Interactive Investor

IAG emerges from an exceptional storm

25th February 2022 08:06

Richard Hunter from interactive investor

The British Airways owner has experienced enough trauma over the past few years to put most companies out of business. But there are good signs that things are improving. Our head of markets talks us through its annual results. 

It is difficult to imagine a more traumatic period for the airline industry to navigate in the future than the one it has had to deal with over the last couple of years.

Grounded fleets due to the pandemic, a complete overhaul of finances which saw some airlines go to the wall, and then the return to some kind of normality punctuated by further restrictions and variants. In addition, the current geopolitical tensions has seen the oil price rise by more than 30% in 2022 alone, adding further pressure to the cost of doing business.

Set against these formidable challenges, International Consolidated Airlines Group SA (LSE:IAG) is beginning to emerge from the exceptional storm.

Passenger capacity is of course a key metric and the current signs are relatively encouraging. For the fourth quarter, capacity was 58% of pre-pandemic levels, and for the full year was 36%. In terms of outlook, IAG is expecting the figure to rise to 65% in the first quarter of this year and to 85% for the year as a whole. This is despite the impact of the Omicron variant which affected bookings for January and February, but which has had a minimal impact on sales for the Easter and Summer periods.

Income has therefore begun to edge higher, with passenger revenues up by 5.9%. Cargo revenues, which has been a helpful contributor during the depths of the pandemic, rose by 28% and total revenues were ahead by 8.3%. Premium leisure flights, especially at British Airways, are springing back to life while there has also been a noticeable recovery on transatlantic journeys after the lifting of restrictions, although the full effects are yet to wash through since this was only a recent development.

The group’s access to liquidity is enough to keep any wolves from the door for the foreseeable future. Access to liquidity currently stands at €12 billion, and there are some undrawn facilities which further underpin the fallback position. This has been invaluable during the depths of the crisis and even for this reporting period, the full-year operating loss before exceptional items was €2.97 billion, although this was a marked improvement from the previous year’s number of €4.4 billion.

In terms of outlook, IAG expects a significant operating loss for the first quarter of this year. The Omicron variant suppressed bookings, the period is in any event a quieter one for seasonal reasons, and there is a cost of returning to higher capacity. Over the full year, for example, the company is guiding a capex figure of €3.9 billion, compared to €700 million this year, as extra expenditure such as previously delayed aircraft deliveries kick in. Nonetheless the company predicts a return to profitability for the second quarter.

However, airlines have always been subject to the vagaries of matters outside of their control, be that viruses, volcanic ash clouds, terrorism or wider geopolitical tensions ratcheting up costs such as oil, while also potentially reducing the propensity of the tourist to travel. There is little question that IAG has taken some formidable steps to ensure survival, but from the company’s own outlook it appears unlikely that a full return to normality will land until 2023, and even then the company will be markedly different from the one which entered the crisis.

The share price has unsurprisingly been buffeted by the various headwinds which have emerged, having dipped by 22% over the last year, as compared to a gain of 8% for the wider FTSE100.

Over the last two years, the shares have fallen by 61% which perhaps begins to underline the scale of the challenges that remain. Even so, the market consensus of the shares is standing firm at a "buy", with this latest release providing further hope on prospects.

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