IAG, the group that owns BA, Iberia, Aer Lingus and Vueling of Germany has reported doubled Q4 operating profits of EUR530m and a 68% increase in full year operating profits to EUR2,335m (2014: EUR1,390m). IAG say that they expect to achieve a similar increase in absolute operating profit in the current financial year. Despite the prospect of an extra billion euros of profit, the shares slipped 4%.
A final dividend of EUR10 cents was declared, making EUR20 cents for the full year.
At constant currency, passenger unit revenue was down 3.5%, non-fuel unit costs were down 3.9% and fuel unit costs dropped 17.2%. Newly acquired Aer Lingus contributed EUR35m during the period that it was within the group.
Each of the component airlines was profitable. BA generated the lion's share, with operating profits of EUR1,914m, Iberia made EUR247m, Vueling did EUR160 and Aer Lingus added EUR35m.
The group saw some reduction in demand following the Paris terror attacks, but was still strongly profitable in the final quarter. The group commented that the industry is currently adding capacity, leading to a decline in unit revenues. Because fuel costs are falling faster, the industry is able to grow profit regardless and IAG is no exception.
IAG faces a period of major fleet renewal in the years ahead, disclosing commitments to spend EUR16.1bn (2014: EUR11.6bn) on new aircraft out to 2022. New additions from Airbus will include 118 A320s, 43 A350s, 14 A330s and 2 A380 super-jumbos. IAG is also acquiring 29 Boeing 787 "Dreamliners".
IAG is performing 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 6.9x 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.
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 2.6x whereas historically, the rule of thumb is that below 1x is the safety zone. 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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