Company update

Monday, 4th November 2019

International 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 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 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 , 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 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 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 , with some North American destinations, 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 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 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 . 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 – , LEVEL, Air Europa, Iberia, . 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

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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. Could you please elaborate on that and what you are expecting in terms of let’s say possible remedies that will be required? Thanks.

Willie Walsh: Thanks, Daniel. Yes, you are quite right. We would not see the business continuing with all of those brands. I think it gives us an opportunity to consider over a short period of time the most effective use of brands. We do see that operating at least a dual- brand strategy at the Madrid hub is an effective way of serving the different customer segments that we have previously identified at IAG and we see this as an opportunity to do that in a more effective manner at Madrid, so we will in due course rationalise the brands that we operate, but that will be done over a period of time and I see this as a significant opportunity for us to do some additional brand testing and research in the Spanish and Latin American markets before we move forward with that decision. However, you should take it that it is not expected that we will continue to operate with all of those brands in the years ahead. We do not take the competition authorities for granted. There will be a process that we will need to go through. That clearly will be a detailed process and we would see engagement with the authorities starting immediately. I am not going to comment on any of the issues there, but clearly, we believe that this is pro-consumer and we would expect to be able to convince the competition authorities in the relevant countries that that is the case, but that process clearly will take a little bit of time and if there is any news or developments in relation to that, we will advise you as they occur, but we are not intending to predict or to suggest any particular outcomes before we have proper engagement with the relevant competition authorities.

Daniel Roeska: Great, thanks.

Jarrod Castle (UBS): Good morning and thank you. Can you just talk a little bit about the balance sheet of Air Europa? Is the €1 billion that you are paying a clean number or is there some debt as well that we have to think about? Then secondly, can you just give some colour: why now? Has it got anything to do with what is going on in LATAM at the moment in terms of your attempted joint venture there? Thanks.

Steve Gunning: Jarrod, it is Steve here. In terms of the balance sheet of Air Europa, as Willie alluded to in his introduction, the balance sheet is constructed on a Spanish GAAP basis, rather than on an IFRS, IFRS 16 in particular basis, so we have had to do work to build up what we think the IFRS 16 adjustments would be, and hence the debt. But that is the principal debt that is on the Air Europa balance sheet. Otherwise, it is pretty clean.

Willie Walsh: On the timing, Jarrod, we had engaged before we heard news of the Delta investment into LATAM, so it is just coincidence, actually, that they did their acquisition at the 20% in LATAM and we are doing this. It is not driven one by the other, so these are completely independent decisions that just happen to have been reached in or around the same time.

Jarrod Castle: Thank you.

Neil Glynn (Credit Suisse): Good morning. If I could first ask a question with respect to Air Europa’s financials to understand the starting point, because I assume that Air Europa will be held to the same targets as the other operating companies. The margin was 5% operating

5 International Airlines Group – Company Update Monday, 4th November 2019 last year, I think. I am just interested in terms of the deficit to somebody like an Iberia. Would you consider it pretty broadly balanced between RASK and CASK or is it lopsided in either direction? I calculated RASK as €0.06, but that may or may not be correct. Then my second question: clearly, Air Europa has played a major role for Globalia over the years. Will there be any IAG relationship with Globalia going forward, or should this represent a complete termination of the Globalia–Air Europa relationship?

Willie Walsh: Thanks, Neil. I will take the second question, comment on the first and then I will let Steve comment as well. It is intended to have a relationship with Globalia on ground handling and maintenance for a period of time. The relationship will be based on market rates, so it is, if you like, a completely market-based approach to having the relationship with them, but we see that certainly in the short to medium term as being the most effective way of dealing with this. In terms of the finances, you especially will be very familiar with the Aer Lingus results pre-acquisition and post-acquisition and the benefits that have accrued to Aer Lingus in terms of enhancement of all of their financial metrics once they became part of IAG, and clearly we see that as being the path that we will follow in relation to Air Europa, but maybe Steve, you would want to comment.

Steve Gunning: Yes. I have a few thoughts, Neil. One is I see the opportunities on both the cost and the revenue side, so it is neither one nor the other – I think it is both. It is interesting, the EBITDAR margin for Air Europa on the numbers we have disclosed to you is about 18.6%. For IAG as a group, we are about 22%, so there is a way to go to move it in line with the group targets. However, as we said, I would expect this to be RoIC accretive by Year 4, so those synergies will build up over a four-year period, it will be revenue and cost, but ultimately, I do expect us to get to the IAG targets.

Neil Glynn: Great. Thank you both.

James Hollins (Exane BNP Paribas): Good morning. Two for me. Can you just let us know what the cost of moving from SkyTeam to will be? I think there is normally some sort of cost in that. Secondly, just run us through who you actually need approval from. It is all the countries in which they operate? And particularly, would it impact – obviously Spain would be one of them, but if we look at Madrid, I think IAG and Air Europa would have about the same amount of slots as IAG has at Heathrow. So, am I right in thinking it is probably not an issue anywhere? Thank you.

Willie Walsh: Thanks, James. We see the cost of exiting SkyTeam as nill cost and in relation to the competition regulators, the principal ones would be the EU, US and Brazil. There will be some others as well but they would be the principal competition regulators that we would need to deal with. As I said, we will engage with all these on a constructive basis. I do not want to make too many comments obviously in advance of having proper engagement with the regulators or to pre-judge their views on this, but we believe that there are a number of precedents we can call on in relation to both the scale and the type of transaction that we are proposing.

James Hollins: Thanks.

Muneeba Kayani (Bank of America Merrill Lynch): Hi. Can you quantify the synergies that you expect over the next five years? Secondly, can you talk a little bit about the performance of Air Europa this year?

6 International Airlines Group – Company Update Monday, 4th November 2019

Willie Walsh: Thank you. Obviously, we are not going to give any details or a quantification of the synergies. We have done detailed work in relation to that, but as I said earlier, we need to properly engage with the competition regulators before we would be prepared to disclose any specific details in relation to that. I would describe Air Europa’s performance this year as being similar to other airlines in that clearly fuel has been a headwind for most airlines in 2019, so where we are giving you the 2018 figures here, we do not see anything unusual or out of line with the figures that we have seen for 2019 in relation to their performance relative to our own airlines or the industry in general.

Malte Schulz (Commerzbank): Hi. Good morning, all. Two questions also from my side. First of all, if you look, particularly on the long-haul side, on the route network, you have a lot of overlap with Iberia. Now with the new slots, do you also intend to go out of the primary focus of just LATAM and move also maybe the Iberia platform, or Iberia/Air Europa combined into other markets – , for example? I think that is my primary question.

Willie Walsh: Yes, I think it is a good point and yes, we do see the opportunity, clearly, to strengthen the relevance of the Madrid hub and enable the new combined Air Europa–Iberia entity to more effectively serve Asia and connecting Latin America to Asia over Madrid. So, that had been the ambition, forIberia as you know, we have started flying to Asia with Tokyo and Shanghai, but I think with this combined network and the better hub and wave performance that we will get at Madrid, it will give us additional opportunities that Iberia on its own or Air Europa on its own would not have. So yes, I think you are quite right to highlight that as an opportunity for us.

Malte Schulz: Yes. Will you give more updates on the Capital Markets Day next week or should we not expect anything?

Willie Walsh: Yes. No. I think Luis Gallego is in Madrid but will be with us in on Friday and I think it would be for me to give Luis an opportunity to give you a flavour of how he sees this would be operating. So, Luis will be with us and will be able to give you maybe not a lot more detail but certainly an insight as to how he sees Iberia managing the integration of Air Europa and he will do that at some stage during the presentation. My team are looking at me here smiling, saying that is another thing they have to add to the agenda for Friday, but yes, we will do that.

Malte Schulz: Okay, thank you.

Johannes Braun (MainFirst Bank): Yes. Good morning. Thanks. Two questions for me. Firstly, back on the synergies. You would not quantify them, but would you tell us what the distribution between cost and revenue synergies is, roughly? Then secondly, could you quantify in any way the implementation costs that we will see over the next five years?

Willie Walsh: We are not going to give those today, Johannes, as I said. I think we are very familiar with completing transactions like this. The critical issue is to engage constructively with the competition regulators at the earliest stage and not to pre-judge or to try and put them in a position where they are responding to public comments that we have made. So we want to do that first and in due course we will clearly give you more detail in relation to the synergies. What I would say to you is we have done a detailed analysis, we are very comfortable with what it is we believe we can achieve, we are very confident that we will deliver on that, and I would once again point to our track record in terms of how we have

7 International Airlines Group – Company Update Monday, 4th November 2019 delivered on both costs and revenue synergies with all of the transactions that we have completed since we created IAG, and particularly if you look at our track record with the initial synergy targets that we gave you for IAG, the combination of BA and Iberia and how we not just delivered on those but significantly exceeded those. So we have ambition clearly in this area. We are very comfortable that the synergies are real and we are very comfortable that we will be able to deliver on those, but we do want to have proper engagement with the competition regulators first.

Johannes Braun: Right, thank you.

Jaime Rowbotham (Deutsche Bank): Morning, all. Two quick ones from me. Firstly, are you in a position to say where Air Europa is in terms of its pilot and cabin crew agreements and whether the change of control could lead to any issues there please? Secondly, in terms of Air Europa’s rankings in things like SkyTrax, do you have a view on where it fits at the moment within the spectrum of performance at IAG and where it could go or something like that? Thanks very much.

Willie Walsh: Yes, they have collective bargaining agreements with their pilots and cabin crew and other staff. Those agreements are in place. Clearly, this will come as a surprise to the people in Air Europa. I believe it will be seen as a very positive development. I think Air Europa, as part of IAG, represents an opportunity for the employees of Air Europa that they would not have as a standalone. Again, I would point to what has happened with Aer Lingus. Aer Lingus as a standalone company had ambition, but as part of IAG not only has it been able to deliver on that ambition but they have been able to do so much, much faster and also on a scale that would have gone beyond anything that they could have thought possible on their own. Therefore, I see this as a very positive development. We will clearly wait to see and interact with the relevant groups when appropriate. In terms of where they sit, I have known Air Europa personally for over 20 years. I have flown with them many times. It is a good airline. We see it in terms of performance being consistent with what we have done with Aer Lingus, which is a four-star SkyTrax airline, as is Iberia. It is one thing looking at them as they are today, it is another thing looking at them as they will be in the future, but my personal experience with the airline has been very positive and we think, as I said earlier, it is a great opportunity for Air Europa and a great opportunity for IAG.

Can I just say thank you? As I mentioned earlier, we will give you some further [inaudible] in relation to this when we see you on Friday this week at Capital Markets Day, but thank you for joining us this morning. We look forward to seeing you on Friday.

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