IAG's premium offering secures Q1 profit boost

British Airways owner International Consolidated Airlines Group SA (LSE:IAG) remains firmly in the ascendancy, despite the wider economic headwinds which have blighted so many industries over the last few months. 

The shares have had a turbulent time over the last three months, weighed both by geopolitical uncertainty as well as fears that travel to the US would be impacted in reaction to its decision to declare a trade war on many countries around the globe.

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However, IAG notes that while there has been some pressure of late on economy flights to the States, the strength of its premium cabin offering has more than offset any weakness. 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.

Overall, figures for the three months to 31 March bode well for the rest of the year, where the company is 80% booked for the second quarter and 29% booked for the second half. In the meantime, revenues rose by 9.6% this quarter to €7.04 billion, driving an operating profit of €198 million which compares to a profit of €68 million the previous year.

The group’s important North Atlantic routes fared well, with a passenger load factor of 78.6% and perhaps more importantly a rise of 13% in passenger unit revenues.

Indeed, 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 €6.13 billion is a notable improvement from the €7.52 billion recorded at the end of 2024 as IAG continues to erode the debt. This previously enabled the group to undertake a share buyback programme of up to €1 billion which is ongoing, and reintroduce the dividend, where a yield of 2.6% is pedestrian but nonetheless positive.

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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. In addition, the group has ordered 53 aircraft which will be delivered over the next few years up to 2033, with free cash flow continuing to enable IAG’s growing financial largesse. 

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. Meanwhile, operating margin improved to 2.8% from 1.1% and a lower fuel price provided some respite, since it is unsurprisingly the largest contributor to costs.

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 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.

Even so, IAG’s combination of brands serve many different customer types to a multitude of destinations and across different price points, although 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.

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The long and arduous reparation from the ravages of the pandemic will take some time to complete, but IAG is improving in leaps and bounds, although this has been a turbulent journey. The shares are 39% down from the pre-pandemic highs achieved in June 2018, and have fallen by 21% over the last three months largely on concerns around US travel which, for the moment, seem largely unfounded.

Despite the recent dip, the share price remains up by 58% over the last year, as compared to a gain of 1.8% for the wider FTSE100, and by 93% over the last two years. Indeed, investors who chose to buy in to the recovery while the shares were on the tarmac have been handsomely rewarded, and the group’s improving financial strength and general growth led to an increasingly improving flight path. As such, the market consensus of the shares as a buy is unlikely to waver.