COVID-19 Summary - Nine months to September 30, 2021

The Group's results continue to be impacted by COVID-19 and the related restrictions on travel. A detailed review of the impact of COVID-19 on the Group in 2020 was provided in the 2020 Annual Report and Accounts and this review provides an update for the first nine months of 2021.

In the first half of 2021, due to the continuing impact of the virus worldwide and the associated travel and border restrictions applying in many countries, the Group was only able to operate a limited passenger schedule, with capacity operated only 20.8 per cent of that operated in 2019. Passenger capacity for quarter 2 was 21.9 per cent of 2019, up marginally on the 19.6 per cent operated in quarter 1, with an increase in capacity during the quarter where travel restrictions allowed. Capacity was increased to 43.4 per cent of 2019 in quarter 3, linked to a partial easing of restrictions. The Group operated 3,334 additional cargo-only flights, leading to record cargo revenue for the nine months.

The Group seeks to reduce the impact of volatile commodity prices by hedging fuel purchases in advance, based on expected capacity levels. The Group also hedges foreign exchange rates. The impact of COVID-19 has led to a significant reduction in the requirement to purchase jet fuel, due to the significantly reduced flying programme. As a consequence, the Group has derivative contracts for which there was no corresponding purchase of jet fuel, leading to discontinuance of hedge accounting for these fuel derivatives, together with the related foreign exchange derivatives. In aggregate there is a net loss on these derivative contracts as, whilst the commodity fuel price has risen in recent months, the average fuel price over the period covered by these contracts was significantly below levels seen before COVID-19, when these derivative contracts were taken out. The exceptional credit in the nine months is mainly due to the reversal of prior year charges resulting from reduced losses (compared to previously forecast) on these contracts, due to rising fuel prices in 2021, net of an adjustment for the latest assessment of capacity for 2021 and foreign exchange movements.

In May 2021, the Board approved a revised fuel hedging policy, which is designed to provide flexibility to respond to both significant unexpected reductions in travel demand or capacity and/or material or sudden changes in jet fuel prices. The revised policy allows for differentiation within the Group, to match the nature of each operating company, and a greater use of call options. The revised policy will operate on a two-year rolling basis, with hedging up to 60 per cent of anticipated requirements in the first twelve months and up to 30 per cent in the following twelve months and with flexibility for low cost airlines within the Group to adopt hedging up to 75 per cent in the first twelve months. For all Group airlines, hedging between 25 and 36 months ahead will only be undertaken in exceptional circumstances.

The Group continues to take action to preserve cash and boost liquidity. In the nine months the Group drew debt facilities agreed in 2020, namely a £2.0 billion Export Development Guarantee (EDG) term loan for British Airways from UK Export Finance and €75 million for Aer Lingus from the Ireland Strategic Investment Fund. IAG closed a dual-tranche senior unsecured bond issuance in March, raising €1.2 billion, with €500 million maturing in 2025 and €700 million maturing in 2029. In May, IAG raised €825 million by issuing a convertible bond, maturing in 2028. During the nine months the Group also signed a committed secured Revolving Credit Facility (RCF) with a syndicate of banks for $1.755 billion, available for three years, plus two consecutive one-year extension periods, at the discretion of the lenders. The facility is available to Aer Lingus, British Airways and Iberia, each of whom has a separate borrower limit within the overall facility. Any drawings under the facility would be secured against eligible unencumbered aircraft assets and take-off and landing rights at both London Heathrow and London Gatwick airports. The facility remained undrawn at the end of September. Simultaneous with entering into this new RCF, British Airways cancelled its US dollar revolving credit facility that was due to expire in June 2021 and which had $786 million undrawn and available at December 31, 2020. Approximately €400 million of aircraft financing facilities expired undrawn by the end of March. In July funding of $785 million was secured for British Airways through a sustainability-linked Enhanced Equipment Trust Certificate (EETC) financing, to be drawn down against future aircraft deliveries; at September 30, 2021 $685 million remained undrawn. Total liquidity at the end of the nine months remained strong at €10.6 billion, including cash, cash equivalents and current interest-bearing deposits of €7.6 billion and committed and undrawn general and aircraft facilities of €3.0 billion. On November 1, 2021, the Group closed a £1 billion committed credit facility for British Airways, partially guaranteed by UK Export Finance, which remains undrawn.

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 is actively involved in restructuring its cost base to adjust to significantly lower levels of demand, including actions to reduce fixed costs and to increase the variable proportion of the cost structure.

Basis of preparation

Based on the extensive modelling the Group has undertaken in light of the COVID-19 pandemic, including considering plausible but severe downside scenarios, the Directors have a reasonable expectation that the Group has sufficient liquidity for the going concern assessment period to June 30, 2023 and accordingly the Directors have adopted the going concern basis in preparing the consolidated results for the nine months to September 30, 2021.

However, there are a number of significant factors related to the status and impact of COVID-19 worldwide that are outside of the control of the Group. These include the emergence of new variants of the virus and potential resurgence of existing strains of the virus; the availability of vaccines worldwide, together with the speed at which they are deployed; the efficacy of those vaccines; and the restrictions imposed by national governments in respect of the freedom of movement and travel. Due to the uncertainty that these factors create, the Directors are not able to provide certainty that there could not be more severe downside scenarios than those that have been considered in the modelling, including the sensitivities the Group has considered in relation to factors such as the impact on yield, capacity operated, cost mitigations achieved and the availability of aircraft financing to offset capital expenditure. In the event that such a scenario were to occur, the Group would need to implement additional mitigation measures and would likely need to secure additional funding over and above that which is contractually committed at November 4, 2021.

The Group has been successful in raising liquidity in the nine months to September 30, 2021, having financed all aircraft deliveries in the period, secured an additional €4.4 billion of non-aircraft debt, secured a new $1.755 billion Revolving Credit Facility, committed for three years and secured a $785 million aircraft-specific facility in the form of a sustainability-linked EETC financing structure. However, the Board cannot provide certainty that the Group will be able to secure additional funding, if required, in the event that a more severe downside scenario than those it has considered were to occur and accordingly this represents a material uncertainty that could cast doubt upon the Group's ability to continue as a going concern.

Principal risks and uncertainties

The Group has continued to maintain its framework and processes to identify, assess and manage risks. The Board continues to meet frequently and review updates, including risk related, from management.

The principal risks and uncertainties affecting the Group, detailed on pages 78 to 88 of the 2020 Annual Report and Accounts, remain relevant. The ongoing impacts of the COVID-19 pandemic (considered as an "Event causing significant network disruption" risk) continue to negatively impact the external risk environment for the Group and change the risk profile of a number of the Group's other principal risks. The Group continues to carefully review its principal risks, implement necessary mitigations to adapt and assess how the severity or likelihood of occurrence of certain risks has changed, which includes consideration of emerging risks related to competitive and market risk, talent and skills retention risk and the acceleration of the digital landscape and customer trends and sentiment to travel. Where further action has been required, the Board has assessed potential mitigations and, where appropriate or feasible, the Group has implemented or confirmed plans that would address those risks.

From the risks identified in the 2020 Annual Report and Accounts, the main risks that have been impacted by the COVID-19 pandemic and ongoing recovery are highlighted below. Business responses implemented by management and that effectively mitigate or reduce the risk are reflected in the Group's latest business plan and scenarios.

•                     Airports, infrastructure and critical third parties. Restrictions at hubs and airports have required capacity adjustments, including fleet adjustments and new operating procedures as markets and regions re-open. The Group has pro-actively worked with suppliers across all categories to ensure that operations are maintained and the impact to their businesses understood, with mitigations implemented where necessary. Additional focus will be placed on key suppliers following the removal of governments' support schemes. Operational bottlenecks such as immigration resource at airports and the potential for Air Traffic Control (ATC) disruption next summer remain outside of the Group's control, although management continues to liaise with the relevant providers to identify potential solutions.

•                     Competition, consolidation and government regulation. The scale of governmental support and aviation specific state-aid measures 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. The heightened threat of ransomware attacks on critical infrastructure and services persists and the Group continues to focus its efforts on further mitigating cyber risks through a Group wide cyber programme.

•                     IT systems and IT infrastructure. The Group is reliant upon the resilience of its systems for key customer and business processes and is exposed to risks that relate to poor performance, obsolescence or failure of these systems. The Group is currently engaged in a number of initiatives to modernise its IT systems, whilst also delivering an ongoing efficiency programme and upgrading its digital capability, customer propositions and core IT infrastructure and network where required. Some of these initiatives have been delayed or impacted by actions the Group is taking to respond to the operational and health requirements of the COVID-19 pandemic.

•                     People, culture and employee relations. The Group is focussed on staff wellbeing and people morale and motivation, particularly as our people return to their offices and the Group businesses adapt and implement hybrid working models. Welfare support schemes are in place to support the Group's staff and initiatives to build trust and engagement continue across the Group's businesses. The Group has identified the skills and capabilities that are required to manage its transformation, which include enhancing its leadership capability and delivering on the Group's diversity and inclusion plans. Employee consultations linked to restructuring proposals have been undertaken as required.

•                     Political and economic environment. National governments continue to impose varying and complex travel and testing requirements, which will continue to impact Group operations and dampen demand as customers choose not to fly given the uncertainty around the application and cost of these. These changes are being actively monitored and near-term capacity plans are refreshed dynamically, according to the latest status. The economic impact of the pandemic, especially with the focus on potential future variants driving further uncertainty, is expected to be significant and the Group will continue to adjust its future capacity plans accordingly, retaining flexibility to adapt as required.

•                     Debt funding and financial risk. Financial markets have been volatile since the spread of the pandemic, although the Group has been able to secure new funding and facilities as needed. The Group has an established process to monitor financial and counterparty risk on an ongoing basis. The Group implemented a new fuel hedging policy during May 2021, providing greater flexibility over fuel hedging.

The Board and its sub committees have been appraised of regulatory, competitor and governmental responses on an ongoing basis.

Operating and market environment

Average commodity fuel prices for the nine months to September 30, 2021 were approximately 40 per cent higher than the equivalent period in 2020, with prices rising since the start of 2021, in contrast to the significant fall in March 2020 as COVID-19 took hold. The US dollar weakened approximately eight per cent against the euro and nine per cent against the pound sterling compared with 2020.

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 nine months to September 30, 2021 the net impact of translation on the operating result before exceptional items was €15 million adverse.

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 before exceptional items was favourable by €188 million for the period, reducing revenues by €114 million and reducing costs by €302 million.

The net impact of translation and transaction exchange on the operating result before exceptional items for the nine months was €173 million favourable.

Capacity

In the nine months to September 30, 2021, IAG capacity, measured in available seat kilometres (ASKs), was lower by 18.9 per cent versus 2020 and by 71.0 per cent versus 2019, with the impact of the ongoing COVID-19 pandemic felt across all regions. Q3 2021 saw the highest passenger numbers and load factors since the start of the pandemic, however capacity continues to be affected by the travel restrictions put in place by national governments in response to the COVID-19 pandemic and variants of the virus.

During quarter 1, British Airways capacity was adversely impacted by the UK-wide lockdown imposed at the beginning of January and associated international travel ban. Longhaul routes operated primarily for cargo purposes with daily flights to several US cities. Shorthaul operations were severely limited by restrictions, but regular operations connected the main cities and saw steady business travel demand. Iberia's longhaul operations were focussed on Latin America and the Caribbean (LACAR) and benefitted from Visiting Friends and Relatives (VFR) travel over the Christmas and New year period and in the lead up to Easter, although the EU restrictions introduced in response to the identification of the Brazil COVID-19 variant adversely impacted passenger numbers. Vueling operations were focussed on Domestic markets, connecting the Spanish peninsula with the Canary and Balearic Islands. Aer Lingus capacity continued to be driven by cargo needs, with flights operating regularly to New York, JFK, Chicago and Boston with very low passenger load factors. LEVEL longhaul operations out of Barcelona were very limited with only regular flights to Buenos Aires in quarter 1.

During quarter 2, British Airways capacity was impacted by the UK government's travel restrictions and the re-introduction of the traffic light travel system. The restricted nature of the 'green' list severely limited the recovery in capacity expected on the lifting of lockdown restrictions. Restrictions introduced by other governments on travellers from the UK in response to the delta COVID-19 variant also contributed to the low capacity. Iberia longhaul operations continued to focus on LACAR with routes to Colombia and Ecuador benefitting from VFR traffic. Shorthaul routes benefitted from high levels of transfer traffic in the quarter. Vueling operations in the quarter benefitted from the Spanish government lifting the state of alarm on May 9, 2021 and the associated restrictions on travel. Domestic routes connecting the Spanish peninsula with the Canary and Balearic Islands performed well. Aer Lingus capacity continued to be severely limited by the stringent restrictions put in place by the Irish government, with passenger load factors averaging only 20 per cent. Operations were driven by cargo needs, with flights operating regularly to New York, Chicago and Boston. LEVEL continued regular operations to Buenos Aires and towards the end of the quarter restarted flights to San Francisco.

During quarter 3, British Airways capacity was impacted by the UK traffic light travel system and the stringent testing requirements for travel. Longhaul routes to North America and Asia Pacific continued to be driven by cargo requirements with low passenger load factors. Leisure routes performed well in the quarter with high load factors on Caribbean routes as well as European destinations on the green and amber lists. Iberia longhaul operations continued to focus on LACAR with routes continuing to benefit from VFR traffic. Restrictions put in place by the Argentinian government limited operations, but this was offset by easing of restrictions in Brazil and Chile. Shorthaul routes benefitted from summer leisure traffic across the network. Vueling's capacity increased in the quarter and Domestic and European routes benefited from summer vacation travel. Domestic capacity recovered to above 2019 levels as routes connecting the peninsula to the Canary and Balearic Islands performed well. Aer Lingus expanded operations in quarter 3 following the Irish government's decision to ease travel restrictions for non-essential travel on July 19, 2021. Domestic capacity also increased following the transfer of a number of routes from Stobart Air following its liquidation. LEVEL restarted routes to New York and Mexico in the quarter, however overall capacity was impacted by strict restrictions put in place by the Argentinian government on routes operating to Buenos Aires.

Unit measures have been rendered much less meaningful than usual by the significant reduction in capacity operated but are included in the commentary below for completeness.

Revenue

Passenger revenue for the nine months to September 30, 2021 fell 35.0 per cent from the previous year; in 2020 the impact of COVID-19 was mainly limited to the period from March onwards. Passenger unit revenue (passenger revenue per ASK) for the nine months decreased 20.6 per cent at constant currency ('ccy'), due primarily to lower passenger seat factors, together with lower passenger yields (passenger revenue per revenue passenger kilometre), associated with the impact of COVID-19.

Cargo revenue for the nine months was 28.0 per cent higher versus 2020 and up 31.7 per cent at constant currency. The strong cargo revenue performance was due to additional cargo-driven flights; during the nine months 3,334 cargo-only flights were operated. Cargo revenue for the nine months was €1,174 million, up from €917 million in the previous year and total cargo carried, measured in cargo tonne kilometres (CTKs) was 15.0 per cent higher. Yields were higher versus last year reflecting the ongoing market supply and demand imbalance. During this pandemic, cargo revenue has had to cover the entire cost of operating cargo-only flights, without passenger revenue, on aircraft configured for passengers.

Other revenue fell by 20.1 per cent and by 15.7 per cent at ccy, mainly due to the impact of COVID-19 on the Group's non-airline businesses.

Costs

Employee costs for the nine months decreased by €519 million compared with 2020, mainly linked to the restructuring programmes implemented in 2020. The Group continued to receive assistance from temporary furlough and equivalent temporary cost reduction schemes, which in the nine months amounted to €481 million, compared with €414 million in the same period in 2020.

Fuel costs, including an exceptional credit related to overhedging of €153 million in 2021 and an exceptional charge of €1,599 million related to overhedging in 2020, reduced by 68.0 per cent. Excluding the exceptional overhedging credit in the period and the overhedging charge in 2020, fuel costs reduced by 28.6 per cent.

Supplier costs decreased by 27.7 per cent, linked to volume-related savings due to the lower capacity operated, together with a reduction in non-essential expenditure and negotiated savings as a result of COVID-19.

Depreciation, amortisation and impairment costs, including an exceptional impairment credit of €13 million in 2021 and an exceptional impairment charge in 2020 of €716 million, decreased by 40.7 per cent on the previous year, linked to the reduction in the Group's fleet triggered by COVID-19 and the related impairment charge. Excluding the exceptional impairment credit in 2021 and exceptional impairment charge in 2020, Depreciation, amortisation and impairment costs decreased by 13.7 per cent. The in-service fleet, which includes those aircraft temporarily grounded due to COVID-19, reduced from 542 aircraft at September 2020 to 533 aircraft at September 2021.

Total non-fuel costs were down 30.9 per cent on the previous year and down 29.5 per cent at ccy. Excluding the impact of exceptional charges in 2020, mainly relating to fleet and related asset impairments, and exceptional credits related to the reversal of impairments in respect of four aircraft in 2021, non-fuel costs were down 21.3 per cent and down 19.7 per cent at ccy.

Operating loss

The Group's reported operating loss for the nine months to September 30, 2021 was €2,487 million (2020 restated: operating loss of €5,975 million). The operating loss excluding exceptional credits in 2021 and exceptional charges in 2020, which are outlined in the Reconciliation of Alternative Performance Measures, was €2,665 million for the nine months to September 30, 2021, compared with a restated operating loss of €3,220 million in 2020. In 2020 the impact of COVID-19 was experienced mainly from March onwards; by contrast all nine months of 2021 were significantly negatively affected by COVID-19 and the related travel restrictions.

Net non-operating costs, taxation and loss after tax

The tax credit on the result after exceptional items for the nine months to September 30, 2021 was €428 million (2020: €638 million), and the effective tax rate was 14 per cent (2020: 10 per cent). The substantial majority of the Group's activities are taxed where the main operations are based, UK, Spain and Ireland, with corporation tax rates during 2021 of 19 per cent, 25 per cent and 12.5 per cent respectively, these result in an expected effective tax rate of 20 per cent. The difference between the actual effective tax rate of 14 per cent and the expected effective tax rate of 20 per cent is primarily due to certain current and prior period losses in Iberia and Vueling not being recognised and the effect of the rate change in the UK.                                                                                                                                                                 

On March 3, 2021 the UK Chancellor announced that legislation would be introduced in the Finance Bill 2021 to set the main rate of corporation tax at 25 per cent from April 2023. On May 24, 2021 the increase in the rate of corporation tax in the UK was substantially enacted, which has led to the remeasurement of deferred tax balances at September 30, 2021 and will increase the Group's future current tax charge accordingly.

On October 8, 2021 the Irish government announced that it would increase the rate of corporation tax for certain multinational businesses to 15 per cent with effect from 2023.  This expected tax rate change has not been reflected in these results because it has not yet been substantively enacted.                                                                                                                                                                          

The loss after tax and exceptional items for the nine months was €2,622 million (2020 restated: loss after tax €5,576 million), driven by the impact of COVID-19 on the Group's operating results.

Cash and leverage

The Group's cash position (including cash, cash equivalents and current interest-bearing deposits) at September 30, 2021 of €7,619 million was €1,702 million higher than December 31, 2020, driven by the additional liquidity actions taken in the nine months. Net debt at the end of the period was €12,356 million compared with €9,762 million at December 31, 2020.

Other recent developments

On October 27, 2021 Iberia submitted remedies to the European Commission as part of the Commission's ongoing review of the proposed acquisition of Air Europa by Iberia.