British Airways owner IAG cruises to £3 billion profit

The British Airways owner remains in the ascendancy, with significant revenue and profit growth reflecting passengers returning to the skies in their droves.

Indeed, on many metrics the figures are starting to resemble pre-pandemic levels, such as overall capacity, which now stands at 96% of 2019 figures, boosted by capacity growth of 22.6% over the last year, with the Atlantic markets making a notable contribution. There is also a growing contribution from alternative sources of revenue, now far in excess of pre-pandemic numbers, which hit €641 million for the last quarter and €2.5 billion for the year, an increase of 25%.

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The main drivers for this alternative source of income comprise Iberia’s third-party maintenance, repair and overhaul business, BA Holidays and the IAG Loyalty scheme. For the latter, profits increased by 17% to €280 million, with new member growth of 17% lifting the number of passengers on the scheme to 4.9 million, and with these three particular strands of additional income providing a springboard for future growth.

Strong demand has resulted in a situation where the direction of travel has at last changed for the better. Despite the obvious economic challenges which many consumers are currently facing, the annual holiday seems to have become shielded from day-to-day financial constraints as something of a must-have, and International Consolidated Airlines Group SA (LSE:IAG)’s combination of brands serve many different customer types to a multitude of destinations. While leisure travel remained strong, however, business travel is recovering more slowly, particularly on short-haul destinations where perhaps the advent of virtual meetings lessens the viability of face-to-face meetings.

Even so, the figures provide relief from some of the difficulties of recent years. Revenues rose by 28% to €29.5 billion from the previous year, while net profit soared from a previous €431 million to €2.7 billion, both ahead of expectations. An increase in adjusted operating profit from €1.25 billion to €3.51 billion was largely in line with estimates, but importantly exceeded the pre-pandemic level of €3.25 billion. Meanwhile, operating margin also showed signs of a strong recovery, rising from a previous 5.4% to 11.9%, within a whisker of the group’s medium-term target of between 12% and 15%.

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The immediate outlook was also upbeat from the group, confirming its recently announced measures of performance, such as operating margin and a return on invested capital of between 13% and 16%. For the first quarter of the new year the company is 92% booked, and already at 62% for the second quarter, while IAG is also planning to generate significant free cash flow over the coming year.

This latter point will be key in dealing with what is arguably the biggest thorn in the side for IAG, namely net debt, which represents an overhang from the days of the pandemic when the group was forced to ratchet up borrowings to survive. In the latest quarter alone, finance costs ran to €246 million (although a reduction from the previous year’s €294 million), with the net debt figure currently standing at €9.2 billion, itself an improvement also from €10.4 billion in the corresponding period. The group is only too aware that this line needs particular attention and, as such, for the moment the thought of a return to a dividend payment remains a distant dream.

More generally, 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 and higher fuel costs. The pandemic then added another level of issues, while current macroeconomic and geopolitical concerns add to a potentially dangerous mix, underlying some of the potential hazards of investing in the airline sector.

Despite the undoubted progress, the share price performance reveals a yawning gap which will take a considerable amount of time to close. Over the last five years, the shares have fallen by 62%, while a dip of 1% over the last year compares to a decline of 3.2% for the wider FTSE 100. There is also an interesting comparison with easyJet (LSE:EZJ), newly confirmed as having regained its FTSE 100 status, whose shares have soared by 31% over the last six months, whereas IAG drifted by 3% over that period. The recovery for IAG will itself be a long-haul journey, although it is one which is being supported by investors for the longer term, with the market consensus of the shares coming in at a buy.