BABWF - International Consolidated Airlines Group S.A. (ICAGY) Q2 2023 Earnings Call Transcript
2023-07-28 11:32:06 ET
International Consolidated Airlines Group S.A. (ICAGY)
Q2 2023 Earnings Conference Call
July 28, 2023 04:30 AM ET
Company Participants
Luis Gallego - CEO
Nicholas Cadbury - CFO
Sean Doyle - Chairman and CEO, British Airways
Conference Call Participants
Stephen Furlong - Davy
Savi Syth - Raymond James
Jarrod Castle - UBS
Jaime Rowbotham - Deutsche Bank
James Hollins - BNP Paribas
Harry Gowers - JPMorgan
Andrew Lobbenberg - Barclays
Neil Glynn - AIR Control Tower
Conor Dwyer - Morgan Stanley
Tobias F - Bernstein
Muneeba Kayani - Bank of America
Ruairi Cullinane - RBC Capital Markets
Presentation
Operator
Good day and thank you for standing by. Welcome to the Half Year 2023 International Airlines Group Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Luis Gallego, CEO. Please go ahead.
Luis Gallego
Thank you very much. Good morning everybody and thank you for joining the IAG results presentation for the first half of 2023. With me today I have Nicholas Cadbury, our CFO as well as members of our management committee including the CEOs of our main airlines.
We have had a strong start to the year, reflecting that our airlines are based in large markets with good demand for our services. We have recorded record profit both for the half year and the second quarter, with operating profit for the first six months of €1.26 billion, which is also a big increase compared to this time last year.
Specifically, our Spanish businesses are performing very well with a record profit at Iberia. Iberia's margin in the second quarter was just under 18% compared to 8.7% in second quarter 2019. At the same time, we are continuing to invest in our customers and operational performance where the operating environment is currently challenging.
Bookings are looking at strong for third quarter due in particular to a strong leisure demand. And financially, we expect net debt and leverage to continue to come down as we generate more profit and positive free cash flow this year.
I will now hand over to Nicholas to talk to you through the financial results for the period.
Nicholas Cadbury
Thank you, Luis, and good morning, everybody. I'll just start with the profit bridge for the first half of the year and highlighting both the drivers of the improvement in profits since last year and then the results by each operating company.
On the left of the slide, you can see that the increase in revenue has been the biggest driver, combining the restoration of capacity with strong unit revenue growth. That is slightly offset by cargo revenue, where yields are actually still 20% higher than 2019 levels, but there is a significant supply and demand imbalance across the market.
The other revenue growth came from across our loyalty, our MRO, and our BA holiday businesses. Non-fuel and fuel absolute costs reflect the higher level of flying activity and also the higher hedged fuel prices in the half.
You can see on the right that all of our airlines have significantly improved their profit year-on-year, which I will come back to later.
This slide shows the key operational and financial metrics for the half and at the bottom of each box is the Q2 variance versus 2022. The 31% increase in ASKs compared to the H1 2022 was driven by a recovery in all airlines, especially in the first quarter when we were annualizing the Omicron constraints and a 20% improvement in ASKs in Q2.
Passenger RASK was up 18% in the half and up 14% in Q2, versus last year with very good growth in unit revenues across all of our IAG Airlines, reflecting the strong demand.
Fuel CASK was up 5.7%. Fuel spot commodity prices were actually lower year-on-year, but we benefited last year from hedges put in place before the Ukraine war sent prices higher.
Non-fuel CASK for the half was in line with our guidance down 7% year-on-year. In the quarter, non-fuel CASK was down only 2.5% lower, lower than our full year run rate expectations due to additional disruption costs and investments we made in resilience. These added around 2% to 3% to our CASK. Despite this, we are still comfortable with our previous guidance for the full year of non-fuel costs being down 6% to 8% on 2022.
As a result of these metrics, we've delivered a record operating profit in the half at €1.3 billion and a margin of 9.3% in the half and a margin of 16.3% in the last quarter. With this good profit performance and a strong inflow in working capital, our net debt has come down again to €7.6 billion and leverage is now 1.5 times, significantly lower than this time last year.
Moving on to the summary of our operating units for the half, you can see it has been a good financial half for all of our businesses. Aer Lingus has returned to a profit after a loss making first quarter, reflecting the more seasonal aspects to its activities.
British Airways has made a big step-up in profits comparisons to last year, driving both revenue and unit cost benefits year-on-year. Iberia has had an exceptional start to the year, making a record profit of €372 million and an 11% margin following strong demand across the South Atlantic. The increase in non-fuel CASK year-on-year largely related to the MRO and Handling business.
Like Aer Lingus, the Vueling result is also more seasonal, but they performed very well with £96 million profit for the half. And finally, we have given you more detail on the loyalty business again, and you can see how it just makes an important contribution to the group's profit at a good margin of 25%.
This next slide just shows you how our operating profit of €1.3 billion reconciles to our statutory post-tax profit of €921 million. I'll just draw your attentions to the fact that we are now starting to get much better financial income on our cash, where we're earning around 3.5% in Q2 at an increasing rate compared to our current average cost of financial debt of about 5%.
Moving on to our cash flow. We've generated a net €2.4 billion cash flow -- inflow in the half. You can see that this has been achieved by the €2.2 billion EBITDA and a positive deferred income of just under €2.4 billion, as we built strong Q2 revenue.
Offsetting this is our continued investment in our fleet, customer propositions, and IT programs with €1.3 billion of CapEx and €225 million of ETS' purchased in the period.
As mentioned earlier, our net debt at the 30th June was $7.6 billion. We expect to continue to benefit from the positive EBITDA across the year with a large proportion of the working capital unwinding in the second half in line with normal seasonal trends.
We maintain our previous capital guidance of around about €4 billion for the year with 19 more aircraft expected to be delivered in the second half compared to 11 in the first half.
Given the recovery of the business and our strong liquidity, we're starting to focus on reducing our gross debt and into July, we repaid a €500 million unsecured bond.
At the year-end results, we gave guidance that net debt would be flat year-on-year. At this point, -- at this -- when we gave this guidance, consensus operating profit was around about €2 billion. As we said at the Q1 results, we expect net debt reduce in line with any operating profit improvements above this level.
We showed in the next slide at results in February to remind you of the manageable debt maturity profile over the next few years. And as mentioned, we may look for opportunities to repay some of our gross debt in the second half if the markets are favorable.
Moving on to our fuel hedging position, we're around about 67% hedged for the remainder of this year and just over 40% for 2024. Again, as the commodity price has been so volatile over the last year -- the last few months even, we've shown some scenarios of our total fuel bill at different levels.
Turning to recent trading. This slide shows the Q2 ASKs and PRASK growth across all of our regions compared to 2022. I won't go through these individually, but you can see our core markets of South and North America and Europe are showing a strong performance overall.
We've shown very large ASK growth in Asia-Pacific, reflecting that the market was substantially closed last year and we've now opened up flights to China, Japan, Singapore, and Australia.
And lastly from me, what does that mean for the rest of the year? We continue to see strong demand in the third quarter, which is 80% booked. We have less visibility into the fourth quarter, which is very typical for this time of year. And so far, for Q4, we're seeing no sign of weakness and our booking curves are actually slightly ahead of normal years. This is due a strong leisure demand that books further out, although with a higher mix of corporates in Q4, we expect this to normalize as we go through the rest of the year.
Our capacity expectations for the year are unchanged at 97% of 2019 ASKs with the main area of shortfall coming from BA's Asia network with growth at each of the other airlines.
Our non-fuel CASK expectations continue to be in the range of 6% to 10% as previously guided. And finally, as mentioned a couple of slides ago, we expect net debt to continue to reduce year-on-year.
On that note, I will now pass you back to Luis.
Luis Gallego
Thank you, Nicholas. I will now spend a few minutes talking about the strength of the group and its business model and highlighting some of the work we are going to deliver our strategy.
Firstly, I would like to remind you that IAG has a unique structure based on driving high and sustainable returns in our operating company. A big part of that is the way we effectively manage our portfolio to maximize value. And I think if you look at these results, you can see the benefits of that portfolio approach in the balance of success we are having in our core markets.
We are investing in our fleet, our cabins, the service delivered by our people, both on board and elsewhere, and in our digital offerings. We have historically improved efficiency at all our airlines and our transformation program is designed to do exactly that over the next few years.
And finally, we recognize that sustainability agenda is essential to the future of the business. The result of all these is that we are very focused on driving long-term sustainable value for our shareholders.
One of the major drivers of long-term success is the leadership positions that we have in our hubs and major markets. And we continue to invest to ensure that our market positions are strengthened.
On the North Atlantic from London, British Airways is now flattening the equivalent capacity of its pre-pandemic schedule. However, the market dynamics are slightly different as we have less premium capacity than we flew before due to the retirement of the 747 fleet. So, we are focused on that market. As we restore our fleet capacity, which will drive an increase in business class seats with an associated revenue benefit.
Aer Lingus has a strong position in Dublin, particularly addressing its core US market, balancing efficiency with an attractive and value-oriented product, and they are expanding their network to places like Cleveland and Hartford.
On the South Atlantic, this is a slightly different market to the North Atlantic where we fit the Madrid hub and compete with other carrier groups from across Europe.
Iberia is focused on building its market share such as adding frequencies to destinations like Bogota and Mexico City.
And finally, Vueling and Level contribute both our strong leadership position in Barcelona, but also through level to the North and South Atlantic proposition.
We are currently investing a lot in our fleet, which drives better customer products, is more efficient, and is more reliable. On the left, you can see that we have now mostly restored our narrow-body fleet to pre-pandemic level with a few more to come still at British Airways.
And on the right, you can see that both British Airways and Iberia are still recovering their wide-body fleet after the retirement of their old and inefficient 747 and 340 fleet respectively.
Our announcement last night means that we can accelerate that recovery process with BA's first order for six 787s and the addition of one A350 to Iberia. It is worth noting that this year, Iberia has been delivering a large part of its long-haul growth through greater utilization as Vueling has done in short-haul.
And in the boxes above each chart, you will see that over 40% of both narrow-body and wide-body are more efficient new generation aircraft, which is over 240 aircrafts.
At this point, we are also recognizing that for many of our customers, we would like to improve our operational performance. It's not helping that the European aviation environment is extremely difficult, weather-related cancellations have increased by over 200% on 2022 at BA in the first half.
The Ukraine conflict has cut EU Aerospace by 20%, which has a knock-on impact in other parts of European Aerospace. And we have also seen sustained amounts of industrial actions; ATC strikes in France, Italy, and Germany, as well as strikes earlier this year by some key [Indiscernible].
Iberia continues to be one of the world's most punctual airlines, and Vueling is proving very resilient, on-time performance and at both BA and Aer Lingus have suffered. The situation compared to last year is different. At BA, the core operation is more stable with significant equipment being the biggest part. The main focus this summer has been on recruitment, managing the supply chain, and the use of well-leased aircraft in both long-haul and short-haul fleets.
Elsewhere across the network, we have a number of initiatives that are focused on delivering our resilient operation this summer.
Aer Lingus have focused on removing bottlenecks such as check-in and for US connections. At Vueling, it has mostly been about using data assistant to have a more join-up approach between planning and on the day delivery. So, they are Europe's second most punctual low-cost carrier despite their significant exposure of French ATC.
And at Iberia, one of the most punctual airlines in the world, they're looking to improve even on this performance with investment in additional resources. We believe that these as well as a large number of other initiatives will deliver better performance for our customers.
As well as in our fleet and operations, we are continuing to invest in the customer proposition for all points of the customer journey. Part of that is to ensure that our premium products are attractive and support the demand from both leisure and business travelers in the future.
Both British Airways and Iberia are implementing new business with products with 55% of BA's Heathrow-based long-haul fleet now embodied with a new product. BA is also enhancing and developing its lounges and lounge products such as the new JFK Terminal Ace lounges, but also at Heathrow Terminal 3, Newark, and Chicago. And all of our network airlines are investing in an enhanced food offering for both premium passengers and also economy passengers.
We continue to invest in IT and digital and our major investment in moving systems into the cloud is continuing. From a customer perspective -- from a customers' service perspective, sorry, we are running out digital capabilities such as live chat, baggage tracking, customer pre-flight messaging, and online menus. And we are investing in our customer service with a new [Indiscernible] call center that is equipped with a new CRM, a better telephony system.
Our loyalty business continues to do well as a high growth, capital life, and cash-generative part of the group. We continually innovate to create ways for customers to engage with Avios and in particular, we do this as we invest in our proprietary technology.
On the collection side, we are working on both airline and non-airline side such as through airline and financial service partners. We are also making it more attractive for our members to redeem their points.
British Airways has now released Avios only reward flights to seven popular destinations and we are also seeing growth in redemption at BA holidays with around 20% of bookings now using Avios to save money.
Moving on to our people, they remain core to our business. In the first half of the year, we have recruited 7,000 people across the group. We are also investing to ensure we have a good supply of pilots into the future with cadet schemes at both Iberia and British Airways.
We are targeting better diversity at senior levels of our organization. Most importantly, we are in the middle of negotiations with a number of our employee groups and we hope to agree this over the next few months to the satisfaction of all parties.
We are working towards ensuring that we can reach long-term sustainable agreements that allow us to be competitive with other airlines and to be able to invest in the business for the future.
And finally, sustainability continues to be a long-term part of our strategy. Firstly, it is important to say that IAG has a positive impact in the economies where it operates. We ask PwC to assess this based on 2019 data. The results show the important contribution IAG is making in the UK and Europe, the job it is supporting and the way it supports tourism. This amounts to a direct and indirect contribution of €70 billion in GDP and supporting more than 600,000 jobs.
During the first half of the year, we continued to make progress on some of our key sustainability initiatives. We are actively advocating for policies to support the production of sustainable aviation fuel, including with the design of the sub-mandates and supporting supply incentives.
We continue to work towards our target of using 10% SAF by 2030, securing more supplies of SAF such as the investment we announced earlier this week with Nova Pangaea in the UK.
And don't forget the investment in fleet we talked about earlier, where the latest generation aircraft are around 20% more fuel-efficient than previously. And the more wide-bodies that we are currently receiving are up to 40% more efficient than the 747s and 340s they are replacing.
So to summarize, this has been a good start to the year, delivering our record first half profit. We are looking forward to delivering another strong quarter in the summer, which is now almost 80% booked and finishing the year positively.
And we will continue to invest in our group wide transformation program that is creating a more efficient business and opening up additional revenue streams. As a result of the good financial performance, we expect to generate sustainable free cash flow this year and to continue to deliver year-on-year.
And looking beyond 2023, we are convinced that IAG's unique business model and attractive markets can deliver sustainable benefits for all stakeholders in the long-term.
And now we are ready for your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
And the first question comes from the line of Stephen Furlong from Davy. Please go ahead.
Stephen Furlong
Hello. Thank you for that. Okay. Maybe two questions please. Can I ask about sustainability and the excellent efforts you're doing there? My understanding is that if Corcya [ph] isn't kind of further developed and other more countries have become part of it, then there's a provision for -- in the EU for ETS -- long-haul to fall into ETS in 2027 onwards. And I'm just wondering what you think of that and you are you worried about that that long-haul will have to pay more allowances? That's the first question.
And then a kind of a particular one on Gatwick, I'm just maybe -- my understanding is in Gatwick, BA wants to expand and the slots that it gave back in the pandemic whether in-house to Vueling or ETS, maybe you can just talk about what are the plans there for the slots that you gave back that would be great? Thank you.
Luis Gallego
Thank you. So, good morning. Yes, as you said, we are pushing to have Corcya as the solution -- and the global solution that we need in aviation. And in parallel, we have the ETS rules that are going to apply to the intra-European flight. So, you know that the allowances are going to be reduced.
We are pushing that this ETS Scheme can in some way help the production of SAF that as you know, we have a short base and the SAF that we have is very expensive. So, SAF that is the only sustainable solution for long-haul flights.
We have commitments of $865 million in order to comply with our of 10% sustainable aviation fuel by 2013. So, in UK, what we are asking the government is to have a mechanism to stabilize the price in order to guarantee the investment in the plants that are needed to have this 10% of SAF.
So, we are going to continue leading this transition to a sustainable aviation, trying to change the policy that would happen in Europe and UK, more oriented to the stick to the carrot that they are using in the state and is helping more to the development of the industry.
About the second question about Gatwick, maybe Sean, you can answer about that.
Sean Doyle
Yes, on Gatwick, Europe up and running, obviously, at a fairly significant scale. We have set up a separate airline operating certificate, and we're operating about 18 aircraft there this summer.
Our plan would be to get that up to about 26 and we do have arrangements to take a lot of back from people we have leased them out to particularly easyJet over the coming years to enable that. That's the big headroom and capacity for Vueling current operation, which again has increased and is performing very well.
Stephen Furlong
Okay. Thanks guys.
Operator
Thank you. We will now take the next question. It comes from the line of Savi Syth from Raymond James. Please go ahead.
Savi Syth
Hey, good morning, everyone, and thanks. If I might, just if you could provide a little bit more color on business and premium demand trends. I know you mentioned it, but basically, essentially business, just where is it trending relative to the past?
And second question that's tied to that, then is just I know your plan as you kind of thought about this coming out of COVID was that business kind of recovers to maybe 85%, and we've kind of definitely been surprised by how strong premium leisure has been. What are the implications for earning seasonality going forward like on a long-term basis? Or do you kind of expect it to be pretty similar to kind of pre-pandemic? Thank you.
Luis Gallego
Okay. So, good morning. So, corporate traffic is recovering more slowly than we thought at the beginning of the year. It's true that business travel is recovering at different rates across our airlines and the different regions. We see a correlation between business travel and people returning to the office. So, for example, our Spanish Airlines are seeing a stronger recovery in business travel if you compare it with the British Airways or Aer Lingus.
It's true that summer period is not a big period for business travel. And the recent trends showed that BA revenue was around 69% and volumes remained around 60%, 61% of 2019 levels.
Iberia, they see something different, revenues closer to 95% and volumes of 82%. We see also a difference in the rate of recovery between the different type of business trips. For example, long-haul business trips over two days trips have been recovering faster than the recovery of our short-haul day trips.
And if we look specifically to British Airways, for example, so since the end of COVID, business volume has recovered each quarter. In the period from the second quarter of 2022 to first quarter of 2023, the average increase in volume comparing with 2019 was 10% per quarter.
But from second quarter of 2023, we didn't see any recovery. The volumes are plateaued at 61%. It's true that the volume of flight cancellations don't help, but we see that things are not improving recently.
But we are more optimistic about the future because for the third quarter, BA's forecasting to reach 68% of corporate traffic if we compare with 2019 and that's a seven-point improvement if we compare with Q2, mainly it's going to be due to less disruption also, we need to take into consideration and in 2019, we have a strike, but it's important also the underlying growth.
When we look, for example, at September, bookings are coming -- business bookings are coming well and are ahead of the expectations that we have. So, as you can see, things are coming back slowly. Are we going to reach the 85% that we said? We think we are going to come back there, but it's going to take more time than we thought originally.
Savi Syth
That's super helpful. And just on the kind of the earning seasonality thoughts there that, I mean, if it even does have an impact?
Luis Gallego
Yes. In the group, we have different airlines. Seasonality is different in the different airlines. For example, we see now that this slow recovery of corporate traffic is having a bigger impact for example in Aer Lingus and now we have a more seasonal airline. But in the case of British Airways or Iberia, we don't see that this is affecting to the functionality of the company.
Savi Syth
Very helpful. Thank you.
Luis Gallego
Welcome.
Operator
Thank you. We will now take the next question from the line of Jarrod Castle from UBS. Please go ahead.
Jarrod Castle
Thanks very much and good morning everyone. Just a question, you say that summer is 80% booked, do you think that's the right number? Or are you missing out on potential yield uplift for close-in bookings?
And then just related to pricing, there's obviously been some comments from US Airlines on pricing weakness. Maybe it's US Airline specific or those airlines specific. Do you think some of that will come Europe's way I guess in the future?
And then just lastly, new Heathrow's CEO starts, I think, at the beginning of October. So, I guess, what would be on your hit-list in terms of things you'd want done differently at Heathrow or things reinforced and I guess just the health of that relationship at the moment and going forward? Thanks a lot.
Nicholas Cadbury
Yes, just in terms of the 80% booked for the summer, I think we're looking at the right number there. It's slightly ahead of where we were a year ago in terms of booking trends. And I think you'd expect that kind of a slightly mix -- bigger mix of leisure that we're seeing. So, I think -- and of course, during the summer periods, you have a much less dependent on corporate travel. So, I think at the moment you're seeing actually those short-term bookings are being filled by leisure at the moment. So, we feel quite comfortable.
As we said earlier, we're not any signs of weakness and a similar sort of trend in yield that we saw in Q2 as well across that as well.
Luis Gallego
Okay. And about the question about Heathrow, I think we welcome the new CEO and for sure, we are going to try to continue improving the relationship with the airport. At the end, it's what is going to be beneficial for the customers.
And I assure that we will talk about a lot of things, but main topics answer will be the Heathrow charges that have been our battle we continue with the battles because we are operating in one of the most expensive airports in the world. But when you see the experience of the customer is not one of the best to be polite.
And also another topic is the electronic travel authorization that we are talking about that now and it's something that can be a big problem for the connecting traffic in Heathrow if we compare with other hubs in Europe. So, I don't know Sean if you want to add any.
Sean Doyle
Yes, I think that would be one thing we'd work with Heathrow to have an ETA because we'll be having an ETA for transit customer until it makes sense. And we need to work together on that. But as Luis said, I think we need efficient and very much improved infrastructure and delivery for customers. We need to make sure that the charge is sustain a competitive position for Heathrow. And we work with Thomas in the same way that we've worked with the previous regime on delivering that.
Luis Gallego
And I think you asked also of the weakness in general in the unit revenues. And as we said before, we don't see that. I think we are -- we see for the third quarter a similar trend that we had in the second quarter and unit revenue increased compared to the 2019 similar to the one we've had in the second quarter. It's true that we see a decrease in the last quarter, but it's not linked to any weakness is linked more to the normal seasonality effect.
Jarrod Castle
Okay. Thanks very much.
Luis Gallego
Welcome.
Operator
Thank you. We will now take the next question from the line of Jaime Rowbotham from Deutsche Bank. Please go ahead.
Jaime Rowbotham
Morning, gentlemen. Two from me. I was going to ask about Q3 yields, but you just covered that. So, instead, just looking at slide 20, big difference in on-time performance between BA and Iberia. I think that probably has a lot to do with Heathrow, which you just talked about a bit, the differences there versus Madrid. But maybe you could just expand a bit on what you can do to improve on-time performance further at British Airways?
And then the second question relates to IAG as a platform for consolidation. Just wanted to get a sense for how ambitious you're feeling in the current environment. Obviously, A, Europe has agreed subject to antitrust. I think the Portuguese government said a process for TAP will take place before October. And presumably, there are other lower profile opportunities around Europe. So, how great is IAG's appetite in this current phase of industry consolidation, please?
Luis Gallego
Thanks. Okay. Starting with the ATP [ph], it's true that we have two different behaviors in British Airways, Aer Lingus, and Iberia and Vueling. I think the environment that we are operating in Europe is very difficult this summer. As I said before, we had strikes, ATC problems, ground hauling. We have less airspace as a consequence of the situation or the Russian invasion of Ukraine.
We are having problems with weather, including thunderstorms, high winds, et cetera. And we are having issues that in all the industry supply chain issues. British Airways and Aer Lingus are particularly impacted. It's true that we are managing better the situation in Spain.
I think in the case of Iberia, it's a process that has started long time ago, and they changed the company to become one of the most punctual airlines in the world. And they are managing better. The situation is true also that during the COVID, in a way it was possible to maintain all the employment.
So, they have -- the people that they have before, they have the right skills and case for example [Indiscernible] BA, they have hired a lot of new people for this summer. and you always need a period in order to improve the performance.
But in any case, when we look at, for example, at the numbers of cancellations in BA this summer and we compare with last year, delayed cancellations have been reduced 40%, flying 20% more flights.
So, our ambition is to improve punctuality in Heathrow, in Gatwick, in Dowling [ph]. But it's true that the environment is not helping, but we know how to do it because as you said, we are having very good operation in other airlines of the group.
And about the platform for consolidation, yes, we continue -- we created IAG as a platform in order to consolidate the European Aviation because we think it's needed. For that reason, new companies join the group in the past, and we always have looked into opportunities to develop the group.
So, in the case of Air Europa, it's something that we closed in November 2019 and we are even with COVID in the middle, we continue trying to do this operation that is critical for the development of Madrid hub that we have seen in these results is a hub that is growing, and I am sure it's going to be a big support for the group in the future.
So, that operation, we are still in the pre-notification phase with the European Commission. We are in the process now of submitting the information. We are talking with potential partners for remedies, and we are working trying to demonstrate the consumer benefits that are going to come with this operation.
And also, trying to show that Madrid hub needs to have to compete with the bigger hubs in Europe. And that the European Airlines, we need to have the size to compete also world where you have the US carriers that are -- yes, they have concentrated the market or you need to operate to compete with Chinese carrier, Gulf carriers, et cetera.
And that, as you said, is something that we are analyzing, but we need to wait until the privatization process will start, probably in October. And at that point, we will determine if it's something interesting for the group or not.
Operator
Thank you. We will now take the next question from the line of James Hollins from BNP Paribas. Please go ahead.
James Hollins
Hi, good morning. Two for me, please, one on pilots, the other on British Airways. So, on the pilots, I guess for Nicholas, I was wondering in your cost guidance what you're assuming on BA, Aer Lingus, Vueling wage increases and any more detail on where we are on those negotiations? And perhaps while we're on pilots, whether the Iberia pilots are agitating for a pay increase or despite them having a long-term deal?
And then for Sean, we had a very interesting afternoon Sunday Times about for the interview with yourself. Running on this platform, you might discuss a little bit more detail on some of those issues you were talking about British Airways, whether it's staff morale, some of the cost required to improve the business back end, front end, et cetera, a key focus. I'd just love to get a bit more on this platform from you, Sean. Thank you.
Nicholas Cadbury
So, James, just starting on pilots. As you know, we've agreed for the next three years with Iberia our CBA, so that's in place overall. As you can see with the operating companies are working incredibly well at the moment as well. This is the season where we start -- we're in negotiations with most of our other airlines at the moment with our pilots and our cabin crew as well.
I think right now, it should be kind of inappropriate for me to kind of comment specifically on any of those deals as well. But we're kind of expecting a robust flying pattern over the summer holiday.
So, really the guidance I'm going to kind of refer you to is the guidance that we've given you before, which is kind of we think overall would employee and our supplier costs on our ownership costs, we've done about 6% to 10% year-on-year overall. So I think that's as far as I can go on that overall.
Sean Doyle
In relation to BA, yes, I think we are kind of midway through transforming the company and I think there's a lot of progress being made. But maybe if I kind of structured this in four key components, well, the first thing is leadership the kind of people we have driving the transformation.
And we have bought in, I think, a lot of very, very strong leaders to really accelerate the pace of improvement in the business. So, more recently, we have a new Director at Heathrow, Tom Moran who has joined from Thameslink. And he's a very, very impressive and experienced professionals, who I think will really help with the Heathrow challenges that Luis has spoken about.
And secondly, it's resourcing. We've made significant progress on rebuilding the resources of the company. We've added 3,000 people alone in the first half in advance for this summer. And we've covered about 13,000 more people since the start of the end of the pandemic. So, the resources are getting there.
You mentioned morale, I think we are seeing significant improvements in employee engagement. We're putting a lot of work into making sure that people have the right skills, the right training, and the right tools to do the job of the day and make sure we do that we support all of our frontline operational people in looking after our customers and that's trending very much in the right direction.
If we look at investments, we have, as Luis mentioned, significant fleet deliveries coming. And the great news is they all come with new products. The club suite is very, very well received. I think it's in the top four business class experiences globally and we now have 55% of our Heathrow fleet has the Club fleet that will rise to 63% by year end and we start reconfiguring the 787-8s and 9 next year.
So, I think the hard product will work and that's going very well. We've also put significant investment to our contact centers. We've had a new site in Delphi, a new site in Bucharest, and a new site in Kuala Lumpur. We've increased our call handling capability by about 30% year-on-year.
And finally, it's putting in some foundations on tech and experience. And a lot of work going into migrates out of our data centers into the cloud. We'll be complete with that next year. And we're redeveloping BA.com and looking to transform the digital experience. And again, we have a new leadership team leading that program in British Airways.
So, there's a lot of foundations going in, a lot of progress being made and very exciting developments that will begin to impact the business positively in the next 12 months.
James Hollins
Okay. Thanks, Sean.
Operator
Thank you. We will now take next question. And the next question comes from the line of [Indiscernible] from Caixabank BPI. Please go ahead.
Unidentified Analyst
Hello. Thank you for taking my questions. Two if I may. The first one coming back to bookings again, if you could provide some view on how our bookings for me across your key geographies? And if you could provide some granularity on gross bookings and cancellation?
And the second question, if you could update us where your NDC volumes are at the moment? And to what extent is having channeled through the GDA? Thanks.
Luis Gallego
So, just for bookings, I mean, we won't go into individual geographies overall. And I think already said that we've seen the kind of continuation of Q3. There's been some of the trends of Q2 with kind of no weaknesses in there. And we've seen particularly in our core markets of North America, South Atlantic, and across Europe continues to be strong. All leisure destinations again continue to be kind of holding up very, very well. So, it's the only area where we are kind of cut on capacity rather than at the moment is flying east and that's just because we don't have a number of planes flying across to the same number of destinations, the same number of frequencies that we had in the Far East. That will take us a couple of years to get back up to that sort of level of capacity. So, I think that's where it is on bookings.
The next question was on kind of cancellations overall, which you'll see, I think if you look at cancellations overall over the last kind of this year versus last year as you'll see the kind of level of cancellations overall is down. We've still got still higher than we would like it to be, of course, but we're still kind of focusing on making sure they kind of come -- continue to kind of come down.
It was another question as well, which I missed actually.
Unidentified Analyst
On NDC, if you could update us where are your volumes right now in terms of the overall volumes and to what that these volumes have been channeled through the GDS?
Luis Gallego
I don't think we disclosed the actual levels of NDS that we do kind of specifically overall, but it's an increasing share of our business overall. And I'm pleased with how that's kind of going at the moment. The direct side has continued to grow as a proportion of our business, both the leisure and for corporates.
Unidentified Analyst
Okay. Thanks.
Operator
Thank you. We will now take the next question from the line of Harry Gowers from JPMorgan. Please go ahead.
Harry Gowers
Hey, good morning. Two questions if I can. So, the first one is disruption. There's been, I guess, increased noise around potential disruption in the last few weeks, especially at places like Gatwick. So how confident are you can complete your Q3 capacity without large delays or last minute cancellations? Are you relatively confident in the system in general or your major airports?
And then just second one, just going back to the corporate travel point, because it sounds like you think the slower recovery versus expectations this year is probably more cyclical in nature rather than a higher structural impact, so is that the case? Because it sounds like structurally you still expect those corporate volumes to get back to around 85% of 2019 levels? Thanks.
Luis Gallego
Yes. So, I'll just start on the corporate one. I'm not sure about cyclical overall. I think in some sectors, you've seen it probably a bit more cyclical. I think you've seen in the finance sector has been at the beginning of the year was a bit subdued, probably levels of level of kind of transactions that were going on actually, but we've seen that kind of recover a bit overall.
So, I think it's just a steady growth back as it's particularly correlated to kind of when people are working from home and as they're coming back into the office as well. So, you've seen Spain recover almost back to 100%. And if you go back to offices in Spain, they're back to almost 100%, whereas if you go to Ireland, it's still kind of Mondays and Fridays are pretty work from home. So, that's it's kind of correlating with that at the moment.
And you'll see the UK as you're working from home kind of continuing to -- work from office is continuous improvement. So, it's going to be improving with that base as well. And as we said, we're starting to see Q4 very, very early, but we're starting to see kind of encouraging signs from bookings on the corporate travel.
Sean Doyle
Just on the disruption in the UK airports, we're the 29th July, so we're in peak summer. We've already been in peak summer as well in June, which is a very big period for North Atlantic. So, I think July, we've seen improved reductions in disruption compared to June, and we expect that to carry on as we head into August.
I think Gatwick, our operation is obviously smaller than some other operators out there. And I think we're not seeing the level of disruption for the BA operation of Gatwick may see overall at the airport, but that has some specific challenges in relation to air traffic control capacity that we monitor closely.
At Heathrow, as we said earlier, I think our resourcing picture is much better. We obviously are vulnerable to the external environment and the airports we do fly to in Northern Europe as well are seeing similar levels of challenge.
But we are focusing on the things we can control particularly supply chain, technical resilience and resourcing. And we do see them being stable and getting better as we look into August.
Harry Gowers
All clear. Thank you.
Operator
Thank you. We will now take the next question from the line of Andrew Lobbenberg from Barclays. Please go ahead.
Andrew Lobbenberg
Hi there. Can I ask, let's just take Gatwick and inquire what your attitude is towards the ambitions of the airport to get their second runway there?
Then can I have a couple on the North Atlantic, please? Obviously, there's great demand and your product is great, but part of the thing that's helpful is that North is a great deal smaller than Norwegian was before the pandemic. But next year, North is expecting to take five 78s back from Europa. And meanwhile, we've got the Valiant people at Global Airlines expecting to put four A380 from the North Atlantic from Gatwick. What do you think about the ambitions of these disruptors?
And the final one on the North Atlantic is, how do you see the developments at American as a partner, as a feed provider for you in the Northeast US given that the partnership with JetBlue has fallen down? Thanks.
Luis Gallego
Okay. So, I'll start with the North Atlantic situation. 75% of the market now in North Atlantic is between the three joint businesses that are with us. And if we look at the traffic between Europe and US, in the second quarter, the capacity was minus 2% versus 2019. In the third quarter, quarter is going to be plus 1% versus 2019. So, the traffic even with the exit of [Indiscernible] has recovered the situation.
It is true that when we look at specifically to the London Heathrow US market, the situation is that in the second quarter we have 11% more capacity that we had in 2019 and in the third quarter, we are going to have 13% more capacity.
And it's true that what is happening is part of the traffic from Gatwick is going to Heathrow. So, when you see London, considering together Heathrow and Gatwick with up in the second quarter minus 1% of capacity. And in the third quarter, we expect plus 4% of capacity. So, with that capacity, it has to do even less the other [Indiscernible] we are replacing, and then we have the same capacity that we have in 2019.
The situation is different, for example, in Spain, where the traffic at Spain US in the second quarter was minus 13% and in the third quarter is going to be similar, going to be minus 14%.
So, in this environment, we have also British Airways that they have less premium seats that they have in 2019 because of the retirement of the 747, and we have all the competitors that they are adding more premium seats. But when we see the situation with British Airways plus American Airlines, we are slightly above market share that we have in 2019. So, that's the situation that we have in the market.
Talking about American JetBlue, we are sure that we can continue working with American and trying to develop the network without this agreement between American and JetBlue. I don't know if you want Sean to add something?
Sean Doyle
Yes. I think the Northeast is an important market first, but Andrew being a hub carrier based Heathrow and having hubs at Madrid, we can drive an awful lot of traffic behind our gateways, feed it into terminating traffic at places like Boston, New York.
So, we've never really built our model on huge amounts of behind feeding those markets. But I think American does give us really strong frequent flyer presence and it gives us good feed over to the Delphi as a Northeast gateway as well as connections over Chicago and Dallas and Southwest.
Andrew Lobbenberg
Gatwick [Indiscernible].
Sean Doyle
Gatwick, I think that we've seen Gatwick obviously launched our plants and they're seeking TCO. We'd evaluate that closely. I think two or three considerations will come into play, one will be cost. And I think they're making a pitch that is a very cost-efficient form of airport expansion.
I think secondly, it would be a wider community impact. And again, I think the number of the community impact to look very manageable in terms of the noise envelope.
So, we'll evaluate that Gatwick is an important gateway for us and I think the case is the one which I'm not surprised they have made and could give us opportunities in the future.
Andrew Lobbenberg
Well, thanks.
Operator
Thank you. We will now take the next question from the line of Neil Glynn from AIR Control Tower. Please go ahead.
Neil Glynn
Good morning, everybody. If I could ask three quick ones, please. The first one, following on from some of the comments on staffing and resourcing. The headcount in the first half of the year was actually higher than pre-pandemic, while capacity was obviously a little bit lower.
So, just interested on the outlook for the future there and how you think about productivity on the labor cost side going into 2024, notwithstanding obvious negotiations?
Second question on Iberia, a very impressive performance, of course. Could you give us a bit of detail in terms of the strength of flows from Europe versus LatAm originating, which maybe helping their long-haul business? And to what extent is the capacity deficit on Europe, LatAm crucial to Iberia's current performance?.
And then the final question, unless I've missed it, I don't think you've confirmed the Capital Markets Day date yet. If that is the case, could you update us on your thinking as to when might be appropriate? Thanks.
Luis Gallego
So, just to get the Capital Market Day, well, yes, we're still focused on that. Yes, but we're just going to make sure we get through, we're focusing on delivering a successful summer first and then we'll come back and announce -- this is again for the summer.
Okay. Talking about the hiring productivity, your first question. So, across the group, we recruited last year 17,000 people and this year, we are in the range of 7,000. We have enough people to support the operation. As I said, the problem we are having more a prominent link to the difficult environment we are operating.
Of the 7,000 people that we have hired in 2023, 4,000 were in BA, and 1,800 in Iberia. So, it's critical when you said that we need to increase our productivity in this environment of higher cost because of the inflation we are having and that's what we are trying to close in the different agreement that we are negotiating right now is the best way to reduce the cost productivity and also utilization of the aircraft. And that's something that, for example, you were asking about the performance of Iberia, they are doing very well there.
With less aircraft that they had in 2019, they are increasing the utilization, and because of that, they are managing very well the cost. In a similar way, Boeing, they are doing that in the shortfall. I don't know, Fernando, you want to comment something about the question about the traffic in Iberia?
Unidentified Company Representative
The recovery in the Latin American market has been driven basically because the ramp-up in the capacity in Iberia has been stronger than our competitors in the last months, in the last years. So the capacity is 98% versus 2019, significantly ahead of our competitors at about 16%, 17%. So that's one of the reasons because we have recovering and performing very well in the Latin American market.
Sean Doyle
Yeah, I think you've seen actually the EU capacity actually is the one that's kind of suffered overall EU to South America. Actually, Madrid to South America has remained fairly strong actually. Yes. You're seeing particularly strong bookings coming from Latin America and from North America at the moment into Iberia and into British Airways.
Yes, and also one thing that is helping Iberia in the results, apart they are doing a very good job. The customer base is more exposed to the VFR traffic and to the leisure segments. Madrid and Spain, they have increased the attractive for other countries. So we have more than 50% more luxury hotels, rooms in Madrid, if we compare with the situation we had 10 years ago. That's helping. We have a lot of people that they are coming to Madrid to live, and that's something that is increasing also. The premium leisure traffic that is a traffic that was not very strong before.
Neil Glynn
Thank you.
Operator
Thank you. We will now take the next question from the line of Conor Dwyer from Morgan Stanley. Please go ahead.
Conor Dwyer
Thank you very much. So it sounds like visibility is reasonably good for the rest of the year and certainly
Sean Doyle
We can't hear you, Connor. You sound like you're underwater.
Conor Dwyer
Is that any better?
Sean Doyle
That's better. That's better.
Conor Dwyer
I'll continue to talk loudly. So it sounds like visibility is reasonably good for the rest of the year and certainly better than earlier when you initially gave an EBIT guided range. So I'm interested to hear your thoughts on why not giving an explicit guidance range now. Is it maybe perhaps elevated recession concerns to the winter? Any information that would be very useful? And the second question is more for Sean.
So the steps you talked about that were helpful in terms of BA turnaround, but I was wondering if you could elaborate on development for the BA app in terms of the customer experience. So what sort of changes should we expect there and any sense of timing on that? Thank you very much.
Luis Gallego
Yeah, you're right. We've got good visibility into Q3 at the moment, but 80% booked. So we've got less visibility into Q4 than into Q3, but actually still, as we said, it's looking promising so far with no signs of weakness overall. I guess just in terms of guidance overall, we're keen to get people focused on the medium to longer term on our performance overall, delivering good returns and good margins over that period, less on the short term performance overall. I think we've given good outlook in terms of consensus is just under 3 billion at the moment and those who have come out more recently are at about 3 billion or even a bit higher.
We've had a good Q2, and I think we've kind of shown you, hopefully, that there's good Q3 bookings and good Q4 bookings with no signs of weakness. And we've given you good, kind of, kind of hopefully good cost guidance as well at the moment. So I think we've given you, hopefully, all the components to help kind of for you to make your own judgments off the back of that.
Sean Doyle
Yeah, in relation to the BAS, we've built up a team of about 200 tech developers, headed up by a guy called Mark Lock. Mark has joined us from Tesco. So we're aiming to launch what I would call a minimal viable product prototype toward the end of the year, and probably trial that on one of our short-haul businesses, potentially at Gatwick. But we will be looking to transform how we merchandise and retail, and move to more shopping basket capability. We'd also like to incorporate dynamic pricing far more effectively than we do today.
Also, make sure that the digital experience is very similar and gives you the same. booking flow and product experience no matter what channels you choose. Whether it's through.com, M-Web, mobile app, or even using a contact center, it's the same offering and the same product is offered up to you. We also want to integrate two very important components.
One would be ancillaries, so that they're available in terms of up-selling, and secondly, loyalty of the currency, and to make sure that that's far more easily convertible in the booking flow than it is today. So it's very exciting. I think we're midway through the development phase and towards the end of the year, we'd be able to share more about what we are doing in that space.
Conor Dwyer
Great, thank you very much.
Operator
Thank you. We will now take the next question from the line of Tobias F from Bernstein. Please go ahead.
Tobias F
Good morning. Tobias From, Bernstein. Two for me, please. The first is on Air Europa. I appreciate you've answered it to a little extent, but maybe could you shed some color around what would be possible remedies from the purchase of Air Europa? And also, do you have any steer on annual profit expectations?
And then secondly, the departing London Heathrow CEO recently said that. First of all, corporate travelers are now accounting for only 30% of traffic, down four percentage points versus pre-pandemic. But he also said that there might be a softening in leisure demand going into H2 2023. Does this match your expectation? Thank you.
Luis Gallego
So I answered the first one about Air Europa, and maybe Sean can comment about the second one. So Air Europa, as I said before, we are still in the pre-notification phase. We are engaging with potential partners. The first time we tried to do this operation we presented some partners, we had some challenges about that, so now we are trying to identify more partners that can be satisfactory for the European Competition authorities, but at this time we are not disclosing who they are.
But I think as I said before, the most important part is to try to demonstrate that this operation is going to be good for the customer, it's going to be good for Madrid Cup, for developing the network, and in order to compete in Europe and in the global world.
Sean Doyle
Sorry, I missed a question on Heathrow. Sorry, you cut out a bit. Sorry.
Tobias F
Yes, yes. Sorry, no worries. So essentially, the departing Heathrow CEO said that corporate travelers are down four percentage points versus pre-COVID in terms of overall traffic. And then secondly, he also said that there might be a softening in the leisure demand in H2 2023. And I was just wondering whether this is in line with your expectations as well.
Sean Doyle
Well, I think we've covered the corporate travel that we are seeing that down overall. So again, we say we been flat over the last quarter, but we do see some very early signs for Q4 that it's picking up a little bit, but we'll wait to see how that comes through in Q4 overall. And in leisure, we're not seeing that leisure software.
Luis Gallego
No, I think in leisure, all the surveys and great car spending reports show that consumers after COVID are giving priority to holiday traffic over other areas of Spain. So I think it's more important now after COVID taking annual vacation that it was before. The segment of visiting friends and relatives, as I said before, in some markets is very, very resilient. It was even during the pandemic.
And to be honest, we see that the situation, for example, in UK, the economic situation now is a little better. So employment levels in UK are high. And because of that, we don't see any and also because the recent developments in economy, we don't see any impact in the leisure traffic.
In the Spanish and Irish economies, they are also in good shape. They have lower levels of inflation, if you compare, and higher GDP if you compare with other countries. And I think also that in the case of British Airways, the demography that we have is different to other carriers.
So I think we are more exposed to customers with high average incomes, and what we see they are less affected by mortgage rates that are increasing now. The demographic of the customers is also, if we compare with other competitors, they 15% of our customers are over 65, and that customer profile is less impacted by the rising of mortgage costs, for example.
So, leisure intakes in British Airways are 115% in revenue and 93% in volume if we compare with 2019. And the health position remains strong. It's particularly strong in the short-haul intakes, where we have 121% in revenue versus 2019, and around 100% in volume.
We've also, if you look at the BA customers, about 65% of them come from London or Southeast as well, so which tends to be the wealthy parts of London and a good proportion come from the main wealthy parts of London as well. So, no one's immune from a downturn, but I think we do feel that they should be protected more than most.
Tobias F
Great, thank you.
Operator
Thank you. We will now take the next question from Muneeba Kayani from Bank of America. Please go ahead.
Muneeba Kayani
Hi. Good morning, everyone. So my first question is just on your medium term outlook. I think in the past you've said that you expect margins to kind of be at the lower end of the 12 to 14% range you were doing pre-pandemic. But if I look at 2Q, you're actually two percentage points above 2Q of 2019. So are you just being conservative? I heard you on some of the investments that are needed on the business. But if you could just revisit that change and how you're thinking about that and risks to upside downside?
And then secondly, on your balance sheet, so leverage at 1.5 net debt, actually at similar levels to where you were at year end 2019. So how are you thinking about dividends and or share buybacks at this point? Thank you.
Nicholas Cadbury
Just in terms of our, in terms of medium targets, the companies operated at kind of 12% to 15% margins you know over a number of years before the kind of COVID hit. You're right, we had a very good margin in Q2, and Q3 tend to be our kind of highest margin periods and Q1, Q4 slightly softer as a softer demand for travel globally on those areas.
So we -- so it tends to dilute that overall. So you can see our margins just below 10% for the first half overall. So we think kind of towards the bottom end of that is probably a good place to aim for. We think that kind of takes account of probably the higher inflation that we've had across the industry in that, and actually also kind of making sure that we're investing in our customer and our IT in particular at a good pace as well. So that's the reason why we think we're kind of going towards that end as well.
In terms of our balance sheet here, the good performance we've had in profit has really enabled us to deleverage our debt faster than we probably could have imagined a year ago, which is very pleasing overall. You can see that the net debt, as you say, the net debt right now is similar to what it was in at the year-end in 2019. That's a bit, kind of not quite looking at the same thing. It's a bit deceptive that, because you've got working capital movements. And you tend to have kind of a €2 million adverse working capital movement in the second half of the year.
So our net debt will go up from this level. But as we said, we think it will be lower than it was at the year-end. So we reduced net debt by about €1.4 billion last year and I think we'll get a good reduction again this year as well. So continue to move in that trend.
I think our priority at the moment in terms of when you think about dividends and share buybacks, we're very focused on getting back to paying a dividend for our customers, but the near-term priority is one is about continuing to pay down that debt. So we make sure we've got sustainable the debt leverage within the investment grade.
And the second thing that we've talked about is actually investing in our customer and particularly around about getting back to the same levels of fleet that we had in 2019 and we've talked about €4 billion of capital spend over the next few years to get to that as well.
So they're the key priorities that I think our shareholders will want to do as well. What the debt delevering does though, it does allow us to think about dividends sooner as well, so that comes high at the front of mind, but at the moment our priority is about deleverage and those capital spends.
Muneeba Kayani
Thank you.
Operator
Thank you. We will now take the last question from the line of Ruairi Cullinane from RBC Capital Markets. Please go ahead.
Ruairi Cullinane
Yes, good morning. I had a couple of questions on the unit revenue trends which show on Slide 14 of your presentation. Firstly, very strong performance in Europe since Ryanair particularly called out the bank holidays in the U.K. I was wondering if you had a particularly strong performance in the U.K. or in the month of May?
And then secondly, Africa and the Middle East lagging in terms of year-on-year fast growth? Would you just attribute that to the above-average capacity growth or anything else? Thank you.
Nicholas Cadbury
I think we did see an improvement in leisure unit revenue in May as a result of having the additional bank holiday, but that would have been consistent with what others were reporting. I think one of the things which is worth noting, year-on-year in Africa, Middle East, we had Canada stored operation to those markets last year and they have performed very, very well because of the scale of VFR traffic that they're exposed to.
And I think we did see probably a quicker recovery last year at those markets compared to what you would have seen in the North Atlantic. But I think the unit revenue comparisons generally, you know, stack up well compared to the rest of the network. It's just that the baseline was better last year compared to this year.
Operator
Thank you. I would like now to hand back over the conference to CEO, Luis Gallego for final remarks.
Luis Gallego
Thank you very much everybody, and I hope that you can have some rest this summer, and we'll see you after that. Thank you. Bye-bye.
Operator
That does conclude our conference for today. Thank you for participating. You may now disconnect.
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International Consolidated Airlines Group S.A. (ICAGY) Q2 2023 Earnings Call Transcript