IAG sees solid double-digit margins for all airlines

Like Air France-KLM, International Airlines Group (IAG) can look back on a strong Q3 and has produced even better results than the French-Dutch airline combination. All of IAG’s airlines except Vueling reported double-digit revenue growth, with British Airways finally catching up to meet the results of its Spanish sister airline Iberia. At 26.2 percent, Vueling produced the highest operating margin of all IAG airlines. IAG ended Q3 with a €1.230 billion net profit, up 44.2 percent from €853 million in the same quarter of 2022. Total revenues grew 18 percent to €8.646 billion from €7.329 billion. Passenger revenues from 33.3 million passengers were up by 20.5 percent to €7.733 billion from €6.416 billion. “Sustained demand across our network has driven significant positive revenue performance across all our airlines. The very good unit revenue trend from earlier this year has continued for the quarter and was up 25 percent on Q3 2019 and up 2.2 percent against a very strong third quarter in 2022,” said CEO Luis Gallego. Domestic produced the highest growth of revenues per passenger kilometer at 8.8 percent, ahead of Europe at 6.3 percent, Latin America at 2.8 percent and North America at 0.6 percent. Other revenues improved to €640 million from €540 million. Cargo saw a 29.5 percent drop in revenues to €263 million, although yields are still 20 percent higher than 2019 levels. Operating expenses were up by 12.9 percent to €6.901 billion, with increases on all items including staffing costs, handling costs, and fuel. This resulted in an operating profit of €1.745 billion versus €1.218 billion in Q3 last year. The operating margin was 20.2 percent. IAG reported a €1.3 operating profit for HY1. Checking the 9M results, IAG reported a €2.151 billion net profit, up from €199 million in January-September 2022. Total revenues grew by one-third to €22.229 billion, of which passenger revenues from 87.5 million passengers to €19.518 billion, up 39.2 percent. Expenses were up by 21.1 percent to €19.224 billion, resulting in an operating result of €3.005 billion versus €801 million last year. Capacity up except at Vueling IAG airlines increased capacity by on average 17.9 percent in Q3 and are now back at 95.6 percent of pre-pandemic levels. Capacity grew at all airlines except Vueling, where capacity was slightly down and kept at 2019 levels as negotiations for a new collective labor agreement with pilots continue. All airlines saw very strong demand for leisure travel, with premium leisure cabins doing very well at British Airways and Iberia. British Airways saw the highest capacity increase at 24.6 percent as it brought back capacity to the Asia Pacific region. This could have been higher without the outage at NATS air traffic control in London in August. Thanks to very strong leisure demand, revenues grew by 20.3 percent to €4.048 billion. BA produced an operating profit of €617 million, up €205 million on Q3 last year, resulting in an operating margin of 15.3 percent. BA Euroflyer at Gatwick continues to grow the network and will expand the fleet from nineteen aircraft now into next summer. Aer Lingus reported an operating margin of 25.5 percent, an operating profit of €196 million versus €139 million, and revenues that were up 16.4 percent to €769 million. The carrier did well in the US premium market, resulting in record load factors in the business cabins. Capacity grew on both short-haul and long-haul but suffered from ATM congestion in Dublin and in Europe, which affected operations. Iberia built on a strong second quarter. The operating margin was up eight percent to 23.1 percent. Revenues were up 18.8 percent to €1.943 billion, while the operating profit was €449 million, up from €255 million. These numbers include those for long-haul low-cost subsidiary LEVEL. While business travel still lags behind by some eleven percent on a group level and will likely not recover at BA until 2026, Iberia is already seeing corporate demand almost back at pre-pandemic levels. Routes to Latin America are performing well and see good aircraft utilization of the Airbus A350 fleet. CEO Luis Gallego was most pleased about the on-time performance of Iberia, one of the highest in the industry. Low-cost airline Vueling reported an operating profit of €282 million versus €259 million in Q3 last year. Revenues were up 5.9 percent to €1.081 billion. The operating margin was 26.1 percent, up 0.7 percent year on year and the highest of all IAG airlines. At 94 percent, the load factor was also the highest. Vueling is seeing positive effects from the transformation to grow load factors and ancillary revenues, which were €29 per passenger. Vueling’s capacity was down 0.1 percent, which is attributed to negotiations about new labor agreements. The airline has concluded one with cabin crew unions and hopes to announce an agreement with the pilot unions soon. IAG Loyalty reported 58 percent higher revenues to €355 million and an operating profit of €76 million. The program welcomed 1.3 million new customers during the quarter and saw the highest number of Avio transactions. Reducing debt Chief Financial Officer Nicholas Cadbury was pleased that IAG has continued to lower gross debt to €17.2 billion, which is down €2.1 billion year on year. Net debt is €8.0 billion, down from €11.1 billion in September 2022. Three years earlier than planned, British Airways repaid £200 million of a UKEF-backed loan facility that had unfavorable floating interest rates. IAG repaid €500 million in unsecured bonds in July. Together, this has reprofiled the debt repayment schedule and removed a peak in 2026. Liquidity stood at €13.7 billion, which gives IAG munition for future investments and acquisitions. Like Air France-KLM, IAG hasn’t given guidance for its financial metrics for A4 and the full year, nor for 2024. Gallego only said that he expects a strong recovery of the operating profit, margins, and balance sheet. Q4 bookings are progressing according to plan, with 75 percent of revenues already booked. All airlines will operate above 2019 capacity levels in Q4, but full-year capacity will stay at 96 percent as the effects of previous restraints and disruptions are taken into account. Gallego said that IAG continues the pre-notification phase with the European Commission for the acquisition of Air Europa. “We are engaging with a potential partner for remedies. We still think the operation will take around eighteen months and should be concluded in the last quarter of next year.” GTF issues hurt Vueling The powder metal contamination with the Pratt & Whitney Geared Turbofan is affecting only the Spanish airlines within IAG. Vueling has 29 Airbus A320neo family aircraft with engines that need replacement of the affected parts, Iberia three. This is less than ten percent of IAG’s narrowbody fleet, but still is a fair number within Vueling. Still, GTF repairs will not have an impact on capacity at Vueling for 2024, although Gallego said that there will be consequences in the winter season of 2024/2025. Discussions with P&W continue about how to mitigate the effects of life-limited engines in the coming three years and about financial compensation. IAG expects to take delivery of ten more aircraft in the final quarter, which will bring total deliveries in 2023 to thirty aircraft. It received twelve narrowbodies and eight widebodies in the first nine months for BA and Iberia. IAG placed orders this year for six Boeing 787-10s for BA and one Airbus A350-900 for Iberia. In June, IAG converted options for ten A320neo's into firm orders.

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