British Airways owner IAG returns to profit

International Consolidated Airlines (IAG) has turned its first full-year profit since the pandemic struck. The group, which owns British Airways, saw revenue almost triple to €23bn (£20bn) in the year to 31 December 2022 and reported an operating profit of €1.3bn. This compares with an operating loss of €2.8bn in 2021 and a €7.4bn loss the year before that. 

Management reported “strong recovery” in its core markets as Covid restrictions were lifted, driven by “sustained leisure demand”, which “drove revenue momentum and a return to profit with significantly positive operating cash flow”. Premium leisure proved particularly popular. 

IAG is not firing on all cylinders just yet, but it is getting closer. Capacity reached 78 per cent of 2019 levels across the whole of 2022, and this improved to 87 per cent in the final quarter (capacity is measured in ‘available seat kilometres’, which is equal to the number of seats available multiplied by distance travelled). Meanwhile, ‘passenger unit revenue’ – defined as passenger revenue per available seat kilometre – rose by 11 per cent, helping to offset fuel price increases and other cost inflation. 

Management is now optimistic that it can achieve operating profit of between €1.8bn and €2.3bn this year. Dividends are still on hold but, in a display of confidence, IAG has acquired an 80 per cent stake in Spanish rival Air Europa for €400mn. This includes €200mn upon closing, with half to be paid in shares and the other half to be paid in cash. Having bought a 20 per cent stake in August, IAG now owns the whole company. Management hopes the airline will cement its position in Madrid, and offer a gateway to Latin America.

The results certainly aren’t flawless. British Airways’ capacity languished at 70 per cent, significantly behind Aer Lingus and Iberia. Management blamed this on problems at Heathrow at the start of the year, the Omicron Covid varient and limited access to South Africa. Meanwhile, despite having passenger revenue of €10.5bn, compared with Iberia’s €4bn, British Airways produced a smaller operating profit. 

The outlook for airlines is clearly sunnier than it was this time a year ago, and markets are taking note. Shares in IAG have risen by 46 per cent over the past six months. After such a torrid three years, however – and with the conflict in Ukraine far from resolved – we remain a little nervous. For now, hold. 

Last IC View: Hold, 121p, 29 Jul 2022