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IAG - profits return in Q2

In the first half, IAG flew 72.0% of 2019 capacity as travel restrictions continued to ease...

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In the first half, IAG flew 72.0% of 2019 capacity as travel restrictions continued to ease. As a result, revenue rose from €2.2bn to €9.4bn. There was an underlying operating loss of €467m, though the group did turn a profit in the second quarter for the first time since the start of the pandemic.

The group's expecting to turn a profit for the full year. Though, due to challenges at Heathrow, full year capacity targets have been dropped 2 percentage points to 78%.

The shares rose 2.1% following the announcement.

View the latest IAG share price and how to deal

Our view

The British Airways owner returns to profit for the first time since the pandemic, with an operating profit at the full year mark now looking promising. Markets had a favourable reaction, and commentary suggesting forward bookings show no sign of weakness supports the argument that pent up demand for travel still far outweighs the impact of a cost-of-living crisis.

IAG's long haul recovery continues to lag that of shorter trips in Spain and beyond, with continued restrictions in large parts of Asia not helping the matter. Trouble closer to home, with Heathrow putting capacity caps in place, means the recovery for BA in particular faces fresh headwinds.

Nonetheless, demand's strong and capacity's climbing towards normal levels. IAG's recovery looks like it could be primed and ready for take-off.

If the group can squeeze more euros out of each additional passenger, the speed of recovery will be that much faster. That is a status quo we expect the group to be able to get back to, courtesy of its enormous cost saving and streamlining efforts over the last few years.

Costs are soaring because of the rate at which it's ramping up capacity, and while planes aren't quite full enough, passenger numbers are enough to pull profits with it.

Some of the short haul carriers have had to lower ticket prices to entice passengers, a trend that could materialise for long haulers as well. Stoking demand is important over the next year and price is one of the few levers IAG has to pull.

There's still has a long journey ahead. And a very real risk that consumer behaviour is yet to fully adjust to a world of higher inflation and increased costs. If spending starts to reign in, we could see the strong forward order book come under pressure.

Our biggest concern for now is the group's eye-watering debt pile, which cost north of £400m in interest for the half just gone. The return of positive free cash flow helps, but shareholder distributions will take a backseat to debt management for a long time to come.

We should note that IAG's price-to-book value shot upwards over the past couple of years. The group's taken on a lot of loans in that time, and sold off over €1bn worth of assets, which has depressed its book value (what's left after all of its debts have been paid). That makes it more difficult to value IAG shares.

It seems the worst is over for IAG and the current risks to demand look more like turbulence than a full stop. There's an opportunity for shares to rerate if passengers come roaring back. But until we have hardened proof of full planes and a full schedule, there's an element of caution alongside our optimism.

IAG key facts

Half Year Results

Passenger revenue rose €6.5bn to €7.6bn, reflecting the significant increase in capacity operated. Revenue per available seat returned to 99.7% of 2019 levels. Cargo revenue increased €74m to €843m, whilst other revenue rose by €602m to €904m reflecting the recovery in the Group's non-airline businesses.

The UK and US saw the highest growth, with both regions growing revenue by more than seven times. Spain and Rest of World saw revenues grow in the region of three times.

Iberia and Vueling were the best performing airlines. The Spanish domestic market and routes to Latin America continued to lead the recovery, with demand exceeding 2019 levels last month.

Net debt was down €688m from the start of the period to €11.0bn, reflecting the seasonal benefit on cash of bookings for travel in the second half of the year. There was a free cash inflow of €1.1bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 29th July 2022