IAG International Consolidated Airlines Group S.a.

IAG full year results 2023

Strong growth in operating profit in 2023 underpinned by robust and sustainable demand for travel, alongside continued investment in our transformation to drive long-term earnings growth.

Summary

•  Strong and sustained demand for travel, in particular in leisure

•  Full year 2023 operating profit before exceptional items of €3,507 million significantly higher than last year and ahead of 2019 (2022: €1,247 million; 2019*: €3,253 million)

•  Operating margin of 11.9% (2022: 5.4%) delivered by our transformation programme

•  Strong free cash flow generation of €1.3 billion has delivered a strong balance sheet, with net debt to EBITDA before exceptional items of 1.7 times (2022: 3.1 times), below our target of 1.8 times over the cycle

•  Positive outlook for 2024: confidence in significant free cash flow generation; disciplined capital allocation will maintain our strong balance sheet; committed to sustainable shareholder value creation and cash returns

Strategic highlights

•  Capacity growth in 2023 of 22.6% vs 2022, focused on our core North Atlantic and South Atlantic markets

•  Revenue and cost transformation initiatives driving improvements to our customer proposition

•  Our Spanish businesses delivered €1.4 billion of operating profit (2022: €0.6 billion), highlighting the greater balance in our portfolio

•  Our highly cash-generative, high-margin IAG Loyalty business grew profits by 17% to £280 million, adding 4.9 million new members (17% increase in new members) during the year

•  Quarter 4 2023 operating profit before exceptional items of €502 million (quarter 4 2022: €477 million)

•  Continued investment in our people, with 13,000 new colleagues hired in 2023

•  One third of our sustainable aviation fuel target for 2030 is now committed

Luis Gallego, IAG Chief Executive Officer, said:

"In 2023, IAG more than doubled its operating margin and profits compared to 2022, generated excellent free cash flow and strengthened its balance sheet position, recovering capacity to close to pre-COVID-19 levels in most of its core markets.

"In 2024, we will execute on our strategy, building long-term value into the business. We will focus on strengthening our core airline businesses and on developing IAG Loyalty and our other asset-light growth opportunities, and we will do this while operating under a strong financial and sustainability framework. Our airlines operate in the largest and most attractive markets globally and we will continue to invest in our brands to transform the business, improve the customer experience and support the delivery of sustainable growth and world-class margins. 

"I would like to thank all of the teams across the Group for their continued hard work and dedication to delivering our transformation plan."

Financial summary:

1  The 2022 results include a reclassification to conform with the current year presentation for the Net gain on sale of property, plant and equipment. There is no impact on the Profit after tax.

2  Total liquidity includes Cash, cash equivalents and interest-bearing deposits, plus committed and undrawn general and aircraft-specific financing facilities.

*The 2019 results include a reclassification to conform with the current year presentation for the Net gain on sale of property, plant and equipment, and a restatement for the treatment of administration costs associated with the Group's defined benefit pension schemes.

The definition of the Group's alternative performance measures is set out in the Alternative performance measures note to the consolidated financial statements, which includes: Free cash flow; Net debt to EBITDA before exceptional items ('leverage'); and Return on invested capital. Capital expenditure is measured as the 'Acquisition of property, plant and equipment and intangible assets' from the Cash flow statement. Operating margin is shown before exceptional items. All other profit, revenue and cost metrics are quoted on a statutory basis, unless indicated otherwise.

Financial highlights for 2023

•  Restored 95.7% of 2019 capacity, measured in available seat kilometres (ASKs), with quarter 4 at 98.6% of 2019

•  Passenger unit revenue for the year was 8.2% higher than in 2022, with strong leisure traffic recovery and business traffic recovering more slowly. The premium leisure segment continued to perform very well

•  Non-fuel unit costs reduced by 4.4% versus 2022, driven by a passenger capacity increase and transformation initiatives, offsetting inflation and the investments we are making in our customer offering and our systems

•  Fuel unit cost was up 0.7% versus 2022, with effective fuel prices after hedging broadly unchanged from 2022 and the Group's investment in more fuel-efficient aircraft partially offsetting increased costs of Emissions Trading Schemes

•  Profit after tax for the year of €2,655 million (2022: €431 million)

Outlook

•  Demand continues to be robust, with particular strength in leisure travel. We are currently 92% booked for Q1 2024 and 62% booked for H1 2024*, ahead of our position last year

•  We are continuing to invest in our core markets and in growing our global leadership positions. We plan to grow capacity (ASK) by c.7% in 2024. In particular British Airways will continue to rebuild to its pre-COVID-19 long-haul capacity and Iberia to grow efficiently in the attractive and growing Latin American market

•  We expect our non-fuel unit costs to increase slightly in 2024, as we invest in our businesses. Our ongoing transformation programme will help us to offset the impact of inflation, improve our customer proposition and support the delivery of world-class margins and returns over the medium term

•  We expect to generate significant free cash flow during the year, prior to the benefit of any leasing transactions and with no additional pension or material debt maturity repayments this year. This is net of capital expenditure related to our investment plans of around €3.7 billion in 2024

Delivering our strategy

Our strategy is designed to generate sustainable earnings growth at world-class margins, the combination of which we expect to drive sustainable returns to shareholders.

This will be achieved by focusing on three strategic imperatives:

1 Strengthening our core

Growing our portfolio of global leadership positions

IAG has leading positions in highly attractive, secular growth markets, in particular the valuable North Atlantic, South Atlantic and Domestic Spanish markets.

Airline markets worldwide were particularly strong in 2023 as demand for experiences increased and lifestyle priorities changed post-COVID-19. Leisure travel has been the strongest driver of passenger demand across all of our cabins. Corporate travel continues to return more slowly, in particular in short duration and short-haul trips.

Investing in our market-leading positions

We are focused on ensuring disciplined capacity deployment into our markets. British Airways is planned to return to pre-pandemic levels of non-premium capacity in 2024; long-haul capacity by 2025; and premium capacity by 2026. Iberia is deploying capacity into a structurally attractive long-term market which is supporting profitable growth. All of our airlines are supporting their growth in an efficient way through a combination of improved aircraft utilisation and more modern, new generation aircraft.

Investing in the North Atlantic - the largest aviation market from Europe

IAG and its joint business partners have market share of 45% on the North Atlantic market and it represents 32% of IAG's total capacity by ASK. We serve North America 150 times each day to 29 destinations, 30% more than nearest competitor.

Aer Lingus

•  Aer Lingus has a unique advantage of strong cultural and geographic links to its core US long-haul market, as well as US-border pre-clearance at Dublin airport

•  2023: reopened Hartford and launched Cleveland

•  2024: expanding network to 21 routes to the US and Canada, including restarting Minneapolis and new route to Denver

British Airways

•  British Airways is the market leader to North America from London, a highly-valuable and mainly point-to-point market

•  2023: new route to Cincinnati and back to 100% of pre-COVID-19 total capacity

•  2024: focus on frequencies and adding premium seats as it builds back towards its pre-COVID-19 premium and non-premium North Atlantic capacity

Iberia

•  Iberia serves destinations in North America with strong commercial or cultural links to Spain

•  2023: consolidation of the new routes to Dallas and Washington that were launched in 2022

•  2024: growth to Los Angeles and further investment in route maturity through reinforcing its presence in select US markets

LEVEL

•  Strong growth to Boston and New York, as it develops the long-haul, low-cost model from the valuable Barcelona market. New route to Miami in 2024

Delivery of three Airbus A321 XLRs in 2024 will allow us to create a competitive advantage over our European peers by using our geographic advantage to develop our network at low cost.

*as of 25 February 2024

Investing in the structurally growing South Atlantic market

IAG and its joint business partners have market share of 32% on the attractive South Atlantic market representing 19% of IAG's total capacity by ASK. IAG operates 45 flights each day to and from Latin America.

Iberia

•  Iberia has strong cultural links to Latin America. It is also well-placed to build on the growing traffic from Latin America to Madrid as investment and migration of a wealthier demographic increases

•  2023: Increasing frequencies to primary cities in core LATAM markets, including Bogotá, Mexico City, Lima, Montevideo and Quito

•  2024: further development of frequencies to core markets

•  Using new A350-900 is more efficient and supports higher utilisation, helping to drive a 10 percentage point improvement in unit operating cost versus the previous generation A340-600

•  Opportunities to deploy A321 XLR to select geographies and secondary cities

LEVEL

•  Strengthened its network between Barcelona and Latin America, including resuming the Santiago de Chile route. Further investment in 2024

British Airways

•  Adding frequencies to Rio de Janeiro and adding a tag flight to Buenos Aires

We announced our proposed Air Europa acquisition in 2023, which will allow for network development in Latin America. We submitted our regulatory application to the European Commission in December; this moved to Phase 2 in early 2024 with a resolution expected in late 2024.

European short-haul market

This represents 34% of IAG's total capacity and is served by our network carriers delivering feeder traffic, alongside our efficient low cost operations providing a combination of feeder and point-to-point services. Our disciplined approach to capital allocation gives us the flexibility to focus investment in order to maximise sustainable, profitable growth.

Vueling

•  Delivering efficient growth through higher utilisation and up-gauging of existing fleet

•  De-seasonalising its network, with a focus on winter sun destinations

•  Strengthening its Spanish domestic position through investment in Barcelona and Bilbao

•  Leader in select European hubs, such as Paris-Orly to Spain; investing in London Gatwick to Spain

Strong performance from Iberia Express, including to the Spanish Islands throughout the year.

BA Euroflyer started operations under its own Air Operator Certificate ('AOC') in January 2023, focusing on the leisure point-to-point market in Europe. Its fleet increased from five to 20 aircraft during the year. 

Once LEVEL has established a new AOC this gives the Group further flexibility in considering its options in short-haul operations.

Strengthening our portfolio of world-class brands and operations

Investing in our products and services to drive better customer experiences

We recognise that we need to continue to drive investment in the propositions of all our airlines to improve the customer experience. We are investing in our propositions to ensure we are competitive and remain attractive to our loyal customers.

Investing in our fleet:

•  34 aircraft delivered in 2023, of which 32 were new generation, efficient and sustainable aircraft with the latest onboard seat offerings

•  British Airways now has 68% of its Heathrow-based long-haul fleet embodied with the Club Suite product. The focus in 2024 will be on the Boeing 787 fleet

•  Iberia is delivering a step-change in customer experience with its new A350 fleet, retrofitting its A330 fleet with its new cabins and its A320-family fleet for the new 'L' overhead bins

•  In 2023 we converted 10 A320neo options to firm deliveries in 2028 as replacement aircraft for our short-haul network

•  We also announced a new order for six Boeing 787-10 aircraft to be delivered to British Airways in 2025 and 2026 to accelerate its premium widebody capacity recovery; and one new Airbus A350-900 aircraft for Iberia

Investing in our products and services:

•  Aer Lingus aims to maximise the benefits of its unique customer base with a competitive onboard product, including its next generation business seat, digital self-service capability, as well as a differentiated service from our Connected Crew programme

•  British Airways is focused on investing in a premium proposition across its cabins, including its lounges (London Heathrow, Edinburgh, Glasgow, Miami, New York JFK), onboard food and in-flight entertainment content. Investment in all of its customers across every cabin includes further development of its call centre in Delhi, using better IT and systems as well as a proactive customer care team

•  Iberia similarly continues to invest in its highly-rated customer proposition, including at check-in and in its Madrid lounges; rolling out new Do&Co menus in all cabins; and making further progress in the digitalisation of our customers' journey, specifically with the digital concierge, WhatsApp text assistant and call-centre Smart Voice assistant

•  Vueling's positioning as a value low-cost carrier sees a focus on its digital proposition across the customer journey: digital touchpoints across the airport journey, better digital self-service in disruption and digital assistance in the customer care channels

During 2023 our customer Net Promoter Score ('NPS') increased very slightly, which was driven positively by our investments in new products and services but negatively affected mostly by the impact of disruption, much of which is outside our control.

Investing in our operations

Efficient operations are a major driver of both customer satisfaction and direct financial (revenue and cost) performance.

•  Iberia continues to deliver excellent operational performance. In 2023 Iberia was the most punctual airline in Europe and the fifth-most punctual airline in the world with On-Time Performance ('OTP') at 88.6%

•  Vueling's OTP in 2023 was 80.0% after benefiting from the integrated approach to planning, scheduling and operations implemented over the last few years

•  Aer Lingus' OTP was 67.5% as it was affected in particular by ATC issues in the UK and France

•  British Airways was affected by similar issues, as well as still recovering its full operational capability at London Heathrow, with OTP in 2023 of 59.7%. As a result significant resource has been invested to drive better performance and some early initiatives are now starting to deliver improvement:

•   Improved OTP in December 2023 at 67.2% and a strong start to 2024. British Airways' OTP in January 2024 up 16 points to 79.8%, significantly better than January 2023 and close to January 2019 levels

•   First wave departures improved to 87% through dedicated resource, integrated planning, ongoing recruitment and training and better performance management

•   Integrated operations programme tools already adding value (performance dashboard, predictive maintenance, schedule, aircraft assignment)

•   A new operating model for London Heathrow will be rolled out for the summer

Transforming our businesses to drive sustainable earnings growth

IAG's transformation programmes are designed to create better businesses at each of its operating companies that are more efficient and resilient in order to sustain long-term competitive advantage

Customer and Innovation

Many of our revenue transformation initiatives are driven by technology and data. Some examples are as follows:

•  British Airways is in the middle of a major transformation of its commercial digital platforms which it expects to deliver significant revenue benefits over the next three years. Improvements to British Airways' 'ba.com' website and app are expected in 2024, including a better content management system, as well as improvements in the revenue management system to follow

•  Iberia is developing its personalisation capability, which will allow for greater content differentiation and digital marketing optimisation  

•  Vueling is continuing to improve its customer offering to drive ancillary revenue through developing its bundles and products

•  The Qatar Joint Business is an opportunity for IAG to develop its network and customer proposition, particularly into the African and Asian markets. This includes greater commercial integration, as well as through the use of Avios 

Efficiency

•  Disruption was a major cause of cost inflation in 2023, as well as impacting customer NPS. British Airways has invested significantly to improve its On Time Performance in 2024, which will lead to cost savings through greater productivity and efficiency, as well as reducing EU261 costs and improving customer satisfaction

•  IAG's investment in new aircraft will drive significant efficiency gains, as well as network benefits. New generation aircraft are typically c.20% more fuel-efficient than the previous generation and Iberia's new A350s' superiority over the A340s is allowing more capacity to be added to Latin America much more productively

•  As well as supporting revenue growth, New Distribution Capability will drive cost savings across all of our carriers

•  Third party supplier costs have seen significant inflation over the past couple of years and this is a big area of focus across all parts of IAG. Savings will be made through procurement in engineering and maintenance, and food and beverage; efficiencies in handling; and pricing across the supply chain

2 Driving earnings growth through asset-light businesses

Growing IAG Loyalty

Our loyalty business has continued to deliver a very strong performance, supporting higher earnings growth and margins, as well as strong cash flow.

•  Record operating profit £280 million, up 17% year-on-year and 59% higher than 2019 operating profit

•  Driven by our better customer engagement as we re-invest our margin in more attractive products:

•   4.9 million new members enrolled in 2023 (17% increase in new members versus 2022) to support future value growth

•   More Avios are being collected through demand to fly on our airlines and strong third-party partnerships, with issuance up 37%

•   More Avios are being redeemed through increasing our range of offerings: 27 Avios-only flights on offer to a range of 11 popular destinations; or using Avios as payment for BA Holidays (c.20% of holidays sold have used some Avios as payment)

•   Opportunity to develop BA Holidays further, as part of an integrated loyalty ecosystem

Leveraging our strategic airline partnerships

IAG also seeks to generate capital-light value through its strategic airline partnerships, mainly through joint businesses that provide customers with a worldwide network of destinations and flights.

•  In 2023 Iberia joined the Qatar Joint Business (QJB) and launched a service from Madrid to Doha

•  As a result the QJB became the largest joint business in the world by number of countries, with Qatar bringing a strong network across Africa and Asia

•  In 2024 British Airways will fly two daily services to Doha, giving its passengers access to that strong onward network

•  Iberia will also start flying to Tokyo in 2024 as part of the Siberian Joint Business and British Airways will be back to two daily flights there in the summer

3 Operating under a strengthened financial and sustainability framework

Industry leader to Net Zero

We continue to state the case for the positive social impact of aviation. Specifically, we are making further progress in our initiatives to deliver our sustainability targets:

•  IAG has been awarded Eco-Airline of the year by Air Transport World for industry leadership and best-in-class Sustainable Aviation Fuel (SAF) programme

•  We are taking an active role in EU and UK discussions on SAF, in particular around mandate design and potential pricing mechanisms

•  IAG was the third largest user of SAF globally in 2023. We have now announced our largest-ever SAF purchase with Twelve, to provide advanced power-to-liquid SAF with a lifecycle emissions reduction of at least 80%. Our total contracted SAF commitment is now at approximately one third of our 2030 target

•  We are investing in 178 new aircraft between 2023 and 2028. New aircraft are generally around 20% more fuel-efficient than the previous generation and significantly quieter. 24% of IAG's short-haul fleet is currently new generation and 42% of long-haul

•  Carbon intensity reduced by 3.6% year-on-year and is more than 10% down on 2019 levels

•  CORSIA and ETS - IAG spent €264 million on carbon credits in 2023 and supports the proposed global CORSIA offset scheme

Disciplined capital allocation and balance sheet management

IAG has historically delivered market-leading Return on Invested Capital through its disciplined allocation of capital to its operating companies. As disclosed at our Capital Markets Day in 2023, through our strategy we are targeting the following metrics for the Group in the medium term:

•  Operating margins of 12% to 15%.

•  Return on Invested Capital of 13% to 16%

•  Organic average annual capacity growth of 4% to 5% between 2024 and 2026

Our operational and financial performance in 2023 has allowed us to strengthen the balance sheet, while investing in our continued transformation. We ended the year at 1.7 times leverage, below our target of 1.8 times through the cycle.

Given the Group's strong cash-generation capability, in 2024 we expect to generate significant free cash flow, prior to the benefit of any leasing transactions and after capital expenditure of around €3.7 billion in the year.

This is further strengthened by the fact that we have no additional pension payments or non-aircraft debt repayments in 2024.

Our first priority is to maintain our strong balance sheet.

We will continue to invest in our business to support sustainable growth and margins.

We are committed to sustainable shareholder value creation and cash returns.

LEI: 959800TZHQRUSH1ESL13

Forward-looking statements:

Certain statements included in this announcement are forward-looking. These statements can be identified by the fact that they do not relate only to historical or current facts. By their nature, they involve risk and uncertainties because they relate to events and depend on circumstances that will occur in the future. Actual results could differ materially from those expressed or implied by such forward-looking statements.

Forward-looking statements often use words such as "expects", "believes", "may", "will", "could", "should", "continues", "intends", "plans", "targets", "predicts", "estimates" "envisages" or "anticipates" or other words of similar meaning or their negatives. They include, without limitation, any and all projections relating to the results of operations and financial conditions of International Consolidated Airlines Group, S.A. and its subsidiary undertakings from time to time (the 'Group'), as well as plans and objectives for future operations, expected future revenues, financing plans, expected expenditure, acquisitions and divestments relating to the Group and discussions of the Group's business plans, and its assumptions, expectations, objectives and resilience with respect to climate scenarios. All forward-looking statements in this announcement are based upon information known to the Group on the date of this announcement and speak as of the date of this announcement. Other than in accordance with its legal or regulatory obligations, the Group does not undertake to update or revise any forward-looking statement to reflect any changes in events, conditions or circumstances on which any such statement is based.

Actual results may differ from those expressed or implied in the forward-looking statements in this announcement as a result of any number of known and unknown risks, uncertainties and other factors, including, but not limited to, economic and geo-political, market, regulatory, climate, supply chain or other significant external events, many of which are difficult to predict and are generally beyond the control of the Group, and it is not reasonably possible to itemise each item. Accordingly, readers of this announcement are cautioned against relying on forward-looking statements. Further information on the primary risks of the business and the Group's risk management process is set out in the Risk management and principal risk factors section in the Annual report and accounts 2022; this document is available on www.iairgroup.com. All forward-looking statements made on or after the date of this announcement and attributable to IAG are expressly qualified in their entirety by the primary risks set out in that section.

IAG Investor Relations
Waterside (HAA2),
PO Box 365,
Harmondsworth,
Middlesex,
UB7 0GB

Investor.relations@iairgroup.com

CONSOLIDATED INCOME STATEMENT

1  The 2022 results include a reclassification to conform with the current year presentation for the Net gain on sale of property, plant and equipment within Operating profit. Accordingly, for the year and three month period to 31 December 2022, the Group has reclassified gains of €22 million and losses of €9 million, respectively, from Other non-operating credits to Expenditure on operations. There is no impact on the Profit after tax.

ALTERNATIVE PERFORMANCE MEASURES

All figures in the tables below are before exceptional items. Refer to Alternative performance measures section for more detail.

1  The 2022 results include a reclassification to conform with the current year presentation for the Net gain on sale of property, plant and equipment within Operating profit. Accordingly, for the year and three month period to 31 December 2022, the Group has reclassified gains of €22 million and losses of €9 million, respectively, from Other non-operating credits to Expenditure on operations. There is no impact on the Profit after tax.

FINANCIAL REVIEW

In the commentary below, references are made in selected places to variances versus 2019 to aid understanding, due to the significant reductions in capacity the Group's airlines made due to the impact of the COVID-19 pandemic in the period from 2020 to 2022. It is anticipated that 2023 will be the last year for which analysis versus 2019 is required.

IAG capacity

In 2023, passenger capacity operated, measured in available seat kilometres (ASKs), rose by 22.6% versus 2022. For the year, capacity operated was 95.7% of 2019 levels and capacity was almost fully restored to 2019 levels by the end of the year, reaching 98.6% of 2019 levels in the final quarter.

Capacity operated by region

Whilst capacity was fully restored to most of IAG's markets, the recovery in the Asia Pacific region was slower, linked to later easing of COVID-19 restrictions in the region.

Capacity operated by airline

In 2023, British Airways had only restored 90.1% of its total 2019 capacity, as the substantial majority of the Group's capacity to the Asia Pacific region in 2019, for which recovery following COVID-19 has been slower, was operated by British Airways. Capacity for British Airways was also impacted by the accelerated retirement of its Boeing 747-400 fleet during the COVID-19 pandemic and further restoration of capacity is planned for British Airways in 2024 and 2025. The reduction in LEVEL versus 2019 relates to the discontinuation of operations from Paris Orly in 2020, with the capacity of LEVEL's operation in Barcelona up 32.4% versus 2019.

Domestic and Europe

Capacity and passenger numbers in IAG's Domestic markets, which are predominantly within mainland Spain and to the Canary and Balearic Islands, increased in line with strong leisure demand, with capacity 7.8% higher than 2022, and with a higher passenger load factor of 89.5%, which was up 4.0 points versus the previous year. Capacity and the passenger load factor were also higher than in 2019, up 8.4% and 2.3 points respectively.

The Group's capacity in Europe was 15.4% higher than in 2022, also boosted by the demand for leisure travel. Aer Lingus began services to Brindisi, Kos and Olbia. British Airways expanded the flying undertaken by its subsidiary launched at London Gatwick airport in 2022, BA Euroflyer, with new routes including Corfu, Mykonos, Innsbruck, and Fuerteventura. Vueling's new routes include a service from Barcelona to Rovaniemi (Finland) and the airline added an extra aircraft at its Bilbao base, with six new routes launched. Passenger load factor for the region was up 4.4 points versus 2022 to 85.9% and was up 2.3 points versus 2019.

North America

The Group's airlines launched new routes and increased services to North America, one of the Group's core profit pools, with capacity 23.0% higher than in 2022 and 3.2% higher than in 2019. Aer Lingus started flights to Cleveland and resumed its route to Hartford, Connecticut, together with additional frequencies to Los Angeles, Seattle, Orlando, and Washington DC. The airline will resume its service to Minneapolis and launch a new route to Denver in 2024. British Airways launched services from London Heathrow to Cincinnati and from London Gatwick to Vancouver, a destination already served from its London Heathrow hub. The airline plans further increases in 2024, including doubling its services to San Diego in the summer. Iberia increased its recently-launched routes to Dallas and Washington to year-round services. LEVEL increased its capacity to North America by 23.8% in 2023 and in 2024 will increase further, with a new route from Barcelona to Miami and significant capacity increases to Boston, Los Angeles and New York, JFK. Passenger load factor for the region was up 3.6 points versus 2022 to 82.9% and was down 1.2 points versus 2019.

Latin America and Caribbean (LACAR)

IAG's other core international profit pool is the Latin America and Caribbean region, including Iberia's network of 20 daily flights to the region and British Airways flights to the Caribbean. British Airways launched flights from London Gatwick to Aruba and Guyana. Iberia increased its capacity to primary cities such as Bogotá, Lima, Mexico City, Montevideo and Quito. LEVEL increased its route to Santiago de Chile to operate as a year-round service, with LEVEL's capacity to the region up 45.4% versus 2022. IAG's capacity in LACAR grew 18.8% versus 2022, although was still down 1.7% on 2019, linked to the retirement of aircraft following the COVID-19 pandemic, with further long-haul aircraft due for delivery in 2024. Passenger load factor for the region at 87.6% increased 2.5 points versus 2022 and was up 1.2 points versus 2019.

Africa, Middle East and South Asia (AMESA)

Capacity to this region was up 32.2% on 2022 and up by 1.1% versus 2019. BA Euroflyer launched a service from London Gatwick to Sharm El Sheikh. British Airways began flights from London Gatwick to Accra and the airline will resume flights to Abu Dhabi in 2024. Iberia started services to Cairo and launched a new route to Doha, which will serve to develop its network with partner Qatar Airways. Vueling's new routes from Barcelona included Luxor and Sharm El Sheikh. Passenger load factor for the region was up 2.2 points versus 2022 to 83.3% and was up 0.3 points versus 2019.

Asia Pacific

During 2023, the Asia Pacific continued to be the least recovered region from COVID-19, as restrictions linked to the pandemic were lifted later than in other markets and industry recovery has been slower. British Airways services to Shanghai and Beijing resumed in the summer 2023 travel season and during the year the airline increased frequencies to Hong Kong and Tokyo Haneda. Iberia will re-open its route to Tokyo in October 2024. The increases during 2023 led to capacity 258.0% higher than 2022 but still 59.7% lower than 2019, with the passenger load factor for the region up 4.4 points versus 2022 to 88.4% and up 2.6 points versus 2019.

Basis of preparation

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 severe but plausible downside scenario. Having reviewed these scenarios and sensitivities, and the Group's aircraft financing requirements, 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 consolidated financial statements.

Summary

The Group was able to substantially restore its capacity compared with 2019 and saw recovery in all its businesses, with particular strength in Spain and the North and South Atlantic. Fuel costs were substantially higher than in 2019 and the Group also faced higher supplier cost inflation. The Group was able to successfully offset both of these challenges through its high-quality and increasingly diverse revenue stream, and through continued transformation of its businesses. The net result was an Operating profit for the year of €3,507 million, versus an Operating profit of €1,278 million in 2022. The Profit after tax for the year was €2,655 million, versus a profit of €431 million in 2022.

Profit for the year

1  The 2022 results include a reclassification to conform with the current year presentation for the Net gain on sale of property, plant and equipment within Operating profit. Accordingly, for the year to 31 December 2022, the Group has reclassified gains of €22 million from Other non-operating credits to Expenditure on operations. There is no impact on the Profit before or after tax.

Summary of exceptional items

The Group uses Alternative performance measures (APMs) to analyse the underlying results of the business excluding exceptional items, which are those that in management's view need to be separately disclosed by virtue of their size or incidence in understanding the entity's financial performance.

There were no exceptional items in 2023. During 2022, the Group recorded exceptional credits relating to the partial reversal of a fine issued to British Airways in 2010 and the reversal of the impairment of certain aircraft returned to service in 2022.

A summary of the exceptional items relating to 2022 is given below, with more detail in the Alternative performance measures section, including a breakdown of the exceptional items by operating company.

The Operating profit before exceptional items for 2023 of €3,507 million was €2,260 million better than the Operating profit before exceptional items of €1,247 million for 2022, driven by the increased capacity and higher revenues, net of higher operating costs, as explained further below. The Profit after tax and before exceptional items was €2,655 million, €2,253 million higher than the 2022 profit of €402 million.

1  The 2022 results include a reclassification to conform with the current year presentation for the Net gain on sale of property, plant and equipment within Operating profit. Accordingly, for the year to 31 December 2022, the Group has reclassified gains of €22 million from Other non-operating credits to Expenditure on operations. There is no impact on the Profit before or after tax.

Revenue

Total revenue increased €6,387 million versus 2022, after adverse foreign exchange rate movements of €490 million, mainly due to the translation of British Airways' and IAG Loyalty's results from pound sterling into euro, which resulted in an adverse variance of €379 million versus 2022.

Passenger revenue

The increase in Passenger revenue of €6,352 million, or 32.6%, was ahead of the increase in passenger capacity of 22.6%, driven by higher yields and higher load factors than in 2022. The growth in Passenger revenue was linked to the reopening of markets, strong leisure demand, together with increases in ticket prices to reflect higher fuel prices and supplier price inflation. The recovery in corporate travel was slower than that of leisure travel, with the Group's premium leisure segment continuing to perform strongly.

The passenger load factor for the year of 85.3% was 3.5 points higher than in 2022 and 0.7 points higher than in 2019. Passenger yields, measured as passenger revenue per revenue passenger kilometre (RPK) were 3.8% higher than in 2022 and up 19.0% on 2019. The resulting passenger unit revenue (passenger revenue per ASK) for the year was 8.2% higher than in 2022 and 20.1% higher than in 2019.

Cargo revenue

Cargo revenue, at €1,156 million, was 28.4% lower than in 2022. Cargo volumes, measured in cargo tonne kilometres (CTKs), were 17.2% higher than the previous year, as the Group's airlines further restored their operations, leading to an increase in both passenger and cargo capacity. Cargo yields, measured as cargo revenue per cargo tonne kilometre, were 38.9% lower than in 2022, reflecting the substantial growth in global cargo capacity across the industry, together with softer market demand, reflecting the macro-economic conditions. In 2022, cargo yields had benefited from disruption to global supply chains, and disruption to shipping, particularly in the first half of the year. Cargo yields benefited from a growth in premium products, enabled by the opening of a new premium cargo facility at London Heathrow. At Madrid, IAG Cargo's investment in a perishable goods handling facility was completed, further boosting cargo handling capacity.

Cargo revenue increased by €39 million, or 3.5% versus 2019. The increase was primarily driven by a 23.8% increase in cargo yields compared with 2019, which included the impact of transformation initiatives. The higher cargo yields more than compensated for a decline in volumes, which were 16.4% lower than in 2019, mainly due to weaker market demand and reduced cargo capacity, particularly from the Asia Pacific region.

Other revenue

One of the Group's strategic imperatives is to drive earnings growth through asset-light businesses, with the growth of IAG Loyalty a particular priority. The impact of the growth in IAG Loyalty contributes both to the airlines' Passenger revenue and to Other revenue, through both the issuance and redemption of its loyalty currency, Avios. IAG Loyalty delivered another strong year of growth in the number of members collecting Avios, including through its partnership with American Express. IAG Loyalty's Other revenue was up 61% versus 2022 to €524 million.

The largest Other revenue streams for the Group are BA Holidays and Iberia's maintenance, repair and overhaul (MRO) business. BA Holidays grew revenues in line with the continued increase in flying activity and holiday and hotel services revenue increasing by €133 million to €938 million. Iberia's MRO business saw increased engine maintenance activity for third-party airlines, with revenues from maintenance and overhaul services up €155 million to €683 million. Revenue from ground handling, at €195 million, was flat versus 2022. After a competitive tender process for ground handling contracts, the final resolution in September 2023 resulted in the loss of third-party handling contracts at eight airports for Iberia and as a result Iberia will see a reduction in ground handling activity and revenues in 2024.

Overall for the year, Other revenue was up 24.8% versus 2022 to €2,487 million, 29.5% higher than in 2019.

Operating costs

Total operating expenditure rose from €21,788 million in 2022 to €25,946 million in 2023, linked to the higher volume of flights and passenger numbers and after favourable foreign currency movements of €408 million, of which €351 million were due to the translation of the operating costs of British Airways and IAG Loyalty from pound sterling into euros.

Employee costs

The rise in Employee costs of €776 million or 16.7% versus 2022 reflected the continued restoration of the Group's capacity and the related increase in employee numbers, as well as the investment in British Airways' London hub to improve operational performance. Average headcount for the year was 69,762, up 9,962 or 16.7% versus 2022. The Group agreed pay deals with the substantial majority of its bargaining groups and employees during 2023. 

On a unit basis per ASK, Employee costs were down 4.8% versus 2022.

Fuel, oil costs and emissions charges

Fuel, oil costs and emissions charges were up €1,437 million versus 2022, principally reflecting increased flying volumes. In 2022, the impact of the significant increase in commodity fuel prices, following the Russian invasion of Ukraine in February of that year, was mitigated by the Group's fuel hedging programme. In 2023, whilst average spot fuel prices linked to fuel purchase contracts were 17% lower than in 2022, the impact of hedging was neutral, with the result that the Group's effective fuel price after hedging was similar to the previous year. Foreign exchange movements accounted for only €6 million of the increase, with the impact of a weaker US dollar against the euro and pound sterling offset by translation exchange between the pound sterling and euro. Within Fuel, oil costs and emissions charges, the cost of complying with emissions trading schemes was €238 million, up from €134 million in 2022, reflecting both the higher level of capacity flown, market prices under such schemes, and the reduction in free allowances issued across the EU and UK.

On a unit basis per ASK, Fuel, oil costs and emissions charges were up 0.7% versus 2022.

Jet fuel price trend ($ per metric tonne)

Fuel hedging

The Group seeks to reduce the impact of volatile commodity prices by hedging prices in advance. The Group's current fuel hedging policy was approved by the Board in May 2021 (and has been regularly reviewed for appropriateness by the Audit and Compliance Committee subsequently) and is designed to provide flexibility to respond to both significant unexpected reductions in travel demand or capacity and/or material or sudden changes in jet fuel prices. The policy allows for differentiation within the Group, to match the nature of each operating company, and the use of call options for a proportion of the hedging undertaken. The policy operates on a two-year rolling basis, with hedging of up to 60% of anticipated requirements in the first 12 months and up to 30% in the following 12 months, and with flexibility for low-cost airlines within the Group to adopt hedging up to 75% in the first 12 months. For all Group airlines, hedging between 25 and 36 months ahead is only undertaken in exceptional circumstances.

Fuel consumption

The Group continued to benefit from reduced fuel consumption, associated with the investment in new fleet, with 35 newer-generation and more fuel-efficient aircraft entering service in the year. Increased passenger load factors versus 2022 also contributed to reduced carbon intensity, measured as grammes of CO₂ per passenger kilometre, which was down 3.6% versus 2022.

Supplier costs

1  For 2022 includes an exceptional credit of €23 million related to the partial reversal of the historical fine, plus accrued interest, initially issued by the European Commission to British Airways for involvement in cartel activity and recognised as an exceptional charge in 2010. Further information is given in the Alternative performance measures section.

Total Supplier costs rose by €1,932 million, or 21.5% to €10,905 million, slightly below the increase in capacity. Supplier costs were impacted by continued high levels of inflation and disruption costs, although the impact was partially mitigated by the Group's procurement and transformation initiatives.

Supplier costs include a €26 million currency differences charge in 2023 versus a €141 million currency differences charge in the previous year; 2022 had been impacted by a significant strengthening of the US dollar against both the pound sterling and the euro versus 2021. Total foreign currency impacts on Supplier costs, including currency differences, were €298 million favourable versus 2022, including a favourable impact of €163 million related to translating British Airways' and IAG Loyalty's supplier costs from pound sterling into euro and the €141 million favourable currency differences charge outlined above.

On a unit basis per ASK, Supplier costs were down 1.1% versus 2022.

Ownership costs

Ownership costs include Depreciation, amortisation and impairment of tangible and intangible assets, including right of use assets, and the Net gain on sale of property, plant and equipment.

1  For 2022, includes an exceptional credit of €8 million related to the partial reversal of an impairment relating to fleet assets that were previously stood down in 2020. Further information is given in the Alternative performance measures section.

The increase in ownership costs versus 2022 is mainly driven by the increase in the Group's fleet of aircraft, linked to the restoration of capacity and 34 deliveries of new aircraft in the year. The Net gain on sale of property, plant and equipment was €2 million, reflecting the disposal of aircraft withdrawn from service and related spare parts. On a unit basis per ASK, Ownership costs were down 18.2% versus 2022, mainly reflecting the restoration of capacity and improvements in aircraft utilisation.

Aircraft fleet

In 2023, the in-service fleet increased by 24 aircraft: 37 aircraft entered service and 13 aircraft were retired. Of the aircraft entering service, five re-entered service having previously been stood down and two were delivered in late 2022. In total, 34 aircraft were delivered in the year, of which four aircraft entered service early in 2024.

Number of fleet

In addition to the in-service fleet, there were a further nine aircraft not in service, made up of five aircraft held by the Group pending disposal or lease return and four aircraft delivered late in 2023 and not in service by 31 December 2023.

Exchange rate impact

Exchange rate impacts are calculated by retranslating current year results at prior year exchange rates. The reported revenues and expenditures are impacted by the translation of currencies other than euro to the Group's reporting currency of euro, primarily pound sterling related to British Airways and IAG Loyalty. From a transaction perspective, the Group's performance is impacted by the fluctuation of exchange rates, primarily exposure to the pound sterling, euro and US dollar. The Group typically generates a surplus in most currencies in which it does business, except the US dollar, for which capital expenditure, debt repayments and fuel purchases typically create a deficit which is managed and partially hedged. The Group hedges its economic exposure from transacting in foreign currencies but does not hedge the translation impact of reporting in euro.

Overall, in 2023 the Group operating profit before exceptional items was reduced by €82 million due to adverse exchange rate impacts.

Exchange rate impact before exceptional items

The exchange rates of the Group were as follows:

Total net non-operating costs

Total net non-operating costs for the year were €451 million, versus €863 million in 2022. Finance costs of €1,113 million were €96 million higher than in 2022, although they fell in the fourth quarter by 16.3% or €48 million, linked to the early debt repayments described in 'Early repayment of debt raised in 2020 and 2021' below and in note 3 to the Group financial statements. Finance income was up €334 million, reflecting the Group's strong cash balances and the higher interest rates earned on deposits. The other main movement was for net currency retranslation, with a credit of €176 million in 2023 versus a charge of €115 million in 2022, principally reflecting the weakening of the US dollar.

The Net change in the fair value of financial instruments of €11 million reflects fair value adjustments at 31 December 2023 of IAG's €825 million convertible bond maturing in 2028.

Other non-operating credits of €8 million in 2023 (2022: credit of €110 million) mainly represent net gains or losses on derivative contracts for which hedge accounting is not applied, together with a net gain of €10 million in 2023 on the sale of investments.

Tax

The tax charge on the Profit for the year was €401 million (2022: tax credit of €16 million), and the effective tax rate was 13.1% (2022: negative 3.9%).

The substantial majority of the Group's activities are taxed where the main operations are based: in the UK, Spain and Ireland, which had statutory corporation tax rates of 23.5%, 25.0% and 12.5% respectively for 2023. The expected effective 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 23.5% for the year to 31 December 2023. The difference between the actual effective tax rate of 13.1% and the expected tax rate of 23.5% is primarily due to the recognition of previously unrecognised tax losses in the Group's Spanish companies.

The Profit after tax for the year was €2,655 million (2022: €431 million).

On 3 March 2021, the UK Chancellor of the Exchequer announced that legislation would be introduced in the Finance Bill 2021 to set the main rate of corporation tax at 25% from April 2023. On 24 May 2021, the Finance Bill was substantively enacted, which has led to the remeasurement of deferred tax balances and will increase the Group's future current tax charge accordingly. As a result of the remeasurement of deferred tax balances in UK entities, a charge of €13 million (2022: €17 million credit) is recorded in the Income statement and a credit of €3 million (2022: €10 million charge) is recorded in Other comprehensive income.

The Group is monitoring the OECD's proposed two-pillar solution to address the tax challenges arising from the digitalisation of the economy. This reform to the international tax system is designed to ensure that multinational enterprises with consolidated worldwide annual turnover exceeding €750 million will be subject to a minimum 15% effective tax rate, and also proposes to address the geographical allocation of profits for the purposes of taxation. On 15 December 2022, the Council of the European Union formally adopted the EU Pillar Two Directive. On 22 December 2022, the EU Minimum Tax Directive was published.

On 11 July 2023, the UK enacted Finance (No. 2) Act 2023 which introduced the Multinational Top-up Tax and the Domestic Top-up Tax with effect for accounting periods beginning on or after 31 December 2023. These taxes are the UK's adoption of the income inclusion rule and domestic minimum top-up tax rule referenced in the OECD's Pillar Two reform.

On 18 December 2023, Ireland enacted Finance (No. 2) Act 2023 which, pursuant to the EU Minimum Tax Directive, provided for the introduction of a new minimum effective rate of tax for certain businesses. These rules provide for a Qualified Domestic Top-Up Tax where an in-scope group's Irish operations have an effective rate of tax of less than 15%. They come into force for accounting periods beginning on or after 31 December 2023.

On 19 December 2023, Spain's Council of Ministers approved a draft law to implement the EU Minimum Tax Directive. This is to be subject to consultation, prior to being sent to Parliament.

For 2023, the predominant jurisdiction in which the Group operates with an effective tax rate of less than 15% is Ireland through Aer Lingus. While the impact on the Group of the adoption of Pillar Two is not yet reasonably possible to estimate, for indicative purposes, in 2023 Aer Lingus recorded a current tax expense of €24 million relating to its Irish operations, representing an effective tax rate of 12.8%. Had the effective tax rate applied by Aer Lingus to its Irish operations been 15%, the current period tax expense would have increased by €4 million to €28 million, which would have increased the overall Group effective tax rate from 13.1% to 13.3%.

On 18 January 2024, the Tribunal Constitucional (Constitutional Court) in Spain issued a ruling that the amendments to corporate income tax arising from the introduction of Royal Decree-Law 3/2016 were unconstitutional and accordingly revoked. The Group has not adjusted the financial statements for this revocation, but expects to recognise a tax receivable, excluding interest arising, from the Spanish tax authorities of approximately €191 million and an associated deferred tax charge of approximately €58 million.

Operating profit performance of airline operating companies

1  Ownership costs reflects Depreciation, amortisation and impairment, and the Net (gain)/loss on the sale of property, plant and equipment.

2  Further detail is provided in the Alternative performance measures section.

The Iberia numbers in the table above are presented on the same basis as in note 5 to the consolidated financial statements and exclude LEVEL Spain.

Review by operating company

All of the airline operating companies saw a significant increase in profitability in 2023, with Iberia and Vueling achieving record levels of operating profit, reflecting strong passenger yields, which were able to offset the impacts of higher effective fuel prices and inflation.

British Airways operated the lowest passenger capacity relative to 2019, with ASKs at 90.1% of 2019, partly linked to the delayed restoration of its capacity to the Asia Pacific region, which saw COVID-19 restrictions continue longer than the rest of IAG's markets. Aer Lingus operated at 104.4% of 2019 capacity, including the impact of its new UK base at Manchester Airport opened in October 2021. Iberia and Vueling both increased capacity versus 2019, operating at 103.2% and 108.5% of 2019 levels respectively.

Operating profit before exceptional items

1  The 2019 and 2022 results include a reclassification to conform with the current year presentation for the Net gain on sale of property, plant and equipment within Operating profit.

2  The 2019 results have been restated for the treatment of administration costs associated with the Group's defined benefit pension schemes.

IAG Loyalty showed significant growth in its non-airline partner revenue streams, together with benefiting from the recovery in the Group's airlines, leading to a second successive year of record operating profits, with operating profit before exceptional items of £280 million (€321 million), up from £240 million (€282 million) in 2022. IAG Loyalty's operating margin for 2023 was 21.7%, with the reduction of 6.7 points from 28.4% in 2022 due to the increased level of Avios redemption activity as well as the mix of Avios issued between the Group's airlines and other partners.

Capital expenditure

In 2023, the Group continued to invest in its aircraft fleets, customer products and services, IT infrastructure and sustainability, as the business continued to recover and restore capacity. Capital expenditure, measured as the Acquisition of property, plant and equipment and intangible assets from the Cash flow statement, was €3,544 million, compared with €3,875 million in 2022, with the reduction of €331 million due to the profile of fleet deliveries and pre-delivery payments, with investment in IT higher than in 2022, as the Group continues to invest in its IT estate and transformation projects. In 2023, the Group took delivery of 34 aircraft: ten for British Airways, 14 for Iberia, six for Vueling, two for Aer Lingus and two for LEVEL. Of these deliveries, 28 were aircraft acquired from Airbus and Boeing and six were leased directly from aircraft lessors (2022: 25 aircraft acquired from Airbus and Boeing and two leased directly from aircraft lessors). One of the aircraft acquired from Airbus in 2023 was novated to a lessor immediately prior to the point of delivery as part of a sale and leaseback arrangement, which resulted in the final delivery payment for the aircraft being made by the lessor, rather than by the Group as capital expenditure; the Group also received a refund of the pre-delivery payments it had made in advance of the delivery date in respect of that aircraft.

Aircraft orders

During 2023, the Group converted ten A320neo options to firm deliveries in 2028, as replacement aircraft for its short-haul network. A new order was placed for British Airways for six Boeing 787-10 aircraft, and one new Airbus A350-900 aircraft was ordered for Iberia; the aircraft represented by these new orders will be delivered in 2025 and 2026. In addition to these orders from Airbus and Boeing, the Group entered into leases directly with lessors for two Airbus A350-900 aircraft for Iberia, two Airbus A330-200 aircraft for LEVEL and two A320ceo aircraft for Vueling, all of which were delivered during the year. The table below includes three further A320ceo aircraft for Vueling, for which leases were signed prior to 31 December 2023, with the aircraft to be delivered in 2024.

The Group anticipates introducing eight further A320ceo aircraft for Vueling in 2024 through operating leases, to cover aircraft availability linked to additional maintenance requirements for aircraft with Pratt & Whitney 'GTF' engines.

In addition to those committed future deliveries shown above, at 31 December 2023, the Group held options to acquire a further 235 aircraft from Airbus and Boeing.

Capital commitments

Capital expenditure authorised and contracted for at 31 December 2023 amounted to €12,706 million (2022: €13,749 million), with the decrease attributable to the net of the aircraft deliveries and the new orders described above. Most of these commitments are denominated in US dollars.

The Group has certain rights to cancel commitments in the event of significant delays to aircraft deliveries caused by the aircraft manufacturers. No such rights had been exercised as at 31 December 2023.

Working capital

The net movement in working capital saw a cash outflow of €142 million in 2023, compared with a significant cash inflow of €1,884 million in 2022. The year 2022 had seen a significant restoration of airline capacity by the end of the year, with significant related increases in bookings for future travel (Deferred revenue), net of trade receivables, together with an increase in Trade and other payables, linked to the increase in the Group's flying programmes and the related increase in operating expenditure. By contrast, in 2023, working capital had returned closer to a steady-state position. Inventories increased by €141 million to €494 million, partially linked to engine purchases to meet maintenance requirements. Trade receivables were up by €229 million to €1,559 million, related to higher passenger numbers and yields, together with some timing differences related to certain receipts due from the Spanish government.

At 31 December 2023, total Deferred revenue, which includes the Group's loyalty schemes, was €8,023 million, an increase of €379 million versus €7,644 million at 31 December 2022. Deferred revenue at 31 December 2023 includes €645 million in respect of unredeemed vouchers, including associated taxes (2022: €911 million). The unredeemed voucher balance includes: flight vouchers issued to customers at their election to provide the flexibility to change their destination and/or date of travel (a policy introduced in 2020 and still in operation) and loyalty-related companion vouchers (referred to as 'non-disrupted vouchers'); vouchers issued due to COVID-19 flight cancellations (referred to as 'disrupted vouchers'); certain other flexible fare options; and other gift vouchers. The outstanding balance of disrupted vouchers at 31 December 2023 was €139 million, with the remaining €506 million relating to ongoing commercial policies, which the Group expects to continue to be offered in the future.

Funding and debt

IAG's long-term objectives when managing capital are: to safeguard the Group's ability to continue as a going concern and its long-term viability; to maintain an optimal capital structure in order to reduce the cost of capital; and to provide sustainable returns to shareholders. In November 2018, S&P and Moody's assigned IAG long-term investment-grade credit ratings with a stable outlook; IAG's credit ratings remained investment-grade up until the outbreak of COVID-19. In 2023, due to the improvement in the Group's profitability, cash generation and balance sheet, both S&P and Moody's raised their credit ratings of IAG in the fourth quarter of the year. The Group's current ratings (at 28 February 2024) are: S&P: BBB- (investment grade), Moody's: Ba1. British Airways has separate credit ratings, which were also increased to BBB- (investment grade) by Fitch and S&P; Moody's rating of British Airways is Ba1.

Early repayment of debt raised in 2020 and 2021

During 2020 and 2021, the Group's airlines required additional liquidity, due to the significant adverse impact of COVID-19, and all entered into special COVID-19-related financing arrangements, partially or fully guaranteed by the governments in their home countries. This debt was based on floating rate arrangements and agreed at margins that reflected the condition of the financial markets and the Group's airlines at the time; this debt was among the most expensive of the Group's debt to service. As a result of the Group's profitability and cash generation in 2022 and 2023, and expected continued strong cash generation over the foreseeable future, in the second half of 2023, the Board agreed that the remainder of this debt should be repaid ahead of its scheduled maturity, which was between 2024 and 2026. The total amount repaid early was €3,271 million: £2,000 million (€2,312 million) for British Airways, partially guaranteed by the UK Export Fund (UKEF); €644 million and €223 million for Iberia and Vueling respectively, partially guaranteed by Spain's Instituto de Crédito Oficial (ICO); €42 million of other non-aircraft debt for Iberia; and €50 million to the Ireland Strategic Investment Fund (ISIF) for Aer Lingus. These early debt repayments will result in a reduction in interest costs in future years.

Following these early repayments, and the repayment of IAG's €500 million bond in July 2023, the maturity profile of the Group's debt as of 31 December 2023, aside from aircraft financing payments, includes two €500 million IAG bonds due in 2025 and 2027, respectively, IAG's €825 million 2028 convertible bond and a €700 million IAG bond due in 2029.

Debt and capital

The Group monitors leverage using net debt to EBITDA before exceptional items, in addition to closely following measures used by the credit ratings agencies, including those based on total borrowings (gross debt).

In 2019, the Group set a target of net debt to EBITDA before exceptional items below 1.8 times, which broadly corresponded to investment grade with the credit ratings agencies. At its Capital Markets Day in November 2023, the Group confirmed this target remains appropriate.

As at 31 December 2023, net debt to EBITDA before exceptional items had reduced to 1.7 times, compared with 3.1 times in 2022, reflecting the strong recovery in profitability and the related cash generation, with capital expenditure €331 million lower than the previous year.

Net debt

Net debt reduced by €1,140 million, principally due to the recovery in profitability and operating cash flow generation, partially offset by the capital expenditure of €3,544 million. Gross debt reduced by €3,902 million during the year to €16,082 million. Repayments exceeded new borrowings by €4,998 million, mainly due to the early repayments of non-aircraft debt outlined above, the repayment on maturity of a €500 million IAG bond, and scheduled repayments of aircraft financing exceeding new aircraft financing raised during the year. The Group also raised financing by way of sale and leaseback transactions and extended existing leases, which together added €1,315 million to gross debt. The Group's gross debt is subject to foreign exchange translation movements, as the majority of the Group's aircraft debt is denominated in US dollars. Over the course of 2023, the euro and pound sterling strengthened against the US dollar leading to a decrease in gross debt of €361 million. The remainder of the variance in gross debt versus 2022 is mainly due to the increase in the fair value of IAG's €825 million convertible bond due in 2028.

Cash

Cash, cash equivalents and interest-bearing deposits

1  At 31 December 2023 Aer Lingus held €31 million of restricted cash (2022: €33 million) within interest-bearing deposits maturing after more than three months to be used for employee-related obligations.

British Airways, Iberia, Vueling, Aer Lingus and IAG Loyalty all experienced significant positive operating cash flow in the year. The reduction in the balance of cash, cash equivalents and interest-bearing deposits in IAG and other Group companies principally reflects the early repayment of floating rate unsecured debt in all the airlines, and the repayment of the IAG €500 million 2023 bond on maturity.

Debt

Long-term aircraft financing was drawn for 31 aircraft during 2023, including five aircraft that were delivered in 2022 to British Airways and for which funding was committed at 31 December 2022. The Group also secured committed funding of €375 million, to be drawn in 2024, for three British Airways aircraft, including two delivered in 2023; this committed funding is included in committed and undrawn aircraft financing facilities at 31 December 2023. Linked to its strong cash generation, Iberia did not seek financing for three new A321neo aircraft delivered in 2023, with these aircraft held unencumbered at 31 December 2023.

Equity

No equity was raised or repaid during the year, nor in 2022.

Liquidity facilities

During the year, the Group exercised a one-year extension to the availability of its Revolving Credit Facility (RCF), which now has committed availability until March 2026. The available amount will remain at $1,755 million (€1,605 million) until March 2025 and reduce to $1,655 million (€1,513 million) for the final 12 months to March 2026. The facility was originally agreed and executed with a syndicate of banks in 2021, with availability for three years, plus two consecutive one-year extension periods, at the discretion of the lenders. The facility is available to Aer Lingus, British Airways and Iberia, each of which has a separate borrower limit within the overall facility. Any drawings under the facility would be secured against eligible unencumbered aircraft assets and/or take-off and landing rights at London Heathrow or London Gatwick airports. This facility was undrawn at 31 December 2023.

The Group also added a new £1,000 million (€1,159 million) committed credit facility for British Airways, partially guaranteed by the UKEF, which was agreed upon the repayment of British Airways' £2,000 million (€2,312 million) loan in September 2023 and which matures in September 2028. This is in addition to the existing £1,000 million (€1,159 million) committed credit facility for British Airways, partially guaranteed by the UKEF, which was agreed and executed in 2021 and matures in November 2026. Both facilities were undrawn at 31 December 2023.

Aer Lingus has a €350 million credit facility with Ireland's ISIF, which is available until March 2025. This facility was undrawn at 31 December 2023. At 31 December 2022 €50 million was drawn; this €50 million was repaid in the first half of 2023.

The Group also has certain other committed and undrawn general and overdraft facilities, bringing total committed and undrawn general and overdraft facilities at 31 December 2023 to €4,412 million (2022: €3,284 million).

The Group also holds €375 million of committed and undrawn aircraft financing facilities (2022: €1,116 million). The committed amount at 31 December 2023 represents financing for three British Airways aircraft to be drawn in 2024. The committed and undrawn aircraft financing facilities at 31 December 2022 included committed financing for five aircraft for British Airways that was drawn in 2023 and certain backstop financing arrangements, which have now expired. The Group's aircraft deliveries continue to be successfully financed on regular long-term financing arrangements as required, and hence no drawing on these backstop arrangements was necessary.

In total, the Group had €4,787 million of committed and undrawn general and aircraft facilities as at 31 December 2023 (2022: €4,400 million).

The facilities values above do not include the balance of certain shorter-term working capital facilities available to the Group's operating companies.

Dividends

No dividends were proposed or paid in 2023 (2022: nil).

Liquidity and cash flow

Total liquidity, measured as cash, cash equivalents and interest-bearing deposits of €6,837 million and committed and undrawn general and aircraft facilities of €4,787 million, was €11,624 million at 31 December 2023. This represented a decrease of €2,375 million versus total liquidity of €13,999 million at the end of 2022, linked mainly to the Group's decision to repay certain of its debt raised in 2020 and 2021 in advance of its scheduled maturity.

Cash flow

The Group saw strong cash flow generation in 2023, mainly linked to its strong profit performance; the strong cash generation in turn allowed the Group to rebalance the mix of gross debt and cash by undertaking the early debt repayments outlined above.

Free cash flow

In 2023, the Group adopted Free cash flow as an Alternative performance measure, replacing Levered free cash flow. Free cash flow is defined as Net cash flows from operating activities less Acquisition of property, plant and equipment and intangible assets. See Alternative performance measures section for further details.

In 2023, Free cash flow was €1,320 million, up €341 million versus 2022, driven by similar Net cash flows from operating activities, but lower capital expenditure, as outlined above. In 2022, whilst the Operating profit was significantly lower, Net cash flows from operating activities benefited from the restoration of capacity and the associated positive impact on working capital, mainly from the rebuilding of advanced ticket sales.

Condensed cash flow summary

1  The 2022 results include reclassifications to conform with the current year presentation. Further information is given in note 2 and note 37.

Many of the significant cash flow items are already explained above, including in the sections covering operating costs, non-operating costs, capital expenditure, working capital and other initiatives and funding. Further detail of the other main movements is provided below.

Cash flows from operating activities

1  The 2022 results include reclassifications to conform with the current year presentation. Further information is given in note 2 and note 37.

In December 2022, British Airways agreed the valuation of its main defined benefit pension scheme, the New Airways Pension Scheme (NAPS), with the scheme's Trustee, which resulted in a deficit as at the valuation date of 31 March 2021 of £1,650 million (€1,887 million). As at 31 December 2023, the scheme was over 100% funded on the 2021 valuation basis and an overfunding protection mechanism agreed with the NAPS Trustee had the effect that no contributions were due in 2022 or 2023. Deficit contributions could resume should the funding level fall in the future. The pension cash flows shown above represent payments to various smaller schemes within the Group. The valuation of the main British Airways pension schemes also showed a surplus on the IAS 19 accounting basis, which does not impact contributions due to the schemes. Total Employee benefit assets at 31 December 2023, of which the principal element is the NAPS accounting surplus, were €1,380 million; the reduction of €954 million versus 31 December 2022 was predominately due to the impact of the fall in AA corporate bond yields applied in discounting scheme liabilities, leading to higher liabilities at the same time as the market value of assets fell, mainly due to the increase in UK government bond yields.

Provision and other non-cash movements mainly relate to restoration and handback provisions for leased aircraft and ETS allowances. Provisions for ETS allowances are charged to Fuel, oil costs and emissions charges as they are built up through the year, with the cash payment for ETS credits acquired by the Group's airlines to meet the requirements of the various emissions trading schemes accounted for as capital expenditure. Provision and other non-cash movements also include restructuring payments of €82 million, mainly relating to redundancy programmes in Iberia agreed prior to 2020.

The increase in interest paid in 2023 reflects higher interest rates, partially mitigated in the fourth quarter by the early repayment of €3,271 million of floating rate debt outlined above. After including the impact of hedging, 13% of the Group's total debt at 31 December 2023 was on floating rate arrangements.

Cash flows from investing activities

The €1,091 million of cash inflow from the Sale of property, plant and equipment, intangible assets and investments is mainly due to the aircraft sale and leaseback transactions discussed in the Funding and debt section above, together with the disposal of assets, principally aircraft being retired from service. The increase from 2022 reflects the number and type of aircraft financed through sale and leaseback transactions in 2023 compared with 2022.

In March 2022, IAG entered into a convertible loan with Globalia for €100 million, convertible into an equity stake in Air Europa Holdings of 20%; the conversion option was exercised in August 2022, with the equity stake treated as an equity investment.

Cash flows from financing activities

Proceeds from borrowings reflect the cash inflows from aircraft financing as described in the Funding and debt section above. Aside from the additional liquidity facilities described in 'Liquidity facilities' above, there was no new non-aircraft financing raised in 2023 (2022: nil).

Settlement of derivative financial instruments relates to settlements of foreign exchange instruments taken out to hedge long-term debt payments, including US dollar lease payments. The outflow in 2023 relates to the weakening of the US dollar versus the euro and pound sterling. In 2022, the significant inflow related to the strengthening of the US dollar versus the euro and pound sterling.

The Acquisition of treasury shares and other financing movements includes the purchase of 27 million shares in 2023 related to the Group's intended acquisition of the remaining shares in Air Europa Holdings, as part of the consideration is required to be delivered as IAG shares, together with 15 million shares related to employee incentive schemes. In 2022, 15 million shares were purchased related to employee incentive schemes.

STRATEGIC FRAMEWORK

IAG's purpose is to connect people, businesses and countries, and we hold innovation, commitment, care for people, responsibility, pragmatism, execution, ambition and resilience as key values that enable us to fulfil our purpose.

We create value through a unique model that enables our airlines to perform in the long-term interests of our customers, people, shareholders and society - knowing that success in each reinforces the others.

IAG, as the parent company, actively engages and works collaboratively with its portfolio of operating companies, sharing best practices and talent, overseeing intra-Group coordination and managing central functions that drive synergies and value to the Group. Its independence from the operating companies enables IAG to implement a long-term strategy for the Group that is aligned with our purpose and values, as well as set performance targets for the operating companies, track their progress and efficiently allocate capital within the Group.

IAG's three strategic imperatives are:

•  Strengthening our core;

•  Driving earnings growth through asset-light businesses; and

•  Operating under a strengthened financial and sustainability framework.

These imperatives are achieved through a series of strategic priorities:

•  Growing our portfolio of global leadership positions and strengthening our portfolio of world-class brands and operations;

•  Developing IAG Loyalty and leveraging our strategic airline partnerships; and

•  Managing our balance sheet, allocating capital in a disciplined manner, and being an industry leader in sustainability.

PRINCIPAL RISKS AND UNCERTAINTIES

The Group has continued to maintain its framework and processes to identify, assess and manage risks. Throughout 2023, the Group has monitored the evolution of the risk landscape, as a result of internal and external changes, particularly considering how risks combine to create increased threats, and re-assessing the potential severity and likelihood of risks accordingly. In assessing its principal risks, the Group has considered Its operational resilience across its businesses, the status of the financial markets, customer mix changes, geopolitical and economic risk and government changes, including upcoming elections, pace of transformation, Artificial Intelligence (AI) adoption, the Group's industrial relations landscape, people engagement, and securing talent and expertise to support operations and deliver cultural change.

No new principal risks were identified through the risk 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. The Group's exposure and ability to directly manage the external risk environment, particularly for aircraft deliveries, engine and component availability 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 and interest rates on demand and customer confidence; higher costs in the supply chain; ongoing geopolitical tensions and conflict in various regions impacting our customer and flight operations as well as creating further airspace disruptions; 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. One risk has been reconsidered as part of the reviews and has been reframed as 'Transformation, innovation and AI' from 'Transformation and change' to recognise how the Group's change agenda is underpinned by investment which will leverage innovation and AI tools to accelerate the delivery of customer-centric, efficient processes and tools to run our businesses. The risk around 'Critical third parties in the supply chain' is now assessed under Business and Operational risk given the nature of the potential impacts facing the Group (having previously been categorised as a Strategic risk). 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 and management's responses, 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 and third-party resilience issues, particularly over engine reliability. All of the Group's airlines continue to support their customers through any disruption including schedule adaptions where required. Investment in cabin and service propositions helps 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, engine and component availability and reliability, resource availability and/or threat of employee industrial action in critical third parties and airport services, the level of resilience of airports, particularly London Heathrow, and ATC capability and restrictions. 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. Delays in new aircraft, technical performance issues requiring additional maintenance and spare engine availability continue to impact operations and increase turnaround times for aircraft.

•  Cyber attack and data security. The threat of 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 geopolitical events, increases in commodity and wage costs from inflation and higher interest rates drive continued significant uncertainty over the economic outlook. The Group is closely reviewing the impacts of wage and supplier inflation on margins and customer demand. Ongoing conflicts, wars and heightened tensions globally further increase airspace restrictions and congestion for flows to Asia. Wider macroeconomic trends are being monitored, with consideration to changes in government in key markets and the implications for trade, respective economic health and how governments view the aviation industry. Recent European governments' proposals to set floor or ceiling caps on pricing, including the scope of ancillaries that airlines may be allowed to charge their customers for, may impact the ability to freely set pricing, sell ancillaries to meet customer needs and/or set 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, 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 and customers of the Group's airlines and increase the costs of running operations. 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 technical licensed staff across the aviation sector and in the Group's airlines combined with aircraft, engines and component shortages are significantly impacting maintenance delivery timelines. 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 or there is a threat of, or actual strike action, our operating companies continue to engage in discussions with unions to secure sustainable agreements and address concerns arising within the negotiations. In September AENA announced the result of its competitive tender for ground handling licences at airports across Spain, which resulted in the loss of key airports to another provider, with the ground handling unions for Iberia taking strike action in January 2024. Iberia plans to create a new handling company, which will provide handling services and all airport staff affected by the AENA decision will be moved to the new company, with a new sector collective bargaining agreement and conditions for existing Iberia employees.

•  Sustainable aviation. Plans implemented by the EU, UK and US governments to decarbonise aviation have resulted in fragmentation of policy measures and support offered by governments for green initiatives across the different regions in which the Group airlines operate. Sustainable Aviation Fuel (SAF) infrastructure and availability lags demand, impacting the ability to achieve the aviation sector's carbon reduction commitments.

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