ii view: IAG takes action to offset vast fuel bill

First-quarter results to 31 March

• Revenues up 1.9% to €7.18 billion (£6.17 billion)
• Adjusted operating profit up 77% to €351 million 
• Net debt down 30% to €4.18 billion 
• On track with a remaining €1 billion of excess cash returns to late February 2027

Guidance:

• Expects full year fuel costs of around €9 billion
• Expects to recover around 60% of the higher fuel cost in 2026 via revenue and cost actions

Chief executive Luis Gallego said:

“IAG is uniquely positioned to navigate the current headwinds created by the Middle East conflict thanks to our leading positions across diverse markets, strong brands, structurally high margins and strong balance sheet, as well as a strong track record of execution.”

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ii round-up:

International Consolidated Airlines Group SA (LSE:IAG) detailed forecast-beating quarterly profit, although it's not now expected to make as much money for the whole year as previously expected given higher fuel costs due to the Middle East conflict.

First-quarter revenue to late March rose 1.9% to €7.18 billion (£6.17 billion), driving operating profit up 77% to €351 million. The City had forecast adjusted profit of €248 million. An estimated annual fuel bill of €9 billion compared with €2 billion last year, is expected to hurt full-year profit. However, management action to counter higher energy bills leaves the airline on track to return the remaining €1 billion of excess cash to shareholders by the end of February 2027.

Shares in the FTSE 100 company fell slightly in post-results trading Friday but rose today. Shares headed into these latest results up by close to a third over the last year. That’s similar to rival Air France-KLM (EURONEXT:AF). The FTSE 100 index is by around a fifth over the last year.

IAG operates a fleet of around 600 aircraft across brands including British Airways, Iberia and Aer Lingus.

The airline expects to recover around 60% of the higher annual fuel bill via higher ticket fares and actions to reduce other costs.

Full-year free cashflows, and given the war in the Middle East, are now expected to come in at below €3 billion, down from an estimate of over €3 billion issued at its previous annual results. 

Such cashflows have helped group net debt fall by 30% year-over-year to €4.18 billion. Expected annual capital expenditure of around €3.5 billion is down from a previous estimate of €3.6 billion.

Already booked revenues for the current second quarter to late June total 80% of expected outcome, in line with the historical average.

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, flagging IAG as a ‘top pick.’ Goldman Sachs and Barclays were among a number of analysts who issued price targets at least 10% above the current share price. A second-quarter trading update is scheduled for 30 July.

ii view:

Formed in 2011 following a merger of British Airways and Iberia, IAG today flies more than 100 million passengers annually to over 90 different countries. Geographically, the UK generated most revenue over its last financial year at 36%. That was followed by Spain at 19%, the USA at 16%, and the rest of the world the balance of 29%. Group rivals include Delta Air Lines Inc (NYSE:DAL), Deutsche Lufthansa AG (XETRA:LHA) and budget airlines such as Deutsche Lufthansa AG (XETRA:LHA) on many inter-European routes.

For investors, ongoing disruption to oil supplies from the Middle East will increase IAG's annual fuel bill, affecting profits. The many different factors which can hinder airline performance such as air traffic controller strikes and the weather should not be forgotten. Continuing trade tensions between the US and Europe could hurt demand for travel between the two, while a forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap. 

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On the upside, consumer demand for air travel following Middle East hostilities appears to remain robust. IAG enjoys diversity of airline brands, pricing segments and geographical hubs. Group net debt continues to decline following the industry’s pandemic shutdown. IAG’s fleet is being driven towards more fuel efficient and climate friendly planes, while a prospective dividend yield of around 2.4% is not to be ignored.

In all, and while investors should not overlook the many factors which can hinder travel companies, a consensus analyst estimate of fair value above 475p per share will likely remain an attraction. 

Positives:

• Diversity of brands
• Industry consolidator

Negatives:

• Many factors outside of management control
• Industry wide climate change concerns

The average rating of stock market analysts:

Buy