International Consolidated Airlines Group SA

LSE:IAG

Earnings Call Transcript 2023-Q1

[Operator]

Good day and thank you for standing by. Welcome to the Q1 2023 International Airlines Group Earnings Conference Call.

[Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Luis Gallego, CEO.

Please go ahead.

[Luis Martín, executive]

Thank you very much. Good morning and welcome to the IAG Q1 results.

I'm joined today by Nicholas Cadbury and the IAG airline CEOs.

Firstly, I am very pleased to report the first profitable quarter 1 since 2019. Pre pandemic, it was normal for IAG to be profitable in the first quarter, something which is not common for European airlines. Our return to profitability in quarter 1 this year is therefore another sign that we are returning to normal. Quarter 1 was ahead of our expectations due to strong demand trends, particularly for our Spanish airlines and in the leisure segment for all our airlines. Fuel prices were also lower than expected, giving us [ a cost win ] against our expectations this quarter. We also saw nonfuel unit cost benefit from the increase in capacity year-on-year.

We are focused on deploying capacity in our core markets. For example, Iberia continues to consolidate its market position in the South Atlantic, while British Airways is focusing on rebuilding its U.S. network, which will be at pre-pandemic levels of capacity by Q3 this year. Vueling continues to grow more in the winter to de-seasonalize its network, for example, to winter sun destinations such as Cairo, Amman or the Canary Islands. Aer Lingus is focusing on long-haul destinations with high leisure component.

As I mentioned, we saw good demand trends in Q1, and with 80% of revenue booked, we expect this to continue into the second quarter as well. Whilst Q3 is currently also looking encouraging, we have a lower level of visibility for the second half of the year compared to Q2. As a result of the better-than-expected performance in Q1, in addition to the encouraging summer demand and lower fuel price compared to our previous expectations, we now expect our full year operating profit before exceptional items to be higher than the top end of our previous guidance which was [ EUR 1.2 billion ] to EUR 2.3 billion.

However, we are mindful that we are still at a relatively early stage in the year. Whilst fuel prices have fallen in the past few months, they are subject to macroeconomic and geopolitical impact, so there is no certainty that they will stay at current levels. We are also mindful of any impact of potential [ sudden ] disruption such as further air traffic control strikes in France.

Now I hand over to Nicholas.

[Nicholas Cadbury, executive]

Thank you, Luis. And good morning, everyone.

As we, hopefully, have left the pandemic behind us, like most other airlines, we've moved our reporting and metrics back to comparing with the previous year, 2022. On this slide, we've shown the key components of the significant change in profit. On the left, you can see the largest single driver of our growth in profitability was the change in passenger revenue. This is a combination of Q1 last year being heavily impacted by the Omicron and the strong leisure demand that we're seeing this year. Cargo revenue declined year-on-year due to the lower yields as a result of the continued increase in cargo capacity from additional passenger aircraft flying, particularly in Asia, and the continued normalization of supply chain. However, whilst cargo revenue fell year-on-year, revenue was still up strongly on the pre-pandemic levels due to higher yields. And lastly, nonfuel and fuel costs increased as we added back capacity and due to the increase in fuel unit costs.

On the right-hand side, we've shown you the bridge between this year and last year by our businesses. All of our businesses saw a strong recovery compared to last year, with the largest increases coming from British Airways and Iberia. I'm also pleased that our loyalty business has had a strong quarter, delivering EUR 81 million in operating profits, and drove good cash flow. The team added 1.2 million newly enrolled customers during Q1, which is 50% more than in Q1 2019. And they launched new products that are designed to increase customer engagement, such as Avios-only flights.

This slide shows our key financial performance metrics. Starting at the top and working down: As we built back capacity, ASKs were up 46% and passenger revenue was up 90%. While most of this came from the stronger pricing on yields, it was also pleasing to see load factors above 81%, an improvement of over 9% (sic) [ over 9 percent points ].

Turning to unit costs. Fuel unit costs were up 31%, driven by an increase in the average price of physical fuel, up 20% per metric ton year-on-year, together with lower hedging gains and the impact of a stronger U.S. dollar. Nonfuel costs reduced by over 13% as we added back capacity and partly offset inflation with our efficiency program. I reiterate the nonfuel cost guidance I gave at the year-end of a reduction of 6% to 8% for the full year compared to 2022. These KPIs led to a profit of EUR 9 million. Not all the airlines make a profit in the first quarter, but Q1 profitability has been a hallmark of IAG's, so it is pleasing to see this trend returning.

On the bottom row, you can see that our net debt was EUR 8.4 million -- EUR 8.4 billion. The comparison is against December '22. And you can see debt was EUR 2 billion lower, giving us a leverage of 2.1x. The reduction in debt was driven by an improvement in cash that principally came from seasonal working capital inflows from passengers making bookings for later in the year. Liquidity continues to be in a very good position at EUR 15 billion.

This slide shows the profitability by business. We have included the detailed breakdown for each airline in the appendix. I want to first highlight Iberia's performance, a record Q1 profit of EUR 66 million and achieved an operating margin of 4.5%. British Airways was also profitable in Q1 and, as I mentioned earlier, had the largest absolute increase in profit year-on-year of GBP 440 million. Aer Lingus and Vueling are more seasonal businesses, so losing money in Q1 was expected. However, it was also pleasing to see they reported a significant increase in profit year-on-year. And then particularly, I'd like to highlight Aer Lingus' strong unit revenue performance and Vueling's capacity growth, which has driven their profit improvements.

This chart shows our capacity growth and the unit revenue performance by region. You can see the impact of the Omicron variant last year on the strong growth rates in capacity in all regions, especially in North America, and the strong leisure demand driving PRASK growth year-on-year in all regions. I want to also highlight the performance of Latin America and the Caribbean. You can see from the relatively lower year-on-year growth rates in capacity that the region was less impacted than other regions by Omicron last year. However, the performance of unit revenue in this region was very good, similar to that of North America and AMESA, demonstrating the strength of trading across LATAM.

For Iberia, the strength in unit revenue was seen on almost all the routes in the region. In general for all airlines, whilst we see strong demand everywhere, the routes that are the strongest are those with a higher mix of leisure passengers.

This slide shows our net debt that improved over the last quarter by EUR 2 billion to EUR 8.4 billion. As I've mentioned, this reduction was mainly driven by the strength in forward bookings which resulted in significant working capital inflows in the quarter. However, we would expect the majority of this inflow to unwind during the second half. We are maintaining our previous capital expenditure guidance at around EUR 4 billion this year. That is [ weighted ] to Q2 onwards. We're not immune to the delay issues that are impacting both OEMs. However, our latest delivery expectations are unchanged from the update we gave you at year-end of 29 aircraft this year, only 3 of which were delivered in Q1.

On debt maturity this year, we have IAG senior unsecured bonds for EUR 500 million due in July and around EUR 250 million of other debt maturing throughout the year. With our cash deposits at over EUR 11 billion, we have the flexibility to pay these down from cash reserves. We previously gave guidance for net debt to be roughly flat year-on-year. As we are more positive on the profit outlook, we expect this to flow through to reduce net debt by this corresponding outperformance.

This slide shows our current fuel hedging position. We currently have around 62% of our expected consumption hedged for 2023. The jet fuel forward curve has come down compared to what we were seeing last quarter, from between [ $1,000 per tonnes ] and $850 per tonne to around $800 per tonne to $750 per tonne. Whilst prices have fallen in the past few months, as you know, we have seen high volatility; and there is no certainty that they will stay at current levels. Rather than give you specific guidance, we've included a sensitivity in this slide for you so you -- can help you think about how to model the rest of the year.

This sensitivity chart shows that, if we assume that the spot prices are around $800 per tonne for the rest of the year, our fuel bill for 2023 will be around about EUR 7.5 billion, but if the price returns to $1,000 per metric ton, the fuel bill would be around the previous guidance of EUR 8 billion. In our own internal forecasts, given the volatility and geographical uncertainties, we are conservative. And we do not account for the full upside from current prices, as we know how quickly these can unwind.

So in conclusion for the financials. We are pleased to return to profitability in quarter 1 with Iberia reporting its best-ever Q1 profit and good year-on-year progress in all the airlines and loyalty. We benefited from the lower fuel prices, and demand was stronger than we had expected in Q1. And this trend continues to be encouraging but with a long way to go until the end of the year.

I will now hand back to Luis, who will give you some more details on the quarter and the outlook.

[Luis Martín, executive]

Thank you, Nicholas.

This slide gives you a flavor of leisure and business demand trends and which network areas are our airlines focusing on.

Firstly, Aer Lingus is seeing particularly strong leisure demand from the U.S. point of sale and also European leisure-focused destinations. Aer Lingus' corporate business is particularly exposed to the technology sector, which has seen a slowdown since the end of last year. To satisfy the strong demand, Aer Lingus are focusing their capacity growth to destinations in the U.S. and key leisure destinations in Europe while reinforcing their Dublin hub.

Likewise, British Airways is seeing a strong leisure demand from the U.S. point of sale. In addition, demand to the Caribbean and Africa and Middle East are also showing strength. Whilst BA has a more diversified mix of corporate customers than our other airlines, business demand is recovering slowly. On the network side, BA will have rebuilt its U.S. network by Q3, although will not have recovered its Asia Pacific network for a number of years.

As I mentioned earlier, our airlines are operating in a challenging environment. British Airways' first wave of flights arriving from Europe into Heathrow are being impacted by the French air traffic control strikes, which because of the constrained capacity at Heathrow have a knock-on impact on flights later on the day. Whilst we are doing all in our power to ensure our operational robustness, we do need all actors in the aviation ecosystem to play their part to deliver a robust operational performance as well.

Iberia is seeing a strong leisure demand in all regions and is seeing business demand recovering faster. These might be due to less of a work-from-home culture in Spain and broader cultural reasons. Iberia's network strategy is focusing on strengthening its position in Latin America in addition to new U.S. destinations through aircraft utilization increases. I'm very pleased to say that again Iberia retains its global leadership in onetime -- in on-time, sorry, performance.

And finally, Vueling is also seeing a strong demand, particularly for winter sun destinations. Their revenue performance is driven by very strong ancillary revenue, higher yields but also a focus on driving load factors higher. Vueling's network strategy is focused on de-seasonalization during the winter season through increased utilization to destinations such as the Canary Islands and Cairo. Given Barcelona proximity to France, Vueling is also significantly disrupted by French air traffic control strikes but, despite this, has delivered robust on-time performance.

We have fully restored capacity in all our airlines, apart from British Airways which remains below pre-pandemic levels because of a smaller fleet as a result of the early retirement of the 747 fleet. The chart on the right shows contribution to IAG's year-on-year capacity growth. You can see clearly Vueling's de-seasonalization with its growth in Q1 compared to the summer season. For 2023 as a whole, you can see that all airlines will be above 2019 levels of capacity, again with the exception of British Airways which remains below 2019 levels. This in turn average down the IAG total, which is planned to be 97% of 2019 levels.

Moving on to our outlook for 2023. We are positive about the remainder of the year. We see strong customer demand at all of our airlines and in all regions. Our capacity expectations are that we will fly 97% of 2019 capacity this year. However, at this point in time, we are mindful of a number of factors that might affect us. Firstly, this is a period of volatility in the geopolitical and macroeconomic environment, which can impact both the fuel price, our biggest cost, and customer confidence. Secondly, we are still only 1/4 of the way through the year. And whilst second quarter bookings are looking good, we have limited visibility of the second half. And thirdly, we are currently in an operating environment that has its challenges such as strikes ongoing at French ATC and Heathrow Airport.

So taking above into account alongside our performance against our expectation in the first quarter, we now expect operating profit before extensional items to be higher than the top end of our previous guidance of EUR 1.8 billion to EUR 2.3 billion. And in turn, this means that we now expect our net debt to be better that our -- than our previous guidance of broadly maintained year-on-year and be down in line with the profit outperformance.

So to conclude. We continue to see a strong customer demand, particularly in the leisure segment. Business travel continues to recover slowly, although at a faster rate at Iberia. We have good visibility for Q2, and whilst the outlook for the rest of the summer looks encouraging, we have less visibility for second half. We are focusing our capacity deployment into our core markets, particularly at British Airways which is restoring its North Atlantic network first and Iberia into both the South Atlantic and North Atlantic. And finally but importantly, we continue to be committed to generating long-term shareholder value and are confident in returning to pre-COVID-19 levels of operating profit within the next few years.

And now we are very happy to take your questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Jaime Rowbotham from Deutsche Bank.

[Jaime Rowbotham, analyst]

2 questions from me. First of all, perhaps for Luis, on the North Atlantic, a number of the American carriers have, I think, called out the fact that U.S. GDP is running about 19% higher in 2022 than it was in 2019. And yet the airline capacity is pretty close to 2019 levels, meaning the potential for continued high fares even if that GDP has to correct a bit. How are you feeling, please, about the outlook on the North Atlantic? And then secondly, maybe for Nicholas, it was very good to see the Q1 nonfuel CASK down 13% year-on-year or up 14% versus pre COVID. On the year-on-year basis, the comps get a lot tougher, which I think is why you're sticking to down 6% to, was it, 8% or perhaps 10% for the full year. Perhaps you'd clarify, but on the precrisis basis, well, I think you previously gave a range of up 10% to 15%. Presumably, Nicholas, is there scope for the up 14% from Q1 to improve further as you bring back more capacity in the summer?

[Luis Martín, executive]

So the first question, about North Atlantic. When we look at the total market and the number of seats in the Q2 and Q3, we see that the U.K. capacity to U.S., including also Caribbean and Mexico, is like minus 4% the capacity that we have in 2019, similar situation in Spain, so we are going to have less capacity than we have in 2019. So what we see is that we are going to have a strong second and third quarter in that region. The capacity in North Atlantic now is up 63%, if we compare with last year. And we are up 2%, comparing with 2019. So I think we have seen in the first quarter that, the capacity, mainly premium capacity, in our case, [ we have less fleets ] than we had in the first quarter of 2019. And because of that, the RASK we are having is impacted, but we see that, for the second and third quarter, the demand is very strong, particularly for leisure and U.S. customers.

[Nicholas Cadbury, executive]

Yes. Just on your second question, in terms of nonfuel, yes, you're right. In Q1, versus last year, we had a reduction in nonfuel costs of 13%. We continue to give guidance of reduction of 6% to 10% for the full year. And the reason for that is actually just you've got more capacity kind of coming back into the market overall, so in -- so just it's basically on the baseline overall. If you look at pre crisis, we gave guidance of kind of price will be up about 10% to 15% on a unit basis, which we're kind of sticking with that kind of guidance at the moment, which over a 4-year period, is -- we think, this is pretty good.

[Operator]

And your next question comes from the line of Alex Irving from Bernstein.

[Alexander Irving, analyst]

2 for me, please. First, on corporate travel, could you please tell us how the recovery has evolved over the course of the quarter both in terms of volumes and in terms of revenues relative to 2019? How also does that look in short haul versus long haul? And how do you think that will evolve as we go through 2023, please? Second one is probably for Sean. BA [ is still ] looking at capacity at 92% of 2019 levels this year despite strong earnings in the first quarter and healthy transatlantic yields. Is this just not having enough planes? Or otherwise, why are we not seeing capacity higher?

[Nicholas Cadbury, executive]

I get the corporate travel. So just to reiterate: Kind of British Airways, for revenue, was around about 71% of 2019. And in Iberia, [ so as we said, mentioned ], they were ahead. So they were more closer to 80% overall. Actually, in British Airways, you saw it growing through the -- from January through to March. Every month, they grew, a little bit slower than we would have liked, but it grew. And actually it's grown again through the last few weeks on top of that as well. We've always said that we don't think that corporate travel will get back to 100%. We've kind of given this kind of 80% to 85% and are probably at the lower end of that range for this year in British Airways.

[Sean Doyle, executive]

In relation to capacity, maybe it's probably best to describe the British Airways plan by looking at key geographic segments. So on North Atlantic, we expect to be marginally ahead of 2019 levels, by the time we get to peak summer, of between 2% and 3%. I think our short-haul network as well will be above 2019 levels as we head into summer. I think what we're seeing which is kind of putting the ASK number down is a slowness in reinstating the Asia Pacific network. Now 2 reasons for that: One, we've only had China open up recently. So we will get back to daily services by summer in Shanghai and Beijing. And also, with the kind of Russian overflying, it's kind of taking more aircraft utilization for the [ in-state ] traditional markets like Hong Kong and Tokyo. So the big pull on capacity, which pulled them to 92%, is Asia Pacific and the fact that we're not reinstating that network to the extent that we had in 2019, but most of our other core markets [ will get out to or ] above 2019 levels over the summer. That reflects, I think, the robust demand that we do see and the outlook.

[Operator]

And your next question comes from the line of Jarrod Castle, UBS.

[Jarrod Castle, analyst]

Just first one, on the balance sheet. It's obviously a more favorable outlook. You've obviously got a big CapEx scheduled, but just in relation to the balance sheet, any kind of views in terms of ability to de-gear from the end of, I guess, this year onwards given the CapEx schedule and kind of current trading and, related to that, how you see getting back to investment grade?

I don't know if that's 1 or 2, but if that's -- you can decide, but the other question was just really an update on Air Europa. But yes...

[Nicholas Cadbury, executive]

That's definitely 3...

[Jarrod Castle, analyst]

Okay, then scrap that one. Someone else can ask that. Scrap that, Nick...

[Nicholas Cadbury, executive]

Just -- we'll answer all 3, as an exception. So just in terms of de-gearing, we obviously -- we reduced our debt by EUR 1.4 billion last year. And this year, you can see that actually our debt has come down by -- net debt has come down by EUR 2 billion, as I've kind of said in the script. A lot of that is due to the buildup of customer bookings who are going to fly later in the year, so you'd expect that to unwind as we get [ into the quieter Q4 ]. So you'd expect most of the EUR 2 billion of working capital to unwind overall. We gave guidance that net debt will be flat, so you're expecting it to be EUR 10.4 billion. We said that at year-end, but actually now we're giving more kind of positive guidance in terms of profitability. You need to kind of flow that from where we gave guidance before to wherever you end up. That outperformance, you need to flow through in your net debt expectations, so we do expect it to come down for this year. I guess we're continuously balancing -- looking at our balance sheet. We want to get back to investment grade, but we know that it's a priority to make sure that we're really servicing our customers in the best possible -- by getting best new aircraft in but also refurbishing our aircraft and also investing in sustainability. So we think, with our level of liquidity that we've got at the moment of EUR 15 billion, we've got some time over a couple of years to get down to that sort of level over time and balance that CapEx; and deleveraging in a kind of the best way, with a pragmatic sort of best way for the customer but also for our shareholders...

[Luis Martín, executive]

Okay. About Air Europa, we are starting to talk with the European Commission's and other authorities in the different jurisdictions in order to try to close the deal. As we said before, we expect that this process is going to take 18 months, but we remain confident that at the end it's a good operation for Madrid hub and also in order to have a strong hub to compete with the hubs in the North of Europe. And it's going to provide significant benefits to customers, employees and shareholders.

[Operator]

And your next question comes from the line of Stephen Furlong from Davy.

[Stephen Furlong, analyst]

2 questions, maybe 1 for Sean. Just I know there was a comment made about obviously BA corporate travel recovering slower. Change in nonpremium mix of seats in the long-haul fleet is also having a negative impact on unit revenue, so maybe you could just talk about maybe BA more in terms of premium and then nonpremium and also within that World Traveller Plus, please. And then maybe for Nicholas: I just note on the full year results and then again in this results there was a callout perhaps that we haven't seen before on IAG Loyalty. And maybe just talk why that is. Is it something you think the market is not thinking about or talking about on that business?

[Nicholas Cadbury, executive]

Shall I start with loyalty one? Yes. Just on loyalty, we've made good profitability [ in this ] EUR 81 million, so I guess it's just becoming a more substantial part of our profit. [ And so we'll just ] make sure we've got full transparency. It's also an interesting business because it's obviously capital light, good margins, good return on capital and some really important for -- not in driving its own profitability but for driving the profitability of all of our airlines as well. So it just becomes a -- really kind of at the heart of our business as well, so we just thought it's important to disclose that onwards.

[Sean Doyle, executive]

Yes. In terms of cabin mix changes across BA, what we do see is the growth in World Traveller and World Traveller Plus as we retired the 747s. And what we have been doing as well across the North Atlantic is deploying more A380s. And we see a reduction in club seats. So club seats will be down, or business class, by about 6%; World Traveller Plus, up about [ 18% ]; and World Traveller, up about 8%. So that mix effect both play into the yields projections that we do have because obviously we have more passengers, but the average yield will reduce with that mix effect. And that will begin to kind of correct as we begin to reinstate the long-haul fleet over the next couple of years. And I think we will have different [ type capacity ] at or above 2019 levels by the time we get into the last stages of 2024, so definitely transitioning. I think actually, considering the demand in leisure and premium leisure and having a lot more World Traveller Plus fleet as a great kind of segment to play in, it's a very important and profitable segment for the airline. And of course, what we do see as well is we reinstate club capacity. It comes with the new Club World suite, which is a significant upgrade to the product quality.

[Operator]

And your next question comes from the line of Muneeba Kayani from Bank of America.

[Muneeba Kayani, analyst]

So I just wanted to talk, get a bit more clarity on the yields that you are seeing. Nicholas, I heard you say "strong in 2Q," but if you could help us quantify that. Your competitors have talked about yields accelerating into 2Q, so are you seeing that? And I know it's early days on 3Q, but if you could help quantify that as well. And then on the guidance raise, if you can help us understand the moving parts: How much of this is simply the fuel benefit? Or have yields also turned out to be so far better than what you were expecting when you had given guidance earlier this year?

[Nicholas Cadbury, executive]

Okay. So just in terms of yields, we just -- we said in Q1 that our yields are up about 14% compared to -- or PRASK was up about 14% compared to 2019 and up about 30% versus last year. We're not giving kind of direct -- we're not giving guidance through the year, but what we're doing is we're seeing kind of those yields, versus 2019, holding up quite well. You would expect, kind of versus last year, to -- not to stay up 30% because we had a very, very good summer. I mean we almost -- we had the Omicron effect this time last year, so you'd expect those to come down, but all I can say is yields are, in terms of -- I mean they're holding up well at the moment, so overall. Just in terms of guidance, we're not giving specific guidance. Well, look. If I, I guess, just point you to Q1, so Q1 versus our sort of guidance: We were about 200 million ahead of guidance. And that was made up by about 3/4 of that came from kind of operating profit, kind of operating results. And that was in kind of yields and a little bit of cost. And about 1/4 of that was from fuel overall. As I said earlier, in our guidance, [ it does -- it feels to be ] very volatile. We've given you the sensitivities in there. We tend to be rather conservative because we just know that can unwind quite quickly overall.

[Operator]

And your next question comes from the line of Neil Glynn, AIR Control Tower.

[Neil Glynn, analyst]

If I can also follow up on Stephen's question on IAG Loyalty. The greater transparency is definitely appreciated. You mentioned EUR 81 million of operating profit in the first quarter of '23, which obviously looks, I guess, high in a seasonally low quarter in this stage of recovery, but could you help us understand what the first quarter of 2022 and the first quarter of 2019 looked like just for context to understand developments? And then the second question: I think, the first time in quite a long time, manpower numbers weren't reported this quarter -- and wondering. Can you give us that exact number or help us understand how manpower progressed relative to the fourth quarter of '19? I presume your crewing is fine for the summer, per previous commentary, but the productivity is obviously important to understand if you recover capacity.

[Nicholas Cadbury, executive]

I haven't got the loyalty numbers for 2019, but I can tell you just we had it on our Slide 6. It was, versus 2022, loyalty was up EUR 8 million year-on-year overall. Just in manpower numbers, we're just trying to probably give that every kind of half actually rather than every kind of quarter. We're just looking at it kind of as it comes rather meaningless looking at it every quarter, [ but we're looking ]. In terms of kind of employment, we've recruited about 17,000 people over the last year into the business. About -- just over 10,000 of those come into British Airways overall.

[Luis Martín, executive]

I think to add something to that. I think, this summer, we don't see any problems with our -- the number of people that -- we have enough people to fly all the capacity that we are explaining you today. In the first quarter, for example, in British Airways, yes, another 2,500 people, they have joined the company, but the risk that we can have this summer is that we are in an ecosystem. We need also airports and we need air traffic controllers to do their parts of the job. So still we are worried about the forecast of number of passengers in Heathrow because, with the plan that we have, we are considering that we are going to have more passengers than they think. And also as I said before, the French ATC strikes can have an impact in our customers; and that's something that we are trying to change and with the rest of the industry. We are talking to the European Commission in order to have protection of our flights in France and even to have a use of arbitration in case it's required to protect the rights of the passengers.

[Nicholas Cadbury, executive]

Neil, just going back to your earlier question about loyalty versus 2019. 2019, in Q1, we made around about EUR 50 million, so up from EUR 50 million, to EUR 81 million.

[Operator]

And your next question comes from the line of Harry Gowers, JPMorgan.

[Harry Gowers, analyst]

The first one is just on are you expecting corporate traffic to continuing recovering over the summer and that could provide maybe an extra boost to yields given the strong leisure demand already. Or is that more of a Q4 and a 2024 story? And then the second one, just on if you could quantify maybe how much slack or lower productivity have you actually built into the system for this year given the [indiscernible] operational disruption. And then maybe that can provide [ a cost boost ] going into 2024 as well.

[Luis Martín, executive]

Okay. I think, on the corporate traffic, Nicholas said before, I mean, the last 5 weeks, we see a positive evolution. And in BA, we are around 65% in volume and 75% by revenue, if we compare then the situation that we have in 2019. Different situation in Iberia, where they are in 95% in volume and above 100% in revenue. So business travel is recovering, but it's recovering at different rates across the different airlines. But we see a positive evolution. As we have explained previously, small and medium enterprises are traveling more than large corporates. And in the big corporates, we have different behavior in the different sectors. So for example, financial services are recovering faster than other sectors like technology, so what we see in general is the corporate customers are coming back to travel. And we expect to have more business passengers in the future.

The second question was about productivity. Yes, I think, as we are recovering the capacity, you see that we are improving our unit costs. And also we are improving also the labor costs because we have the fixed costs we can dilute with more ASKs. So it's something that it's improving, although we are negotiating with the different unions in order to increase the productivity for the future.

[Operator]

And your next question comes from the line of Conor Dwyer from Morgan Stanley.

[Conor Dwyer, analyst]

Just to come back quickly on fuel, for the first question. You were saying that you're not taking into account fully the prices that have come down so much. I was wondering what's stopping you from basically locking in the lower prices, even via options, if you're expecting a bit more of a decline going forward. And then the second question is we've seen a lot about the disruption in Q1, but the impact for you guys and the rest of the sector, so far, seems to be somewhat limited. And just thinking about going into the summer, I think the risk is increasing, as we head in there, [ because ] capacity obviously ramps up. Or do you think that, particularly for you guys and Heathrow, the risk is a bit more calm than it will have been certainly for last year but versus the start of this year as well?

[Nicholas Cadbury, executive]

Just on the fuel. I mean we are 63% hedged for the rest of the year, which we think is -- we have our own internal policy and we kind of work with the trend lines of that policy. I guess we don't hedge, for 2 reasons. We don't know if it's going to fall even further and then you come out uncompetitive, so that's the kind of danger of that as well. And also, just in terms of just in the markets at the moment, it's quite challenging to get hedging in the market at the moment, not just for us but for everyone. It's quite expensive. And you kind of get, you end up with caps and collars which are not particularly effective, so you've just got to be a bit careful with that at the moment. So...

[Luis Martín, executive]

Yes. Then about the disruption of the strikes that we had during the year. I think the HAL strikes that we had during Easter didn't have a big impact, although we needed to reduce or to cancel 5% of our so-called flights. And at -- also, Vueling strikes that we have in January, I think we handled well that situation. As I explained before, the difficulty was the ATC strikes in France, so -- where we had 34 days of strike between March and April. So 30% of daily European flights were impacted, according to the report from EUROCONTROL. So Spain was the second most impacted country, and U.K. the third. And this, for sure, has an impact in our passengers. So if we look at the cost of disruption: BA, they are in the region of EUR 30 million in the first quarter. And maybe, Sean, you want to comment on that.

[Sean Doyle, executive]

Yes. I think that's a reduction versus the year before, but as we said, about 60% will be -- short-haul flights will be impacted by French aerospace. I think we're #3 in terms of exposure to it, as well as Vueling; and that's what we're trying to work mitigations around at the minute. More broadly I think, just on Heathrow, looking ahead, as Luis said, the [ in-house ] strike doesn't have too much impact than the ones that are ongoing today. Again, we're navigating through that very well. And I think our [ resourcing picture ] is in a much better place this year than it would have been last year, but we do have air traffic control and the external ecosystem to cope with and mitigate against.

[Operator]

And your next question comes from the line of Sathish Sivakumar from Citi.

[Sathish Sivakumar, analyst]

So I've got 2 questions. The first 1 is around Aer Lingus. Obviously, if I look at the load factor, it is underperforming versus the other airlines. It's still around 74%, 75% mark. And just to -- I want to understand. Is it all like down to the lack of business travel coming in? Or is -- are you actually seeing even some weakness within the leisure segment there? Or the network itself has changed something, where you need to like ramp up and build that load factor there. And the second one, actually on the other revenues. Could you actually give us color on the holiday bookings [ and their progress ] as we go into Q2 and Q3? That will be helpful. And then also the trend -- in Q1, the trend between loyalty and holiday is helpful.

[Luis Martín, executive]

Okay, about the question of Aer Lingus, and I'm sure that Lynne can talk more about this. So we have a very strong leisure demand from the U.S., but it's true -- also in the leisure-focused destinations in Europe, but corporate business, they are more exposed to the technology sector. And you have seen that there is a slowdown in that sector, but maybe, Lynne, do you want to comment on that?

[Lynne Embleton, executive]

Yes. Let me come in. So overall actually our load factor for Q1 '23 is above our load factor for Q1 in 2019. And of course, we've been growing our long-haul business and we've been filling our seats there well. The weakness, which really links back to what Nicholas and Luis have already talked about, is in that one-day trips, one-night-stay business travel, particularly between Ireland and the near European markets like the U.K. Now we have seen some positive signs in recent weeks that that's picking up again, so I'm hopeful that we'll get bigger loads on our business traffic in the months ahead.

[Nicholas Cadbury, executive]

Yes. Just on the split of other revenue: Other revenue went from -- in the quarter went from EUR 348 million to EUR 525 million, so up around 50%. We don't give the split in the quarter, but you can look at the year-end results to see how it kind of generally splits overall. But actually we -- it covers maintenance, MRO. It covers our holiday business from BA Holidays and it also covers our loyalty business. And we saw all 3 of those areas were strongly up year-on-year and on a 3-year basis as well, so...

[Operator]

We will now go to your next question, and the question comes from the line of Andrew Lobbenberg from Barclays.

[Andrew Lobbenberg, analyst]

Can I ask about labor? In the context of productivity, you just said talks were ongoing with unions [ and improve ]. And obviously unions are very interested in mitigating inflation, so yes, how are the relations across the businesses and the main work areas in terms of inflation talks and productivity? And I think you've cut back the capacity a bit at Vueling, so are there issues there that remain unresolved?

Second question would come around slots. Obviously you've got the slots back from Flybe at BA. And you just sent them out on loan to Loganair. Would you be expecting to take those back into the family and start flying them yourself, and when? And equally, the slots that are out on lease to easyJet at Gatwick, are you expecting to take those in, in the coming years? Or would you expect to be selling them or keeping them out on lease?

[Luis Martín, executive]

Okay. So about the different negotiations that we have, I think the situation is different in the different airlines and the different countries. So if we start, for example, with Iberia: They close agreements with all the groups of employees and they have agreements in place until the end of 2025. Iberia Express, for example, they have reached an agreement with the ground staff. They are trying now to close an agreement with cabin crew and also with pilots. Vueling, as you said, they are trying to reach an agreement in order to invest in the future because -- and we want to have an agreement that reflects the situation of the company. We understand the pressure from inflation. We all suffer that, but we need to understand also that what we can give to our employees must be related to the performance of the company and the performance of the group. So they are right now in the middle of their negotiations. And it's true that we have adjusted the capacity for the summer because we need to be sure that we are going to have CBA that allow the group to invest more in the company.

And in the case of British Airways and Aer Lingus, they are now in the middle of their negotiations. And again we want a similar model. We want to reward our people. And we understand the pressure everybody is suffering, but we want also to link the reward with the performance of the different airlines, with the productivity, with the customer experience and with the results. And that's what we are trying to do right now.

[Sean Doyle, executive]

In relation to slots, let me start with Gatwick, yes. The Gatwick situation is that we have launched Euroflyer. It's flying about 19 aircraft this summer. And the AOC migration has gotten underway, so that's very much on track according to our original plans. We will, over the next 4 years, take back slots we have leased out, to continue to grow that business. And of course, Vueling has expanded its base at Gatwick as well, so I think, over the next 4 years, you will see that slot portfolio come back into the -- in IAG's hands. The situation in relation to the Flybe slots is a little bit more dynamic. Those slots came back to British Airways [ pretty late in the day ] as a result of slightly going into administration. Those slot pairs are available for people to apply for as a result of the original British Midland merger remedy. So that situation is fluid, so I think we'd have to understand 2 things first.

One is what's the likelihood of somebody else coming in and applying for that remedy and taking up that slot portfolio. And I think, if that likelihood is low, then there is optionality to figure out what we do with those slots in the future, but at the minute, the slot portfolio British Airway has, excluding those remedy slots, is kind of more than sufficient to fulfill our expansion plans. But we just have to wait and see what happens in relation to the remedy uptick before we have clarity on those slot pairs.

[Operator]

And your next question comes from the line of Johannes Braun from Stifel.

[Johannes Braun, analyst]

Yes. I have also 2. The first 1 actually is going back to the outstanding CLAs for this year, especially for BA. Can you give us any indication when those talks will actually close and what kind of labor cost inflations you have included in your unit cost guidance for this year? I'm not sure if the unions have voiced any concrete demands in terms of wages.

Secondly, how do you see the industry's capacity developing this year but also the next years? And one of your main competitor is talking about structural bottlenecks in the industry relating to airports, spare parts, engines, maintenance, capacities and so on, which will obviously keep supply-demand in a positive position not only, hopefully, for this year but also for next. Just wondering if you have the same view.

[Nicholas Cadbury, executive]

I was going to just talk about employment. Just in terms of employment, I think it would be -- we've given you guidance on where our nonfuel costs are [ as agreed with the overall ], so I think we're going to leave it at that level at the moment. I think it wouldn't be kind of appropriate to talk about what we are expecting to negotiate with in a negotiation that we're under at the moment, but it's early days in terms of where the negotiation is. So we'll keep you informed as we go through the quarters.

[Luis Martín, executive]

Yes. And about your second question. As I said in the first question, the capacity in our main markets are still below the capacity that -- in the total market that we have in 2019. And if we add to that problems that, the different OEMs, they are having for delivering the aircrafts, I think this situation is going to continue for several years. So it's true that, for example, the latest delays announced in the 737s are not going to impact us. And we expect to take delivery of 29 aircraft in total this year, so we are not going to be affected, but the restrictions in the number of aircrafts in the market, the problems with the supply chain is affecting the capacity. So for example, we are suffering that in the engineering part of our business, where we are having some issues in order to have enough spare parts to maintain the fleet. And that is impacting also in the utilization of the aircraft. Airports, it's going to be a challenge. Again, the summer, I think everybody is in a better situation than last year. And as I said before, we hope that Heathrow is going to have enough resources for all the capacity that we plan to operate.

[Operator]

[Operator Instructions] And your next question comes from the line of Achal Kumar from HSBC.

[Achal Kumar, analyst]

2 for me, please. So going back to your loyalty program. So basically you added 1.2 million new customers. In terms of profitability, what kind of growth do you see? And what all you're planning to do there, I mean, to sort of accelerate the profitability in that business. And what kind of profitability do you see going ahead given that you're adding so many new members? Secondly, about your ETS and SAF. So it's -- so if next year [ really these allowances are cut ], how do you see yourself as compared to your competitors? And if you could also give us a bit of color on your SAF offtake agreements, please.

[Nicholas Cadbury, executive]

So just on the loyalty program. We're not giving long-term forecasts on our loyalty program. I think we just started to disclose the profitability last year, which was over EUR 200 million. And as we just said, we've grown the profit from -- over the last 3 years from EUR 50 million to EUR 81 million. And it's up again year-on-year this quarter as well, so good growth. You're seeing particularly strong growth. Obviously the Avios points are generated by our airlines, but we're seeing particularly strong growth from some of our non-air partners, the likes of Amex, Barclaycard as well. And we're just starting to also launch other kind of new programs as well. So if you want to stock up on your wine, the best place [ to realize this is ] from our Avios wine website as well. And you'll see more of those kind of initiatives coming online, which hopefully kind of drives longer-term engagement and both for Avios points but also for our airlines as well, so...

[Luis Martín, executive]

Okay. And about the SAF question. I think there is a good progress in Europe and also in U.K. about the SAF mandate. And also in U.K., yes, I think there is a good progress with the second mandate SAF consultation that we are having right now, but what we need is clear policies in order to invest to have enough plants to produce the 10% SAF that we want to use in 2030. For that, we consider it's going to be needing like 14 plants in U.K. And now the plans -- is to have under construction, in 2025, 5 of them. That is not going to be enough. So we have now assured 25% of the SAF that we need for 2030. And the investment that we have made is $865 million, but yes, we need more SAF. We need more affordable SAF. And we consider it's an opportunity also for U.K. and for Europe to try to lead the production in SAF that is going to be required to achieve the net zero emissions objective for 2050.

[Operator]

Thank you. I will now hand the call back for closing remarks.

[Luis Martín, executive]

Okay. So thank you very much, everybody. I think, as I said, we are happy to present a profitable first quarter after -- the first one after 2019. And I am sure that we are going to continue giving good news during the rest of the year.

Thank you very much.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.