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International Airlines Group is one of the world's largest airline groups, with a fleet of 573 aircraft, operating 256 destinations and carries around 95 million passengers. The following airline brands are part of IAG: Aer Lingus; British Airways; Iberia; Level and Vueling. It is a Spanish registered company with shares traded on the London and Madrid Stock Exchanges and is part of the FTSE 100 Index.
We were delighted to welcome Stuart Morgan, Head of Investor Relations, to the latest Yellowstone Advisory webinar to provide an update on performance and prospects following the recent Q3 results and Capital Markets Day. A recording of the webinar is available here.
The group strategy is broadly the same as it was pre covid and has three pillars: To grow their global leadership position in the strong hubs of Dublin, London, Madrid and Barcelona; to strengthen their portfolio of World Class Brands & Operations and ensure the customer propositions are increasingly strong; and, to grow IAG loyalty, a high growth, capital light business. In the medium term the ambition is to create a sustainably profitable business with 12-15% operating margins and 13-16% ROIC. In addition the company targets 4-5% growth in Available Seat Kilometres (ASK) and to maintain leverage below 1.8x (ND/EBITDA) through the cycle. If they can hit these targets the company should be able to deliver strong shareholder returns via a combination of EPS growth, ordinary dividends, share buybacks and special dividends. An interim dividend was announced in August 2024 and a share buy back followed the recent Q3 results.
The financial performance in the third quarter delivered revenue growth of 7.9%, operating profit growth of 15.4% to €2,013m, a record for the group and an increase in the operating margin to 21.6%. Apart from Ryanair, the company believes they are the most profitable airline business in the World. Combined the company generated significant free cash flow and enabled them to announce a €350m share buyback, which should take up to results in 2025 to complete. At that point the company will update the market on the capital allocation policy going forward. Demand remains strong in all core markets and the company expects their strong financial performance to continue for the rest of the year.
The improvement in Q3 profitability mainly came from growth in passenger revenues but there were also positive contributions from cargo and loyalty. There was a negative contribution from the increase in nonfuel costs. In terms of brands, British Airways showed the biggest increase in profits while Aer Lingus profits declined, impacted by industrial action and increased competition in Dublin.
Looking at the KPI’s, capacity increased by 5.7%, which is marginally less than had been hoped for, unit revenues were up 1.2%, non-fuel costs rose 2.2% broadly in line with guidance. The standout performance was the margin increase to 21.6% and Net Debt to EBITDA fell to 1x. Leverage might increase slightly going into the end of the year due to the seasonal working capital flows.
By airline, Aer Lingus didn’t perform as well as last year but still had a healthy margin of just under 19%. British Airways added €250m to profits and grew margins to 20.7%, Iberia maintained their margin above 21% and Vueling improved their margin to an incredible 26.9%. Vueling is strong out on Barcelona, Gatwick and Orly. IAG loyalty remains an important contributor to profits and increased margin slightly to 17.9%.
In terms of geographic markets, the North Atlantic region grew 3.9% and was a particularly strong market. British Airways has experienced strong demand as competitors have allocated resources directly to Southern Europe. Latin America added over 10% to capacity and going forward this is viewed as an attractive growth opportunity as some competition has disappeared. Europe experienced very strong demand, especially in the third quarter while Asia Pacifica experienced good growth as routes were restated to pre covid levels but demand from China was particularly weak. The other issue which impacted Asia Pacific is to get to China you need to fly around Russia which increases fuel costs and crew costs.
In terms of the Q3 financials, PAT increased to €2,340m in the 9 months. This was after a €50m break fee charge incurred in the period after regulators prevented an acquisition from completing. The balance sheet looks very strong with net debt falling to €6,189m and ND/EBITDA falling to 1x. Capex for the year will likely fall a little due to phasing of IT investments and the delivery of aircraft is likely to slip due to problems at Boeing, Airbus, Rolls Royce and GE. That said 20 aircraft will still be delivered this year.
The Capital Allocation framework was outlined last year and good progress has been made in this area. The number 1 priority is a strong balance sheet and leverage at 1x is now below the 1.8x through cycle target (a proxy for investment grade financing). Next comes investing in the business to remain competitive (fleet, lounges, digital, apps, commercial platforms), after that comes the dividend where expectations for the FY are approximately 2x the interim payment of €0.03. Finally the strong balance sheet has enabled further shareholder returns through a €350m buy back. The Capital allocation framework is going to be reviewed with the FY results in March in light of the strong cash performance.
Last year the margin came in at c12% and this is expected to increase driven by the BA margin improving from 10 to 15% - a level previously achieved in 2018/19, leveraging the Spanish platforms which are more profitable businesses now and growing the capital light loyalty program by 10-15% a year.
Looking at the core markets, North America is the largest long haul market from Europe and IAG is the number one operator with 58% of capacity between London and the US. Latin America is an increasingly attractive market, especially from Spain and is developing strong demand characteristics. Finally, within Europe, domestic Spain is the number 1 market and IAG is particularly strong in this area.
In terms of operating metrics there has been a big focus and improvement in punctuality performance across all the airline brands driven by more efficient operations. Improved punctuality drives better customer satisfaction. There is also investment going into customer experience with different focuses across the brands. Aer Lingus is investing in TSA pre-checks, BA is investing in lounges and club suites, Iberia is investing the customer propositions at airports and Vueling is focussed on improving the digital experience.
IAG loyalty is looking at more ways to earn Avios points through airlines and non-airline partners and to create more opportunities to use Avios points. BA holidays are going to be added into the loyalty system and the company thinks there is a huge opportunity here.
The strong performance hasn’t been at the expense of the company sustainability goals where further progress has been made. The key things are the increase in Sustainable Airline Fuels (SAF) which needs to account for 6% of all fuels used by 2030 and on a European basis needs to be 10%. SAF is 3x the cost of jet fuels so there is a big push to increase capacity to bring the price down.
In terms of the outlook for 2024, growth has been impacted by the availability of engines and aircraft and so capacity growth for 2024 is likely to come in at 6%. Fuel prices have been volatile but have declined through the year and are expected to provide a positive impact on profitability. Overall the strong performance YTD in 2024 is expected to continue for the rest of the year.
In summary, the company expects positive long term, sustainable demand for travel and this provides a great tail wind to a strong future performance. Post covid travel has rebounded quickly and has been very resilient and this is expected to continue. Execution of the transformation program which looks to improve all aspects of the business to deliver world class margins and returns remains a core focus. The company will continue to operate a disciplined capital allocation to ensure the strong cash flows are translated into a strong balance sheet, investment in future growth and attractive shareholder returns. The share price is up almost 70% over the past year and judging by the strong performance across many metrics this is thoroughly deserved.
A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com
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