British Airways owner IAG's profits 8% ahead of pre-pandemic levels

International Consolidated Airlines (IAG) has seemingly yet to convince the market that its rebound has legs.

The parent company of British Airways, Spain’s Iberia and Ireland’s Aer Lingus described demand for travel as both strong and “sustained” as it reported a more than doubling of its operating profit to €3.5bn (£3bn) in 2023. The figure was also around 8 per cent higher than pre-pandemic levels.

The uplift was due to a near-normalisation of its business, with capacity increasing by 22.6 per cent, meaning that it now represents 95.7 per cent of 2019 levels, accelerating through the final three months of the year.

This hasn’t been exactly stress-free, though – particularly for passengers who have continued to face travel disruption. Fewer than 60 per cent of BA’s flights arrived on time last year, which the company blamed partly on air traffic control issues in both the UK and France, as well as the slow recovery in operational capacity at Heathrow.

A 17 per cent increase in staff costs to €5.4bn was attributed to the scaling-up of operations, including an investment in BA’s London hub “to improve operational performance” and it said early initiatives are starting to deliver improvements, with almost 80 per cent of BA’s flights arriving on time in January.

Thankfully, Iberia performed much better, with nearly 90 per cent of its flights arriving on time and its operating profit jumping by 70 per cent to €940mn.

A €300mn increase in free cash flow to €1.3bn also helped the company to make inroads into its debt pile, which was cut by €1.1bn to €9.2bn, or 1.7 times Ebitda. With the company’s huge pension scheme also now in surplus, most of the restrictions around dividend payments appear to have been lifted, although given the quantum of outstanding debt it has kept its powder dry for now.

This could change, though, given the company is signalling “significant free cash flow” generation this year even after capex of around €3.7bn. Demand currently remains “robust”, the company said, with bookings in the first half above last year’s levels.

Reaction to IAG’s results were as flat as its share price performance has been over the past 12 months. Investors seem to prefer the short-haul recovery story and most low-cost carriers (barring Wizz Air) have healthier balance sheets. But if IAG can keep generating enough cash, then a re-rating of its shares from their current low rating of just four times earnings should follow. Buy.

Last IC view: Buy, 162p, 28 Jul 2023