Profit uplift allows IAG to strengthen balance sheet

Things are looking up for International Consolidated Airlines (IAG), the unglamorously titled parent of British Airways.

The group, which also includes former flag carriers Aer Lingus and Iberia, as well as European short-haul specialist Vueling, reported a 55 per cent increase in passenger revenue to €11.8bn (£10.1bn) as the long-haul market recovered following the lifting of travel restrictions in China.

Capacity increased by 30.9 per cent, and with load factors and passenger yields both increasing, this was done without sacrificing margin. A prior-year operating loss of €417mn turned into a profit of €1.26bn. British Airways reported a swing of €1bn, from a loss of €436mn to a profit of €602mn, although this is still around 30 per cent lower than pre-pandemic levels. Iberia, however, trebled pre-pandemic profit levels, reaching €372mn. The company attributed this to “exceptionally high demand” and better utilisation of its planes. 

It is continuing to add to the fleet, too – it expects to take delivery of 30 new planes this year and for year-end capacity to reach 97 per cent of pre-Covid-19 levels. It also ordered seven new wide-bodied planes and firmed up orders for 10 of Airbus’s A320 narrow bodies.

This is as good a sign as any that the group is moving out of recovery mode after a torrid few years and is once again looking at growth, albeit tentatively. Improving profitability allowed IAG to cut its measure of net debt by €2.8bn since its year-end, to €7.6bn. Its leverage ratio has also halved – net debt now stands at 1.5 times adjusted cash profit. There’s no sign yet of any dividends, though – some of the loans it borrowed during the pandemic were guaranteed by the British and Spanish governments, which came with restrictions on payouts. 

Even after a 30 per cent year-to-date increase, IAG's shares are priced at six times FactSet consensus forecast earnings. This is understandable, given that airlines are an inherently risky business and that contributions to BA's legacy pension schemes have weighed on earnings for years.

Rising interest rates mean these schemes are now fully funded, however, and the group’s growth prospects look decent. It has already booked 80 per cent of the current quarter’s revenue and even if the demand picture further out is a little fuzzier, there are enough signs of improvement to move our view from hold to buy.

Last IC View: Hold, 158p, 24 February 2023