FINANCIAL REVIEW FOR THE SIX MONTHS TO JUNE 30, 2023

Developments since the last report (May 5, 2023)

On June 30, 2023, the Group announced that it had converted 10 A320neo options into firm orders, with the option to convert certain aircraft into A321neos. The aircraft will be delivered in 2028 and will be used by any of the Group's current airlines to replace A320ceo family aircraft.

On July 27, 2023, the Group announced that it had converted six Boeing 787-10 options held by British Airways into firm orders and at the same time is adding a further six 787-10 options to its longhaul order book. The Group is also converting one Airbus A350-900 option held by Iberia into a firm order. The firm aircraft will be delivered in 2025 and 2026 and will be used by British Airways and Iberia to restore capacity in the airlines' longhaul fleets.

Basis of preparation

At June 30, 2023, the Group had total liquidity of €15,552 million, comprising cash, cash equivalents and interest-bearing deposits of €12,010 million, €3,308 million of committed and undrawn general and overdraft facilities, and a further €234 million of committed and undrawn aircraft specific facilities.

In its assessment of going concern over the period of at least 12 months from the date of approval of this report (the 'going concern period'), the Group has prepared extensive modelling, including considering a plausible but severe downside scenario. Having reviewed these scenarios, the Directors have a reasonable expectation that the Group has sufficient liquidity to continue in operational existence over the going concern period and hence continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements for the six months to June 30, 2023.

Principal risks and uncertainties

The Group has continued to maintain its framework and processes to identify, assess and manage risks. The principal risks and uncertainties affecting the Group, detailed in the Risk management and principal risk factors section of the 2022 Annual report and accounts, remain relevant at the date of this report. The Group continues to monitor risks as the risk landscape evolves, particularly considering how risks combine to create increased threats and how to re-assess the potential severity and likelihood accordingly. The Group's exposure and ability to directly manage the external risk environment remains a challenge, given the fundamental weaknesses in the resilience of the aviation sector's supply chain, inflationary impacts in both supplier costs and salaries, and policy measures taken by governments to address economic threats. Management remains focused on mitigating risks at all levels in the business and investing to increase resilience.

The Board reviews and challenges management on the risk landscape in the light of changes that influence the Group and the aviation industry. Where further action has been required, the Board has considered potential mitigations and, where appropriate or feasible, the Group has implemented or confirmed plans that would address those risks or retain them within the Board's determined Group risk appetite.

In assessing its principal risks, the Group has considered operational resilience, supply chain risk, the status of the financial markets, the industrial relations landscape and people engagement and cultural change across the Group. No new principal risks were identified through the risk management discussions and assessments across the business in the year to date. From the risks identified in the 2022 Annual report and accounts, given the current environment, the main risks that continue to be a key area of focus, due to their potential implications for the Group, are outlined below.

•       Brand and customer trust. Operational resilience and customer satisfaction underpin customer trust. Reliability, including on-time performance, service and product delivery, are key elements of brand value and of each customer's experience. The Group continues to improve its disruption management capabilities to support customers through disruption and improve its service propositions to help ensure that our customers choose to fly with the Group's airlines.

•       Critical third parties in the supply chain. The aviation sector continues to be affected by global supply chain disruption which has impacted aircraft deliveries, component availability, resource availability and/or threat of employee industrial action in critical third parties and airport services, airports' resilience weaknesses, particularly Heathrow and air traffic control (ATC) restrictions and strikes. The Group proactively assesses its schedules for operability and continues to work with all critical suppliers to understand any potential disruption within their supply chains from either a shortage of available resource, strike action or production delays which could impact the availability of new fleet, engines or critical goods or services.

•       Cyber attack and data security. The threat of sophisticated ransomware attacks on critical infrastructure and services remains high with the Group exposed to threat actors targeting both the Group's operating companies and its suppliers. In the half year, some of the Group's businesses were impacted by an attack on a third-party services provider holding employee data. The Group is focused on improving its cyber security posture and better understanding the risk presented by its suppliers.

•       Debt funding. Interest rates increases implemented by central banks to address inflation increase the cost for the Group for existing floating rate debt, as well as for new financing. The Group continues to successfully secure aircraft financing.

•       Economic, political and regulatory environment. The economic impact of increases in commodity and wage costs has driven significant inflation and impacted on interest rates as governments seek to moderate inflation, which may result in demand softening. If interest rate increases have not yet materially passed through to customers for their personal debt, they may need to reduce their spend on travel to accommodate the increase in their cost of borrowing.

•       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 continues with major programmes and upgrades to modernise, including new commercial capabilities and customer centric enhancements using agile based models, as well as replacing core IT infrastructure and improving network connectivity. Mitigating actions that prioritise operational stability and resilience have been built into all cutover plans for the go-live of IT systems related changes.

•       Operational resilience. Ongoing labour shortages, industrial unrest and strike action in the aviation sector, shortages in the supply chain and airspace and ATC restrictions can all impact the operational environment of the Group's airlines as well as the operations of the businesses on which the Group relies. The Group continues with its ambitious IT infrastructure transformation agenda to modernise and digitalise its IT estates. The Group is focused on minimising any unplanned outages or disruption to customers with additional resilience built into the airlines' networks.

•                     People, culture and employee relations. Our people, their engagement and cultural appetite and mindset for change are critical to the Group's current performance and future success. Our leadership recognises the efforts of our staff and their commitment through the continued operational challenges facing our airlines. Resource shortages in crew have been addressed and our businesses are building the knowledge and experience of their new starters and managing the cultural impacts of onboarding at scale to ensure they have the right capabilities to operate. Shortages in engineers across the aviation sector and in the Group's airlines may impact maintenance delivery timelines unless resource levels can be secured. Across the Group, collective bargaining is in place with various unions. Where agreements are open, our operating companies continue to engage in discussions with unions to secure sustainable agreements and address concerns arising within the negotiations.

•       Sustainable aviation. The plan to decarbonise aviation has resulted in fragmentation of policy measures and support offered by governments for green initiatives across the different regions in which the Group airlines operate. As Sustainable Aviation Fuel (SAF) infrastructure and availability still lags demand for SAF, mandates and other tax-based measures may disproportionately impact the Group's airlines versus their competitors.

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

Operating and market environment

The average jet fuel spot price for the six months was $834 per metric tonne, 25 per cent lower than the average spot price in the first six months of 2022 of $1,120 per metric tonne. Prices fell over the course of the six months, from a peak of $1,142 per metric tonne in January and ended the six months at $769 per metric tonne. The shape of price movements within the first six months of 2023 was markedly different from that in the first six months of 2022, which saw a significant rise in fuel prices from late February, following the outbreak of the war in Ukraine, with the commodity price of jet fuel rising from $708 per metric tonne at the start of January to $1,235 per metric tonne at the end of June 2022. Jet fuel supply contracts are typically based on pricing up to one month in arrears, which results in the reduction in the average price paid for jet fuel supply in the first six months of 2023 compared with the first six months of 2022 being lower than the movement in spot jet fuel prices, with a reduction in the average commodity price paid of approximately 13 per cent for the six months.

The average foreign exchange rates for the first six months of 2023 resulted in the US dollar strengthening by three per cent against the euro and seven per cent against the pound sterling, compared with the average of the first six months of 2022. The closing foreign exchange rates, applied for balance sheet translations, represented a weakening of the US dollar of three per cent against the euro and five per cent against the pound sterling since December 31, 2022.

The net impact of transaction and translation exchange for the Group for the six months of 2023 was €15 million favourable versus the first six months of 2022, with the net impact €54 million adverse in quarter 1 and €69 million favourable in quarter 2.

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 generates a surplus in most currencies in which it does business, except for the US dollar, as capital expenditure, debt repayments and fuel purchases typically create a deficit. The Group hedges a portion of its transaction exposures. The net transaction impact on the operating result was favourable by €45 million for the first six months, increasing revenues by €222 million and costs by €177 million, with the impact €48 million adverse in quarter 1 and €93 million favourable in quarter 2.

IAG's results are impacted by exchange rates used for the translation of British Airways' and IAG Loyalty's financial results from pound sterling to the Group's reporting currency of euro. For the six months, the net impact of translation was €30 million adverse versus the first six months of 2022, with the impact €6 million adverse in quarter 1 and €24 million adverse in quarter 2.

Unless stated otherwise, all variances quoted below compare the first six months of 2023 with the first six months of 2022 on a reported basis (including exceptional items). Results for 2022 include a reclassification to conform with the 2023 presentation for Net gain on sale of property, plant and equipment within Operating profit/(loss), with €21 million of gains in 2022 reclassified from Other non-operating (charges)/credits to Expenditure on operations.

Capacity and passenger traffic

The Group continued to restore its passenger capacity, following the significant reductions due to COVID-19, with passenger capacity now close to pre-pandemic levels. In the first six months of 2023, IAG capacity, measured in available seat kilometres (ASKs), was 30.9 per cent higher than in the first six months of 2022, which was impacted by the Omicron variant of COVID-19, particularly in January and February. Passenger capacity was only 5.7 per cent lower than in the first six months of 2019. Passenger load factor for the six months was 84.1 per cent, up 6.3 points on the previous year and 1.1 points higher than in the first six months of 2019 (quarter 1: 0.8 points higher, quarter 2: 1.4 points higher).

Summary of passenger capacity and load factor by region

As can be seen in the table above, the remaining capacity shortfall to 2019 is principally attributable to the pace of capacity restoration in the Asia Pacific region, linked to the late lifting of COVID-19 restrictions. The Group is increasing its schedule to the region during 2023. British Airways services to Shanghai and Beijing resumed in the summer travel season and the airline has increased frequencies to Hong Kong and Tokyo Haneda.

Revenue

Passenger revenue rose €4,180 million from the first six months of 2022 to €11,784 million, reflecting the 30.9 per cent increase in capacity operated, together with the positive impact of the 6.3 percentage point increase in the passenger load factor and passenger yields per revenue passenger kilometre (RPK) up 9.5 per cent. The resulting passenger unit revenue (passenger revenue per ASK) was 18.4 per cent higher than the previous year and 18.1 per cent higher than the first six months of 2019 (quarter 1: up 14.8 per cent versus 2019, quarter 2: up 20.8 per cent). Leisure traffic performed particularly strongly, with corporate traffic recovering more slowly.

Cargo revenue was down €240 million versus the previous year to €603 million. Cargo carried, measured in cargo tonne kilometres (CTKs), rose by 14.7 per cent. Yields were 37.6 per cent lower than in the previous year, reflecting the increase in global passenger airline capacity across the industry and the recovery from the global supply chain and sea freight disruption seen in the first half of 2022. Cargo revenue was up €47 million, or 8.5 per cent, versus the same period in 2019, with cargo yields up 36.6 per cent versus 2019 despite challenging air cargo market conditions.

Other revenue increased by €292 million to €1,196 million, reflecting the recovery in the Group's non-airline businesses, including Iberia's third-party maintenance business, BA Holidays, and the growth of IAG Loyalty. Other revenue was 35.3 per cent higher than in the first six months of 2019.

Costs

Costs were impacted by the 30.9 increase in capacity versus 2022, with Total expenditure on operations 26.2 per cent higher than the previous year and non-fuel costs per ASK down 7.3 per cent.

Employee costs increased by €443 million versus the first six months of 2022 to €2,610 million, reflecting the increase in airline operations and the related increase in employee numbers, together with pay increases. On a unit basis per ASK, Employee costs were down 8.0 per cent.

Fuel, oil costs and emissions charges increased by €984 million to €3,550 million, principally reflecting the impact of the higher capacity operated. On a unit basis per ASK, Fuel, oil costs and emissions charges were up 5.7 per cent, principally reflecting the increase in the effective fuel price net of hedging. The significant increase in commodity fuel prices in the first half of 2022 was mitigated by hedging gains from hedging placed when the fuel prices were lower in 2021 and previously, whereas in 2023 there was a small net cost of hedging, due to the sustained increase in fuel prices since the start of 2022. Fuel costs continue to benefit from the Group's investment in new, more fuel-efficient aircraft.

Supplier costs increased by €1,156 million to €5,197 million, mainly linked to the increase in capacity operated, together with inflationary increases and disruption costs, partly offset by the Group's procurement initiatives. On a unit basis per ASK, Supplier costs were down 2.3 per cent.

Depreciation, amortisation and impairment costs for the first six months were €983 million and the Net gain from the sale of property, plant and equipment was €17 million, representing the disposal of assets, mainly connected with the disposal of aircraft and related spare parts. On a unit basis per ASK, Ownership costs (which include Depreciation, amortisation and impairment costs, and the Net gain from the sale of property, plant and equipment) were down 26.2 per cent.

Operating result

The Group's operating profit for the period was €1,260 million, an improvement of €1,677 million versus the operating loss of €417 million for the first half of 2022. Excluding exceptional items, the operating result improved €1,706 million versus the previous year.

The breakdown of the operating result between the Group's main operating companies is shown below.

Restoration of capacity in British Airways has been lower than in the other operating companies, reflecting the retirement of British Airways' Boeing 747-400 fleet in its response to the COVID-19 pandemic and the slower restoration of capacity in the Asia Pacific region. Both Iberia and Vueling have performed strongly in the first six months of 2023, with operating profit before exceptional items exceeding that achieved in 2019. IAG Loyalty continues to increase its base of collectors of the Group's loyalty currency, Avios, with its operating profit for the first six months significantly increased versus the same period in 2019.

For further information, see note 4 'Segment information'.

Exceptional items

There were no exceptional items in the first six months of 2023. In the first six months of 2022, the Group recorded an exceptional credit of €23 million, relating to the partial reversal of a fine previously issued by the European Commission, in 2010, to British Airways, and an exceptional credit of €6 million reflecting the reversal of an aircraft impairment made in 2020. See Reconciliation of Alternative performance measures for further information.

Net non-operating costs, taxation and loss after tax

The Group's net non-operating costs for the first six months of 2023 were €223 million, compared with €426 million in the first six months of 2022, mainly reflecting: net finance costs of €398 million, down €79 million, driven by the significant increase in interest received on deposits, linked to rising interest rates; €149 million of Net currency retranslation credits in 2023, versus charges of €197 million in 2022; a charge of €13 million for the net changes in the fair value of financial instruments versus a credit of €130 million in 2022, principally due to changes in the mark-to-market of the IAG €825 million convertible bond, which is held at fair value; and other non-operating charges of €12 million in 2023 versus a credit of €105 million in 2022.

The tax charge on the profit for the period was €116 million (2022: tax credit of €189 million), and the effective tax rate was 11 per cent (2022: 22 per cent).

The substantial majority of the Group's activities are taxed where the main operations are based: in the UK, Spain and Ireland, which have corporation tax rates during 2023 of 23.5 per cent, 25 per cent and 12.5 per cent, respectively. The expected tax rate for the Group is determined by applying the relevant corporation tax rate to the profits or losses of each jurisdiction. The geographical distribution of profits and losses in the Group results in the expected tax rate being 24 per cent for the six months to June 30, 2023. The difference between the actual effective tax rate of 11 per cent and the expected tax rate of 24 per cent is primarily due to the partial recognition of previously unrecognised tax assets in the Group's Spanish companies.

The profit after tax for the first six months of 2023 was €921 million (2022: loss after tax of €654 million).

Cash, debt and liquidity

The Group's cash balance (defined as cash, cash equivalents and current interest-bearing deposits) of €12,010 million at June 30, 2023 was up €2,411 million on December 31, 2022, in line with the normal seasonal pattern of working capital movements and the trading performance. The Group's airlines typically experience a rise in deferred revenue in the first half of the year, linked to bookings for future travel, particularly leisure bookings for summer travel; deferred revenue then usually falls in the second half of the year.

During the six months, the Group took delivery of 11 aircraft and drew financing for 11 aircraft as set down below.

The five aircraft for British Airways delivered in 2022 and financed in 2023 had financing secured at December 31, 2022, which was reported within committed and undrawn aircraft financing facilities. The Group has a number of options available to it to finance aircraft during the remainder of the year.

The Group's total borrowings at June 30, 2023 were €19,623 million, down €361 million from December 31, 2022. The reduction was mainly due to foreign exchange movements, linked to the weakening of the US dollar, in which a substantial portion of the Group's aircraft-related debt is denominated, together with the value of repayments of existing debt exceeding the value of new debt raised in the six months. Debt maturities in 2023, aside from regular aircraft lease payments, include the repayment of a €500 million senior unsecured IAG bond, which was redeemed at its maturity on July 4, 2023 and has not been refinanced.

Net debt (total borrowings less cash, cash equivalents and current interest-bearing deposits) was €7,613 million at June 30, 2023, a reduction of €2,772 million since December 31, 2022, mainly due to the increase in cash outlined above, driven by the profitability in the first six months, inflows of forward bookings for future travel, partially offset by capital expenditure and net interest, with the direct impact of foreign exchange movements reducing Net debt by €332 million.

The Group's EBITDA before exceptional items for the rolling four quarters to June 30, 2023 was €4,993 million. Net debt to EBITDA before exceptional items was 1.5 times at June 30, 2023. The seasonal pattern of airline bookings typically results in Net debt and Net debt to EBITDA before exceptional items being lower at the end of June than at the end of December. See Reconciliation of Alternative performance measures and Alternative performance measures section of IAG's 2022 Annual report and accounts for further information.

Total liquidity at June 30, 2023 was €15,552 million, up €1,553 million from €13,999 million at December 31, 2022. Committed and undrawn general and overdraft facilities were €3,308 million (December 31, 2022: €3,284 million) and committed and undrawn aircraft specific facilities were €234 million (December 31, 2022: €1,116 million).