Company Update Air Europa

Company update Air Europa Monday, 4th November 2019 International Airlines Group – Company Update Monday, 4th November 2019 Analyst and Investor Presentation Willie Walsh Chief Executive Officer, International Airlines Group Thank you very much and good morning, everybody. Thanks for joining us. I know you are all very busy so we will not take too long with this presentation. We are delighted to announce this morning agreement to acquire Air Europa. I will just take you through the transaction. The acquisition will be by Iberia OPCO Holding, which is the parent company of Iberia and will acquire 100% of the air division of Globalia, which is the parent company of Air Europa. The purchase price is €1 billion. We see it as a bolt-on acquisition and initially the Air Europa brand will be retained. It will increase Iberia’s size by about 50% and IAG by about 10% in terms of traffic revenue and the cost and revenue synergies that will accrue will be in line with previous IAG transactions. Significantly, it will be EPS accretive from Year 1 and accretive to IAG’s return on invested capital by Year 4. The funding for the acquisition will be with external debt and we expect closing to be in the second half of 2020. Clearly, this is subject to regulatory approval. For those of you not familiar with Air Europa, let me just give you some headline figures for the company. You can see their annual passengers for 2018 totalled almost 12 million, they had ASKs of nearly 34 billion, 66 aircraft, revenues of €2.1 billion and an EBITDAR of €392 million. These figures are Spanish GAAP. They have not been adjusted for IFRS 16. We see Air Europa’s value carrier operating model as similar to Aer Lingus and it has been a full member of the SkyTeam Alliance since 2010. Looking at their fleet, it currently has a fleet similar to our own aircraft, actually – A330-200s and A330-300s. It has been transitioning to the Boeing 787 and the intention is to transition the fleet to an all-Boeing fleet of 737s and 787s. They currently also have some Embraers and ATR 72s on wet lease. We are familiar with all of these aircraft and we see the fleet being very much consistent and in line with the plans of IAG. Globalia is a leading leisure and tourism group in Spain, founded by Juan José, or Pepe Hidalgo in 1971 and he is the Chairman of the group. It is one of the leading leisure and tourism groups in Spain, with annual turnover of €3.9 billion. You can see on the right-hand side of the slide the transaction perimeter. In effect, we are acquiring the airline Air Europa and some associated activities, but it is the airline that we are acquiring. Air Europa was Spain’s first privately owned company to operate domestic scheduled flights when Globalia acquired a majority stake in 1991. We see this as being absolutely great news for Spain and for consumers. It will strengthen and make more relevant the Madrid hub. It is a sustainable investment by IAG. It will give us great opportunities to broaden the network and give further choice of schedules and 2 International Airlines Group – Company Update Monday, 4th November 2019 flexibility for customers and significantly provide job security and the opportunity as we see going forward for additional job creation. The Air Europa network is complementary to the Iberia network. You can see there it is principally flying to Latin America, with some North American destinations, Europe and a significant domestic operation as well. It flies to 24 destinations in the Americas, 16 in Europe and 25 domestic in Spain. It will improve IAG’s position in the Europe to Latin America market. This chart shows the passenger market share for the trailing 12 months to August 2019. As you can see there, IAG would go from 19% pre-deal to 26% post-deal. Just to reinforce what I said about the effectiveness of the Madrid hub, you can see here the hub and wave chart. When you put the Air Europa schedules together with the Iberia schedules at Madrid, this will give significant strength to the hub at Madrid, giving very significant additional choice to consumers in Spain, and bring Madrid very much into line with the other major hub airports in Europe. I will hand over to Steve, who will take you through some of the financial headlines. Financial Headlines Steve Gunning Chief Financial Officer, International Airlines Group Thank you, Willie. Good morning. As we have touched on in the RNS, we expect the acquisition to generate significant synergies, both cost and revenue. In terms of cost, it is very much with regards to leveraging the scale of the group and the expertise in the group. With regards to revenue, there are a number of ways we think synergies will be produced. Clearly, code-shares within the group can be built up, optimising the connectivity in the Madrid hub, aligning commercial policies and integrating sales forces, and also looking at the opportunities for joint business, and last but not least, using the Avios platform for loyalty as well. So, on both the cost and the revenue side, we think there are significant synergies to be achieved. We have a good track record of doing this. We have done this a number of times and we are confident in that. We think these synergies will come in over a four-year period but, as Willie said, we expect to be EPS accretive in Year 1 and we expect to be RoIC accretive for the group by Year 4. Overall, we think the level of synergies will be commensurate with transactions of a similar size. If I turn to the next slide, I have probably dealt with most of these points. I think the key additional point I would add here is we expect the transaction to move our net debt to EBITDA by about 0.3 turns. In calculating that, we have done an estimate of what we think the IFRS 16 lease liabilities are, we have looked at the debt that we are bringing on to our 3 International Airlines Group – Company Update Monday, 4th November 2019 books to finance the equity purchase, and then we have looked at the EBITDA of the target and the Year 1 synergies. When we have worked that through, that is how we get the 0.3 movement. Last but not least, Willie has mentioned the fact that we will be funding this with external debt. We have a lot of flexibility as to how we fund the acquisition. We are probably intending to fund it at the Iberia level. There is good appetite for Iberia paper. We also have the ability to use bank loans if we think that is the right way forward. This is a size of transaction that is very comfortable for us to absorb, both at a group level and at an Iberia level. I will hand back to Willie at this point. Willie Walsh Chief Executive Officer, International Airlines Group Thank you, Steve. We see this as a good fit with the IAG platform and portfolio and we believe that we will be able to extract significant synergies, as Steve has said. The track record that we have in this area is very strong. Those of you familiar with us will know that we have pursued a number of transactions since we created IAG in 2011. All of them have been accretive and positive and we continue to believe that there is scope for further consolidation within Europe. This is the next step in that consolidation. Turning to our integration plans, as we have mentioned, this will be a bolt-on acquisition with the Iberia corporate structure, so will come under the leadership of Luis Gallego. We will retain the Air Europa brand initially. The integration will be managed principally by Luis and his team, with IAG, and clearly, as a result of this acquisition, Air Europa will leave the SkyTeam Alliance. The triggers to the synergies will be the quick integration into the IAG platform of common services, giving Air Europa benefits of the cost and scale of IAG. We will quickly move to create commercial links between Air Europa and the other IAG operating companies and that would also involve bringing Air Europa into our joint businesses and then integrating the Air Europa flying at the existing Madrid hub. The transaction does not require IAG shareholder approval. It is subject to relevant competition approvals and we expect this deal to close in the second half of next year, 2020. All in all, it is a good deal for IAG, a good deal for Air Europa, good for Spain and good for consumers and we are very confident that this is the right move for IAG and look forward to completing the transaction in the second half of next year. Q&A Daniel Roeska (Bernstein Research): Good morning, gentlemen. Congratulations on the deal. It seems to be reasonably priced. I have two questions then, if I may. Number one, you now have a multitude of brands active in the Iberian market – Vueling, LEVEL, Air Europa, Iberia, Iberia Express. Could you elaborate a little bit the logic behind that? You already said you would retain the Air Europa brand for now. What would be the options you could be thinking about and how does that also relate to the LEVEL long-haul possibly within 4 International Airlines Group – Company Update Monday, 4th November 2019 Iberia? Then secondly, of course, on competition authorities, you must have thought through that and it seems that you do not expect competition authorities to be a major obstacle to the combination of those airlines.

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