IAG hits pocket of turbulence in Q3

Any long-haul journey will encounter pockets of turbulence and International Consolidated Airlines Group SA (LSE:IAG) has found that its weak performance over the last three months has been punished due to a mixture of sky-high expectations and subsequent investor disappointment.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

The environment was a difficult one in the third quarter, with geopolitical uncertainty resulting, for example, in a reduction of capacity at Tel Aviv airport. In addition, the inconsistent performance of sterling has added foreign exchange headwinds, while of late the government shutdown in the US let alone the ongoing trade wars and the impending Budget in the UK has done little for the customer propensity to spend.

Revenue of €9.33 billion was flat compared to the previous year’s record levels and shy of the expected €9.6 billion, with operating profit of €2.05 billion 2% higher than the corresponding period although also missing estimates of €2.19 billion. More positively, operating margin also grew to 22% from a previous 21.6%, with a constant passenger load of 88.6% keeping its direction of travel intact.

Indeed, figures for the year to date emphasise that the third quarter was something of a minor headwind. Revenues have grown by 4.9% this year, operating profit by 18%, while the €1 billion share buyback programme is all but complete. In terms of shareholder returns, an increase to the dividend leads to a fairly pedestrian projected yield of 2.2%, with further announcements on the strategy to come at the full-year results.

• FTSE 100 round-up: Lloyds Bank, NatWest, IMI, Hikma
• Why Diageo shares keep falling and BT bounces
• Bank of England chooses caution ahead of Autumn Budget

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 although demand has weakened of late. By brand, British Airways remains the jewel in the crown in terms of the group’s highest returns, especially this North Atlantic market which accounts for 32% 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 are also holding firm, there is more promising news from the Asia Pacific, where capacity had been lower than pre-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.

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 €6 billion is a notable improvement from the €7.52 billion recorded at the end of 2024 as IAG continues to erode the debt.

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 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 Le Shuttle, American Express and Universal Studios.

• US tariffs or AI: which is the biggest risk for S&P 500?
• Four UK stocks we own – and how we differ from a global tracker
• How we build a defensive buffer and three new buys in 2025
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

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 of late 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.

The arduous reparation from the ravages of the pandemic will take some time to complete, but IAG has made large strides. The shares are just 6% shy of the previous record highs achieved in 2018, and investors who chose to buy in to the recovery while the shares were grounded have been handsomely rewarded. The price has risen by 87% over the last year, as compared to a gain of 19.6% for the wider FTSE100, and by 177% over the last two years.

The airline’s superior diversity of brands, price points and destinations lead to a sector-beating market consensus of the shares as a strong buy, which is unlikely to waver despite today’s setback.