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IAG - A good performance in a challenging environment

George Salmon | 24 February 2017 | A A A
IAG - A good performance in a challenging environment

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International Consolidated Airlines CDI

Sell: 204.30 | Buy: 204.60 | Change -8.90 (-4.17%)
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Revenue for the year is down 1.3% to €22.6bn. However, with costs falling, particularly through a lower average fuel price, operating profit for the year is €2.5bn, up 7.2%.

The group says terrorist attacks and the uncertainty around the UK's exit from the EU impacted demand earlier in the year, but is seeing an improvement in trend in recent months. The shares rose 1.9% following the announcement.

Our View

Lower fuel prices have helped to boost IAG's profits this year, but it's also contributing to the supply problems that are plaguing the industry. Surging capacity (up around 6.2% in 2016) mean that airlines are having to cut prices to fill their seats. That would normally drive the weaker players out of the market, but lower fuel prices mean they are hanging on in there.

Fortunately for IAG, much of this capacity is coming in at the short-haul budget end of the market. It's still been caught up in the price wars, but at least IAG's more premium brands, such as British Airways and Iberian, are not in direct competition.

The group is offsetting the lower prices by increasing the numbers of passengers it flies, and cutting operating costs. The group has made some headway on both this year, although progress is slow.

Negative economic fallout in UK from the vote to leave the EU is a worry. 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. There's no update on how the segment is faring today, but weakness in premium cabins at the third quarter could be a warning sign of things to come.

The problem for any airline is that deep recessions or global panics empty the plane, but leases and 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 valuation in intensely cyclical, asset-heavy businesses like airlines, IAG is trading at 1.7x, according to Bloomberg. That's a lot lower than it was before the referendum, but historically, the rule of thumb is that below 1x is the safety zone.

Full year results:

Load factor, a measure of how full the planes are, increased 0.2 percentage points, to 81.6%. IAG is also flying more, with available seat kilometres up 4.3%. However, passenger revenue per available seat kilometre fell 5.6% at constant currency rates, reflecting lower fares.

Adjusted net debt has fallen 4.1% to €8.2bn. This now represents 1.8 times group earnings before interest, tax, depreciation, amortisation and aircraft lease costs.

The group has declared a final dividend of €0.125 per share, bring in the full year payment to €0.235 per share. The group has also announced its intention to carry out a share buyback of €500 million during the course of 2017.

Looking ahead, the group has confidence in its future prospects of returning cash to shareholders. At current fuel prices, the group expects operating profit to improve in 2017.

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.