ii view: Pilot strike action proves a headwind at IAG

IAG battles both strike action and higher fuel costs and has committed to a climate change goal. 

Third-quarter results to 30 September 2019 

• Revenue up 2.4% to €7.3 billion
• Operating profit down 7% to €1.43 billion
• Net debt down 4% to €6.18 billion
• Interim dividend unchanged at 14.5 € cents per share

Chief executive Willie Walsh said:

 “These are good underlying results. As we said in September, our performance has been affected by industrial action by pilots' union BALPA and other disruption including threatened strikes by Heathrow airport employees.

In addition, our fuel bill increased by €136 million during the quarter with fuel unit costs up 4.2% at constant currency. At constant currency, passenger unit revenue decreased by 1.1% while non-fuel unit costs were up 1.1%.”

ii round-up:

Airline group International Consolidated Airlines Group SA (LSE:IAG), whose brands include British Airways, Iberia and Aer Lingus, reported third-quarter results hit by the recent strike action of its pilots. 

Industrial action by the British Airline Pilots Association (BALPA), together with other disruption resulted in an adverse operating profit impact of €155 million during the quarter. Operating profit descended 7% lower to €1.43 billion, matching analysts’ forecasts. 

British Airways pilots took industrial action over a period of 48 hours in September, grounding 1,700 flights in a dispute between the pilot union and IAG over pay.

The pilot walkout was the first in the airline’s history. No further strike dates have been scheduled, but the union said it retained the right to announce more.

Passenger revenue in the quarter rose by 2.3% while cargo revenue fell by 7.2%. Non-fuel unit costs before exceptional items rose by 0.5%. Fuel unit costs increased by 6.1%, up 4.2% on a constant currency basis. 

Accompanying outlook comments remained unchanged, pointing to full year operating profit before exceptional items €215 million lower than 2018 at €3.48 billion. 

IAG, which operates over 570 aircraft flying to more than 260 destinations, recently announced its commitment to achieving net zero carbon emissions by 2050. 

The share price was little changed in early afternoon UK stock market trading. 

ii view:

IAG has transformed itself from the UK’s national airline to a multi-branded 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 Holdings (LSE:RYA).  

For income investors, a prospective yield of around 5% (not guaranteed) and covered over three times by earnings provides appeal. A forward price earnings ratio below the three-year average potentially adds further weight, although the highly cyclical nature of the airline business should not be forgotten. 

Positives: 

• Strong and diverse brands
• Committed to achieving net zero carbon emissions by 2050
• New fleet adds are driving efficiencies.

Negatives:

• Further pilot strike action could impact
• Events outside of management control can hinder performance
• Climate change requirements could see fuel taxes introduced/increased

The average rating of stock market analysts:

Buy