ii view: IAG flying blind

Now battling the coronavirus, the airline's shares are down over 20% year-to-date.

Full-year results to 31 December 2019 

• Revenue up 5.1% to €25.5 billion
• Operating profit down 5.7% to €3.28 billion
• Profit after tax and exceptional items down 41% to €1.72 billion
• Final dividend up 3% to 17.0-euro cents per share
• Total 2019 dividend payment of 31.5-euro cents per share
• Net debt up 18% to €7.57 billion

Chief executive Willie Walsh said:

"These are good results in a year affected by disruption and higher fuel prices. We demonstrated our robust and flexible model once again through additional cost control and by reducing capacity growth to reflect market conditions.

"We've increased investment in new aircraft, customer products and operational resilience and this has seen our airlines improve their customer performance scores this year.

ii round-up:

International Consolidated Airlines Group (LSE:IAG), owner of British Airways and Iberia, was unable to provide a profit forecast for the current financial year given the unfolding coronavirus outbreak.

Management confirmed that it was currently experiencing weakness in demand for Asian and European flights, given reduced business travel resulting from the cancellation of industry events and implemented company travel restrictions.

In late January, British Airways suspended its daily flight to both Beijing and Shanghai while, more recently, capacity on its Italian routes for March had been significantly reduced.

The share price fell by more than 8% in early trading, mirroring further coronavirus related falls for stock markets globally and adding to a 20% plus fall in IAG’s shares since the start of the year. 

Cancelled Asian flights are being re-routed to other long-haul destinations such as India, South Africa and the US in order to try and mitigate the impact. 

Full-year and fourth quarter results proved to be largely in line with analyst forecasts, with profit hit by higher fuel prices and disruption including a strike by its pilots. 

easyJet (LSE:EZJ), whose shares were down by 5%, also issued an update in relation to the virus impact. 

The soon-to-leave IAG chief executive Willie Walsh noted that “We are strongly positioned for the expected recovery in demand.”

ii view:

IAG has transformed itself from the UK’s national airline to a multi-brand operator. A low-cost business model has been adopted for two of its brands, while cost reduction now features across the industry thanks to the success of rivals such as easyJet (LSE:EZJ) and Ryanair (LSE:RYA). 

Investors in any airline company must be prepared for an often turbulent ride. Volatile fuel costs, the threat of terrorism, volcanic ash clouds and now the outbreak of the coronavirus are among the many hurdles which management can find themselves having to navigate.

IAG’s successful track record for squeezing costs and integrating previous acquisitions such as Iberia, British Midlands and Aer Lingus bode well for its 2019 takeover of Latin America-focused Spanish airline Air Europa. 

For investors, an estimated forward dividend yield in the region of 5% (not guaranteed) and covered over three times by earnings, provides appeal. A single-digit forward price/earnings ratio marginally below the three-year average adds further weight to the 'buy' case. However, while the shares are cheaper than they were just a few weeks ago, the airline business will remain highly volatile and unpredictable. 

Positives: 

• Strong and diverse brands
• Committed to achieving net zero carbon emissions by 2050
• Returned more than €4.4 billion to shareholders since 2015

Negatives:

• Events outside of management often hinder performance
• Customer satisfaction surveys show room for improvement
• Climate change requirements could see fuel taxes introduced/increased

The average rating of stock market analysts:

Strong buy