Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

IAG - recovery ready to take off

Easing coronavirus restrictions helped passenger capacity at IAG rise to 58% of 2019 levels in the fourth quarter...

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 2 years old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Easing coronavirus restrictions helped passenger capacity at IAG rise to 58% of 2019 levels in the fourth quarter, pushing underlying cash profits (EBITDA) positive. The group's full year capacity was 36.1% of 2019 levels, reflecting the impact of travel restrictions. This was an improvement over 2020 levels, and together with strong growth in cargo, fed into an 8.3% increase in revenue to €8.5bn.

The profit increase together with a 26.5% decline in expenses like staff costs and fuel meant operating losses narrowed from €7.5bn to €2.8bn.

The impact of Omicron and seasonal trends are expected to drive a "significant" operating loss in the current period. This is expected to swing to a profit in the second quarter, with positive profits and cashflow expected for the full year.

The shares rose 1.3% following the announcement.

View the latest IAG share price and how to deal

Our view

IAG's recovery is primed and ready for take-off.

After a difficult two years coping with reduced passenger numbers, the group's finally starting to see green shoots as capacity climbs back toward normal levels. Barring any additional disruption, the group's expecting to post a profit in 2022.

The pandemic saw IAG embark on huge cost cutting measures to stay afloat. We're pleased to see the new lower cost base is sticking around as operations resume. Operating expenses fell even as capacity rose, suggesting IAG's new leaner operations are sustainable. If the group can squeeze more euros out of each additional passenger, the speed of recovery will be that much faster.

Not to mention it gives IAG a touch more flexibility when it comes to ticket prices. 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. Rising inflation could make people more price sensitive when it comes to booking flights, so there's a limit to how much the group can charge for tickets.

The lower costs are helpful, but it's not a magic bullet. IAG still has a long journey ahead. We worry that the past two years of staycationing could see travellers stick closer to home to save money once again this year . The crisis in Ukraine could also knock confidence.

Another year of tepid passenger numbers would be disastrous. The group's lugging around an eye-watering debt pile that grows larger with every quarter free cash flow is in the red. Even if the group's operations progress as planned, shareholder returns 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 year. 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 we view the current risks to demand as relatively minor all things considered. But even a best-case scenario isn't overly positive at this point. There's an opportunity for shares to rerate if passengers come roaring back. But capacity was only just over half of 2019 levels in the fourth quarter, suggesting it's more likely to be a slow drip.

IAG key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results

Passenger revenue rose 5.9% to €5.8bn, weighted primarily toward the end of the year as restrictions eased. Cargo revenue was 28.1% higher at €1.7bn, a record high, as the group used available passenger aircraft for cargo flights. Other revenue, which includes maintenance and repair, and BA Holidays was down 4.1%, reflecting the impact of the pandemic.

Cost reduction continued this year to mitigate the impact of lower passenger numbers. Stripping out the impact of one-off charges, operating expenses fell 6.8% even as capacity rose 7.7%. This helped cost per available seat decline 13.5% to €9.36.

Planes were 64.5% full, up slightly from 63.8% last year. However, passenger revenue per available seat kilometre declined 2.9% to €4.78.

Net debt increased by €1.9bn to €11.7bn, owing to a rise in loan amounts as well as a free cash outflow of €603m.

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.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 25th February 2022