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Late summer turbulence ahead for IAG

Failure to overturn threatened strikes by British Airways pilots is the latest bout of turbulence to hit IAG
Late summer turbulence ahead for IAG

Nothing infuriates summer travellers like disruption to their plans, and International Consolidated Airlines (IAG) could be this year’s offender. Last week it was announced that British Airways pilots look set to strike over a pay dispute this month, one of the busiest times of year for BA, IAG's major subsidiary. BA operates around 145,000 flights each day in the peak summer season, and since it would be responsible for finding alternative routes for affected passengers, this could be a huge financial burden.

IC TIP: Sell at 454p
Tip style
Sell
Risk rating
High
Timescale
Medium Term
Bull points

Submitted Brexit plans
Lowly-rated compared with peers

Bear points

Upcoming pilots' strike
Boeing 737 Max order
Rising fuel costs
Operating profit decline

In other bad news, IAG recently received the largest-ever fine – £183m – from the UK Information Commissioner’s Office for customer-data theft and the resulting breach of data-protection regulations. This related to a cyber-attack in September last year, which compromised the personal data of around 500,000 customers. In addition, in June, BA announced it had ordered 200 Boeing 737 Max aircraft for around £20bn. This was despite the fact that this model has been grounded since March after two crashes killed 346 passengers. It’s unknown when – or if – the 737 Max will be able to fly again. BA's planes are expected to be delivered between 2023 and 2027. IAG's chief executive, Willie Walsh, says he has “every confidence in Boeing” and expects the aircraft will make a return to service in the coming months, although Boeing has given no date.

IAG reported that operating profit declined 41 per cent to €1.1bn (£1bn) during the first half of 2019, although the comparison does include a €620m gain in the first half of 2018 owing to a drop in the liabilities of the group's defined-benefit pension schemes. Strip out the effect of that exceptional credit and operating profit dropped 12 per cent. Meanwhile, IAG struggled with its operating costs. Fuel, oil costs and emissions charges increased by a fifth during the first half to €2.94bn, while non-fuel costs per available seat kilometre increased by 1.2 per cent to €4.93. Overall, total expenditure on operations increased by 10.3 per cent to just under €11bn. At current fuel and exchange rates, it’s expected that 2019's operating profit before exceptional items will be in line with 2018's. Airlines are capital-intensive businesses, so it is encouraging that return on invested capital improved from a claimed 15.7 per cent in 2017 to 16.6 per cent in 2018 and only slipped to 15.6 per cent in the first half of the current financial year.

Capacity in the European airlines sector has been a contentious topic in recent years, as some airlines, such as Monarch and Air Berlin, have gone bust, and struggling budget airline Flybe was bought for just 1p per share. Despite this, during the first half of the current financial year, IAG increased capacity by 5.7 per cent to just over 163bn available seat kilometres, while passenger revenue increased just 1.3 per cent to 6.52¢ per available seat kilometre.

Brexit is another dark cloud hanging over the airline industry. IAG says it “remains confident that a comprehensive air transport agreement will be reached between the EU and the UK”, adding that IAG’s airlines have submitted plans on ownership and control to the national regulators in Spain, Ireland, France and Austria. Those regulators confirmed that the plans would satisfy EU ownership-and-control rules in the event of a no-deal Brexit, which is one concern allayed. 

INTERNATIONAL CONSOLIDATED AIRLINES (IAG) 
ORD PRICE:454pMARKET VALUE:£9.01bn
TOUCH:454-454.4p12-MONTH HIGH:711pLOW: 403p
FORWARD DIVIDEND YIELD:6.7%FORWARD PE RATIO:4
NET ASSET VALUE:303pNET DEBT:

73%

Year to 31 DecRevenue (€bn)Pre-tax profit (€bn)Earnings per share (¢)Dividend per share (¢)
201622.62.369323.5
201722.92.489527.0
201824.43.49143

31.0

2019*26.53.0311730.3
2020*28.13.2612833.2
% change+6+7+9+10
Normal market size:3,000   
Matched bargain trading    
Beta:0.95   

*Deutsche Bank forecasts; £1=€1.09