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IAG - underlying profit reached and full year guidance raised

IAG has posted a first quarter underlying operating profit of EUR9m.

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International Consolidated Airlines (IAG) has posted a first quarter underlying operating profit of €9m. That's a €750m improvement on the previous year, and the first time the group's been in profit since the pandemic. The improvement reflects a 71.4% increase in revenue to €5.9bn, as leisure travel demand rebounds. Business travel remains sluggish. Overall, 80% of expected summer-quarter revenue has been sold.

Planes were, on average, 81.5% full in the quarter, compared to 72.2%. Together with lower fuel prices, this helped the group exit loss-making territory.

Net debt fell 19.1% to €8.4bn, partly because of the higher profits.

IAG now expects full year underlying operating proft to be above the top end of previous guidance, of €1.8bn - €2.3bn.

The shares rose 3.9% following the announcement.

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Our view

IAG's firmly on a more attractive path. Profits are back and leisure demand is strong. Business travel is still taking some time to ramp back up, but overall, the British Airways owner has had a strong start to the year.

The biggest trumph has been the group's ability to reinstate and largely fill huge amounts of capacity. There's also been successful moves on price increases, despite the considerable pressure on customer incomes. That reflects the tailwind that is pent up travel demand. The second thing to consider is consolidation in the airline industry. A handful of smaller carriers have gone out of business and IAG's acquisition of Air Europa means there's more market for the taking. This doesn't upend the investment case, but it's a helpful market dynamic and shows the benefit of having strong, trusted brands in this business.

There are some things to keep in mind though. While pent up travel demand still has room to run, it can't go on forever. At some point we'll see what normal demand looks like once more. There's 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.

Costs are also a drag, thanks to the wider cost increases that come with getting this giant bird of a business back at full height, this means pre-covid levels of operating profit aren't expected for a few years. For now, lower fuel prices should become profit-plumpers if sustained, but this is outside IAG's control and could change at short notice.

Our biggest concern for now is the group's eye-watering debt pile, meaning that interest payments were north of €824m last year. Shareholder payouts 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. We're a lot more positive than we've been for some time. But keep in mind, IAG is likely to face the worst of any slowdown in consumer spending and we can't rule out knocks to the valuation in the short term.

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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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 5th May 2023