IAG back in the black despite airport issues

Airports across the globe have been in turmoil due to ongoing staff shortages, so it’s easy to forget that passenger numbers are firmly in recovery mode. International Consolidated Airlines (IAG) crept back into profit in the second quarter of this year, reporting an operating profit of €293mn (£248mn) against a loss of €967mn in 2Q 2021. Passenger revenue for the half-year came in at €7.6bn, against €1.14bn in 2021.

The group, which numbers British Airways, Aer Lingus and Iberia among its carriers, pointed to a resurgence in European short-haul traffic as the principal driver of volumes. Passenger capacity through the second quarter came in at 78 per cent of 2019 levels and well in advance of the 65 per cent rate recorded in the previous quarter, while 81.8 per cent of available seating capacity was filled. That’s down by 3.2 percentage points on the 2019 comparator but up by 9.6 points from the first quarter.

May figures from the International Air Transport Association (IATA) show that international traffic rose by 326 per cent year-on-year, a reminder of how disastrous Covid-19 was for the industry. Unfortunately, the indirect impacts are still apparent. The IATA recently warned that European hubs could face further chaos if the European Commission prematurely reimposes pre-pandemic slot use rules. The rules are designed to manage scarce capacity at airports, but the industry body believes that airports could struggle to meet the standard statutory threshold due to ongoing staffing problems.

It’s doubtful whether industry analysts took adequate account of the potential staffing issues following the pandemic, but the problems have certainly constrained capacity levels. Because of the well-publicised challenges at Heathrow Airport, British Airways’ capacity was limited to 69.1 per cent in the June quarter, well down on the group average.

Anecdotal evidence certainly points to renewed appetite on the part of holidaymakers – no surprise there – but business travel is recovering at a more measured pace. One still wonders what the impact of cloud-based video conferencing will have on business travel over the long-term.

Looking ahead, IAG expects pre-exceptional operating profit to improve significantly through the current quarter and to be in positive territory for the full-year, mirrored by net cashflow performance. Management, somewhat wearily one imagines, trotted out the usual caveats linked to a resurgence of the virus and “material impacts from geopolitical developments”, but consumer appetite for air travel has clearly recovered appreciably, even if you might find yourself waiting at an airport for longer than anticipated. We will review our position on the stock once Q3 numbers are available. Hold.

Last IC view: Hold, 145p, 25 Feb 2022