International Airlines Group

ICAG.L IAG LN
EQUITY: EUROPEAN AIRLINES

Results review

Global Markets Research

The strong 1Q results and confident outlook reaffirm

our support for a long position in IAG

1 May 2015

1Q results ahead of expectations

IAG reported 1Q EBIT of +EUR 25m, ahead of consensus (loss of EUR 3m)
and our expectation of a loss of EUR 47m. The first-time 1Q profit (EUR 175m
y-o-y improvement) represents a clear welcome progression for the business,
with British Airways EBIT rising y-o-y from a EUR 5m loss to +EUR 117m,
Iberia losses reducing from EUR 111m to EUR 55m, and Vueling relatively flat
(EUR 29m loss vs EUR 30m loss) following a front-loaded staff pay increase.
FY15E outlook maintained despite marginal increase in fuel guidance
On the outlook, the group maintains guidance of FY15E EBIT in excess of
EUR 2.2bn (NomE: EUR 2.25bn, consensus: EUR 2.29bn) and our adjusted
forecasts, therefore, continue to sit in line with group expectations. It is
important to note that the retained guidance of FY15E EBIT >EUR 2.2bn is
despite slightly higher fuel expectations (EUR 6.0bn vs previous EUR 5.9bn
guidance) and management has noted that this reflects a slight improvement
in underlying ex-fuel expectations for the full year.
Positive short- and medium-term outlook retain Buy
The 1Q results and call highlighted or reiterated several key issues that
support our bull stance: (1) Iberia rebrand has been fantastic, with further
revenue and cost benefits to come from the Iberia Plan de Futuro, (2) IAG is
still to see some margin benefits at BA from back-office cost rationalisation, (3)
IAG has seen a strong improvement in its position at Gatwick, and the outlook
on short-haul into the summer is very encouraging, (4) the new route update
shows Kuala Lumpur as very impressive and Chengdu improving following a
slow start, (5) existing routes will benefit from Virgin withdrawing from markets
such as Tokyo and Cape Town, (6) the group cargo contribution has improved
since exiting full freighters at the end of 1Q14, (7) Aer Lingus dialogue is
continuing and is expected to be concluded in coming weeks. We regard the
1Q results as strong, the underlying FY15E guidance (ex-fuel) has risen
marginally, and we see real value in the stock now trading at a P/E FY15E of
10.2x (9.0x FY16E), 5.0x adj. EV/EBITDAR (4.6x FY16E), with resumption of
dividends for FY15E (2.4% yield) our EPS CAGR is 12% for FY15-18E.

Year-end: Dec

2014

2015E

2016E

Old

New

Old

New

Old

New

20,170

21,280

21,608

22,245

22,428

23,301

23,525

EBITDA (mn)

2,586

3,473

3,510

3,793

3,807

4,040

4,077

PBT Underlying

1,106

1,958

1,983

2,238

2,239

2,452

2,474

Adj EPS (EUR)

0.39

0.71

0.72

0.81

0.81

0.88

0.89

DPS (EUR)

0.00

0.19

0.19

0.21

0.21

0.23

0.24

P/E (x)

Total Revenue (mn)

Buy

Target price
Remains

700p

Closing price
29 April 2015

559p

Potential upside

Research analysts
European Transport
James Hollins - NIplc
james.hollins@nomura.com
+44 20 7102 1543
Arthur Truslove - NIplc
arthur.truslove@nomura.com
+44 20 7102 1185

Industry specialist
Rebecca Langley - NIplc
rebecca.langley@nomura.com
+44 20 7103 4691

2017E

Actual

Currency (EUR)

Rating
Remains

16.9

N/A

10.2

N/A

9.0

N/A

8.2

Net yield (%)

0.0

N/A

2.4

N/A

2.8

N/A

3.1

EV/EBITDA (x)

8.3

N/A

6.2

N/A

5.7

N/A

5.3

Source: Company data, Nomura estimates

Key company data: See page 2 for company data and detailed price/index chart

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

+25.2%

Nomura | International Airlines Group

1 May 2015

Key data on International Airlines Group

Rating

Summary income statement (EUR mn)

Stock
Sector

Buy
Bullish

Relative performance chart

Year-end: Dec
Revenue
EBITDAR
Rent
Depreciation & amortization
Adj EBIT
Net interest
Adj pre-tax profit
Income tax
Minorities
Extraordinary items
Net income
Adj EPS (EUR)
DPS (EUR)
Dividend payout ratio (%)

2014A
20,170
3,137
(551)
(1,196)
1,390
(284)
1,106
(238)
(21)
0
569
0.39
0.00
0.0

2015E
21,608
4,089
(579)
(1,262)
2,249
(266)
1,983
(436)
0
0
1,547
0.72
0.19
25.0

2016E
22,428
4,397
(590)
(1,312)
2,495
(257)
2,239
(492)
0
0
1,746
0.81
0.21
25.0

2017E
23,525
4,678
(602)
(1,361)
2,715
(241)
2,474
(544)
0
0
1,930
0.89
0.24
25.0

2015E
3,510
(409)
0
3,101
(266)
(218)
(1,800)
818
199
0
0
(520)
496
(4,727)

2016E
3,807
(409)
0
3,398
(257)
(246)
(2,500)
396
199
(387)
0
(520)
(313)
(4,620)

2017E
4,077
(409)
0
3,668
(241)
(272)
(2,500)
654
199
(437)
0
(520)
(104)
(4,307)

2014A
11,784
2,438
23,652
10,058
9,801
1,324
1,967
3,485
23,652

2015E
12,124
2,438
24,897
9,558
9,983
1,324
1,967
5,048
24,897

2016E
13,113
2,438
25,982
9,058
10,168
1,324
1,967
6,448
25,982

2017E
14,053
2,438
27,228
8,558
10,357
1,324
1,967
8,004
27,228

2014A
4.9
2.3
0.0
0.6
1.8
0.5

2015E
8.5
3.3
4.0
0.2
1.2
0.1

2016E
9.7
3.6
4.0
0.1
1.1
0.1

2017E
11.3
3.9
4.0
0.0
0.9
0.0

Summary cash flow statement (EUR mn)

Source: Thomson Reuters, Nomura research

Performance
(%)
Absolute
Relative to sector

1m
-5.9
-6.2

3m
-0.9
-6.1

12m
40.2
10.0

YTD
15.0
1.0

2014A
559.00
2,036.00
11.38
4.30
1.03
0.00
16.70
21.51

2015E
559.00
2,036.00
11.38
3.41
0.95
0.00
15.74
21.84

2016E
559.00
2,036.00
11.38
3.33
0.95
0.00
15.67
21.73

2017E
559.00
2,036.00
11.38
3.10
0.95
0.00
15.44
21.42

Enterprise value
Year-end: Dec
Avg/curr share price (GBP p)
Avg shares outstanding (mn)
Market cap (GBP bn)
Net debt/(cash) (GBP bn)
Pension deficit (GBP bn)
Other EV adj (GBP bn)
Enterprise value (GBP bn)
Enterprise value (EUR bn)
Free float: 100.0%

Valuation
Year-end: Dec
P/E (x)
P/adj NAV (x)
EV/revenue (x)
EV/EBITDA (x)
EV/EBIT (x)
EV/CE (x)
FCF yield (%)
Dividend yield (%)

2014A
16.9
4.2
1.1
8.3
15.5
2.4
(6.9)
0.0

2015E
10.2
3.1
1.0
6.2
9.7
2.2
7.2
2.4

2016E
9.0
2.4
1.0
5.7
8.7
2.0
3.5
2.8

2017E
8.2
2.0
0.9
5.3
7.9
1.7
5.7
3.1

Growth (%)
Year-end: Dec
Lfl Revenue
Revenue
EBITDA
EBIT
EPS
DPS

2014A
0.8
8.0
45.6
80.5
89.0
N/M

2015E
2.0
7.1
35.7
61.8
78.2
N/M

2016E
0.0
3.8
8.5
11.0
12.9
12.9

2017E
1.2
4.9
7.1
8.8
10.5
10.5

2014A
15.6
12.8
6.9
16.3
12.0
1.6

2015E
18.9
16.2
10.4
30.6
17.9
2.4

2016E
19.6
17.0
11.1
27.1
17.6
2.3

2017E
19.9
17.3
11.5
24.1
17.2
2.3

Year-end: Dec
EBITDA
Other/pension
Change in working capital
Cash inflow
Interest
Taxation
Capital expenditure
Group FCF
Net (acquisitions)/disposals
Cash dividends received/(paid)
Equity financing
FX & others
Net cash in/(out)flow
Net cash/(debt)

2014A
2,586
(896)
426
2,116
(159)
(118)
(2,622)
(783)
(310)
2
0
1,078
(13)
(5,530)

Summary balance sheet (EUR mn)

Year-end: Dec
Fixed assets
Goodwill
Total assets
Long term liabilities
Short term liabilities
Pension liability
Other provisions
Shareholders' equity
Total liabilities & equity

Financial ratios
Year-end: Dec
Interest cover (x)
Fixed cover charge (x)
Dividend cover (x)
Net debt/EBITDA (x)
Adj net debt/EBITDAR (x)
Net debt/equity (%)
Source: Company data, Nomura estimates

Margins & returns

Year-end: Dec
EBITDAR margin (%)
EBITDA margin (%)
EBIT margin (%)
ROE (%)
ROCE (%)
ROCE/WACC (x)

Source: Company data, Nomura estimates; please see the appendix at the back of this report
for more detailed financial statements.

Nomura | International Airlines Group

1 May 2015

IAG 1Q & outlook

IAG reported 1Q EBIT of +EUR 25m, ahead of consensus (loss of EUR 3m) and our
expectation of a loss of EUR 47m. The first-time 1Q profit (EUR 175m y-o-y
improvement) represents a clear welcome progression for the business, with British
Airways EBIT rising y-o-y from a EUR 5m loss to +EUR 117m, Iberia losses reducing
from EUR 111m to EUR 55m, and Vueling relatively flat (EUR 29m loss vs EUR 30m
loss) following a front-loaded staff pay increase (three-year agreement) that will
normalise from 1Q16E.
For the group, constant currency unit revenue was exactly as per our expectation (-0.8%
y-o-y), although material forex movements led to revenue for the quarter well ahead of
our estimate of EUR 4.45bn (reported EUR 4.71bn, +12% y-o-y).
Across the regions, North America was the standout performer (despite some oil-related
softness in demand to Houston), with a helpful benign capacity shift (+0.5% y-o-y)
supporting constant currency unit revenue (RASK) growth of +5.0%. In Fig. 1, the
expectation would be for a major capacity decline/rise to be partially offset by a
corresponding RASK increase/decrease. However, North America has both bars in the
chart heading in the same direction, reflecting a strong underlying performance.
Elsewhere, the trends are as projected, with high-capacity growth in territories such as
LatAm (driven by Iberia) and Europe (Vueling and Iberia) offset by RASK declines. The
only capacity and unit revenue drop is in AMESA, with pockets of softness on Middle
Eastern and South-East Asian routes, reflecting a clear negative impact from route overcapacity and aggressive competition.
Fig. 1: IAG 1Q15 capacity (ASKs) and constant currency unit revenue (RASK)
% change y-o-y

Group
LatAm
AMESA
AsiaPac
N. America
Europe
Domestic
-6%
RASK

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

ASKs

Source: Company data, Nomura estimates

The overall 1Q capacity increase of +5.0% is projected to show an incremental rise

through the summer (2Q +5.9%, 3Q +6.1%) before falling back to +4.8% in 4Q (FY15E
guidance maintained at +5.5%). We expect the group to maintain its target of annual
capacity +3-4% from FY16 to FY20 (as per our estimates).

Nomura | International Airlines Group

1 May 2015

Fig. 2: IAG capacity outlook FY15E

ASKs % change y-o-y

20%

20%

18%

18%

16%

16%

14%

14%

12%

12%

10%

10%

8%
5.0%

6%

8%

6.1%

5.9%

4.8%

6%

4%

4%

2%

2%
0%

0%
1Q15A
IAG

2Q15E
BA

Iberia

3Q15E

4Q15E

Vueling

Source: Company data, Nomura estimates

Constant currency unit costs (CASK) fell by 2.7% (vs NomE -3.4%) in 1Q15, although
there were clear forex headwinds (forex led to a 900bp unit cost increase on reported
numbers) and we have adjusted our forecasts (underlying relatively neutral bottom-line
impact) to reflect the 1Q and expected 2Q forex effect on revenue (positive) and
expenses (negative). 1Q itself had just an EUR 8m forex negative effect, and we expect
forex to be neutral or a small positive from 3Q as there is a seasonally higher proportion
of ex-EUR revenues (we assume a neutral impact from 2Q).

Nomura | International Airlines Group

1 May 2015

Forecast changes
Fig. 3: IAG forecast changes
EURm

Profit and loss account

Capacity % change (ASKs)
Yield % change (EURc per RPK)

New

New

New

Old

Old

Old

% ch.

% ch.

% ch.

2015E

2016E

2017E

2015E

2016E

2017E

2015E

2016E

2017E

5.5%

4.0%

3.8%

5.5%

4.0%

3.8%

0.0%

0.0%

0.0%

2.0%

0.0%

1.2%

0.3%

0.8%

1.2%

1.8%

-0.8%

0.0%

19,181

19,949

20,965

18,852

19,763

20,751

2%

1%

1%

992

1,017

1,053

1,007

1,032

1,058

-1%

-1%

-1%

Group traffic revenues

20,173

20,966

22,018

19,859

20,795

21,809

2%

1%

1%

Other revenues

1,434

1,463

1,507

1,421

1,449

1,493

1%

1%

1%

Group total revenues

21,608

22,428

23,525

21,280

22,245

23,301

2%

1%

1%

Personnel

4,498

4,520

4,611

4,390

4,456

4,613

2%

1%

0%

Fuel and oil

5,960

6,170

6,616

5,890

6,190

6,587

1%

0%

0%

Engineering and other

1,292

1,331

1,367

1,238

1,275

1,310

4%

4%

4%

Landing and en route

1,657

1,740

1,824

1,657

1,740

1,815

0%

0%

0%

Handling and catering

2,220

2,309

2,395

2,155

2,241

2,337

3%

3%

3%

885

929

975

911

956

985

-3%

-3%

-1%

Accom., ground equip. & FX differences

1,007

1,032

1,058

987

1,002

1,012

2%

3%

4%

Operating costs

17,519

18,031

18,846

17,228

17,861

18,659

2%

1%

1%

CEASK (ex-fuel) % change

-0.5%

-1.2%

-0.6%

-2.3%

-0.9%

-0.3%

1.8%

-0.3%

-0.3%

Passenger revenues
Cargo revenues

Expenses

Selling expenses

EBITDAR

4,089

4,397

4,678

4,052

4,383

4,642

1%

0%

1%

- margin (%)

18.9%

19.6%

19.9%

19.0%

19.7%

19.9%

-1%

0%

0%

579

590

602

579

590

602

0%

0%

0%

EBITDA

3,510

3,807

4,077

3,473

3,793

4,040

1%

0%

1%

- margin (%)

16.2%

17.0%

17.3%

16.3%

17.1%

17.3%

0%

0%

0%

Aircraft operating lease

Depreciation

1,262

1,312

1,361

1,249

1,299

1,348

1%

1%

1%

EBIT

2,249

2,495

2,715

2,224

2,494

2,693

1%

0%

1%

Net interest

(266)

(257)

(241)

(266)

(256)

(241)

0%

0%

0%

Profit before tax - adjusted

1,983

2,239

2,474

1,958

2,238

2,452

1%

0%

1%

Associates/Share of operating income

Exceptionals

Profit before tax - stated

1,983

2,239

2,474

1,958

2,238

2,452

1%

0%

1%

Tax

(436)

(492)

(544)

(431)

(492)

(539)

1%

0%

1%

Net profit - stated pre-minorities

1,547

1,746

1,930

1,527

1,745

1,912

1%

0%

1%

Source: Company data, Nomura estimates

On the outlook, the group continues to maintain guidance of FY15E EBIT in excess of
EUR 2.2bn (NomE: EUR 2.25bn, consensus: EUR 2.29bn) and our adjusted forecasts,
therefore, continue to sit in line with group expectations.
It is important to note that the retained guidance of FY15E EBIT in excess of EUR 2.2bn
is despite a slightly higher fuel expectation (EUR 6.0bn vs previous EUR 5.9bn
guidance) and management has noted that this reflects a slight improvement in
underlying ex-fuel guidance following the strong 1Q.
For 2Q, the group has also flagged that the quarter will likely not show the impressive
EUR 175m y-o-y EBIT improvement as seen in 1Q given the timing of Easter (benefit
was all 2Q last year) and a previously highlighted fuel cost headwind for the quarter. This

Nomura | International Airlines Group

1 May 2015

places some pressure on 2H, although we regard the >EUR 2.2bn FY15E EBIT target is
readily achievable given the capacity and projected demand outlook.
Overall, we regard the outlook for FY15 and the ability of IAG to achieve its longer-term
targets as positive. Following the 1Q results and analyst call, we highlight the following
key issues:
The Iberia rebrand has been fantastic, according to the management that is very
pleased with performance within the legacy Spanish brand. Furthermore, there are still
brand, revenue and cost benefits to come from the Iberia Plan de Futuro, all aimed at
reaching the mid-term (2020) target of an EBIT margin of 10-12%.
IAG is still to see some margin benefits at BA from back-office cost rationalisation, and
we would also highlight the upcoming benefits of moving from three to two terminals at
Heathrow as supportive of further margin accretion in the core brand
IAG has seen a strong improvement in its position at Gatwick and the outlook,
particularly at Gatwick, on short-haul into the summer is very encouraging. The group
will also benefit from the completion of the Gatwick BA short-haul upgauge exercise
The new route update shows Kuala Lumpur as very impressive on future bookings
(starts 27 May) and Chengdu is improving following a slow start (Visa issues). We also
believe that the uptick in capacity at Haneda has been a big success
Existing routes will also benefit from Virgin withdrawing from markets such as Tokyo
and Cape Town (although most of this capacity will be pushed onto transatlantic)
The groups cargo contribution has improved since exiting full freighters at the end of
1Q14 and outsourcing the non-belly cargo to Qatar Airways. We firmly believe that the
Qatar relationship can and will be deepened further over the short- to medium-term,
encompassing passenger traffic as well, with a corresponding increase in group returns
on the Africa, Middle East and South Asia routes
Aer Lingus dialogue is continuing (expected to be concluded in coming weeks). We
believe that this deal would be strongly earnings-accretive in the medium term,
although political risk around acceptance leads us to remain cautious ahead of any
announcement
We regard the 1Q results as strong, the underlying FY15E guidance (ex-fuel) has
effectively risen marginally, and we see real value in the stock (on new numbers) now
trading at a FY15E P/E of 10.2x (9.0x FY16E), adjusted EV/EBITDAR of 5.0x (4.6x
FY16E), with resumption of dividends for FY15E (2.4% yield). These multiples are
despite a projected (NomE) earnings CAGR of 12% (FY15-18E) and we retain our Buy
on an unchanged target price of 700p.

Nomura | International Airlines Group

1 May 2015

Summary financials
Fig. 4: IAG summary income statement
EURm

Profit and loss account

1Q14A

2014

1Q15A

Capacity % change (ASKs)

11.8%

9.3%

5.0%

5.5%

4.0%

3.8%

3.8%

Yield % change (EURc per RPK)

-1.3%

0.8%

5.8%

2.0%

0.0%

1.2%

1.2%

Passenger revenues

3,664

17,825

4,116

19,181

19,949

20,965

22,034

250

992

246

992

1,017

1,053

1,090

3,914

18,817

4,362

20,173

20,966

22,018

23,123

Cargo revenues
Group traffic revenues
Other revenues

2015E

2016E

2017E

2018E

289

1,353

345

1,434

1,463

1,507

1,552

4,203

20,170

4,707

21,608

22,428

23,525

24,675

Personnel

1,018

4,325

1,124

4,498

4,520

4,611

4,751

Fuel and oil

1,388

5,987

1,389

5,960

6,170

6,616

6,998

Group total revenues

Expenses

Engineering and other

307

1,276

334

1,292

1,331

1,367

1,404

Landing and en route

335

1,555

362

1,657

1,740

1,824

1,911

Handling and catering

452

2,063

511

2,220

2,309

2,395

2,485

Selling expenses

213

859

227

885

929

975

1,024

Accom., ground equip. & FX differences

236

968

285

1,007

1,032

1,058

1,084

Operating costs

3,949

17,033

4,232

17,519

18,031

18,846

19,657

CEASK (ex-fuel) % change

-1.6%

-1.6%

-0.5%

-0.5%

-1.2%

-0.6%

-0.3%

254

3,137

475

4,089

4,397

4,678

5,019

6.0%

15.6%

10.1%

18.9%

19.6%

19.9%

20.3%

126

551

144

579

590

602

614

EBITDAR
- margin (%)
Aircraft operating lease
EBITDA

128

2,586

331

3,510

3,807

4,077

4,405

- margin (%)

3.0%

12.8%

7.0%

16.2%

17.0%

17.3%

17.9%

Depreciation

278

1,196

306

1,262

1,312

1,361

1,413

EBIT

(150)

1,390

25

2,249

2,495

2,715

2,992

Net interest

(53)

(284)

(62)

(266)

(257)

(241)

(227)

Profit before tax - adjusted

(203)

1,106

(37)

1,983

2,239

2,474

2,765

(278)

(203)

828

(37)

1,983

2,239

2,474

2,765

19

(238)

11

(436)

(492)

(544)

(608)

(184)

590

(26)

1,547

1,746

1,930

2,157

Exceptionals
Profit before tax - stated
Tax
Net profit - stated pre-minorities
Source: Company data, Nomura estimates

Nomura | International Airlines Group

1 May 2015

Data page IAG

Fig. 5: ASKs (bn) & y-o-y change (%)

Fig. 6: Yield (EURc/RPK) & y-o-y change (%)

YoY change (%)

Yield (EURc/RPK)

Source: Company data, Nomura estimates

Fig. 7: Cost per EASK (CEASK) split (FY14)

Fig. 8: CASK ex-fuel (EURc) & y-o-y change (%)

-15%

2004A

Selling expenses

11%

23%

Leasing

CEASK ex-fuel (EURc)

Source: Company data, Nomura estimates

2017E

-10%

Accom., ground equip. & FX

2016E

8%

2015E

2014A

-5%

D&A

2013A

2012A

0%

Engineering and other

2011A

2010A

5%

Landing and en route

2009A

6%

2008A

10%

Handling and catering

2007A

15%

Personnel

2006A

20%

2005A

Fuel and oil

32%

2017E

YoY change (%)

Source: Company data, Nomura estimates

5% 3%
5%
6%

2016E

2015E

2014A

2013A

2012A

2011A

2010A

2009A

2008A

2007A

2006A

2004A

2017E

2016E

2015E

2014A

2013A

2012A

2011A

2010A

2009A

2008A

2007A

2006A

2005A

2004A

ASKs (bn)

20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%

10
10
9
9
8
8
7
7
6
6
5

10%
8%
6%
4%
2%
0%
-2%
-4%
-6%

2005A

350
300
250
200
150
100
50
0

YoY change (%)

Source: Company data, Nomura estimates

Fig. 9: CASK y-o-y change (%)

11.5%

40%
30%

5.4%

20%

7.0%
1.7%

1.4%

10%

12.0%

5.8%
0.6%

2.0%

0%
-10%

-2.2%

-20%

-3.0%

-0.9%

-2.1%

-3.6%

-4.2%

-5.7%

-30%
-40%

-8.0%
-13.0%

-11.2%

-50%
-60%

-18.0%
2005A

2006A

2007A

2008A

2009A

2010A

2011A

2012A

2013A

2014A

2015E

Total

Personnel

Fuel and oil

Engineering and other

Landing and en route

Handling and catering

Selling expenses

Accom., ground equip. & FX

Leasing

D&A

2016E

2017E

Source: Company data, Nomura estimates

Fig. 10: EBITDAR (EURm) & EBITDAR margin (%)

Fig. 11: NOPAT (EURm) & ROCE (%)

4500
4000
3500
3000
2500
2000
1500
1000
500
0

30%

2500

20%

25%

2000

15%

20%

1500

10%

1000

15%

EBITDAR (EURm)

Source: Company data, Nomura estimates

EBITDAR margin (%)

5%

500

0%

NOPAT (EURm)

2017E

2016E

2015E

2014A

2013A

2012A

2011A

2010A

2009A

-10%
2008A

-1000
2007A

-5%

0%

2006A

-500
2005A

5%

2004A

2017E

2016E

2015E

2014A

2013A

2012A

2011A

2010A

2009A

2008A

2007A

2006A

2005A

2004A

10%

ROCE (%)

Source: Company data, Nomura estimates

Nomura | International Airlines Group

1 May 2015

Appendix A-1
Analyst Certification
I, James Hollins, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about
any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more
Nomura Group companies.

Materially mentioned issuers

Issuer
International Airlines
Group

Ticker

Price

Price date

Stock rating Sector rating Disclosures

IAG LN

559p

29-Apr-2015 Buy

Bullish

A4,A5,A6,A16

A4

The Nomura Group had an investment banking services client relationship with the issuer during the past 12 months.

A5

The Nomura Group has received compensation for investment banking services from the issuer in the past 12 months.

A6

The Nomura Group expects to receive or intends to seek compensation for investment banking services from the issuer in the next three
months.

A16 An employee, director or associated person, of the Nomura Group is an officer, director or advisory board member of the issuer.

International Airlines Group (IAG LN)

559p (29-Apr-2015) Buy (Sector rating: Bullish)

Rating and target price chart (three year history)

Date
02-Mar-15
30-Jan-15
08-Dec-14
07-May-14
21-Jan-14
18-Nov-13
14-Aug-13
21-Jan-13

Rating Target price

700.00
650.00
550.00
465.00
474.00
380.00
335.00
283.00

Closing price
574.00
544.50
477.70
394.20
431.40
362.00
316.00
212.50

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We utilise a mid-term (average of FY15E and FY16E calendarised) combination of P/E and adjusted
EV/EBITDAR to establish our target price, with a P/E expectation of 12x and EV/EBITDAR of 5.5x (pension adjusted at 1H
2014A deficit figure) driving our TP of 700p. The benchmark index for this stock is the Dow Jones STOXX 600.
Risks that may impede the achievement of the target price IAG operates in an industry with high macroeconomic sensitivity
in both the passenger and cargo divisions. Its global presence means exposure to all major economic areas. Consumer
confidence affects travel in the economy cabin, while corporate spend by companies has an impact on demand in the premium
cabin. Air travel is sensitive to external shocks such as terrorism, wars, pandemics and natural disasters. With revenues, costs,
capital requirements and debt in different currencies, the company is exposed to movements in major currencies, particularly the
dollar and sterling versus the euro. Fuel makes up an important part of the cost base, making oil price movements an important

Nomura | International Airlines Group

1 May 2015

factor, and, with personnel a major cost line, industrial disruption is a risk. With high operating and financial leverage, forecasts
are sensitive to changes in any of these factors. IAG has particular exposure to the North Atlantic and Latin American routes.

Important Disclosures
Online availability of research and conflict-of-interest disclosures
Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne.
Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested
from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please
email grpsupport@nomura.com for help.
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are
not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to
FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held
by a research analyst account.
Nomura Global Financial Products Inc. (NGFP) Nomura Derivative Products Inc. (NDPI) and Nomura International plc. (NIplc) are
registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and
NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.
Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International
plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have
coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear.

Distribution of ratings (Global)

The distribution of all ratings published by Nomura Global Equity Research is as follows:
48% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 43% of companies with this
rating are investment banking clients of the Nomura Group*.
44% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 53% of companies with
this rating are investment banking clients of the Nomura Group*.
8% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 25% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 31 March 2015. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and
Japan and Asia ex-Japan from 21 October 2013
The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
subject to limited management discretion. An analysts target price is an assessment of the current intrinsic fair value of the stock based on an
appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow
analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated
target price, defined as (target price - current price)/current price.

STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral',
indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that
the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target
price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies
that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or
additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia exJapan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed
at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI
Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.

SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance,
indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that
the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as
'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging
Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.

Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that
potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A
'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price
have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is
acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled
as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should
not expect continuing or additional information from Nomura relating to such securities and/or companies.

10

Nomura | International Airlines Group

1 May 2015

SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks
under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average
recommendation of the stocks under coverage is) a negative absolute recommendation.

Target Price
A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the
company's earnings differ from estimates.

Disclaimers
This document contains material that has been prepared by the Nomura entity identified on page 1 and/or with the sole or joint contributions of
one or more Nomura entities whose employees and their respective affiliations are also specified on page 1 or identified elsewhere in the
document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or
more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura
Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (NIHK), Hong Kong; Nomura Financial Investment
(Korea) Co., Ltd. (NFIK), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be
found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (NSL), Singapore (Registration number 197201440E, regulated by
the Monetary Authority of Singapore); Nomura Australia Ltd. (NAL), Australia (ABN 48 003 032 513), regulated by the Australian Securities and
Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (PTNI),
Indonesia; Nomura Securities Malaysia Sdn. Bhd. (NSM), Malaysia; NIHK, Taipei Branch (NITB), Taiwan; Nomura Financial Advisory and
Securities (India) Private Limited (NFASL), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie
Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; CIN No : U74140MH2007PTC169116, SEBI
Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034) and NIplc, Madrid Branch
(NIplc, Madrid). CNS Thailand next to an analysts name on the front page of a research report indicates that the analyst is employed by
Capital Nomura Securities Public Company Limited (CNS) to provide research assistance services to NSL under a Research Assistance
Agreement. NSFSPL next to an employees name on the front page of a research report indicates that the individual is employed by Nomura
Structured Finance Services Private Limited to provide assistance to certain Nomura entities under inter-company agreements.
THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO
BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE
SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER
RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP.
Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable
and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent
permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use,
misuse, or distribution of this information.
Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including
the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document.
Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group.
Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate,
seek professional advice, including tax advice. Nomura Group does not provide tax advice.
Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal,
agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative
instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity
provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of market maker is
carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately
disclosed within the specific issuer disclosures.
This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poors.
Reproduction and distribution of third-party content in any form is prohibited except with the prior written permission of the related third-party.
Third-party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and
are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such
content. Third-party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or
fitness for a particular purpose or use. Third-party content providers shall not be liable for any direct, indirect, incidental, exemplary,
compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and
opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements
of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for
investment purposes, and should not be relied on as investment advice.
Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (MSCI). Without prior written permission of MSCI, this
information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including
any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its
affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of
originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any
of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information
have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.
Russell/Nomura Japan Equity Indexes are protected by certain intellectual property rights of Nomura Securities Co., Ltd. and Russell
Investments. Nomura Securities Co., Ltd. and Russell Investments do not guarantee the accuracy, completeness, reliability, or usefulness
thereof and do not account for business activities and services that any index user and its affiliates undertake with the use of the Indexes.
Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be
viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a
number of different types of research product including, among others, fundamental analysis and quantitative analysis; recommendations
contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of
differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the
posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and
services from the research department depending on their individual requirements.

11

Nomura | International Airlines Group

1 May 2015

Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future
performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future
performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future
distribution of returns.
Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived
from, the investment.
The securities described herein may not have been registered under the US Securities Act of 1933 (the 1933 Act), and, in such case, may not
be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption
from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura
entity in your home jurisdiction.
This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc. NIplc is authorised
by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. NIplc is a
member of the London Stock Exchange. This document does not constitute a personal recommendation within the meaning of applicable
regulations in the UK, or take into account the particular investment objectives, financial situations, or needs of individual investors. This
document is intended only for investors who are 'eligible counterparties' or 'professional clients' for the purposes of applicable regulations in the
UK, and may not, therefore, be redistributed to persons who are 'retail clients' for such purposes. This document has been approved by NIHK,
which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been
approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been
approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the
content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients
who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document
in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of
Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its
contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. The entity that prepared this
document permits its separately operated affiliates within the Nomura Group to make copies of such documents available to their clients.
This document has not been approved for distribution to persons other than Authorised Persons, Exempt Persons or Institutions (as defined
by the Capital Markets Authority) in the Kingdom of Saudi Arabia (Saudi Arabia) or 'professional clients' (as defined by the Dubai Financial
Services Authority) in the United Arab Emirates (UAE) or a Market Counterparty or Business Customers (as defined by the Qatar Financial
Centre Regulatory Authority) in the State of Qatar (Qatar) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case
may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than
those authorised to do so into Saudi Arabia or in the UAE or in Qatar or to any person other than Authorised Persons, Exempt Persons or
Institutions located in Saudi Arabia or 'professional clients' in the UAE or a Market Counterparty or Business Customers in Qatar . By
accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are an Authorised Person, an Exempt
Person or an Institution in Saudi Arabia or that you are a 'professional client' in the UAE or a Market Counterparty or Business Customers in
Qatar and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE
or Saudi Arabia or Qatar.
NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II)
REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed
by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be
intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors
or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a
hard-copy version.
Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not
limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee
training.
Additional information is available upon request and disclosure information is available at the Nomura Disclosure web
page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx
Copyright 2015 Nomura International plc. All rights reserved.

12