IAG invests in BA and Spain to become even more profitable

International Airlines Group (IAG) is launching a new transformation program that should improve the efficiency and resilience of all its airlines, result in sustainable operating profits, produce world-class margins, and deliver higher customer satisfaction. IAG will adopt the successful transformation strategy of Iberia, which resulted in a drastic improvement in results in the past decade, IAG said on Tuesday during its Capital Markets Day in London. IAG, which includes British Airways, Iberia, Aer Lingus, Vueling, and LEVEL, has recovered strongly from the pandemic. It produced a €1.745 billion operating profit before exceptional items in the third quarter with a 20.2 percent operating margin. The 9M operating profit was €3.005 billion, with an operating margin of 13.5 percent. It has a strong balance sheet with a net debt/EBITDA ratio of 1.4 times. But IAG wants to do better to maximize shareholder returns. It outlined a four-step transformation strategy today that includes the structure and business model, the network and customer proposition, efficiency, and innovation, and making sure the airlines have a world-class team. All businesses should transform to reach their full potential in the long term. Group CEO Luis Gallego outlined the medium-term financial targets: an operating margin of 12-15 percent, a return on invested capital of 13 to 16 percent, a net debt/EBITDA ratio of 1.8x, and the commitment to pay dividends once the balance sheet and investment plans are secure. Capacity as in available seat kilometers (ASK) should grow 4 to 5 percent year on year. IAG also commits to its net zero target for 2050, with interim steps built in like an 11 percent fuel burn improvement in 2025 versus 2019 and the use of 10 percent sustainable aviation fuels (SAF) in 2030. British Airways While the transformation looks at all of IAG’s airlines, British Airways and the Spanish airlines Iberia, Vueling, and LEVEL plus eventually Air Europa get special attention. Including the fleet plans, IAG will invest £7 billion in British Airways between 2024 and 2026. It wants to invest in BA to further strengthen its position at the three London airports Heathrow, Gatwick, and City Airport, and improve its premium proposition and operational efficiency with a double-digit improvement in on-time performance. The airline will invest £100 million in improved schedule planning and fleet management systems. BA also wants to become more colleagued centered. There will be a global refurbishment of airport lounges, a new dedicated Club check-in zone at London Heathrow’s Terminal 5, and the introduction of enhanced digital applications with the re-launch of an updated BA app next year. Roll out of the new Club Suite across the fleet will be completed, while the inflight entertainment will get double the content. Crew will get new uniforms and new digital tools and the customer contact center will see new telephone systems and more AI. Following various IT issues in the past years, IAG already committed to beefing up the IT infrastructure. It says now that it will further modernize the technical infrastructure by replacing 645 older systems and 10.600 servers by 2025, becoming 95 percent cloud-based. Combined, the transformation should deliver higher margins and better returns. Spanish profits IAG targets growth in the operating profit of its Spanish airlines Iberia and Vueling to €1.5 billion. Iberia CEO and Chairman Fernando Candela referred to the transformation of his airline between 2012 and 2023, in which it turned around a €-350 million EBIT into a €821 million EBIT for the year to date and improved non-fuel costs. The Spanish carriers will be subject to what Candela called forensic governance and oversight at the group level. Numerous initiatives are planned to improve revenues, costs, and operations. Iberia is ahead of BA as it has already introduced various digital initiatives to improve the customer journey as well as cabin products like the new Business Class. Vueling already improved this year after adapting its network to become less dependent on traffic in the summer season. It is now one of the best-performing low-cost carriers in Europe, but the management is still in tough discussions to conclude new collective labor agreements. Once concluded, they will “unlock growth opportunities.” Digital is also prominently in Vueling’s dictionary. A large part of the profit growth must come from the markets in Latin America, where Iberia has traditionally been strong. This was confirmed during the pandemic when Iberia produced better results than its sister airlines. Growth opportunities exist in Brazil, which is an almost untapped market for Iberia. Long-haul low-cost subsidiary LEVEL wants to develop its Barcelona hub and generate profitable growth. LEVEL will grow the fleet from five aircraft this year to eight in 2026. The integration of Air Europa will further strengthen the Spanish airlines, as it has a very strong share of the routes to Latin America and particularly Brazil. The acquisition for €500 million is still in the pre-notification phase with the European Commission and is expected to close only in the third or fourth quarter of 2024. While given less priority than its sister airlines, Aer Lingus also continues to invest in product improvements. These are visible as the updated aircraft cabins, but also as new digital products. IAG also aims for what it calls capital-light earnings growth from the Loyalty program. With new ventures and increased revenue penetration, the airline groups want to drive customer loyalty and generate more cash. This should grow further thanks to the extensive data that IAG Loyalty generates for future developments. Already, Loyalty generates 65 percent more profit than in 2019. Loyalty has now 40 million members and welcomed two million so far this year, the highest-ever growth in a single year. The advantageous geographical location of Ireland and the Iberian peninsula plays into the hands of the Airbus A321XLR, of which 14 have been purchased by Aer Lingus and Iberia. The Irish carrier expects to take delivery of the first aircraft in Q4 2024. Thanks to the 8.700-kilometer range of the XLR, Aer Lingus can penetrate deep into the US while Iberia can cover the Northeast of the US. The aircraft promises 18 percent lower costs per seat and a 20 percent higher operating margin compared to the Boeing 757. This year, IAG expects to introduce 31 new-generation aircraft into the fleet. This should be 34 in 2024, growing to 58 by 2028 as deliveries of Airbus A320neo family aircraft, Boeing MAX, 787s, and 777-9s get into full swing. Together with the use of SAF and operational efficiencies, IAG expects to reduce carbon dioxide emissions to 70 grams per equivalent passenger kilometer in 2030 versus 91 in 2019.

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