On Thursday IAG, parent company of British Airways, Iberia, Aer Lingus and Vueling, gave its 1st Quarter results presentation. This was obviously more significant than usual given the current grounding of the fleet.
Whilst Rob has already covered the published highlights, including IAG’s £300 million loan from the UK Government’s Coronavirus Corporate Finance Facility, there were a few more interesting tidbits from the presentation which followed.
Current flying is cash positive, impressively
Whilst capacity is currently 10% of 2019 levels, British Airways is still operating some flights, including around 15 long haul routes, on a daily basis.
These are not loss-making. According to Willie Walsh, ALL currently operated flights are cash positive due to the cargo being carried. British Airways is able to keep core passenger routes open even if there are only a handful of travellers.
From July, IAG expects to fly ‘meaningful’ capacity
IAG will operate ‘meaningful’ capacity from July onward, subject to travel restrictions being lifted, although it may take until 2023 to see levels return to previous highs.
‘Meaningful’ refers to the number of seats in the air. There was no guidance on how many would be filled with paying passengers. Currently, IAG thinks that 50% of previous capacity will operate in Q3.
This is not entirely unreasonable. China’s domestic capacity rebounded to 70% of its previous average by the end of April according to aviation analytics company Cirium.
What will BA’s future fleet look like?
Whilst carriers such as Virgin Atlantic and Lufthansa have been making firm aircraft retirements and therefore permanent capacity reductions, British Airways is allowing itself a greater degree of flexibility.
IAG currently has approximately 440 aircraft grounded at airports around Europe. Whilst these are currently on modified maintenance schedules because they are not flying, it would only cost a modest €10 million to return the entire fleet to active duty.
British Airways will be accelerating the retirement of two Boeing 747s already due to retire this year and returning a potential 20 additional aircraft back to lessors. IAG will also be deferring future deliveries across all its airlines:
As you can see from the slide above, three fewer long haul aircraft will be delivered this year compared to previous forecasts, as well as eight fewer in 2022. These deferrals are relatively limited because many future deliveries are already paid, in part or in full.
British Airways is keeping relatively tight-lipped about further reductions to the existing fleet although it says it is assessing the permanent retirement of further 747s.
There are also 96 aircraft across IAG coming off lease in 2021 and 2022 which could be returned without penalty.
This is a sensible strategy. Nobody currently knows how the travel demand will respond once travel restrictions lift. At this stage, it makes sense to keep the majority of aircraft parked for potential future use.
If demand returns at a faster rate than expected, all British Airways has to do is pull a few more aircraft from being parked (assuming it has retained enough staff to fly them …..). If demand returns at a reduced rate, those aircraft can be permanently retired later.
The most likely scenario is that new fuel-efficient aircraft such as Boeing 787s, Airbus A350s and A320neos will be re-activated first, with older aircraft such as Boeing 747s and 777s activated later or not at all.
British Airways is currently undergoing a large fleet renewal and refurbishment program which gives it additional flexibility. Whilst BA has historically had very premium-heavy configurations, this could change as it tries to match demand and supply. This could affect future Boing 787, 777, 777X and Airbus A350 and A380 deliveries and refurbishments.
The Letter of Intent signed with Boeing for 200 x 737MAX aircraft is still valid, although a Letter of Intent is not a legally binding order.
In-flight social distancing?
IAG does not anticipate social distancing to be a workable solution at airports or inside aircraft, and does not see itself leaving middle seats empty.
On most aircraft doing so only adds an additional 18″ of space between passengers, far less than the 2 metres recommended for social distancing. It believes that requiring face masks or coverings as well as additional aircraft cleaning procedures are a more effective way of containing the spread of the virus.
Will British Airways offer aggressive pricing to stimulate demand?
Whilst in previous crises airlines have used low prices to encourage passengers to return, Willie Walsh is uncertain that such a stimulus would work. Demand will depend on passenger confidence that flying is safe, irrespective of cost and does not excessively increase transmission of the virus.
That suggests that British Airways will not use price as a lever, and may prefer to fly emptier planes at higher prices. This has the added benefit of making the in-flight experience easier to manage.
What about the Air Europa acquisition?
IAG’s acquisition of Spanish airline Air Europa is still ongoing. Willie Walsh said that the deal “still makes sense” although it has yet to get competition clearance. With Air Europa giving IAG 73% of the Spanish domestic market, substantial changes will be required.
The original contract has a price adjustment mechanism that may mean IAG can acquire the airline for less than it previously expected, although it is debatable if Air Europa has much value at all as a stand-alone business at the moment.
What is happening with the transatlantic joint venture?
We discussed the current Competition & Markets Authority investigation into the BA / American Airlines transatlantic joint venture a few days ago. What was meant to be a routine review has now gone on for 18 months which is not a good sign for the airline.
Whilst not published prior to IAG’s Q1 results, the review was finally published yesterday afternoon. You can read our article on what will change for the British Airways transatlantic joint venture here.
The full presentation is available as a PDF here although some of the points above were only covered verbally.
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