Confident IAG is flying high after booking big profits

British Airways owner International Consolidated Airlines Group SA (LSE:IAG) remains firmly in the ascendancy, and the announcement of a further €1 billion share buyback programme reflects confidence from a company which is currently flying high.

Significant cash generation has helped IAG in dealing with arguably the biggest thorn in its side, namely net debt, 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 €7.5 billion is a significant improvement from the previous year’s level of €9.25 billion as the group erodes the debt.

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Revenues grew by 9% to €32.1 billion in 2024, leading to an operating profit which jumped by 26.7% to €4.44 billion, with pre-tax profit rising by 23.5% to €3.77 billion. Revenues were boosted by improvements across the piece, with stronger contributions from higher passenger and cargo numbers, the former of which represents the lion’s share of group income and rose by 9.5% to €28.3 billion.

At the same time, the group’s profitability comes despite significant investment in the business, particularly in the digital space, as well as allowing for improvements to its services such as the improvement of aircraft interiors and airport lounges.

Free cash flow of €3.56 billion was achieved even after investments of €2.8 billion, while an operating margin of 13.8%, up from 11.9% in the corresponding period, shows further prudent financial management.

There are also other sources of income, 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 operating profit of £420 million (€495 million) having grown by 14.4% during the year. These strands of additional income providing a springboard for future growth.

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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 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. Indeed, IAG estimates that corporate travel will noy recover to pre-pandemic levels at all, especially for short-haul trips.

By brand, British Airways remains the jewel in the crown in terms of the group’s highest returns, especially the North American market. 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.

While growth may be hampered over the next few years by engine maintenance issues or new aircraft delivery delays, the direction of travel is positive, with boosts also coming from elsewhere such as Iberia, where Madrid is seen as the gateway to Europe from Latin America.

More broadly, the ferocity of competition and economic pressure remain 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.

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Even so, the long and arduous reparation from the ravages of the pandemic is largely complete. The shares have recovered to pre-pandemic levels, largely due to a stellar last year during which time the price has risen by 117%, as compared to a gain of 15% for the wider FTSE100.

The warm reaction to these full-year numbers is a reflection of the strong signals and prospects, such as a further increase to the dividend, today’s pleasantly surprising share buyback announcement and another reduction to net debt.

The group’s outlook predicts that robust demand momentum will carry over to the current year, and even though the recovery for IAG has been a long-haul journey, thoughts can now turn to growth, with the market consensus of the shares as a buy echoing this optimism.