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IAG - Q3 Profits at top end of expectations

George Salmon | 28 October 2016 | A A A
IAG - Q3 Profits at top end of expectations

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International Consolidated Airlines CDI

Sell: 99.78 | Buy: 99.98 | Change 4.22 (4.41%)
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Q3 Profits at top end of expectations

IAG's third quarter operating profit of EUR1.2bn before exceptional items was down 3.6% on last year. However with this coming in marginally above analyst expectations, the shares rose by 3% on the news.

Our view:

Despite terrorist attacks and strikes, IAG seems to be dealing well with the drop off in demand that is plaguing the sector. Q3 results showed that passenger unit revenue, although down 5.9% at constant currency rates, is an improvement on the 6.2% decline at the half year stage. Increased passenger numbers are making up for falling pricing while the group is starting to make headway on cutting costs.

The group has played down the impact of Brexit, although as a Euro reporter with 36% of revenues generated in the UK, lower sterling has dramatically hit reported profits. However, if the UK were to enter a recession BA would be among the first in the firing line.

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 current weakness being seen in premium cabins could be a warning sign of things to come.

The problem for any airline 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. Seat factor, essentially how full the airline has managed to keep the plane, will be a closely watched figure going forwards.

On price to book measures, a more conservative way of looking at the valuation of intensely cyclical, asset-heavy businesses like airlines, IAG is trading at 1.3x. That's a lot lower than it was before the shares dropped sharply following the referendum but historically, the rule of thumb is that below 1x is the safety zone.

Third quarter trading in detail:

Passenger unit revenue for the quarter is down 13.7% (5.9% at constant currency rates).

IAG say that so far this year, group performance has been negatively impacted by terrorist attacks, the UK referendum vote to exit the EU, air traffic control industrial action and adverse exchange rates. These headwinds have been partially offset by lower fuel prices.

Looking forward, at current fuel prices and exchange rates, IAG expects its operating profit for 2016 to be around €2.5 billion.

The interim dividend of 11 euro cents per share is up 10% on last year.

Adjusted net debt fell by 5.6% to €8bn, with the adjusted net debt to EBITDAR ratio falling from 1.9 to 1.8 times.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.