The third quarter has been an ‘inflection point’ for International Airlines Group (IAG). It has drastically reduced its operating loss by almost three quarters to €452 million and stopped burning cash. Its Spanish airlines performed best, with Iberia producing a net profit and Vueling breaking even. British Airways and Aer Lingus remain loss-making but at lower levels, the airline group said on November 5. IAG reaches inflection point and reduces losses.

The €452 million operating loss compares to €-1.923 billion for Q3 last year and to €1.0 billion in Q2 and €1.1 billion in Q1. The net loss after tax was €574 million versus €1.763 billion. Total revenues grew to €2.7009 billion from €1.217 billion, of which €1.999 billion from passengers and €405 million from cargo which continued to contribute strongly. The group operated fewer cargo only-flights itself but this was offset by more co-sponsored passenger and cargo flights. Other revenues improved thanks to BA holidays and loyalty programs.
The average capacity was 40 percent or down by 56.6 percent compared to 2019, while load factors improved to 69.1 percent compared to 51.8 percent in Q2.

Looking at the first nine months, IAG recorded a net loss after tax of €2.622 billion versus €-5.576 billion. The operating loss was €2.487 billion (€-5.975 billion), with revenues at €4.921 billion (€6.505 million). Cargo revenues for the period were up 28 percent to €1.174 billion while passenger revenues were down 35 percent to €3.140 billion.

Iberia less affected by travel restrictions

That IAG reached an inflection point is best illustrated by Iberia, which produced a €21 million operating profit in Q3 compared to a €252 million loss last year. The reason that the Spanish carrier was less affected by travel restrictions in Spain and on its routes to Latin America. Total revenues improved to €845 million, although still 46.8 percent down on 2019. The operating margin improved to 2.5 percent.

Low-cost Vueling ended Q3 break even compared to a €230 million loss last year. Revenues improved to €466 million and load factors reached eighty percent.

As it was still very much restricted by the UK travel bans, British Airways booked a €386 million loss, although it is a big improvement over the €1.020 billion loss for Q3 last year. Passenger revenues improved to €721 million, with total revenues up to €1.093 billion.

Aer Lingus also suffered from travel restrictions that banned all non-essential traffic until mid-July. The Irish carrier produced an €80 million loss compared to €-249 million in Q3 last year. Total revenues were €131 million.

IAG’s CEO Luis Gallego is very optimistic for the current fourth quarter and the outlook for 2022. The reopening of the US on November 8 has been highly anticipated, with long-haul bookings up from forty percent in July to almost 100 percent by the end of October. Corporate bookings also look strong. Capacity to North America will be restored to 100 percent next summer compared to 60 percent this winter and only 30 percent in Q3.

British Airways has planned a major restoration of its North American network from this month. It will bring back the Airbus A380 out of storage to operate on some key US routes. As the number of countries on the UK red list has been reduced to just seven now, BA expects to operate at 61 percent capacity this winter and to 90 percent in Q3 2022. Without its London Gatwick short-haul operations, capacity is capped at 96 percent. Asia-Pacific will lag behind as travel restrictions continue here. BA will recall all staff that has been on furlough to prepare for the ramp-up next summer and will hire additional staff if needed.

Green light for new Gatwick leisure airline expected soon

Gallego confirmed that BA is still working on a new low-cost airline with a separate Airline Operating Certificate (AOC) to be based at Gatwick. It is in negotiations with unions and the airport about completing the new carrier, which is intended to serve the point-to-point leisure market. Earlier this autumn, unions rejected the plan and BA took the new airline off the table, but CFO Steve Gunning said negotiations are progressing well now and should be completed in a few weeks.

Aer Lingus will restore capacity to fifty percent this winter and to 104 percent of 2019 levels by next summer. It has planned a major restoration of its North Atlantic network, starting services to New York and Orlando in December from its recently opened base in Manchester.

Iberia will grow capacity this winter to 77 percent and to 105 percent next summer but expects to have fully restored North American capacity by Q2. Latin America should be back at 85 percent in Q2 2022 as Argentina and Brazil are opening up.
Iberia is doing very strongly on premium leisure traffic, which has reached eighty percent in September compared to forty percent at BA. Spain’s ERTE force majeure furlough scheme supports Iberia until February but as Iberia ramps up its capacity it likely will not need to put staff on furlough after that.

Vueling will grow its network out of Paris Orly by 32 destinations.

Paris Orly to become Vueling’s growth market

Vueling tries to capitalize on the recovery in the Spanish domestic market, which is showing strong bookings at 90 percent. The focus from this month is on expanding Vuelings activities at Paris Orly, where it has won the eighteen daily slots that Air France had to release as part of conditions set by the European Commission on the French state aid program. Vueling will add 32 European destinations out of Orly to the current 22, strengthening its number two position at the Paris airport. Vueling will transfer four A320s to Orly that were stood down in December 2020, as a result reversing a previous €13 million exceptional impairment.

Long-haul low-cost LEVEL has operated at very limited levels so far and only out of Barcelona. It will ramp up capacity to nine percent this winter to 312 percent next summer as it resumes service on four North Atlantic routes.

In summary, IAG’s capacity will go from fifty percent in September to 68 percent in December as demand recovers, with Iberia and Vueling up to 75 percent. IAG expects to narrow its operating loss in Q4 and should produce a pre-exceptional operating loss of around €3.0 billion. With Boeing and Airbus struggling to meet delivery schedules, IAG’s capital expenditures will be down to €1.3 billion from the previously planned €1.7 billion. IAG has hedged its fuel by on average forty percent for 2022, down from seventy percent this Q4. It benefitted from a fuel hedging advantage in Q3 matched into the fuel consumption.

Jury still out on medium-haul fleet order

Speaking about aircraft, Steve Gunning said that nothing is decided on the order for medium-haul aircraft. IAG is still looking at the right fleet composition and the Boeing MAX, for which it signed a Letter of Intent for 200 in July 2019, remains part of the picture despite reports that the deal is off. Although he didn’t say, the group is now also reviewing the Airbus A320neo family.

Finally, IAG’s liquidity position has never been stronger before at €12.1 billion, up from €10.2 billion in June. The group and its individual airlines have arranged a set of financial transactions since the start of the year, including a $785 million EETC facility for BA in Q3. The UK Export Facility agreed on a £1.0 billion five-year credit facility for BA earlier this week. IAG’s net debt remained almost flat at €12.4 billion but up €2.4 billion since December.

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