International Consolidated Airlines Group SA (IAG) Ord EUR0.50 (CDI)
HL comment (26 September 2019)
Industrial action by British Airways pilots led to 2,325 flight cancellations during September, with knock-on effects on 4,070 other flights. The company has also seen a deterioration in booking trends in its low cost brands, Vueling and LEVEL.
As a result full year operating profit is now expected to be EUR215m lower than last year, with negative impacts on passenger unit revenue and capacity growth.
The shares fell 2.3% in early trading.
A £183m fine from the Information Commissioner and ongoing industrial action are both unwelcome, but IAG should be able to withstand the impact. They're one offs after-all.
More worrying are signs that the global economy is creaking. Demand for First and Business class berths turns off and on like a tap as the economy rises and falls. IAG hasn't seen any change in behaviour yet, but potentially variable revenues and a large fixed cost base make the unknowns around global trade wars and the UK's impending exit from the EU a concern.
Perhaps with the inherent cyclicality of running premium brands like British Airways and Iberia in mind, IAG is exploring building out lower-cost services. IAG had wanted to bolster its offering by acquiring rival operator Norwegian, but after at least two failed approaches decided the price wasn't going to be right. Its LEVEL and Vueling brands have shown early signs of success, while transatlantic flights from Barcelona have kicked off its first foray into the low-cost long-haul market.
For now though, the focus remains on the core, premium brands. 2018 profitability was boosted by low fuel prices, which has in turn led to healthy dividend increases and chunky share buybacks. The shares offer a prospective yield of 6%.
But that fuel tailwind is running out of puff. If IAG is to keep profits up, it'll need to improve efficiency elsewhere. Recent updates have brought good news on this front, and the group is growing revenue per seat ahead of non-fuel costs. We think that's encouraging to hear.
However the shares have been weighed down by the potential uncertainties ahead, which means they trade at 1.6 times book value, a more conservative way of valuing intensely cyclical and asset-heavy businesses like airlines. The PE ratio is just 4.6 times expected earnings. Both measures are well below the longer-term average.
That could look attractive to investors willing to stomach the macro risks.
Half Year Results - 2 August 2019
Second quarter revenues and operating profits at International Airlines Group (IAG) are ahead of analysts' prior forecasts.
Second quarter revenue was EUR6,8bn, up 9.5% on last year. That was driven by passenger revenue, which rose to EUR6bn on account of a 5.4% increase in available seat kilometres, a measure of capacity, and a rise in seat factor from 84 to 85, which is a measure of how full the planes are.
Quarterly underlying operating profit rose 6.7% to EUR960m, with increased fuel and aircraft costs driving operating costs up 10%. That's an improvement from a weaker first quarter, but isn't enough to stop profits for the half as a whole falling 11.7% to EUR1.1bn.
On a per seat basis, and at constant exchange rates, passenger revenue rose 1.1%, while non-fuel costs rose 0.4%.
Net debt of EUR4.8bn represents an underlying fall of 25.7% (after excluding the impact of accounting rule changes that impact how debt is calculated). That means leverage as measured by net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) fell to 0.9, from a ratio of 1.2 last year.
Looking ahead, at current fuel prices and exchange rates, IAG expects 2019 underlying operating profit to be in line with 2018. Passenger revenue per available seat is expected to be flat, with non-fuel costs per available seat expected to improve.
IAG has announced plans to order eight new aircraft from airbus, and intends to purchase 200 from 737s from Boeing. These planes should join the fleet from 2023.
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