Second-quarter revenue was broadly flat at €8.9bn (€9.2bn expected), with higher prices offset by capacity reductions because of disruptions in the Middle East and the unfavourable timing of Easter.
Underlying operating profit fell 16% to €1.4bn (€1.4bn expected), with the decline driven by higher fuel costs. But fuel and non-fuel costs were both lower than expected, keeping profits in line with forecasts despite revenue's falling short.
First-half free cash flow rose 39% to €2.9bn, benefitting from favourable timing of plane deliveries. Net debt fell by €1.3bn to €4.7bn.
Full-year fuel cost guidance has been lowered from around €9.0bn to between €8.3-8.6bn. Capacity is expected to be in line with last year.
€0.8bn of the ongoing €1.5bn share buyback programme has been completed.
The shares fell 2.5% in early trading.
Our view
IAG’s second-quarter results didn’t deliver many surprises given the challenging backdrop. Higher fuel prices are weighing on profitability, so productivity improvements and capacity cuts are being leaned on to limit their impacts. Encouragingly, demand’s holding up well so far, with bookings for the second half in line with last year’s level.
IAG’s market-leading networks, strong brands, premium passenger exposure, and fierce operational focus mean that it has structurally higher margins than most of its peers. That provides an extra cushion during tough times, and performance has held up relatively well compared to the competition so far.
Its largest airline, British Airways, accounts for more than 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 soar well above last year’s level. The group is working hard to offset this impact by reigning in capacity growth and finding efficiencies elsewhere in the business. However, full-year operating profits are still expected to fall by around 12% to €4.4bn.
IAG is 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. Although these investment plans are getting scaled back slightly, it’s a cautionary move 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 2.3% 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 that 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 that yields are variable and not a reliable indicator of future income. Keep in mind that 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.