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IAG 2020 results show strong cash position and reduced cash burn

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IAG, the Spanish parent company of Iberia, Aer Lingus and British Airways, published its 2020 financial results this morning.

The key takeaway is that the group is not short of cash and, with aggressive cost cutting, has reduced its cash burn sharply.

It is also not short of debt, of course, but much of that debt is not due for repayment for some years.

There seems to be little danger to its survival in the next 12-18 months. A slow return to long term profitability would lead it unable to repay its debts in the medium term, however, as loans come up for repayment.

There is no point looking at the stated profit and loss numbers because they are distorted by intangible write-offs and one-off charges. Here are some headline figures:

  • passenger km flown were down 87% in the March-December period vs 2019
  • Aer Lingus was the worst performer in terms of passenger revenue, down 81% – BA was 3rd best out of the four core brands with ‘only’ a 75% reduction
  • IAG operated over 4,000 ‘cargo only’ flights between March and December
  • €10.3 billion is currently available, either as cash in the bank or as bank loans which have been agreed but not yet drawn
  • the €10.3 billion includes €3.6 billion of Government grants and loan guarantees (as HfP predicted, the latest €2 billion UK facility is 80% guaranteed by the Government)
  • net debt (debt minus cash) was €9.8 billion at the year-end, with total debt of €15.7 billion
  • net debt ‘only’ rose by €2.2 billion during 2020 which, at just €40 million per week, appears to be a strong achievement
  • cash burn across IAG is estimated to be €185 million per week in Q1 2021
  • all contracted aircraft deliveries are fully funded – 15 planes will be delivered across IAG in 2021 including 10 long-haul aircraft
  • 68 aircraft deliveries have been deferred
  • Club Suite installed on 28 British Airways aircraft as of today
  • 2023 is seen as the earliest date by which IAG will return to the level of demand seen in 2019
  • the amount of Avios revenue expected to be used to fund future redemptions dropped from €844m to €361m, reflecting lower Avios issuance. This is NOT the same as the amount that IAG Loyalty receives for selling Avios as that sum includes a profit margin and ‘breakage’ costs.
  • the documents stress – twice – that ‘cyber’ spending has not been cut. Investors are clearly nervous of another ICO fine ….

Most of the other news has already been covered on HfP:

  • IAG lost €1.7 billion due to its fuel hedging strategy – this is a screw-up of astonishing proportions which could have been the difference between life and death for the group, but which has been swept under the carpet amongst the other numbers

You can read the slide presentation here and – strictly for finance professionals only – the 91-page small-print formal accounts are here.

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Comments (39)

  • Alex says:
    26 Feb26 February 11:07

    Bit harsh on the fuel hedging comment Rob! Unless I’ve missed anything, IAG would have had a 3-year plan for fuel hedging, but no-one was planning for a downturn this big. Do you know how big the losses were at similar sized competitors? (AF, LH, US3 for example)

    • Track says:
      26 Feb26 February 11:17

      I guess, negative oil futures prices in APRIL 2020 should’ve given a hint…

      However technical the circumstances in which those negative prices arisen were.

      • Ken says:
        26 Feb26 February 11:24

        Really helpful when all the hedges has long been in place.

        Do you think 4 months into the pandemic, airlines hedging at $70 a barrel?

      • Track says:
        27 Feb27 February 07:07

        So what, if you can unwind the hedge, enter the opposite position to cancel it.

        Requires some structuring, terms matching but nothing impossible.

        “Hedges put long in place” is a phrase for “we are lazy and rely on out relationship with a bank.”

        • Lady London says:
          28 Feb28 February 08:44

          +1

          However over the years I’m guessing they would save a lot by fuel hedging. This was just a period they didn’t.

    • Littlefish says:
      27 Feb27 February 12:50

      I’d strongly suspect the IAG/BA boards were not challenged strongly enough on the bit of the Risk Assessment graphic which will have had the Low risk/High impact marker around fleet grounding.
      Low risk tends to get morphed to No Risk far too frequently. I’m not privvy to this within BA, but I observe enough boards to see this elsewhere.
      To push the debate a bit broader; a similar but extra observation on cyber spending. Cyber spend should be going up, not held steady. So again, not clear to me the challenge on these things is looking too sharp tbh.
      Lots that BA is good at, but bit of a weakness emerging within this area imo.

      • Rob says:
        27 Feb27 February 14:29

        Plenty of interesting studies into this sort of thing. For example, Lehman Brothers was – in theory – the last investment bank that should have gone bust. It was primarily employee-owned and the staff would have an extra incentive not to destroy it. (The biggest issue in banking is that shareholders swallow the losses and staff pocket the gains.) It was, of course, Lehman that imploded.

  • Ken says:
    26 Feb26 February 11:23

    IAG fuel hedging losses had already been flagged so nothing new here.
    Decide to hedge like European airlines, or don’t hedge like the US air carriers?
    You can’t really have your cake and eat it (or if you do it becomes overly expensive).
    Ryanair, EasyJet and rest of European airlines will show similar losses as a proportion of revenues.
    What do they do, fail to hedge raises the prospect of fuel surcharges or IAG would become a pension fund & an oil price bet with an airline attached.

    Is it really an astonishing cock up?
    Only in perfect hindsight

    • Rob says:
      26 Feb26 February 11:43

      Not really. Unless you believe you have special psychic powers, a hedge strategy will do no better than evens over time. You then need to look at black swan events and consider which is most likely – a long-term grounding of your fleet or an astonishing spike in the oil price. One of those loses you €1.7bn, one might make you €1.7bn. The problem is that – as you don’t have the €1.7bn in scenario 1 to cover the cost, as your fleet is grounded – it should be seen as too risky.

      • Sean says:
        26 Feb26 February 13:32

        Amazing tunnel vision there, what about the xx,000 staff that you cant afford or the lease payments on your planes that you also can’t afford in that situation. Can’t afford that either so don’t have an airline.

        • Will says:
          26 Feb26 February 13:46

          I’m not sure but I think Rob might have been hinting at perhaps hedging to limit loss. So hedge a % of fuel, a % at which you can afford the loss in both worst case scenarios.

          A grounding of fleet is particularly catastrophic as there are no new bookings coming in, at least a spike in oil would still see new bookings at the rate of the day is revenue continues to flow.

          I do somewhat agree though that a spike in oil prices would have been considered more likely than 1+ year grounding of 80% of operations.

      • ken says:
        26 Feb26 February 14:12

        Its hardly a secret that airlines hedge – its disclosed every time accounts are published.
        I’m agnostic about whether any company should hedge and how predictable income and expenditure ever really is in extreme circumstances.
        It’s also a low cost, simple to understand product, not some bobby dazzler dreamt up by Goldman Sachs.

        I’ve never seen investors pressing european airlines not to hedge (although I know Terry Smith wouldn’t consider hedging his investment trusts) – in fact, they want predictable profits and dividends – which hedging normally helps to provide.

        I’m not suggest hedging is the best strategy (and you will only ever come out slightly less than evens in long run) and the stronger the airline, the less it should hedge in my view, and I’m fully aware that by hedging, all the CFO’s are taking the easy option and following the herd.

        You just know the next time (and there will be), un-hedged airlines will yet a mauling as the oil price spikes – and no doubt it will be a massive screw up then.

        • chabuddy geezy says:
          26 Feb26 February 16:01

          In which other industry could you lose 1.7bn and no one gets fired? Unless this is another one they pin on Alex Cruz. There were plenty of early warning signs about poor hedging strategies if management cared to look. Cathay pre covid as an example.

        • Bagoly says:
          26 Feb26 February 19:05

          I expect that in future they will buy call options instead.
          That will protect them from high oil prices without the risk of collapse in price at the same time as having no use for the product.
          But the expected effect will be somewhat worse – there will be more taken out by the banks.

        • Matarredonda says:
          28 Feb28 February 10:09

          Interesting thoughts as one of the reasons Norwegian got into trouble was they didn’t hedge in the years before the pandemic struck was because of the costs involved and thus got caught out when prices of oil spiked.

      • J says:
        26 Feb26 February 16:40

        @Rob – That all depends on what you consider the equivalent unlikely extreme of an oil price spike. Presumably a hundred fold increase without hedging would’ve been fairly crippling. And going back a couple of years I doubt too many of us would have bet on global grounding of most transport as more likely that worldwide issues in oil supply (eg. from targeted attacks or war).

        • Rob says:
          26 Feb26 February 17:51

          Bottom line – don’t make a bet if you can’t afford to pay up if you lose

          • Sean says:
            26 Feb26 February 17:57

            But they have afforded it – they have BILLIONS in the bank as you point out.

          • Rob says:
            26 Feb26 February 19:31

            …. but the company has had to do a lot of stuff it probably didn’t want to do in order to get that cash, including aircraft sale and leasebacks, selling £750m of dirt cheap Avios to Amex and taking Government-backed loans which restrict its ability to fire people (Iberia) or pay dividends (BA).

            It would be interesting to know which investment bank pocketed the €1.7 billion. On the upside, some of the bonus payments should flow back in BA F tickets.

          • Bagoly says:
            26 Feb26 February 19:01

            The economic effect is the same as if they had bought a fixed volume at a fixed price. Then if some black swan event means that you have no use for the product, and nobody else does either, you have to sell what you said you would take at a now lower price.
            There were many, many businesses in that position (restaurants with food, tour operators with hotel rooms, advertising agencies with billboard space) but it would be very harsh to call that a cock-up.

            A derivative is a bet if you don’t have the relevant risk, but airlines very definitely do have the risk of jet fuel prices going up.

          • Rob says:
            26 Feb26 February 19:27

            Few of those case are equivalent. A restaurant does not buy a year’s food in advance, or contract to do so. A tour operator will contract for hotel rooms but when the hotel is closed the contract breaks – and the contract probably has some get-out clause in it anyway, allowing the tour operator to break in case of terrorist attack etc.

            The HfP office was on a 30-day rolling contract when covid struck, and we had turned down various offers over the years to lock in for 12 months for a modest discount. We also put our part-time staff on agency contracts and not permanent ones. There is literally no HfP contract in place which we cannot break at 30-60 days notice. We practice what we preach.

          • J says:
            26 Feb26 February 19:50

            @Rob – Most restaurants can change their menus if needed (airlines can’t change their fuel), but I assume super large restaurants would hedge some of their essential food. Would be surprising if McDonalds didn’t have some system in place for it’s beef/potatoes. Starbucks hedge their coffee.

          • Track says:
            27 Feb27 February 07:10

            ” a fixed volume at a fixed price.”

            Then enter a physical market and get prepared to store it — oil tankers offshore + some real options (non-financial) with refineries for their capacity.

      • Will says:
        26 Feb26 February 19:24

        A catastrophic rise in prices could also be mitigated to an extent by cancelling flights (14+ days in advance) so to an extent a surge in oil prices wouldn’t necessarily result in massive losses if not hedged.

        Wouldn’t be a good PR episode but still if it was that or go bankrupt, better to cancel and survive.

        • J says:
          26 Feb26 February 19:42

          @Will. And the question is, would that compensation, PR damage cost more or less than 1.7 billion Euros. Assuming all rival airlines had hedged, it wouldn’t be nothing. At least here they are all (I think?) in the same boat.

          • Will says:
            26 Feb26 February 22:49

            There would, I think, be no compensation for flights cancelled more than 14 days out.

            So I’m the extreme liability would be limited to 14 days of flights.

            The PR of course wouldn’t look good, but it would be an extreme event to trigger it.

            I’m not particularly advocating it, but it’s an interesting alternative.

            No hedge would be extremely vulnerable to a persistent gradual increase in oil prices, perhaps the type we might see if covid recedes and the world puts more demand in supplies.

          • Track says:
            27 Feb27 February 07:25

            Only the under-loaded flights can be cancelled (under this ‘natural hedging’ approach).

            Profitable flights / with cargo can still be run in case of fuel shock.

            Actually, fuel shortage can be used as exceptional circumstances — not worse an excuse than any other rubbish we are given. Don’t see any PR problem, yes the BBC can run a line “50 flights cancelled at Heathrow”, we barely notice such news.

            Within the US, domestically airlines cancel flights all the time — it is norm, not irregular operation to them. But then the agents on boarding gates have wide powers to re-route you across the entire network, or authorise hotel voucher right there and then.

      • Track says:
        27 Feb27 February 07:12

        @Rob, financial textbooks and newspaper narratives portray futures markets as a farmer entering a contract to sell the produce ahead of time.

        Nothing can be farther from truth, farmers don’t have spare capital and capacity to manage futures.

        In real life, a farmer sells to whoever brings a track to their door — at the mercy of logistics, timing and trading houses local and global.

        • kitten says:
          28 Feb28 February 16:40

          My family’s crops are sold ahead including an insurance for crop failure.

          I gather this model has been in use for quite a few years now. So real hedging/options trading is going on at the production end in agri too.

      • Track says:
        27 Feb27 February 07:16

        A global airline, on the other hand is in a better position than a farmer.

        For example, it can seek to deal with more suitable and natural counterparties than commodity traders and divisions of banks. An airline can seek real options with refiners and store oil.

        Even with solely financial contracts, It can reduce the overhead by going direct to the hedging programs such as one of Pemex.

    • Mouse says:
      27 Feb27 February 05:41

      BA needs to follow the same strategy as its main competitors on hedging, otherwise it is perpetually in a position where it makes significant losses in the event of an oil price increase because its competitors are hedged and don’t need to put prices up to compensate. That is the scenario management needs to plan for, not a global pandemic that crushes demand, which is essentially a potential extinction event, whatever the oil price. No company’s management plans for such scenarios.

  • Gavin says:
    26 Feb26 February 15:17

    Is this the first time IAG have confirmed the Barclays Premier/Avios tie-up? (In the deck)

    • Rhys says:
      26 Feb26 February 15:28

      I seem to remember it being mentioned previously, but I could be wrong. There was also a brief trial in 2019, so it was never really in any doubt.

    • Rob says:
      26 Feb26 February 17:08

      No, it was announced literally a year ago – it was just very slow to get going.

  • Lord Doncaster says:
    26 Feb26 February 16:24

    Fuel hedging…another cock up strategy.

    • insider says:
      26 Feb26 February 19:37

      A bit of a vicious circle maybe, but you have to follow what your competitors are doing if you want to align pricing with costs, and the European big carriers hedge a lot. It’s also true that they are probably so scared of not hitting their targets that they want to lock in as much cost as possible up front which led to this situation

  • Lady London says:
    28 Feb28 February 08:40

    “Investors are clearly nervous of another ICO fine”

    I don’t think BA has had any ICO fine yet. It was reduced to $20 million. Against BA’s scale of operations and the serious level of negligence $20 million is no fine at all.

    • Rob says:
      28 Feb28 February 10:14

      I don’t think a 2nd fine would get reduced from $183m to $20m as a ‘favour’ due to BA’s bad financial position, as this one was.

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