Earnings Transcript for ICAGY - Q3 Fiscal Year 2024

Luis Gallego: Good morning, everyone and welcome to the IAG Third Quarter Results. Today I have with me Nicholas Cadbury, our CFO, as well as members of the IAG Management Committee. First of all, I would like to extend my deepest sympathies to the families affected by the impact of the catastrophic rainfall and flood in Spain. Our Spanish airlines are supporting the relief efforts and our thoughts are with those impacted during this difficult time. In summary, this has been a very successful quarter financially, as we continue to execute our strategy. We have increased revenue by 7.9%. Our operating profit has increased by 15.4%, which is an increase of €268 million to just over €2 billion. And we have increased operating margin by 1.4 percentage points to 21.6%. This means that for the nine months to 30th of September, our operating profit is €3.3 billion and the operating margin is 13.8%. This emphasized the strong margins already been achieved individually by our airlines, as well at a group level and we are on track to deliver on our world-class margins target. Demand for travel remains strong, particularly in our core markets of North America, Latin America and intra-Europe, which has supported a passenger unit revenue increase of 1.2%. We continue to invest for our customers and in particular to improve our operational resilience. We are making progress. Iberia from time performance remains very high and BA has improved meaningfully compared to last year. Our increasing profitability is delivering the significant free cash flow generation that we have previously signed -- signaled and our balance sheet is increasingly strong. So, I am very pleased to say that this means that we are now announcing a share buyback of €350 million. This reflects our commitment to delivering sustainable shareholder returns on top of the interim dividend that we announced at the half year results, with opportunity for further returns in future. This is a measure of our confidence in our strategy and business model, as well as in the execution of our transformation program. And looking forward, we expect our strong finance performance to continue for the rest of the year. I will now pass you over to Nicholas.

Nicholas Cadbury: Thank you, Luis and good morning everyone. I'm pleased to share with you our financial results for the third quarter. This slide demonstrates how we have once again delivered a very strong financial performance, increasing our operating profit by €268 million compared to last year to just over €2 billion. This performance was delivered on the back of strong passenger revenue growth and good revenue growth in cargo and loyalty. On the right, you can see that the transformation of British Airways was the largest contributor to this growth. This slide demonstrates that we have achieved a robust performance across all of our key performance indicators during the third quarter. Our ASKs increased by 5.7%, which is slightly below our initial guidance of 7% due to a high level of disruption than anticipated. Our passenger unit revenue grew by 1.2% against a very strong comparator last year, mainly driven with our load factor reaching nearly 90%, up one percentage point. Looking at our costs, nonfuel costs increased by 2.2% with the impact of previous waste settlements and supply, cost inflation partially offset by our transformation initiatives, but on guidance. Our fuel unit costs improved 4.2% benefiting from the drop in the commodity price and also the introduction of our new more efficient aircraft. These together resulted in our total CASK increasing by only 0.3%. Together with our strong revenue performance, these delivered world-class margins of 21.6%, an increase of 1.4 percentage points. This performance led to a further strengthening of our balance sheet and the net debt-to-EBITDA leverage ratio improved to one time down 0.7 times from year-end. This really illustrates the resilience of our group and the efficiency of our strategy in a competitive and challenging market. Now, let's look at our performance of our operating companies in more detail. The third quarter presented a number of challenges for Aer Lingus with industrial action during the summer period particularly in July and continued competitive pressure from the US carriers. Consequently Aer Lingus' operating profit declined by €57 million to €140 million. An agreement was reached with the pilots at the end of July and as the quarter progressed, we saw a recovery in demand enabling Aer Lingus to still deliver a very good operating margin of 18.6%. British Airways saw the most significant year-on-year improvement among our airlines with an increase in operating profit of £251 million and its operating margin increasing by over five percentage points to 20.7%. This robust performance was driven by good unit revenue and capacity growth especially in the North America and European markets and a reduction in non-fuel unit costs. Iberia continues to build on its record performance from last year with an operating profit of €454 million and a margin of 21.5%, driven by the strong performance in its core European and Latin American markets with overall capacity growth of over 12%. Vueling's network strategy continues to deliver positive results with the company's operating profit, reaching €252 million and the margin, the highest amongst our airlines reaching 27%, an impressive improvement of 0.8 percentage points. Finally, our Loyalty business has performed very well this summer with a continue -- with an operating profit of £125 million and a 10% increase year-on-year. The third quarter saw a strong revenue performance against a strong prior year, reflecting the strength of our core markets and market positions and our customer proposition. We were particularly pleased with the performance across the North Atlantic, the group's largest market. Our unit revenue improved 3.5% on top of a 4% increase in capacity. British Airways performed particularly well with its premium cabins and in both its US and UK point of sale where Aer Lingus saw a negative impact from the pilot strike and US competition but improved as we went through the quarter. Europe was again one of the best performing markets. Unit revenue was up 1.4% and capacity up 5%. All our airlines demonstrated strong performance, leveraging our leading position in our key European hubs, as well as the attractive proposition of our low-cost airlines. Latin America and the Caribbean was again a standout performance with capacity up 11% and despite the significant increase, unit revenue only decreased by 2.8%. In Africa, the Middle East and South Asia, we limited our capacity growth to only 1% due to the geopolitical issues. The Asia Pacific market were the largest capacity increase by 18% as we restored some of the pre-COVID routes, but still represents our smallest market, accounting for only 4% of our ASKs. China is still seeing soft demand and there continues to be a cost advantage for local Chinese carriers. In both AMESA and Asia Pacific, we continue to adjust our schedule to reduce our exposure to the weaker performing rates and allows us to focus on the stronger Atlantic markets and build more operational resilience. This slide shows our results for nine months to September down to net profit levels. We have delivered €3.3 billion of operating profit after exceptional items, up €300 million year-on-year and €2.3 billion of profit after tax. I'd also just point out the reduction in our net finance costs, which declined by €204 million in the first nine months of the year due to the lower gross debt. Turning to our balance sheet performance. Our financial position continues to strengthen with a reduction in both net debt and leverage. Our net debt decreased by €3 billion versus December 2023 to just over €6 billion due to the strong cash flow from profits. And our leverage as I've said earlier improved to one times well-below our target of below 1.8 through the cycle. Our total liquidity increased by €1.7 billion to just over €13 billion again due to increase in our cash. This delivery and confidence in our business model and strategy led to the €147 million, interim dividend announced in August that we paid in September. Our CapEx plans for the year have declined slightly to €3.1 billion due to the phasing of some investments. But despite this, we continue to expect to take delivery of 20 aircraft in the year with four expected to come in the fourth quarter. We anticipate that our net debt leverage will have a modest increase by the end of the year in line with the typical seasonal unwind of forward bookings. And finally, for me, the strengthened financial position has allowed us to invest in our business with confidence and fulfill our commitments to shareholder returns. We had already committed to a sustainable dividend. And as Louis mentioned earlier, we will start returning a further €350 million to our shareholders through a share buyback that will run through to the year-end results presentation. As we continue to execute on our strategy, delivering stronger margins and stronger free cash flow, you can see from our capital allocation framework that we will have the opportunity to return more to shareholders in the future. I'll now hand you back to Louis.

Luis Gallego: Thank you, Nicolas. I will now spend a couple of minutes highlighting some of the initiatives that we are implementing around the group. In terms of our network strategy, we continue to focus on our core markets and hubs. Aer Lingus has returned to flying to Minneapolis and will use its 321 extra range to go to Nashville and Indianapolis. Iberia will fly their new XLR to Boston and Washington as well as continue to add frequencies to Latin America. British Airways continues to add a range of additional frequencies for the US. And Vueling is increasing its presence at its Barcelona hub and in the Spanish market. Each airline is also investing in its customer propositions and brands. Aer Lingus, BA and Iberia are all refreshing their onboard offering as well as their airport lounges. Vueling is increasingly developing the digital tools its customers can use to manage their journeys. We are also very focused on delivering better on-time performance in the context of an operating environment where disruption factors are largely outside our control and which are affecting all airlines. In particular, BA has now taken steps to add resilience to its winter schedule as well as for next summer, addressing not only the poor performance of its Rolls-Royce train engines, but also the significant effect of air traffic restrictions at Heathrow and across Europe over the summer. A stronger, resilient operations for all of our airlines will deliver a better customer experience and more efficient growth over the longer term. This is also where our investment in digital technology plays a major part. For example, as our airlines introduce self-service capability for customers to manage their own journeys. Finally, our loyalty business is doing well. Aer Lingus is our third airline to offer Avios-only flights. They launched Avios Wallet as we bring our separate airlines more closely into the loyalty ecosystem. And Royal Caribbean Cruises were added as a third-party partner. Moving on to our outlook. I continue to feel very positive about the business. Our planned capacity growth for the final quarter is around 5%, which means that for the full year, it will be around 6%. This mainly reflects the impact of the schedule adjustment that I have just mentioned. We, therefore, expect nonfuel unit cost to be up around 2% on a full year basis. Our expected total fuel cost for the year is now around €7.7 billion as the price of oil has come down through the year. And we expect this strong financial performance to continue for the rest of the year. So in summary, the execution of our strategy is delivering good results, but there is more to come. We expect a strong sustainable long-term demand for travel, particularly in our core markets. We are making good progress towards our world-class margins and return targets as we execute our transformation program, and we are generating significant free cash flow as a result. With an increasingly strong balance sheet and disciplined investment, we can now focus on rewarding our shareholders. First, with the reinstatement of the dividend in August and now the announcement of the share buyback with the opportunity for more in future. And on that note, I will open the call to questions.

Operator: Thank you. [Operator Instructions] We will now take the first question from the line of Alex Irving from Bernstein. Please go ahead.

Alex Irving: Hi, good morning. Two from me please. First is on aircraft and engine reliability. What sort of cancellation risks do you currently experience notably the 787s with the Trent 1000 and also the A380 sub-fleets? And what action is being taken to alleviate this? Second is on IT. You're a few months on to the announcement of adopting Nevio at British Airways. How are your expectations evolving for what this can do for unit revenues and what you've seen so far? Could you achieve a similar uplift at Iberia or Aer Lingus? Thank you.

Luis Gallego: Okay, good morning. So, the first question we are having a brand issues like everybody is having. So you know that we have reduced the program because we don't have enough engines. We are improving the technical dispatch reliability of for example the three IPs that is helping. We have a program in place to improve that. So, in general, we are happy with the performance of the other lead but it's true that we have an issue with 787, but we are trying to solve. Maybe Sean you can expand on that.

Sean Liam: Yes, I think we saw the 787 issue begin to scale in terms of impact as we got towards the end of the summer. We took an intervention in mid-September to take lines of flying out for the winter. I think that worked and our completion factor has improved materially since we made that engine. On the A380, as well, we've seen a big improvement in CDR. And again the completion factor is a lot better in the second half of the year than it was in the first. And we're working closely with Airbus on improvement packs that we're rolling out across the fleet. So, in essence, we're still working through the 787s for next summer. But our focus will be on making sure that the operation is resilient and building the progress we've made in the last six weeks.

Luis Gallego: [indiscernible]

Sean Liam: Yes. Nevio is -- we're at the -- in beta testing across a number of routes and we're very encouraged by the trends we're seeing in terms of our new booking platform the month we will see more releases. But we're very excited by both the customer experience and new opportunities that present. But that said it is covering maybe about 20% of our dot-com bookings in a minute. So, it's early stages.

Alex Irving: Thanks for the color.

Operator: Thank you. Sorry, is the question finished? We will now take the next question from the line of Stephen Furlong from Davy. Please go ahead.

Stephen Furlong: Morning. Okay two questions. I mean there are about more capital allocation. So, maybe on the buyback can you just talk to me where you came up with the €350 million number? Maybe it's kind of a rolling. I know it's smaller than what was there pre-COVID in terms of buybacks. Then again you may be thinking about things like inorganic stuff like happens so we just talk about that. And the second thing is on CapEx. I hope it was it's going to be €3.1 billion this year. And obviously there's kind of supply chain delivery issues across the industry. In your CMD, you talked about an annual average of €4.5 billion in CapEx to 2024 to 2026. So, can you just update us your thought process on CapEx? Thank you.

Nicholas Cadbury: Yes. So, just in terms of the capital allocation. We laid out at the Capital Market Day in a clear framework we want to improve the balance sheet, which we think we're in a very good position. Secondly, we invest in our fleet, which we're doing. We'd like to be doing it quicker than we are but there's not a lot we can do about it. The third thing was then to get back to paying a dividend which we started in August. And the last thing was then to distribute any additional cash which we started share buyback program. So, I think if you look at kind of consensus, I think many people were expecting to do a share buyback in this quarter. So, hopefully, we're kind of accelerating ahead of our people's kind of expectations overall. I think when you just think about the quantum in particular, kind of, a few things that kind of cross our mind when we think about it. First of all, it's just the liquidity in our stock overall. And we're talking about buying this back over -- before our year-end. So, kind of end of February over a three-month period. So €350 million is kind of a reasonable percentage of our free stock overall. So that was why, it was partly set at that level overall. And secondly, if you look at the kind of dividend assuming that keeps rolling on and where we are that is around about a kind of 5.5% to 6% yield, which puts us well in the kind of top half of the kind of FTSE overall. So we thought that was a good – hopefully, good reward given where we are with our performance as well. When it comes to year-end, of course, we'll review again to see where we are. But you can see we're generating significant cash flow and our balance sheet is in a good position. Yes. Sorry just in terms of the capital, overall. Yes, we said at the half year, we bought that kind of €4.3 billion down. We removed remember the €4.5 billion also includes ETFs, which is about €200 million to €300 million, per year as well. So we took that out as well. So that's not in our capital numbers. I mean, we've given -- we kind of gave guidance for kind of the next few years of around about €4 billion. We're not giving guidance for 2025. I'm sure, I'll get lots of questions on it, but we're not giving guidance at this moment. So our guidance is still the same. But what you can see is, you can see the programs -- the delivery programs of delivery and particularly some of the refurbishments are slipping slightly to the right just the supply chain issues that we've got.

Operator: Thank you. We will now take the next question from the line of Jaime Rowbotham from Deutsche Bank. Please go ahead.

Q – Jaime Rowbotham: Good morning, Luid and Nicholas and congrats on the strong set of numbers. So two from me. First, can you talk about how you see the competitive capacity outlook for 2025, please? From the scheduling data I see, it looks like some of your long-haul competitors are actually retrenching a bit, which can only be a good thing I would have thought. So, any comments there? And then secondly, Nicholas, any particular cost headwinds you think we should be aware of heading into 2025? Or can we think about a similar state of play when it comes to the nonfuel unit costs? Thank you very much.

Luis Gallego: Good morning. Talking about capacity, the overall capacity in the Europe, North Atlantic has reduced slightly in the Q3 and Q4. In particular, the London North Atlantic capacity, appears to be lagging behind the Europe, North Atlantic market. So that's what we see for the next quarter. It's true that we see some traffic that is moving from the north of Europe to the south of Europe then we see an opportunity for Madrid. And I think now with the arrival of the 321 extra long-range is going to be an opportunity for us. If we look at the Europe lager market, is a market that is going to be totally recover and over 2019 from the last quarter of 2024. Madrid again, experience and understanding demand growth. So, we see a strong premium lesser demand there and Iberia is taking that opportunity.

Nicholas Cadbury: Just on the cost kind of headwinds, overall. I mean, we'll see where fuel gets to. But on the nonfuel CASK overall, it's a similar sort of direction overall. We're not going to give specific guidance for 2025, but you're seeing to kind of seeing the employment inflation and inflation in are kind of supplier base is probably in the same sort of direction as well. And of course, we're continuing to invest in our business. So I think consensus on fuel CASK is probably around to just a little bit over 2% next year, up and that's pretty reasonable and similar direction to this year.

Q – Jaime Rowbotham: Thank you very much.

Operator: Thank you. We will now take the next question from the line of Savi Syth from Raymond James. Please go ahead. Savi Syth from Raymond James, is your line on mute?

Q – Savi Syth: Yes. Thank you. Sorry. Good morning, everyone. I was just wondering for my first question, if you could talk a little bit about what you're seeing on the corporate demand side. It seems like there's a bit of an acceleration here in the US and I’m wondering if you're seeing it in Europe as well. And then just for my second question, I was wondering, if you could -- if you've quantified the impact of the Aer Lingus issues during the quarter and just take on the Dublin Airport issues and how that might impact your view on 2025 plan for Aer Lingus?

Luis Gallego: Okay. Good morning. So the first question business travel continues to recover. It's true that a different rate in our different airlines and regions. In the case of BA volumes when we see business agencies travel management companies around 65%, the level that we have in 2019, with revenues around 80%. This is different when we look at -- in our algorithm that we look at the people that they travel for business reasons that the volumes are over 70% and the revenue is around 90%. Iberia they have reduced slightly the volume that they have previously but it's true that the third quarter is not the most important when you look at corporate travel. So they were around 83% in volume and around 105% in revenues in comparison with 2019 levels. And in Aer Lingus the volumes were close to 95% on revenue around 90%. North America is working very well when we see the recovery of business demand. Also, Europe. So I think we are positive with the recovery, but it's going to take more time to arrive to 85% of volume that we said previously.

Nicholas Cadbury: Just Aer Lingus. So just in terms of Aer Lingus I mean it was in the press just after the strike of the disruption cost is around about €55 million overall. And since the strike we've seen a kind of recovery in demand and glad we've reached a good settlement with the pilots at the moment.

Lynne Embleton: Should I comment on top of that? And also just a comment on the -- on some of there were two factors in the performance. The industrial action which Nicholas said €55 million of direct impact and then some impact on the forward booking over that introduction period. But we also had such a glut of capacity -- competitive capacity came in to Dublin 20% growth in one go. That just takes a little bit of time for the supply demand to settle into and we feel the effects of that this summer. Going on to the passenger cap. So we had -- the high cost during the week would stay on the imposition of the passenger cap for next summer. And we're very -- we think that's the right decision. In our view the passenger cap conflicts with the European slot flights and historic slot flights. So we were very pleased that that stay was granted. Importantly, it means, we don't have to reduce our network by 5% next year which was what we were facing until Monday. Now, it's very late -- planning process. There's still uncertainty around long-term growth at Dublin. But we're really pleased that that reduction has been lifted. And we're now albeit late in the planning process just looking to see, if there's any small tweaks we can make to the network for next year around the margins to improve the schedule.

Savi Syth: Lynne, is there any risk that it's been state that it might be reversed? Or is it pretty clear now that the caps aren't going to be in place for the summer?

Lynne Embleton: So we have another legal step at the beginning of December. I think now, we are solid in the planning process. I don't think -- I'm not expecting any new news for how we approach summer 2025. I think most of the debate now is on the time horizon beyond that.

Savi Syth: Appreciate it. Thank you.

Operator: Thank you. We will now take the next question from the line of Ruairi Cullinane from RBC Capital Markets. Please go ahead.

Ruairi Cullinane: Yes. Good morning. Perhaps just a question on the US Presidential election. Have you seen any impact on transatlantic demand in Q4? And what do you see as sort of long-term risks? Or perhaps could you?

Nicholas Cadbury: You're breaking up Rory. I don't if you can speak up a bit.

Ruairi Cullinane: Is that better?

Nicholas Cadbury: Better. We got the first question about Trump.

Ruairi Cullinane: Yes. Just any impacts in Q4 and any, sort of, risks beyond -- yes quite an open-ended question, but I'd be interested to hear your thoughts. Thank you.

Luis Gallego: I think it's too soon to see any impact. It's true that it's possible that we have oil price down that can help. It's possible that we are going to have a stronger dollar. That is something that can have an impact also. We are going to see the impact in the demand. But we are -- now but maybe we are -- it can be positive for travel by US consumer and even businesses. And also we need to see if this has an impact in the Ukraine situation and the restoration of the Russian airspace. So all are the things that we are considering but it's too soon to say anything.

Operator: Thank you. We will now take the next question from the line of Harry Gowers from JPMorgan. Please go ahead.

Harry Gowers: Hi. Good morning. I've got a couple of questions if I can. The first one is on disruption. I mean clearly it's quite a difficult operating environment for all the airlines in Europe. So I was wondering if you would be able to -- if you could quantify the overall disruption impact for the group in Q3 maybe a bit EBIT level given there's probably some impact on revenue and on the cost line as well? The second one is some of your peers have spoken about the pricing or bookings outlook getting sequentially better actually year-over-year -- inter-winter clearly after a more difficult summer on yields than you've had. So maybe if you could give any comments just how you see the level of demand into winter or anything you can call out on Q4 in terms of bookings or pricing? And then the last one, should we think about one times net debt to EBITDA as maybe the floor that you'll try and stay at? And then is that a level consistently and return any excess cash to shareholders beyond that in terms of a buyback? Thanks a lot.

Nicholas Cadbury: So just in terms of disruption costs, Harry, we're not going to give specific line by line on our cost overall. It was slightly better than last year. Overall, the disruption cost is still higher than we'd like it. So hopefully it's a benefit over the longer term, but we're not going to give much more in terms of that as well. Just in terms of the kind of floor for our net debt, we're not going to right now talk about where we are in terms of the kind of that framework. I think we're going to -- we're pleased that we've started with the dividend. We're pleased that we've got on with the share buyback overall. And we've always said externally -- we want to keep our leverage below 1.8. We always want some good headroom in that get rid of volatile sector. But we take a kind of view looking forward what -- going to be pace going, what the economy is going to be and also what kind of capital requirements and kind of we also keep an eye on what kind of M&A are in the future. So it's a multifaceted view about how we look at this as well.

Luis Gallego: About the future we said before that we expect the capacity to grow in 2024 by 6%. We have adjusted the capacity as we said before the same position that we have for the last quarter and for the first quarter is in line with what we have in our forecast. North Atlantic continues very strong. Europe also strong. Asia Pacific is the area where we see more weakness. Also we commented before about the recovery in corporate traffic. So we expect that it's going to continue. Lesser traffic although it's performing well in the different regions where we operate so we don't see any weakness.

Harry Gowers: Great. Thanks, guys.

Luis Gallego: Thanks, Harry.

Operator: Thank you. We will now take the next question from the line of Conor Dwyer from Morgan Stanley. Please go ahead.

Conor Dwyer: Perfect. Thanks very much. First question is on BA. So the unit cost development in the quarter was quite good down 3.9%. Just wondering what the driver of that was? And then the second question is really BA as well but more kind of medium term €250 million up year-over-year for EBIT. That's a sizable chunk of recovering some of the pre-COVID level of profitability. Just wondering from Sean what is the next step in the recovery of profitability there? Is it revenue opportunities? Is it further improvement in unit cost efficiency? A little bit of both? Any steer on that would be super helpful. Thank you.

Nicholas Cadbury: Just short answer to that just in terms of the cost yes there was good performance of costs in the quarter. I think if you get always ups and downs through the quarter. So I think we kind of – if you look at the kind of year-to-date position for British Airways, non-fuel CASK is about 1% better overall. So I think if you're going to look over the year that's kind of more a better kind of steer for where our overall good performance overall, particularly in supplier costs.

Sean Doyle: Yes. I think just a bit on that. I think there's a couple of things at play. I think we did have an improvement on disruption costs albeit as we said earlier, there's still work to do there to reduce that which will be a focus for next year. If I look generally at other things, which are happening in the business I think we're beginning to build out the long-haul program and recover the situation, the position we had pre-2019. And I think that is a lever for better productivity, better utilization and improved profitability as well. So I think as we begin to take delivery of more long-haul claims in the medium-term that's the lever for I think optimization and profit opportunity. I think if we look as well then at the other transformation initiatives that we have ongoing I think making sure that we maintain a competitive cost base is always going to be a huge focus. We have a lot of activity going on there but also making sure that we optimize I think the new platforms we're investing in. So you heard about the new kind of Navio digital platform. But I think we hope to see significant benefits next year as we roll that out both in terms of customer experience and being able to offer more dynamic pricing and consumer packages to our customer base. We're also investing a lot in technology to improve our operational agility. So we have a lot of initiatives going on there. And we're investing a lot in improving our data structure so that we can begin to optimize artificial intelligence. So I think there is optimization opportunity across the current business. And I think there's also profit growth opportunities as we begin to rebuild the long-haul network in the years ahead.

Conor Dwyer: Perfect. Thanks very much, guys.

Nicholas Cadbury: Thanks, Conor.

Operator: Thank you. We will now take the next question from the line of Andrew Lobbenberg from Barclays. Please go ahead.

Andrew Lobbenberg: Good morning, guys. Congratulations, good results. Sean was just speaking about the importance of long-haul aircraft growth. How are you thinking about that, given the challenges with the new 78 deliveries with the great uncertainty around the 777-9. So yes I mean are you thinking of contingency plans to get more long-haul – or long-haul aircraft from elsewhere to continue that push for BA? And then the second question might come back to Air Europa. And whilst obviously you were competing, when the deal was not completed, now you're properly going your own way. So how is the competitive environment? How is the planning – the capacity plan how are they impacting the Latin American market? And how do you think about your sort of left there is a holding in that business?

Luis Gallego: Okay. So talking about the fleet, this year we expected 20 new aircraft. We are going to receive 19. We have built our schedule also with some buffer understanding the difficulties that the manufacturers they have. We have received the first external range on the 30th of October and we expect to have the other two that we are going to receive this year for Aer Lingus before the end of the year. It's true that the 777x program is going to be delayed. And now we expect to have the first delivery for us by 2027. That's a delay in the program of around five years. And as you said, we are reducing the capacity because of the programs with the trend engines. But for the time being the capacity that we have in plan in our program we can deliver that we are looking also at all the possibilities to have some aircraft from the market and some wet leases and maybe Sean you can expand on.

Sean Doyle: Yes. I think one thing to note we took aircraft this year into service mainly in the form of 787. So we'll have the full year effect of flying them next year albeit offset by the impact of the Rolls-Royce trends but we would see growth year-on-year next year. And I think then we have more deliveries, which are scheduled in 2026, which are 787-10s, which we're again just working through exactly when they will arrive. But I think we have been relatively conservative in our delivery assumptions in our plans. But as Luis said, we're keeping an eye on the situation closely and for interim lift -- solutions available in the market, we're evaluating those as well.

Unidentified Company Representative: We're extending the 777.

Sean Doyle: We have some green time as well on our existing fleet that we can utilize into 2026 to 2028 window.

Luis Gallego: Okay. And on Air Europa, we were competing with Air Europa before and we continue competing. So nothing has changed. We have 20% of the company. And you know that the origin of that is we wanted to buy the company. But it's a financial investment and it's a good investment for us. And what we are considering now is what to do with that investment. But for the time being, we don't have any reason to sell, because we consider that it's going to have more value in the future.

Operator: Thank you. We will now take the next question from the line of Patrick Creuset from Goldman Sachs. Please go ahead.

Patrick Creuset: Hi, Luis, Nicholas and team. First of all congrats on the strong print. And the first is just on your outlook. I mean you're saying that you expect a strong trading environment to continue into year-end. What reference point for a strong fourth quarter? Would it be 4Q 2019, 4Q 2018, kind of pre-COVID year-end considering that you've been running well ahead of pre-COVID profitability recently? So that's the first.

Nicholas Cadbury: Yes. I think it's probably more towards Q4 2019 than Q4 last year probably.

Patrick Creuset: Okay. And then second question, just coming back to your buyback. I think you've -- if I recall correctly, you've previously said, anything below 1.5 leverage was basically excess. If we now apply that rough numbers, I mean that implies something like €3 billion sort of excess cash with probably a lot more cash flow coming in over the next year. How should we think about the buyback timing and scale of possible future tranches of buyback over the next year?

Nicholas Cadbury: Yes, you're right, Patrick. I mean we're very pleased with our cash generation and this gives us lots of really good options. As we said earlier, we'd like to -- we wish we could spend more on capital and do it faster at the moment but that's not the case. So we need to make sure that we're not spending the capital now. It is stacking up on the right-hand side of the bar chart. So we do need to make sure that we've got some good headroom for that when that does come overall. And you're right we wanted to keep some headroom to the 1.8. We talked about kind of less than 1.5, is a good place to start reviewing those kind of returns. But we'll give you more detail on that when we review it again at year-end overall. But I think what you can see is actually just with our cash generation the balance sheet, you can see we've got lots of room for options once this buyback finishes.

Patrick Creuset: Thank you.

Operator: Thank you. We will now take the next question from the line of Gerald Khoo from Panmure Liberum. Please go ahead.

Gerald Khoo: Good morning, everyone. Two for me. Firstly, going back to the issue of the British Airways' long-haul fleets. I was just wondering whether you could quantify how far short you are versus pre-pandemic levels? And when do you expect to see full recovery on that front? I know obviously dependent on OEM deliveries. And secondly, I was wondering whether you could give some sort of indication of capacity growth plan for next year if not an actual number? Maybe is it going to be -- higher or lower than what you're playing for this year please?

Nicholas Cadbury: I start with the last question. And then just in terms of capacity growth, we're not giving specific guidance next year. I think the way -- I'll probably think about it. When we did the Capital Market Day, we said we're looking at kind of 4% to 5% growth over the three years and that includes this current year when we're growing at 6%. So that kind of -- into that 3% to 4% over the next couple of years and given the disruption and the kind of resiliency build into the model, it's probably towards the bottom end of that revenue overall.

Luis Gallego: Yes. On the first question, all airlines -- British Airways 2023 about 100% of their 2019 capacity. But we expect BA to end 2024 at 95% of 2019 levels. And the main reason as you know is that we'll retire all the 747 432 aircraft. So, they're going to end the year with around nine aircraft less than they had in 2019. So that's the main reason. They are not recovering the capacity.

Nicholas Cadbury : As part of the going-forward margin story there the profit recovery there we're going to go on -- get the capacity back and then more importantly it takes us a little bit longer we'll get the premium seats back as well.

Sean Doyle: Yes. And I think as well what we will see is a short haul for instance will be putting bigger gauge aircraft which is a very efficient way of actually growing ASKs and effect net in the year after. And then of course we will get recovered a long haul position in the medium term.

Luis Gallego: And at the same time what you see is that on the back of the strength of the Latin America market with a to grow and we're in fact at least year - so we were growing 15% over we already as a whole versus last year we are now 17% of the capacity ahead of 2019.

Operator: Thank you. We will now take the question from Jarrod Castle from UBS. Please go ahead.

Jarrod Castle: Good morning everyone and congrats on 3Q. I'd be interested now to get some updated thoughts on how you see the U.K. budget and impact on your business both in terms of the more affluent getting taxed and also obviously aviation taxes and linked to aviation taxes. It seems like a number of European countries see this as an easy win. And I guess there's also potential in Spain. So, just your feeling on how that's playing out. And then just the Loyalty margin it fell a little bit in 3Q. So, just a bit of color there. Is there some investment? Or what's going on there?

Nicholas Cadbury : Just to answer that last one first again. Just in terms of -- just in Q3 you've got -- the loyalty business now has holidays in it and Q3 is obviously a peak time for the holiday business and that's a lower margin. So, that's going to the margin overall. And the holiday business had a good Q3 as well. So, again the mix -- mini mix effect overall. Over just into Loyalty we have kind of said over the last couple of years is we are investing more to get more engagement with our customers for the longer-term as well. So, we did say there has been a little bit of margin -- to come in the actual Loyalty business. Just in terms of the U.K. budget the direct hit was mainly within national insurance overall which is probably somewhere between €25 million and €30 million overall direct hit overall. Do you want to talk about EPD?

Sean Doyle: Yes. I think we have seen rises in APD again. So, I think long-haul economy will go up by 12 short -- economy by 2. I think we just got to be careful that we already pay a huge amount of tax in APD. I think Britain is the most taxed country in terms of APD. And we got to make sure that -- we don't end up in a position which impacts the business. So, we'll make that message clearly to government. I think I'm positive there is consultations ongoing on aerospace before which will be very important for resilience. And also we welcome the extension of the fuel funding to help us in the path -- advanced fuels which will help us in the path to kind of building more SAF in the country. And we're also looking forward to closing out the consultation on the revenue certainty mechanic for a production in the U.K. So, I think some things -- we're encouraged by the things we just got to watch in terms of competitiveness.

Nicholas Cadbury : Yes. We also welcome -- they continue the kind of capital allowances and the tax as well which is given the amount capital we're spending over the next few years is a big benefit to us from a cash flow.

Jarrod Castle: And anything about aviation taxes across Europe?

Nicholas Cadbury : Aviation tax -- could you be a bit more specific?

Jarrod Castle: Well, I mean you obviously saw an increase in the U.K. Is it sounds like maybe you could see something in Spain just in terms of how you're thinking about network as these things come in.

Nicholas Cadbury : Well, I guess we're thinking about kind of how the kind of cost of sustainability and the kind of taxes on sustainability as well. But I think that's one of the reasons we're where we think we're in a good position relative to some of our other European competitors overall particularly with our focusing our long haul across the South and North Atlantic able.

Jarrod Castle : Okay. Thanks a lot.

Operator: Thank you. We will now take the next question from the line of Jiana Mistry from Jefferies. Please go ahead.

Jiana Mistry: Hi. It's Jiana Mistry from Jefferies. Two questions, if I may. First one, could you give any color on the impact of the SAF spending requirements on your fuel costs the next year?

Nicholas Cadbury: Could you repeat that again? Sorry just break up.

Jiana Mistry: Yes. Could you give any color on the impact of the SAF lending requirements on your fuel costs for next year? Any insight on what the pricing differential is versus jet fuel and any offset from carbon credits there? And then secondly, can you just give a bit more color on what you've seen in pricing trends by airlines in Q3? Thank you.

Nicholas Cadbury: Little break up again. I have break up again on that last question.

Jiana Mistry: My last question was on pricing trends by airline in Q3 any color there.

Nicholas Cadbury: Just in terms of -- we're not going to give any guidance for next year at this moment, Jiana, just overall. So you can see that the credits on SAF to start reducing right way through 2026. It will become an increasing cost for us. But I think our kind of strategy in terms of investing in SAF production, I think is kind of -- give us an advantage overall and our mix of flying as well across the Atlantic. In terms of pricing trends overall, I think the one thing I'd just pull out overall, is if you look at our kind of yield actually our yield is relatively flat overall. What we're doing is actually -- we're filling the planes better high yield. Our load factor was up 1%, overall a record level. And actually I think what the pleasing thing is we've seen actually the premium cabins load factors are almost the same as the economy sectors which kind of just shows the strength of our customer base.

Operator: Thank you. We will now take the next question from the line of Johannes Braun from Stifel. Please go ahead.

Johannes Braun: Yes. Good morning. Thanks for taking my question. First one would be on the supply demand dynamics in specific markets obviously very strong performance on the Transatlantic and BA. But fuel had flat unit revenues on flat capacities as far as I can see. Would I look a little bit more muted in terms of supply-demand dynamics? Any specific reason for this is it more the obviously competitive Italian market or is it more the Spanish home market? And then, secondly, I see cargo yields are down 11% in Q3, which seems to be a little bit in contrast to the airfreight industry in general. I think -- airport reported 5% cargo yield increase at the back of the Red Sea situation et cetera. So just wondering why you are reporting a lower cargo yield here? Thank you.

Luis Gallego: Okay. So I think about the Vueling and Iberia, you can expand on this, but I think that they have a very good performance in the quarter if you compare with competitors. And I think that is well in the three main regions where they operate. So Peninsula, Balearic and Canary Islands, there is a very good job. It's true that they have some headwinds in some international market. And Lynne, maybe you can expand on that

Lynne Embleton: Yeah. We had some headwinds. We have -- we had disruptions, but overall the flat result for RASK is not a bad thing. We had a marginal increase on load factor improvement in ancillary sales and a very strong domestic. And as we were seeing some challenges in other markets, but I would say a very good result and a strong disruption over the summer that has impacted both the planned capacity and also had an impact on revenues.

Nicholas Cadbury: That's correct. Just in terms of cargo actually we saw CTK so cargo tonnes were up about 16% for the three months overall. And our cargo revenue per CTK was actually flat overall. So I think you may be looking at the kind of nine months rather than three months was strong and strong unfortunately due to the kind of Red Sea and the kind of Middle East issues. So we're seeing kind of yields to kind of strengthen overall in the last quarter.

Johannes Braun: Okay. Thank you.

Nicholas Cadbury: Thank you.

Operator: Thank you. I would now like to turn the conference back to Luis Gallego, for closing remarks.

Luis Gallego: Okay. So thank you very much everybody. It's good to being here today and to announce very good results for the quarter. We continue working to improve the performance of the group. We'll see you for the full year results. Thank you very much.