International Consolidated Airlines Group SA (IAG) Ord EUR0.50 (CDI)
HL comment (8 July 2019)
The Information Commissioner's Office (ICO) has told IAG it intends to levy a fine of £183.4m on the group for its loss of customer data, which IAG first disclosed on 6 September 2018.
IAG has said it is 'surprised and disappointed', and will be entering into a dialogue with the ICO around the proposed fine.
The shares moved slightly lower on the news.
The ICO fine is an unwelcome distraction, but IAG should be able to withstand the impact. It's a one-off hit, is less than 10% of next year's expected profits and could yet be reduced on appeal. However, that's not to say improvements aren't required. The ICO could levy up to 4% of a business' turnover - and in British Airways' case that would have been closer to £500m.
A repeat could be even more painful if the worries around a disorderly Brexit turn to reality. 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 the UK's impending exit from the EU a worry.
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 are growing, 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. Profitability has been boosted by low fuel prices, which has in turn led to healthy dividend increases and chunky share buybacks. But that 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 confident it can reduce costs and increase revenue per seat for the remainder of this year. While that's encouraging to hear, investors should remember that much of IAG's destiny remains out of its hands and there are numerous uncertainties around.
That probably explains why the group's trading at 1.5 times book value, a more conservative way of valuing intensely cyclical and asset-heavy businesses like airlines, and on just 4.5 times expected earnings. That's below the longer-term average on both measures.
The shares are priced to yield 6.3% in 2020.
First quarter results, 10 May 2019
IAG continues to add capacity, with total ASKs (available seat kilometres) rising 6.1% to 75.4bn. A slight increase in seat factor, to 80.7, shows its 582 planes were slightly fuller than at this time a year ago, but pressure on pricing, the timing of Easter and a slight fall in cargo revenue ensured group revenue rose just 5.9% to EUR 5.3bn.
However, with higher fuel prices driving operating costs up 10.7%, underlying operating profit fell 60.3% to EUR135m. After excluding the impact of a stronger dollar and other currency moves, that still represents a 51.6% fall.
While non-fuel costs rose 6.9%, that represents a slight decline at constant exchange rates on a per ASK basis. The main driver of the extra costs was a 22.8% increase in fuel oil and emission charges, which rose to EUR1.4bn, or 11.1% at constant exchange rates on a per ASK basis.
IAG's adjusted net debt at the end of the quarter was EUR5.2bn, which equates to a net debt to EBITDA ratio of 1.
Looking ahead, the group says it expects both passenger revenue per available seat kilometre (ASK) and non-fuel costs per ASK to improve over the year, such that full year operating profits will be broadly flat on 2018.
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