.

The related tax credit was €87 million.

3 The exceptional charge to Engineering and other aircraft costs of €77 million includes an inventory write down expense of €71 million and a charge relating to contractual lease provisions of €6 million. The inventory write down expense represents those expendable inventories that, given the aforementioned asset impairments, are no longer expected to be utilised. The charge relating to the recognition of contractual lease provisions of €6 million represents the estimation of the additional cost to fulfil the hand back conditions associated with the aforementioned leased aircraft that have been permanently stood down and impaired.

The related tax credit was €5 million.

4 The exceptional charge of €22 million represents management's best estimate of the amount of any penalty issued by the Information Commissioner's Office (ICO) in the United Kingdom, relating to the theft of customer data at British Airways in 2018. The process is ongoing and no final penalty notice has been issued. The exceptional charge has been recorded within Property, IT and other costs in the Income statement, with a corresponding amount recorded in Provisions.

There is no tax impact on the recognition of this charge.

4. Seasonality

Except for the impact of COVID-19, 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.

The Group has determined its operating segments based on the way that it treats its businesses and the manner in which resource allocation decisions are made. British Airways, Iberia, Vueling and Aer Lingus have been identified for financial reporting purposes as reportable operating segments. IAG Loyalty 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.

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 incidental to the activities of the Group and resource allocation decisions are made based on the passenger business, or are not reviewed regularly by the IAG MC and are included within Other Group companies.

5. SEGMENT INFORMATION continued

5. SEGMENT INFORMATION continued

b Geographical analysis

Revenue by area of original sale

Assets by area

6. FINANCE COSTS, INCOME AND OTHER NON-OPERATING CREDITS/(CHARGES)

7. TAX

The tax credit on the result after exceptional items for the six months to June 30, 2020 is €400 million (2019: €201 million charge), and the effective tax rate is 10 per cent (2019: 20 per cent). The effective tax rate in the period was different to the expected rate of 20 per cent due to not recognising tax credits in respect of certain current and prior period losses and deductible temporary differences, and due to the cancellation of the UK rate reduction and its impact on UK deferred tax balances. Had these losses and deductible temporary differences been recognised the additional tax credit would have been €371 million and the effective tax rate would have been 18 per cent.

8. EARNINGS PER SHARE AND SHARE CAPITAL

The effect of the assumed conversion of the IAG €500 million convertible bond 2022 is antidilutive for the six months to June 30, 2020, and therefore has not been included in the diluted earnings per share calculation.

The number of shares in issue at June 30, 2020 was 1,992,032,634 (December 31, 2019: 1,992,032,634) ordinary shares with a par value of €0.50 each.

9. Dividends

As a result of the impact of COVID-19, on April 2, 2020, the Board of Directors of the Group resolved to withdraw the proposal to the next Annual Shareholders' Meeting to pay a final dividend for 2019 of 0.17 euros per share.

The Directors propose that no dividend be paid for the six months to June 30, 2020 (June 30, 2019: nil).

The dividend paid in the six months to June 30, 2020 of €52 million relates to the withholding tax on the 2019 interim dividend, which was proposed in October 2019.

10. property, plant and equipment AND intaNgible assets

1 Includes an impairment expense of €731 million mainly on fleet assets, recognised as an exceptional item (note 3).

At June 30, 2020, bank and other loans of the Group are secured on fleet assets with a net book value of €1,557 million.

Capital expenditure authorised and contracted for but not provided for in the accounts amounts to €11,306 million (December 31, 2019: €12,830 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

Basis for calculating recoverable amount

The Group performs its annual impairment test of goodwill and indefinite live assets during the fourth quarter of each year based on the five year Business plans prepared and approved at each operating company.

At each other reporting date, the Group considers the existence of indicators of potential impairment. At June 30, 2020, the disruption caused by COVID-19 has led to a decrease in demand across each CGU and economic uncertainty over the short and medium term.

As a result, a full impairment test at June 30, 2020 has been conducted for each CGU, based on the updated operating companies' Business plans which consolidate into the Group Business plan, approved by the Board.

The recoverable amount of each CGU is measured based on its value-in-use, which at June 30, 2020 utilises a weighted average multi-scenario discounted cash flow model. The details of these scenarios are given in the going concern section of note 1.

11. IMPAIRMENT REVIEW continued

Key assumptions

The value-in-use calculations for each CGU reflected the increased risks arising from COVID-19, including updated projected cash flows for the decreased activity for the remaining six months of 2020 through to the end of 2024, an increase in the pre-tax discount rates to incorporate increased equity market volatility and a decrease in long-term growth rates.

For each of the CGUs the key assumptions used in the weighted average multi-scenario value-in-use calculations are as follows:

1 In prior periods the Group applied the average ASK growth per annum as a key assumption. Given the impact of COVID-19, the Group has presented ASKs as a proportion of the level of ASKs achieved in 2019, prior to the application of the terminal value calculation.

Forecast ASKs reflect the range of ASKs as a percentage of the 2019 actual ASKs over the forecast period, based on planned network growth and taking into account Management's expectation of the market.

The long-term growth rate is calculated for each CGU based on the forecasted weighted average exposure in each primary market using gross domestic product (GDP) (source: Oxford Economics).

Pre-tax discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and underlying risks of its primary market. The discount rate calculation is based on the circumstances of the airline industry, the Group and the CGU. It is derived from the weighted average cost of capital (WACC). The WACC takes into consideration both debt and equity available to airlines. The cost of equity is derived from the expected return on investment by investors and the cost of debt is broadly based on the Group's interest-bearing borrowings. CGU specific risk is incorporated by applying individual beta factors which are evaluated annually based on available market data. The pre-tax discount rate reflects the timing of future tax flows.

Summary of results

At June 30, 2020 Management reviewed the recoverable amount of each of the CGUs and concluded the recoverable amounts exceeded the carrying values.

Reasonable possible changes in key assumptions have been considered for each CGU, where applicable, which include reducing operating margin by 2 per cent in each year, ASKs by 5 per cent in each year, long-term growth rates to zero, increasing pre-tax discount rates by 2.5 percentage points, and increasing the fuel price by 40 per cent.

While the Iberia CGU recoverable amount is estimated to exceed the carrying amount by €628 million, the recoverable amount would be below the carrying amount when applying certain of the reasonable possible changes in key assumptions. The recoverable amount of the Iberia CGU would equal its carrying amount if the following were applied individually to the cash flow projections: (i) if the pre-tax discount rate applied had been 1.4 percentage points higher; (ii) if operating margin had been 2 per cent lower; (iii) if ASKs had been 4.1 per cent lower; and (iv) if the fuel price had been 7.1 per cent higher.

For the remainder of the reasonable possible changes in key assumptions applied to the Iberia CGU and for all the reasonable possible changes in key assumptions applied to the remaining CGUs, no impairment arises.

For impairment charges recognised in relation to fleet assets stood down permanently at June 30, 2020, refer to note 3.

12. FINANCIAL INSTRUMENTS

a Financial assets and liabilities by category

The detail of the Group's financial instruments at June 30, 2020 and December 31, 2019 by nature and classification for measurement purposes is as follows: