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IAG not giving up on Aer Lingus

International Consolidated Airlines (IAG) boss Willie Walsh is keen to continue negotiations with Irish officials over a potential bid for Irish carrier Aer Lingus
March 3, 2015

Dublin officials have said they need "greater assurance" from International Consolidated Airlines (IAG) on job security and growth before they agree to a takeover of Irish carrier Aer Lingus (EIL). IAG boss Willie Walsh - himself an Irishman - said he would meet officials again following the publication of IAG's financial results.

IC TIP: Hold at 581p

These suggest the fortunes of flagging Spanish subsidiary Iberia are finally on the turn. The airline reported operating profits of €50m (£36m) for 2014 - a €216m improvement over the previous year. Capacity grew by 3.6 per cent, but revenues remained flat. That implies lower ticket prices, which management blamed on high levels of market competition. Tellingly for Aer Lingus, Iberia also slashed costs last year - particularly employee costs, which fell nearly 10 per cent to €1.04bn. Fuel, oil and emission costs also dropped 5 per cent to €1.16bn.

The depressed oil price also helped British Airways, IAG's flagship brand, cut fuel and emission costs by 6.4 per cent to €3.52bn. That, higher revenues (up 2.6 per cent year on year) and tight cost control helped BA grow operating profits by €324m to €975m. At the group level, operating profits consequently shot up a staggering 81 per cent to €1.39bn. Management said a disciplined approach to capacity increases, relative to productivity improvements and cost savings, helped drive the improvement.

A successful takeover of Aer Lingus would hand IAG control of more take-off and landing slots at London's Heathrow airport. Aer Lingus is the fourth-largest operator at Heathrow after British Airways, German flag-carrier Lufthansa and Richard Branson's Virgin Atlantic. But the Irish government - which owns just over 25 per cent of Aer Lingus - wants IAG to "guarantee" those slots would remain dedicated to Irish flight routes for at least 10 years. Rumour has it IAG could offer detailed, albeit non-binding, commitments on the Heathrow slots for just over five years by way of compromise.

Management expects an operating profit of €2.2bn or more in 2015, with capacity growth of approximately 5.5 per cent. Analyst forecasts are on hold in light of the Aer Lingus negotiations.

INTERNATIONAL CONSOLIDATED AIRLINES (IAG)
ORD PRICE:581pMARKET VALUE:£11.8bn
TOUCH:580-581p12-MONTH HIGH:595pLOW: 306p
DIVIDEND YIELD:NILPE RATIO:17
NET ASSET VALUE:171ȼ*NET DEBT:44%

Year to 31 DecTurnover (€bn)Pre-tax profit (€m)Earnings per share (ȼ)Dividend per share (ȼ)
201014.88417.1nil
201116.350331.1nil
201218.1-774-36.7nil
201318.62276.6nil
201420.282848.2nil
% change+9+265+630-

Ex-div: na

Payment: na

*Includes intangible assets of €2.44bn, or 120ȼ a share

£1 = €1.37