Quarterly results from International Consolidated Airlines have been well received, but our head of markets explains the risk of possible turbulence.
Even though the British Airways owner has flown back to profit for the first quarter since 2019, the numbers underline that full recovery remains a long-haul journey.
There are a number of positives within International Consolidated Airlines Group SA (LSE:IAG)' statement showing that the direction of travel has at last changed for the better. Revenues rose by 71% to €5.89 billion from the previous year, helped along by strong demand particularly within leisure, and showing the determination of a cost-pressured consumer to continue travelling. There is also a growing contribution from alternative sources of revenue, which hit €525 million for the quarter, coming from Iberia’s third party maintenance business, BA Holidays and the IAG Loyalty scheme.
At the same time, passenger numbers increased by 69% compared to a year previous and have now all but returned to pre-pandemic levels across the network. This comes despite a slower recovery in the business travel market, previously such a strength of the British Airways offering, and where the adoption of apps such as Teams and Zoom has severely reduced the need for face-to-face meetings.
The generally improving picture has revealed a sight which will be of some relief to long-suffering shareholders, namely a return to quarterly profit. Adjusted operating profit of €9 million compares to a loss of €741 million the year previous, and substantially outperforms estimates of another €207 million loss.
Indeed, IAG has upgraded its full-year guidance given these most recent tailwinds. Operating profit has been raised to above the top end of previous expectations, with 97% of 2019 capacity now expected. In addition, the group now expects for net debt to reduce further, as opposed to the previous estimate that it would largely remain the same.
The issue of net debt is arguably the biggest thorn in the side for IAG, representing an overhang from the days of the pandemic when the group was forced to ratchet up borrowings to survive. In this quarter alone, finance costs ran to €274 million, with the net debt figure currently standing at €8.4 billion. More positively, this is an improvement of 19% from the €10.4 billion number from the corresponding period. The group is well aware that this line needs particular attention and, as such, even the thought of a return to a dividend payment remains a distant dream.
IAG will also be hoping that the rest of the year plays out along these lines. For the second quarter, 80% of revenues have already been booked, although it remains too early to guess how the less seasonally popular months will fare. The headwinds which have blighted the sector are never far away, meaning that airline stocks have long been a traditionally hazardous investment, variously affected by virus outbreaks, industrial action, volcanic dust clouds and higher fuel costs. The pandemic added another level of issues, while current macroeconomic and geopolitical concerns add to a potentially dangerous mix.
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The improvement in the group’s fortunes is a welcome development as evidenced by the initial price reaction to the release, but the road to recovery remains long and arduous. Strong demand and a slightly lower fuel price in this quarter are helpful, but do not necessarily establish a trend.
The share price has reflected the turbulence of airline investing, having risen by 18% over the last six months but having dropped by 15% over the last quarter. Over the last year, the shares have added just 1%, as compared to a rise of 2.7% for the wider FTSE100 index, and the fact that the price remains down by 65% over a five-year period is further evidence of the repair needed. With visibility clearing but far from guaranteed, the market consensus remains marginally positive for prospects, coming in at a 'cautious buy'.
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