Developments since the last report (July 28, 2023).

On August 23, 2023, the Group extended the availability period for $1.655 billion of its $1.755 billion Revolving Credit Facility, which is available to British Airways, Iberia and Aer Lingus. Following the extension, $1.755 billion will be available to March 2025 and then $1.655 billion available to March 2026. At September 30, 2023 the facility remained undrawn.

On September 28, 2023, British Airways repaid its syndicated loan of £2.0 billion (?2.3 billion), which was partially guaranteed by UK Export Finance (UKEF).  At the same time, British Airways entered into a new 5-year Export Development Guarantee Facility of £1.0 billion (?1.2 billion), with commitments from a syndicate of banks, partially guaranteed by UKEF, and available through to September 2028. The new facility is in addition to the £1.0 billion Export Development Guarantee Facility, which was entered into in 2021 and which is available through to November 2026. Both facilities were undrawn at September 30, 2023.

Basis of preparation

At September 30, 2023, the Group had total liquidity of ?13,697 million, comprising cash, cash equivalents and interest-bearing deposits of ?9,218 million and ?4,479 million of committed and undrawn general and overdraft 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 this interim management statement for the nine months to September 30, 2023.

Principal risks and uncertainties

The Group has continued to maintain its framework and processes to identify, assess and manage risks. The Group monitors the evolution of the risk landscape and internal and external changes, particularly considering how risks combine to create increased threats, re-assessing the potential severity and likelihood accordingly.

In assessing its principal risks, the Group has considered operational resilience, supply chain risk, the status of the financial markets and demand, political risk and government intervention, pace of transformation, particularly IT, 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 and 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. However, the profile of certain risks has changed over the past nine months. These include the Group's exposure and ability to directly manage the external risk environment, particularly for aircraft, engines and component availability, which remains a challenge, given the fundamental weaknesses in the resilience of the aviation sector's supply chain. Other external threats which remain heightened include: the impact of inflation on demand and customer confidence; higher costs in the supply chain; the impact of escalating and ongoing geopolitical tensions and conflict in various regions, in particular the Middle East; air traffic control (ATC) resilience issues and industrial unrest impacting operations; and policy measures taken by governments to address the economic environment or policy proposals that could impact the Group's airlines' ability to set capacity and/or pricing. Further detail on the changes in the risk environment including management's responses are provided below. 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 and its management 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 addition, the Board and its sub committees have been appraised of regulatory, competitor and governmental responses on an ongoing basis.

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 given the extent of external disruption due to ATC resilience issues because of staff shortages and/or industrial unrest. All of the Group's airlines continue to support their customers through any disruption including schedule adaptions where required. They are also enhancing cabin and 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 London Heathrow, and ATC restrictions and strikes. Delays in new aircraft and spare engine availability continue to impact operations and increase turnaround times for aircraft. 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. The Group continues to improve its cyber security posture either through major IT transformational change or additional monitoring through tools as well as better understanding the risk presented by its suppliers.

?     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. As interest rate increases start to materially pass 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. Recent European governments' proposals to set floor or ceiling caps on pricing may impact the ability to freely set pricing and/or capacity.

?     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 and redundancy. 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, particularly for engineers, 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. Our businesses continue to build the knowledge and experience of their new starters and manage the cultural impacts of onboarding at scale to ensure they have the right capabilities to operate. Shortages of licensed engineers with aircraft experience across the aviation sector and in the Group's airlines combined with aircraft, engines and component shortages are significantly impacting maintenance delivery timelines and may challenge morale. The Group is investing in apprenticeship programmes and retention initiatives to help secure and train engineers. 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, mandates and other tax-based measures may disproportionately impact the Group's airlines versus their competitors.

Operating and market environment

The average jet fuel spot price for the first nine months of 2023 was $873 per metric tonne, 22 per cent lower than the average spot price of $1,118 per metric tonne in the same period in 2022. Prices were volatile over the course of the first nine months of 2023, falling from a peak of $1,142 per metric tonne in January to $769 per metric tonne at the end of June, and then rising again to reach $1,055 per metric tonne at the end of September. In 2022, the shape of price movements was markedly different, with fuel prices rising significantly from late February, following the outbreak of the war in Ukraine; prices rose from $708 per metric tonne at the start of January to $1,236 per metric tonne at the end of June 2022 and then fell to $965 per metric tonne at the end of September.

The average foreign exchange rates for the first nine months of 2023 resulted in the US dollar weakening by 1 per cent against the euro and strengthening by 3 per cent against the pound sterling, compared with the average of the first nine months of 2022. The closing foreign exchange rates, applied for balance sheet translations, were close to those at December 31, 2022, with the US dollar weakening by 1 per cent against the euro and 2 per cent against the pound sterling since December 31, 2022.

The net impact of transaction and translation exchange for the Group for the nine months of 2023 was ?50 million favourable versus the first nine months of 2022, with the net impact ?54 million adverse in quarter 1, ?69 million favourable in quarter 2 and ?35 million favourable in quarter 3.

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 ?81 million for the first nine months, increasing revenues by ?65 million and reducing costs by ?16 million, with the impact ?48 million adverse in quarter 1, ?93 million favourable in quarter 2 and ?36 million favourable in quarter 3.

IAG's results are impacted by exchange rates used for the translation of British Airways' and IAG Loyalty's financial results from pound sterling to the Group's reporting currency of euro. For the nine months, the net impact of translation was ?31 million adverse versus the first nine months of 2022, with the impact ?6 million adverse in quarter 1, ?24 million adverse in quarter 2 and ?1 million adverse in quarter 3.

Unless stated otherwise, all variances quoted below compare the first nine months of 2023 with the first nine 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, with ?31 million of gains in 2022 reclassified from Other non-operating 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 that of 2019. In the first nine months of 2023, IAG capacity, measured in available seat kilometres (ASKs), was 25.8 per cent higher than in the first nine months of 2022, which was impacted by the Omicron variant of COVID-19, particularly in January and February. Passenger capacity was only 5.3 per cent lower than in the first nine months of 2019. Passenger load factor for the nine months was 85.9 per cent, up 4.6 points on the previous year and 1.2 points higher than in the first nine months of 2019.

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 has increased 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 ?5,497 million from the first nine months of 2022 to ?19,517 million, reflecting the 25.8 per cent increase in capacity operated, together with the positive impact of the 4.6 point increase in the passenger load factor and passenger yields per revenue passenger kilometre (RPK) up 4.8 per cent. The resulting passenger unit revenue (passenger revenue per ASK) was 10.6 per cent higher than the previous year and 20.6 per cent higher than the first nine months of 2019. Leisure traffic performed particularly strongly, with corporate traffic continuing to recover more slowly.

Cargo revenue was down ?350 million versus the previous year to ?866 million. Cargo carried, measured in cargo tonne kilometres (CTKs), rose by 16.3 per cent. Yields were 38.8 per cent lower than in the previous year, reflecting the substantial increase in global passenger airline capacity across the industry and the impact of market demand decline due to the change in macro-economic conditions. Cargo revenue was up ?41 million, or 5.0 per cent, versus the first nine months of 2019, with cargo yields up 29.5 per cent versus 2019, despite weaker market demand and reduced cargo capacity from the Asia Pacific region.

Other revenue increased by ?402 million to ?1,846 million, reflecting the growth of IAG Loyalty and the recovery in Iberia's third-party maintenance business and BA Holidays. Other revenue was 32.9 per cent higher than in the first nine months of 2019.

Costs

Costs were impacted by the 25.8 increase in capacity versus 2022, with Total expenditure on operations 21.1 per cent higher than the previous year and non-fuel costs per ASK down 5.8 per cent.

Employee costs increased by ?568 million versus the first nine months of 2022 to ?3,985 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 7.3 per cent.

Fuel, oil costs and emissions charges increased by ?1,179 million to ?5,579 million, principally reflecting the impact of the higher capacity operated. The significant increase in commodity fuel prices in the first nine months of 2022 was mitigated by hedging gains from hedging placed when the fuel prices were lower in 2021 and previously, whereas in the first nine months of 2023 there was a small net cost of hedging, due to the sustained increase in fuel prices since the start of 2022. The net result was that on a unit basis per ASK, Fuel, oil costs and emissions charges were up 0.8 per cent. Fuel costs continue to benefit from the Group's investment in new, more fuel-efficient aircraft.

Supplier costs increased by ?1,605 million to ?8,167 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 1.4 per cent.

Depreciation, amortisation and impairment costs for the first nine months were ?1,508 million and the Net gain from the sale of property, plant and equipment was ?15 million, reflecting the disposal of aircraft withdrawn from service 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 21.3 per cent.

Operating result

The Group's operating profit for the nine month period was ?3,005 million, an improvement of ?2,204 million versus the operating profit of ?801 million for the first nine months of 2022. Excluding exceptional items, the operating result improved ?2,235 million versus the first nine months of 2022.

The breakdown of the operating result between the Group's main operating companies, for the nine months and quarter 3, 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 nine 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 nine months significantly increased versus the same period in 2019.

Exceptional items

There were no exceptional items in the first nine months of 2023. In the first nine 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 ?8 million reflecting the partial reversal of aircraft impairments made in 2020. See Alternative performance measures section for further information.

Net non-operating costs, taxation and profit after tax

The Group's net non-operating costs for the first nine months of 2023 were ?390 million, compared with ?635 million in the first nine months of 2022, mainly reflecting: net finance costs of ?582 million, down ?130 million, driven by the significant increase in interest received on deposits, net of increases in finance costs, linked to rising interest rates; ?64 million of Net currency retranslation credits in 2023, versus charges of ?305 million in 2022; no net change in the fair value of financial instruments, versus a credit of ?132 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 credits of ?51 million in 2023 versus credits of ?231 million in 2022, mainly related to fair value movements on derivatives for which hedge accounting is not applied.

The tax charge on the profit for the period was ?464 million (2022: tax credit of ?33 million), and the effective tax rate was 18 per cent (2022: negative 20 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 23 per cent for the nine months to September 30, 2023. The difference between the actual effective tax rate of 18 per cent and the expected tax rate of 23 per cent is primarily due to the partial recognition of previously unrecognised deferred tax assets in the Group's Spanish companies.

The profit after tax for the first nine months of 2023 was ?2,151 million (2022: ?199 million).

Cash, debt and liquidity

The Group's cash balance (defined as cash, cash equivalents and current interest-bearing deposits) of ?9,218 million at September 30, 2023 was down ?381 million on December 31, 2022, mainly driven by repayments of debt described further below.

During the nine months, the Group took delivery of 20 aircraft and drew financing for 19 aircraft as set down below.

The five aircraft for British Airways delivered in 2022 and financed in 2023 had financing secured but undrawn at December 31, 2022, which was reported within committed and undrawn aircraft financing facilities. The Group continues to have a number of options available to it to finance its deliveries of aircraft.

The Group's total borrowings at September 30, 2023 were ?17,227 million, down ?2,757 million from December 31, 2022. The reduction was mainly due to the Group's repayments of debt, including the early repayment of British Airways' £2.0 billion (?2.3 billion) loan partially guaranteed by UKEF and an IAG unsecured bond of ?500 million, which was redeemed at its maturity on July 4, 2023.

Net debt (total borrowings less cash, cash equivalents and current interest-bearing deposits) was ?8,009 million at September 30, 2023, a reduction of ?2,376 million since December 31, 2022, mainly due to the increase in cash outlined above, driven by the profitability in the first nine months, inflows of forward bookings for future travel, partially offset by capital expenditure and net interest. The normal seasonal pattern of cash flows typically results in an increase in net debt in the final quarter of the year.

The Group's EBITDA before exceptional items for the rolling four quarters to September 30, 2023 was ?5,529 million. Net debt to EBITDA before exceptional items was 1.4 times at September 30, 2023. See Alternative performance measures section for further information.

Total liquidity at September 30, 2023 was ?13,697 million, down ?302 million from ?13,999 million at December 31, 2022, linked to the Group's debt repayments net of cash generation in the first nine months of 2023. Committed and undrawn general and overdraft facilities were ?4,479 million (December 31, 2022: ?3,284 million), with the increase mainly reflecting the new £1.0 billion (?1.2 billion) British Airways facility outlined above; there were no committed and undrawn aircraft specific facilities (December 31, 2022: ?1,116 million).