IAG’s first-quarter revenue rose 1.9% to €7.2bn (€7.1bn expected). This was driven by higher ticket prices, fuller planes, and a small increase in capacity.
Underlying operating profit jumped 77.3% higher to €351mn (€275mn expected). This was due to broadly flat operating costs, which meant the revenue growth flowed straight onto a small profit base.
Net debt fell by €1.8bn to €4.2bn, helped by increased cash generation.
Due to the Middle East conflict, full-year fuel costs are now expected to be around €9.0bn, up by €1.6bn compared to prior group expectations. As a result, full-year free cash flow guidance has been lowered from above €3.0bn to below €3.0bn.
The group expects to complete the remaining €1.0bn of its ongoing €1.5bn share buyback programme by February 2027.
The shares fell 2.6% in early trading.
Our view
Given the timing of the Middle East conflict, it had very little impact on IAG’s first-quarter profits, which soared past expectations. Much more important was the outlook for the rest of the year. While near-term demand remains strong, news that IAG was (sensibly) less optimistic about offsetting rising fuel costs than one of its peers saw its shares dip in early trading.
IAG’s market-leading networks, strong brands, premium passenger exposure, and fierce operational focus have continued to drive underlying performance skyward over the first quarter. These strengths also mean its airlines have high margins by industry standards.
Its largest airline, British Airways, accounts for around half of the group’s operating profits. The airline is based in London, where the market is particularly constrained, and new flight slots are among the most scarce in the world. Given that British Airways owns such a large share of these slots, it has strong pricing power and looks well-positioned to keep benefiting more than its peers from these dynamics.
Fuel is unsurprisingly IAG’s single biggest expense, and the Middle East conflict has seen prices nearly double in recent months. The group’s working hard to offset this impact by reallocating capacity and finding efficiencies elsewhere in the business. However, full-year operating profits are now expected to fall by around 12% to €4.4bn.
IAG’s also in the middle of a period of investment, looking to expand its fleet, upgrade its digital infrastructure and leverage data in a bid to improve the customer experience. Annual capital expenditure was set to rise from €3.4bn in 2025 to around €4.9bn by 2028. While these investment plans are getting scaled back slightly, it’s a cautionary rather than a sign of real trouble.
The balance sheet is in good shape, and cash flow generation is expected to remain pretty healthy this year, despite the dip in profits and continued investments. As a result, management’s pressing ahead with the remaining €1.0bn of its €1.5bn share buyback programme, and the 2.5% forward dividend yield looks well covered. As always though, no shareholder returns are guaranteed.
With a strong balance sheet, impressive market position, and high margins, we think IAG should be able to navigate the current market challenges better than most of the competition. If, as we believe, IAG’s valuation deserves a premium to peers, then we see plenty of upside on offer over the long term. But movements in fuel prices and the macroeconomic outlook are likely to be the key drivers of sentiment in the near term, and the picture could remain difficult for some time.
The author holds shares in IAG.
Environmental, social and governance (ESG) risk
The transport industry is medium risk in terms of ESG, with European firms managing them better than others. Carbon emissions, product governance, and quality & safety are the biggest risk drivers. Other key areas are emissions, effluents & waste, labour relations, and employee health & safety.
According to Sustainalytics, IAG’s management of ESG risk is strong.
IAG publishes annual ESG disclosures, which follow leading reporting standards. It has a board-level committee dedicated to oversight and review of the group’s sustainability, environmental, and social programmes, showing that these topics are integrated into core business strategies. Executive compensation is also linked to ESG performance targets. However, some of IAG’s airlines continue to face labour challenges, including strikes and disputes over policies and compensation.
IAG key facts
All ratios are sourced from LSEG Datastream, 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 LSEG. 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.