Unloved by investors during the pandemic British Airways owner International Consolidated Airlines (IAG) has experienced a revival of fortunes due to strong consumer demand and holidaymakers paying higher ticket prices. Despite the ongoing cost-of-living crisis – people are still prioritising holidays.
In a recent full year trading update at the end of February, the airline group said it had restored 95.7% of 2019 capacity.
Passenger unit revenue for the year was 8.2% higher than in 2022 ‘with strong leisure traffic recovery and business traffic recovering more slowly’ although the premium leisure segment continued to perform ‘very well’.
Operating profits nearly tripled from €1.3 billion to €3.5 billion surpassing the previous record of €3.3 billion made by the company pre-pandemic in 2019.
The group, which also owns Spain’s Iberia and Ireland’s Aer Lingus, has a positive outlook for 2024 and is generating significant free cash flow.
We don’t think this improving picture is reflected in an extremely grudging price to earnings ratio of just 4.5 times based on 2024 consensus forecasts.
IMPROVING SENTIMENT
The airline group is at least getting a more sympathetic hearing from the analyst community. Analyst James Hollins from French investment bank BNP Paribas recently observed the company had: ‘Fixed our bear thesis; leverage is down. British Airways is improving, Iberia is at record strength, shareholder returns are resuming, Heathrow is full again and core wage deals are fixed mid-term.’
Savi Syth, analyst at US investment bank, Raymond James highlights: ‘IAG’s greater exposure to favourable trends in the transatlantic and intra-European markets, improving competitive capacity set up, and opportunity to initiate cash returns to shareholders.’
The company has adapted to and acknowledged the post-pandemic realities of flying in Europe grabbing a high share of transatlantic traffic and offering premium leisure travel to consumers.
It is making improvements to its service which could help it maintain and grow its market share. There is planned investment in areas including a digital concierge service, WhatsApp text assistant and call-centre Smart Voice assistant.
There will also be touchpoints across the airport journey, better digital self-service in disruption and digital assistance in the customer care channel.
British Airways customers will benefit from increased in-flight entertainment and a premium proposition across its cabins. The airline is also going to further develop its call centre in Delhi using better IT and systems and an initiative-taking care team.
WORST IS OVER
Analyst Nicholas Mauder of Kepler Cheuvreux no longer believes the airline operator will see a passenger yield decline this year. Passenger yield is an important metric for the airline sector – it shows the average fare paid per mile or kilometre, per passenger.
Mauder has significantly increased his EBIT (earnings before interest and taxation) estimate for 2024 to €3.74 billion.
Mauder says the company has the cleanest unit cost outlook among its counterparts. He adds: ‘Our (significantly increased) estimates are above consensus, and an eventual share buyback could be the catalyst the market needs to acknowledge the value we see in IAG shares.’
FUEL COST WORRIES
The main sticking points for the company are slower than expected recovery of business travel and ongoing volatility in the cost of fuel.
In the recent annual results, the company noted fuel unit costs were up 0.7% versus 2022, however the group’s investment in more fuel-efficient aircraft should help offset increased costs of emissions trading schemes.
The airline is 92% booked for the first quarter of 2024 and 62% booked for the first half of 2024, ahead of last year on both measures.
The company plans to grow capacity by around 7% in 2024 and rebuild its pre-pandemic long haul capacity and grow Iberia in the attractive Latin American market.
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