ii view: IAG upbeat on profits despite headwinds

Third-quarter results to 30 September

• Revenues up 4.5% to €9.7 billion (£8 billion)
• Adjusted operating profit down 16% to €1.73 billion
• Interim dividend up 10% to €0.053 per share

Guidance:

• Continues to expect full-year fuel costs of around €8.6 billion
• Continues to target a medium-term operating profit margin of between 12% and 15%.

Chief executive Luis Gallego said:

“IAG has delivered another resilient quarter. For the quarter we have achieved an operating margin before exceptional items of 17.7%, despite the very high price of jet fuel and a number of one-off disruption events, clearly demonstrating the quality of our business.

“With our significant free cash flow generation, underpinned by a very strong balance sheet, we remain committed to delivering for our shareholders.”

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ii round-up:

British Airways owner International Consolidated Airlines Group SA (LSE:IAG) today maintained hopes for annual profit margin in line with full-year 2026 and its own medium-term guidance.

Fuel costs up by close to third during the third quarter to late September left adjusted profit down 16% at €1.73 billion (£1.4 billion). An operating profit margin of 13.5% for the nine-month period remains above a 2026 target of at least 12%, driven by increased revenues and a heavy focus on costs.

Against a backdrop of significant global stock market falls, shares in the FTSE 100 company rose 2% in UK trading having come into this latest news up by around 3% so far in 2026. That’s similar to rival Air France-KLM (EURONEXT:AF). The FTSE 100 index is up 6% year-to-date.  

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

Third-quarter revenue rose 4.5% to €9.7 billion (£8 billion), led by long-haul demand. Management flagged a securing of 85% of expected fourth-quarter bookings with demand for Q1 of 2027 also strong.

An interim dividend of €0.053 per share is up 10% from a year ago, with €500 million of a previously announced €1.5 billion share buyback programme still to complete by February 2027. 

Group net debt fell by close to a third from a year ago to €4.2 billion, leaving a net debt-to-adjusted profit ratio of 0.6 times versus 0.8 times a year ago.

Full-year costs excluding fuel are now expected to rise by around 1%, largely due to Middle East disruption and reduced capacity.

IAG continues to target a medium-term operating profit margin of between 12% and 15%. Annual results are likely to be announced late February.

ii view:

Formed via a merger between British Airways and Iberia in 2011, IAG today flies to more than 280 destinations in just over 90 countries. The multiple branded airlines employs around 75,000 people.

Geographically, the UK generated most revenue in 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 easyJet (LSE:EZJ) on many inter-European short-haul routes.

For investors, disruption to oil supplies in the Middle East continues to see a bigger annual fuel bill predicted than at the start of the year. A forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap. Demand for flights within the Middle East region have suffered, while the many different factors which can hinder airline performance such as air traffic controller strikes and the weather should not be forgotten.

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On the upside, demand for travel appears to be robust. Diversity of group brands, pricing segments and geographical hubs exists. Group net debt continues to fall following the industry’s pandemic shutdown. IAG’s fleet is becoming more fuel efficient and climate friendly, while a forecast dividend yield of around 2.1% is not to be forgotten.

In all, the many factors which can impact the travel industry like wars and terrorism continue to make it higher risk. That said, a consensus analyst fair value estimate above 525p per share will likely leave fans of this diversified airline remaining optimistic.

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