IAG, the group that owns BA, Iberia, Vueling and now Aer Lingus too, reported Q3 revenues up 15% and profits up 39% to EUR1,250m, before exceptional items. Market expectations had been high and the shares slipped over 4% in response.
- Revenue for the quarter up 15.2 per cent to EUR6,756 million
- Passenger unit revenue for the quarter up 6.5%. Excluding Aer Lingus, down 3.3%
- Fuel unit costs for the quarter down 8.6%, down 19.7% at constant currency (ccy)
- Non-fuel unit costs for the quarter up 5.6 per cent. Excluding Aer Lingus,at ccy down 3.5%
- Operating profit for the nine months EUR1,805 million before exceptional items (2014: EUR1,130 million), up 59.7%
- Cash of EUR6,786 million at Sept 30, 2015 was up EUR1,842 million on 2014 year end, including EUR958 million from Aer Lingus
- Adjusted gearing down 2 points to 49%; adjusted net debt to EBITDAR improved 0.1 to 1.8 times
Capacity for the quarter, measured in Available Seat Kilometres (ASKs) rose by 6.9%, with Passenger unit revenue per ASK rising by 6.2%, ahead of non-fuel unit costs per ASK, which rose by 4.8%. With fuel unit costs falling, profit margins for the nine months widened from 8.5% to 10.5 %.
IAG announced their maiden dividend of 10 euro cents and intend to declare a final dividend at the full year results that will see a quarter of annual underlying post-tax profits paid back to investors.
Aer Lingus contributed EUR45m to profits, having been consolidated from Aug 18. IAG caution that Aer Lingus is highly seasonal, so we should not extrapolate that rate of contribution. Nevertheless, IAG state that Aer Lingus will be a great asset for the group.
Each of the airlines in the group contributed to profit in Q3. BA earned EUR825m (2014: EUR607m), Iberia earned EUR200m (2014: EUR162m) and Vueling generated EUR178m (2014: EUR140m).
At current fuel prices and exchange rates, IAG expects to generate an operating profit between EUR2.25 billion and EUR2.3 billion for the full year, excluding Aer Lingus.
IAG has performed well, benefiting from economic growth, a favourable pricing environment on North Atlantic routes and the lower cost of fuel. Below the radar, it continues to restructure its operations, with Iberia still in turnaround and now Aer Lingus to begin the process. Aer Lingus has greatly strengthened BA's already dominant position at Heathrow.
IAG is more lowly rated than many shares. It trades on just 8.5x 2016 earnings, according to the current Bloomberg consensus. The reason for that is that the market understands just how volatile airline profitability can be. First and Business class passengers contribute hugely to profits, and their custom turns off and on like a switch as the economy rises and falls. Conditions are favourable right now but who knows what lies around the corner? Another outbreak of SARS, or a terrorist incident and the premium cabins can empty overnight, never mind what the economy may do.
The problem is that all those aircraft have to be paid for, whether anyone is sitting in them or not. Deep recessions or global panics empty the plane, but the leases and the bank debts have to be serviced all the same.
On price to book measures, which are a more conservative way of looking at the valuation of intensely cyclical, asset-heavy businesses like airlines, IAG is trading at 3.3x whereas historically, the rule of thumb is that below 1x is the safety zone though remember ratios should not be looked at in isolation. Right now, when everything is going well, IAG is benefiting from earnings upgrades. But if a bolt from the blue comes along, the market will punish airlines trading on high price to book multiples. So think of IAG as a fair weather friend, great fun when the party is in full swing, but not to be relied upon if the music stops.
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