International Consolidated Airlines Group SA (IAG) Ord EUR0.50 (CDI)
HL comment (31 October 2019)
IAG's third quarter revenue was €7.3bn, up 2.4% on the same period last year, but strikes by the British Airlines Pilots Association (BALPA) meant operating profits fell 6.9% to €1.4bn.
The interim dividend was held at 14.5 eurocents per share.
The shares were flat following the news.
A €155m hit to operating profits from industrial action is unwelcome, but IAG should be able to withstand the impact.
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 such change in behaviour yet (in fact it's the lower cost brands that have been struggling), 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. Transatlantic flights from Barcelona under the LEVEL brand kicked off a slightly lower key 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, but 2019 offers no such tailwinds. If IAG is to keep profits up, it'll need to improve efficiency elsewhere. The most recent update hasn't brought good news on this front as costs are increasing ahead of revenues.
The shares have also been weighed down by the potential uncertainties ahead. They trade at 1.7 times book value, a more conservative way of valuing intensely cyclical and asset-heavy businesses like airlines and a PE ratio of just 5.4 times expected earnings - both measures are below the longer-term average. The shares offer a prospective yield of 5.2%.
That could look attractive to investors willing to stomach the macro risks.
Third Quarter Results
Third quarter passenger revenue was up 2.3% to €6.5bn, and capacity was up 2.8%. 87.7% of seats were filled, up from 86.5% last year.
Non-fuel costs (the bit airlines can control) per seat were up 0.5% in the quarter, reflecting the impact of strikes and increased investment in Iberia and BA Holidays.
Fuel costs were 6.1% higher than the third quarter last year, despite lower commodity costs. This is because of a strong US dollar and higher hedging profits in 2018 that were not repeated.
Cargo revenue declined 7.2% to €269m due to reduced global trade, and ancillary revenue was up 9.3% to €505m.
At current fuel prices and exchange rates, IAG expects operating profit for the full year to be €215m lower than 2018 (€3.49bn).
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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.
Previous International Consolidated Airlines Group SA updates
The London Stock Exchange does not disclose whether a trade is a buy or a sell so this data is estimated based on the trade price received and the LSE-quoted mid-price at the point the trade is placed. It should only be considered an indication and not a recommendation.
Trades priced above the mid-price at the time the trade is placed are labelled as a buy; those priced below the mid-price are sells; and those priced close to the mid-price or declared late are labelled 'N/A'.