The British Airways group IAG is flying high again with its financial performance significantly ahead of both what the City was expecting for 2023 and in comparison to 2019, the last year before Covid-19 travel restrictions.
Although business class passengers have been slow to return to the air after the pandemic, the group reported strong leisure demand, especially among holiday travellers willing to pay extra to sit in the roomier premium economy cabin.
The group reported “strong and sustained demand” and said that its planes flew 3.5 percentage points fuller last year at 85.3 per cent. Revenue per passenger kilometres flown, a proxy for air fare inflation, grew 27.8 per cent.
IAG, or International Consolidated Airlines Group, is made up of BA, which accounts for nearly half the business, the Spanish airlines Iberia and Vueling, and the Irish flag carrier Aer Lingus. It operates 582 aircraft, 193 of them on long-haul routes where the group has premier positions across the Atlantic to the US and Latin America. It is a member of the FTSE 100.
For 2023 it reported group revenues of €29.4 billion, 15 per cent higher than in 2019. On its preferred earnings comparison, it reported operating profits before exceptional items of €3.5 billion compared with €3.2 billion four years previously, at a historically strong profit margin of 11.9 per cent.
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At the pre-tax profit and after-tax earnings per share level, the City had reckoned that IAG would report €2.8 billion and 43 euro cents a share. In the event, it came in at €3 billion and 50 euro cents a share.
The company said it would reconsider the restart of dividend payments to shareholders only when the repair of its balance sheet was complete after the heavy borrowing to keep the engines running during the pandemic. Its net debt stands at €9.2 billion compared with €7.5 billion before the arrival of Covid-19.
It said that in 2024 it finally planned to get back to carrying more passengers than in pre-Covid times, having been held back by British Airways, for which the return of routes to Asian markets has been slow. In 2023 IAG’s airlines carried 115 million passengers; in 2019 that figure was 118 million.
“Demand continues to be robust, with particular strength in leisure travel,” the company said in a statement. “We are currently 92 per cent booked for the first quarter of 2024 and 62 per cent booked for the first half. We plan to grow capacity by circa 7 per cent in 2024. In particular, British Airways will continue to rebuild to its pre-Covid-19 long-haul capacity and Iberia to grow efficiently in the attractive and growing Latin American market.”
Despite the strong results and a bullish outlook, shares in IAG continued to be stuck in a low-rated holding pattern. Having traded in a narrow margin over the last 12 months, the stock price has shown no gains.
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That compares to strong recoveries in the share prices of the European short-haul carriers Ryanair and easyJet.
However, IAG’s European peers Lufthansa and Air France-KLM have both seen their shares fall by at least 25 per cent over the past year. Even its US rivals are having a tough time on the stock market, with American Airlines down 4 per cent and United Airlines 14 per cent over the past year.
IAG shares closed down 3.6 per cent, or 5½p, at 147¼p.
Luis Gallego, who replaced Willie Walsh as IAG chief executive during the pandemic, said he did not believe the slow return of corporate customers was to blame for investors turning their back on the airline group.
He said that corporate passengers were currently at 70 per cent of pre-pandemic levels but as their employers are prepared to pay the elevated fares being charged, revenues from business passengers had recovered to 85 per cent.
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Pointing to the strong profits reported for 2023, Gallego said: “These are excellent results with just 70 per cent of corporate traffic.” He said of an expected acceleration in the return of business passengers: “Corporate traffic is higher yielding. The results will then be even better. It is all potential upside.”
The stock that isn’t flying
Strong demand, fare inflation, revenue growth and cash inflows, profits better than they were before the pandemic and the debt mountain taken on during the Covid crisis now coming down. And yet the IAG share price, which has flatlined for most of the last year, barely stirred and even fell in later trading.
At around the 150p mark IAG is trading on just three and a half times its 43p of earnings for 2023. By any benchmark that is a very low rating.
When IAG executives are asked why this might be, the answer is: “That is a very good question,” without any further elucidation.
For analysts, and even those who believe the stock is a raging buy, there are various issues that may dissuade investors from acquiring shares.
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These include the fact that war, especially the current multiple conflicts, is never conducive to getting people flying; in a time of recession, there are doubts that consumer demand will hold up, especially at the elevated fares being charged; high-yielding corporate passengers have failed to return in large enough numbers; doubts that a £7 billion makeover of British Airways can repair the trust lost under the group’s previous regime; and increasing competition over the Atlantic, which is the group’s major market.
And at £16 billion IAG still has a huge amount of gross borrowings, with no sign yet of a return of the dividend.
