Bloomberg News

BA-Iberia Tap U.S. Pickup to Outdo Air France-KLM, Lufthansa

July 29, 2011

(Updates with comments from CEO starting in 13th paragraph, further increase in share price in fifth.)

July 29 (Bloomberg) -- International Consolidated Airlines Group SA, formed from the January merger of British Airways and Iberia, tapped a rebound in U.S. business travel to post a second-quarter profit that outperformed European competitors.

IAG had an operating profit of 190 million euros ($272 million), versus a 71 million-euro year-earlier loss, the London-based company said today. Analysts had expected earnings of 166 million euros, based on the average of four estimates.

Air France-KLM Group and Deutsche Lufthansa AG, Europe’s two biggest airlines, tumbled yesterday after missing profit predictions as fuel costs surged and crises in the Middle East and Japan sapped demand. IAG, the No. 3, reiterated today that it expects significant growth in operating profit as it wins market share on U.S. routes through an alliance with American Airlines and merger savings help counter high kerosene prices.

“It’s steady as she goes,” said Andrew Fitchie, an analyst at Investec in London. “They are ticking all the boxes and doing the right things in a difficult and challenging environment. It’s quite confident compared with Lufthansa and Air France.”

Shares Gain

IAG rose as much as 2.4 percent and was trading 2.1 percent higher at 237.5 pence as of 11:59 a.m. in London, where the company is based, making it the third-best performer on Britain’s benchmark FTSE-100 Index.

“Looking at the financial reports of some of our competitors it would appear that we are doing slightly better,” IAG Chief Executive Officer Willie Walsh said on a conference call. “The environment in London is probably somewhat better than the rest of Europe. Our premium-traffic performance has been very strong, particularly in the long-haul area.”

Air France slumped 8.1 percent yesterday following a 145 million-euro second-quarter loss, while Lufthansa closed 2.8 percent lower after earnings of 230 million euros failed to meet a 325 million-euro target. Singapore Airlines Ltd. figures also fell short last night and the stock traded 3.3 percent lower.

IAG shares are down 18 percent since Jan. 22, valuing the company at 4.32 billion pounds ($7 billion). Lufthansa has lost 14 percent and Air France-KLM has tumbled 37 percent.

U.S. Growth

The merged company is tapping a rebound in bookings for corporate travel, especially between BA’s London Heathrow hub and New York. The alliance with AMR Corp.’s American Airlines after the companies won antitrust immunity last year has also spurred sales, while the carrier kept a lid on capacity, buoying average fares as quarterly fuel costs jumped 32 percent.

IAG’s passenger traffic rose almost 11 percent in the first six months, led by a 16 percent gain on routes to North America. Capacity climbed 10 percent, so that the load factor, a measure of occupancy, increased 0.2 percentage point to 76.9 percent.

The carrier said its long-haul business is stable, with “strength in the premium sector,” and the melding of trans- Atlantic schedules between BA, Iberia and American is beginning to grab market share, Walsh said today on the conference call.

“We’ve had a number of early achievements with aligning the schedule on New York to Heathrow,” he said. “We’re clearly gaining premium market share, which is one of the objectives that we had set. Having a trilateral relationship can be difficult, but my assessment is that it’s definitely positive.”

Iberia ‘Issues’

There is further scope to grow volumes in business- and first-class cabins, Walsh added. Second-quarter revenue rose 20 percent from a year earlier to 4.14 billion euros.

Responding to questions on a call with analysts, Walsh said he’s aware of “structural issues” at Iberia that need to be addressed, without elaborating. Since IAG’s creation it has formed a single cargo business, introduced integrated sales and airport teams and achieved savings through joint procurement in areas including insurance and ground handling, the CEO said, with non-fuel costs declining 5.8 percent in the quarter.

The carrier said it may be tougher to claw back kerosene expenses that are expected to rise by one-third to 5.2 billion euros for the year as the hedged price converges with spot rates and the European economic outlook remains unclear. The European short-haul market also remains “highly competitive,” Walsh said.

IAG recovered 50 percent of the first-half fuel-bill increase through “revenue initiatives” including surcharges.

Fewer Frequencies

Walsh said IAG will slow fourth-quarter capacity growth to 6 percent from a slated 7.6 percent by cutting frequencies on some routes. While the carrier will continue to evaluate winter seating, the CEO said he’s otherwise “comfortable” with the plans and “pleased to see some competitors taking capacity out.”

Air France-KLM said yesterday it will pare the increment in winter seating from 5.1 percent to 2.7 percent. Lufthansa’s main-brand airline will trim growth to 6 percent from 12 percent and other units are also revising their expansion plans.

Global passenger growth slowed to 4.4 percent in June from 6.8 percent in May, the International Air Transport Association said yesterday. IATA, which predicts a 78 percent drop in industry income this year to $4 billion, a 0.7 percent margin, blamed the slowdown on fuel costs, the economy and higher taxes.

--Editors: Chris Jasper, Chad Thomas.

To contact the reporter on this story: Steve Rothwell in London at srothwell@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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