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IAG - sales back at pre-covid levels

Third quarter revenue of €7.3bn was up 170% against 2021, and broadly flat against 2019 levels despite restrictions at Heathrow

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Third quarter revenue of €7.3bn was up 170% against 2021, and broadly flat against 2019 levels despite restrictions at Heathrow and widespread network closures in the Asia-Pacific region.

This was achieved with capacity running at 81.1% of 2019 levels, and that's expected to increase to 87% in the final quarter of the year.

Underlying operating profit of €1.2bn was in line with recently upgraded guidance. That's against a loss of €485m in the same period last year.

Net debt fell 5.2% to €11.1bn.

For the full year, assuming no change in exchange rates and fuel prices, the Group expects underlying operating profit of €1.1bn. It also expects 'significantly positive' net cash flow.

IAG reported continuing strength in demand but is "conscious of the uncertainties in the economic outlook and the ongoing pressures on households".

The shares were broadly unmoved following the announcement.

View the latest IAG share price and how to deal

Our view

We're the first to admit we weren't expecting a third quarter upgrade from British Airways owner, IAG, just yet. Especially in the current climate. But it seems that pent up travel demand is currently trumping cost-of-living pressures.

Capacity's climbing towards normal levels too. 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.

That said, for now, costs are soaring because of the rate at which it's ramping up capacity. We are cautiously optimistic that planes are now full enough per-trip that profits can find a sustainable path forwards.

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.

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. On the upside, the lifting of passenger caps at Heathrow comes as some relief.

There's still 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 rein 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 in the first half. The return of positive free cash flow helps, but shareholder distributions will take a backseat to debt management for a long time to come.

For now, 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 more 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's 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.

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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 28th October 2022