Bloomberg News

British Airways Parent IAG Doubles Profit on Spanish Reforms (2)

November 08, 2013

Iberia Logo

The new logo of Iberia, a unit of International Consolidated Airlines Group SA (IAG), sits displayed outside the airline's headquarters in Madrid. Photographer: Antonio Heredia/Bloomberg

British Airways parent International Consolidated Airlines Group SA (IAG) doubled third-quarter earnings and lifted the full-year outlook as it squeezes value from Spanish arm Iberia and the U.K. unit taps a trans-Atlantic boom.

IAG had an operating profit of 690 million euros ($925 million) before one-time items, versus 270 million euros a year earlier, Europe’s No. 3 airline group said today in a statement. That beat the 651 million-euro average estimate of four analysts.

Chief Executive Officer Willie Walsh is seeking more than 3,100 job cuts as he makes a Spanish turnaround central to his strategy. Iberia’s operating profit jumped to 74 million euros in the quarter from 1 million euros, while Barcelona-based discount carrier Vueling, of which London-based IAG recently took full control, made a 139 million-euro contribution.

“Progress and strength were across the board,” James Hollins, an analyst at Investec Securities in London, said in a note. “We were premature moving from ‘buy’ to ‘hold’ in August and the group is outperforming our short-term expectations.”

IAG advanced 5.7 percent, the biggest jump in three months, and was trading up 18.9 pence or 5.4 percent at 367.9 pence as of 9:28 a.m. in London.

Top Performer

The stock has exactly doubled in price this year, valuing the company at 7.52 billion pounds and eclipsing rivals Air France-KLM Group (AF), which has added 2.9 percent and has a market capitalization less than one-quarter that of IAG in dollar terms, and Deutsche Lufthansa AG (LHA) of Germany, which is barely changed.

Air France-KLM and Lufthansa, Europe’s biggest airlines by passenger traffic, said Oct. 31 they were struggling to reach earnings goals as a stronger euro and sluggish economic growth undermine the benefits of their savings programs.

IAG is also worth $2 billion more than Ryanair Holdings Plc (RYA), Europe’s top discount carrier, which on Nov. 4 predicted its first profit drop in five years as competition crimps fares.

Still, Madrid-based Iberia must continue to restructure, Walsh said on a conference call, adding that “further improvements in productivity will be necessary to ensure that we have an airline that is viable, profitable and can pursue growth on a sustainable basis.”

The CEO said Oct. 22 he expects the unit to post a full-year profit in 2014 for first time since 2008, aided by a lower break-even point following the establishment of Iberia Express.

British Airways had a three-month operating profit of 477 million euros, up from 268 million euros a year earlier, aided by strong demand on its key trans-Atlantic routes.

Vueling Growth

IAG’S European network produced a “good performance,” overall, according to Walsh, with Iberia paring unit costs after capacity cuts, though he said more work to reduce expenses is needed and that talks are continuing with unions to achieve that.

“The current restructuring proposals don’t go far enough to provide us with the basis for investment for future growth,” said Walsh, who has curbed Iberia fleet growth compared with BA.

Discount operator Vueling can expect “further opportunities” as former flag-carrier airlines continue to restructure, leaving gaps in the short-haul market, he said.

Vueling delivered the group’s strongest operating margin for the third quarter at 25 percent, almost double the BA figure of 12.8 percent and four times Iberia’s 6.2 percent.

IAG returned to providing guidance on earnings -- suspended while it awaited shareholder backing for $17 billion of plane purchases -- saying it expects to post an operating profit of about 740 million euros this year as Walsh targets earnings of 1.6 billion euros in 2015. It said previously that the 2013 figure would at least equal 2011’s 485 million euros.

Volume Focus

The CEO said the group should be profitable at a “low level” in the traditionally weak fourth quarter.

Exchange-rate fluctuations “had a big impact” in the third quarter, Walsh said, with a net effect of 42 million euros as the headwind on revenue more than offset cost benefits.

British Airways began operating Boeing Co. (BA:US)’s 787 Dreamliner and the Airbus SAS A380 superjumbo in the third quarter as it seeks to phase out higher fuel-burn 747 jumbos. New routes at BA mean the driver for sales growth will shift from yield -- a measure of pricing -- to volume in 2014, according to IAG.

Investec’s Hollins said the emphasis on adding seats at a company that’s benefitted from a period of capacity constraint across the industry gives “some cause for concern.”

IAG is evaluating Boeing’s new 777X wide-body, which would be of interest to both British Airways and Iberia, said Walsh, who has been briefed on the jet by Ray Conner, CEO of the U.S. company’s commercial aircraft division.

The long-range plane, which Cologne-based Lufthansa has already agreed to buy, will have worldwide interest and provides an incentive for rival Airbus to improve its product, Walsh said.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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