BA owner IAG makes record profit with premium offering  

The pandemic slate is all but wiped clean, and International Consolidated Airlines Group SA (LSE:IAG) has recorded record operating profits as it closes in on former glories.

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The full-year results overpowered a difficult third quarter, where the government shutdown in the US let alone the ongoing trade wars and the then impending UK Budget did little for the customer propensity to spend. Indeed, figures for the year as a whole emphasise that the third quarter was something of a minor headwind. 

Annual revenues grew by 8.5% to €33.2 billion (£29.1 billion), while operating profit rose by 13.1% to a record €5 billion. Operating margin improved from 13.8% to 15.1%, underpinned by figures of 16.2% at Iberia and 15.2% at British Airways, and the Return on Invested Capital (ROIC) also grew to an impressive 18.5%, having been at 17.3% in the corresponding period. 

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If one trace remains of the ravages wrought by the pandemic, it is net debt. Significant cash generation has helped IAG in dealing with arguably the biggest thorn in its side, which represents an overhang from the days of the pandemic when the group was forced to ratchet up borrowings to survive. The latest level of €6 billion is a notable improvement from the €7.52 billion recorded at the end of 2024 as IAG continues to erode the debt. It has also enabled a further increase to the dividend which has a pedestrian yield of 2.1%, with the headline positive being a further €1.5 billion share buyback programme which underlines management confidence in improving prospects.

Elsewhere, the group continues to ratchet up revenues from its asset-light businesses, such as Iberia’s third-party maintenance, repair and overhaul business, BA Holidays and the IAG Loyalty scheme. BA Holidays and IAG Loyalty have now been combined to form the third-largest company in that field, with these strands of additional income providing a springboard for future growth. The appeal of this offering has been further enhanced by partnerships with the likes of American Express.

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IAG had previously noted that while there was some pressure on economy flights to the States, the strength of its premium cabin offering had more than offset any weakness of demand. By brand, British Airways remains the star performer in terms of the group’s highest returns, especially this North Atlantic market which accounts for 30% of capacity. Flight frequency to selected destinations is continually on the increase, with IAG looking to maximise income from not only its premium offering but also an affluent customer base.

With Latin America and Europe also holding firm, there is more promising news from the Asia Pacific, where capacity had been lower than before the pandemic due in part to its competitive disadvantage with Chinese carriers who are able to fly over Russia, impacting the destinations of Beijing, Shanghai and Hong Kong. Even so, the group has now added Bangkok, Kuala Lumpur and Tokyo in an effort to minimise this loss.

Of course, the ferocity of competition and economic pressure remain as potential headwinds, as do some of the other issues which have historically blighted the sector, such as virus outbreaks, industrial action, volcanic dust clouds, higher fuel costs and technical outages at certain airports. Alongside the current macroeconomic and geopolitical concerns, this can be a potentially dangerous mix, underlying some of the potential hazards of investing in the airline sector. 

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Even so, the arduous reparation from the ravages of the pandemic are all but complete, with the shares now having exceeded the record highs achieved in 2018. Investors who chose to buy in to the recovery while the shares were grounded have been handsomely rewarded, with the price having risen by 40% over the last year, as compared to a gain of 24% for the wider FTSE100, and by 195% over the last two years. 

IAG has already noted strong bookings for this quarter, helped along by an earlier Easter, and its new medium-term targets for operating margin and ROIC are stretching, but achievable. Indeed, the group’s superior diversity of brands, price points and destinations lead to a sector-beating market consensus for the shares, where the general view of IAG as a strong buy is likely to remain intact.