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IAG – free cash flow improves, transformation ongoing

British Airways owner IAG reports capacity’s back near pre-pandemic levels.
IAG - recovery ready to take off

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IAG’s full-year revenue rose 27.7% to €29.5bn, reflecting strong leisure demand, increased capacity and load factors (a measure of how full planes are). The fourth quarter saw capacity at 98.6% of pre-pandemic levels.

Operating profit more than doubled to €3.5bn, as revenue growth outpaced increased operating expenses.

Free cash flow was €341m higher at €1.3bn, partly reflecting lower capital expenditure. Net debt compared to cash profits (EBITDA) reduced to 1.7 times, down from 3.1.

IAG has “confidence” in significant free cash flow generation for 2024 and is continuing its transformation plan. This includes leveraging data and technology to improve the customer proposition, improving ba.com and boosting service efficiency.

There was no dividend in 2023.

The shares were broadly flat following the announcement.

Our view

British Airways owner IAG is continuing its impressive momentum. Led by leisure demand, profits have climbed up, up and away. Capacity's building too, meaning operations are within a whisker of pre-pandemic levels, as well as renewed demand for more lucrative Business Class travel. All in, that means this aviation giant's back on an even keel.

We're particularly pleased by the positive moves on price increases, despite the considerable pressure on customer incomes. 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 costs. The group's also more exposed to business travel than other short-haul-focused carriers, and that corner of the market would take more of a hit should consumers avoid departure gates.

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. The group’s set to spend big on its transformation overhaul, which includes leveraging data and technology to improve the customer experience. Many frequent users of ba.com will cheer the news that the website’s getting some much-needed TLC, but IAG is also hoping to boost efficiency by reducing disruption. These are all great targets, but the pace of delivery is far from guaranteed. It’s crucial that BA gets this right. The dominance of airlines can fade at short notice if customers lose their patience.

Debt is reducing and we're pleased with the direction of travel, but shareholder payouts could take a backseat for a while longer.

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.

IAG key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. 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
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: 29th February 2024