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Annual report and accounts 2016

20 Iberia Delivering on

20 Iberia Delivering on our promise “One of the key pillars of the Plan de Futuro is our full transformation of Iberia’s customer proposition, putting the customer in the centre of all our activities.” Luis Gallego Martín Chairman and Chief Executive Officer of Iberia Performance € million 2016 Higher/ lower Revenue 4,586 (2.4)% EBITDAR 738 +6.5% Operating profit 271 +22.6% Key statistics Punctuality 88.7% Fuel efficiency gCO 2 /pkm 86.5 Overview In 2014 Iberia launched its Plan de Futuro to radically transform a company that was struggling to adapt to the new and challenging environment in our industry. After three years, we can state that the Plan has been successful: after several years in the red, Iberia has had its third consecutive year of operating profits, while consistently improving operational and key business indicators. We are proud of what we have achieved so far, but we are also aware that we have only completed half of the path towards full transformation of the company. Industry context in 2016 2016 has not been an easy year for aviation. We have experienced strong headwinds due to terrorist attacks, the economic uncertainty caused by the UK referendum result, macroeconomic instability in Latin America and, in addition, unprecedented overcapacity in our core markets which has, in turn, resulted in yield pressure. Iberia reacts to a complex environment The tough context in 2016 has put us to the test but we have reacted swiftly to this challenging environment. On one hand, we have adjusted our capacity to the new market reality, by tactically reducing our exposure to markets with low profitability or high risk. In parallel, we have intensified our focus on strategic markets that can now be operated profitably with our lower cost base. During 2016, we restarted flights to San Juan in Puerto Rico and Johannesburg, and launched new routes to Shanghai and Tokyo supporting our strategic aim to compete in Asian markets. Iberia targets aligned with IAG targets 2016 2016-2020 Lease adjusted operating margin (%) 7.6% +1.2pts 8-13% RoIC 9.0% (0.7)pts 15% ASK growth per annum 4% 4% Fleet 98 106 On the other hand, we have intensified the execution of the initiatives of our ongoing Plan de Futuro. On the revenue side, the enhancement of our initiatives in revenue management allowed us to minimise the yield erosion on longhaul markets, while on short and medium haul the expansion of basic fares throughout the economy cabin, fare simplification, and capturing demand early in the booking curve have allowed us to reach unprecedented load factor levels. The introduction of new ancillary propositions, increasing our digital capabilities, further enhancing Iberia’s brand, and developing our sales programmes within IAG – such as the launch of On Business– enabled us to sustain our revenue performance in this unfavourable RASK context. With regards to costs, we have continued implementing our Plan de Futuro optimization measures across the full cost base, with special focus on reduction of our labour costs, through voluntary collective dismissal plans (our 2016 employee cost per ASK was 24 per cent lower than in 2012). Finally, we have further developed the transformation of our complementary businesses, Airport Services and Maintenance, focusing on improving productivity, flexibility, and customer service. IAG’s Maintenance project is becoming a catalyst for us to push forward a new innovative approach that will allow Iberia to become a top-class world player while providing superior service to all IAG airlines. The future ahead of us: Plan de Futuro Phase 2 2016 operating profit of €271 million continues the trend of 2015 and gives us the confidence that we are on the right track. But, as I said before, we are still half way in our transformation journey, particularly considering the industry context today. INTERNATIONAL AIRLINES GROUP Annual Report and Accounts 2016

21 This is why we have recently launched Phase 2 of our Plan de Futuro, encompassing over 200 projects aimed at placing us among the best operators in the industry, in revenues, costs, and capital efficiency. This second phase of our plan is expected to generate €400 million of additional operating profit focusing in four areas: • Stronger revenue and customer proposition; • Best-practice costs in the industry; • Sustainable profitability of complementary businesses (MRO and HDL); and • Improved capital efficiency and flexibility to adapt to market changes. Stronger revenue and customer proposition On the revenue side, we are redefining how we undertake revenue management, using state-of-the-art technology and processes, and focusing on ancillary revenue. The Joint Business model that we have today with our partners in the North Atlantic and between Europe and Japan has proven to be successful, which is why we aim to reinforce the model and expand it to other relevant markets. We are also introducing our new Premium Economy cabin which will optimise revenue generation by serving an increasing demand of customers looking for a superior product at an adjusted fare. We are also adding slim seats to our narrow body aircraft to increase revenue generation opportunities. Lastly, we will continue working as hard to remain the most punctual airline in the world as we have achieved in 2016. Best practice costs in the industry On the cost side, we have intensified even further the transformation of our cost base, with the target of becoming one of the most competitive airlines in the industry. In this effort we are benefitting from increased integration with GBS, which should allow us to reduce our supplier and IT costs, one of the main focuses of this Phase 2. Also, labour restructuring is not finished yet and there is still work to do on this front. We continue working towards a more agile organisation, with special focus on reducing our SG&A costs. Always keeping the customer at the centre The customer is always at the centre of all decisions that we make. We continue to invest in our fleet. After the exit of all the Airbus A340-300s this year and the arrival of eight new Airbus A330-200s, all our wide body aircraft are now fitted with our new cabin, which has been very well received by our customers, particularly the new entertainment system. The cabin improvements have been a key contributor to the significant improvement in our Net Promoter Score. Moreover, we are leveraging digital as one of the key components of Iberia’s value proposition to our customers. In-flight connectivity has created new merchandising opportunities in the air such as pay-for-content and we have made significant improvements to our check-in process through the web, mobile apps, and physical kiosks, making it more efficient and seamless than ever before. On-time performance is one of the attributes that our customers value the most. This is why our commitment to operational excellence and on time performance is stronger than ever. We are proud of having become the most punctual airline in the world in 2016 and of Iberia Express reaching the top spot in the low cost carriers’ category. Our customers also expect us to become a role model in embracing a sustainable approach to the way we operate our business. This is why in 2016 Iberia took a leading role in a three year EU project called “LIFE+ Zero Cabin Waste”. Our aim is to reduce waste from catering in our aircraft by 5 per cent and recycle 80 per cent of the waste generated. Sustainable profitability of complementary businesses (MRO and HDL) Phase 2 of Plan de Futuro has set very ambitious goals to increase productivity and sustainable profitability of our complementary businesses (MRO and HDL), while offering competitive service to all the carriers in the Group.. Improved capital efficiency and flexibility to adapt to market changes We are working hard to become a more flexible airline that adapts quickly to environment changes. First, the new Premium Economy and the slim seats will allow us to add more seats to our aircraft to increase revenue generation opportunities. Second, we are rethinking from the ground up our network and fleet plan to increase aircraft utilisation and achieve the most optimal fleet mix. Finally, we are balancing our fleet financing mix to be able to adapt upwards or downwards to market changes. We are working with IAG to achieve harmonisation in the Group’s fleet, which will allow for further flexibility within the Group at a lower cost. Conclusion In summary, we are proud of the transformation we have achieved so far, but we are well aware that our work is not finished but we are confident that this new phase of our Plan de Futuro will allow us to complete the transformation that Iberia needs and reach the level of profitability and sustainability that we want for the Iberia of the future. Strategic report Corporate governance Financial statements Additional information

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