IAG Rides Transatlantic Strength to Robust Summertime Profits

Photo credit: Iberia and Vueling planes at the Madrid airport Flickr / vic_206

International Airlines Group and Air France-KLM pleased investors Friday with strong summertime profits that show no signs of fading this fall, even as macroeconomic and cost headwinds intensify. Both carriers echoed many of the broad trends currently defining the airline industry, including strong travel demand and extremely strong pricing but also rising costs.

IAG produced a 16.5 percent operating margin for the peak summer quarter, down from 19.5 percent in the same quarter of 2019. Prior to the pandemic, the group had become one of the world’s most profitable airlines, a status it hopes to recapture now that the crisis has waned. That 16.5 percent figure was indeed among the best of all airlines reporting so far, and better than what Air France-KLM and the Lufthansa Group reported.

Key to full-year European airline success, however, is not merely making big profits in the summer but also avoiding big losses in the winter. Encouragingly for IAG, it’s guiding investors to expect a $400 million operating profit in the current October-to-December quarter, which would bring full-year profit to roughly $1.1 billion. For all of 2019, IAG’s operating profit was $3.7 billion — this year’s results will include the drag from earlier months, prior to the strong rebound in demand this summer.

In the fourth quarter, only Aer Lingus will be back to pre-Covid capacity levels. Other IAG airlines, namely British Airways, Iberia, Level, and Vueling, will still be flying less capacity. British Airways’ capacity will reach just 80 percent of 2019 levels, held down by London Heathrow’s capacity limitations and exposure to shuttered East Asian markets. British Airways is, however, restarting two key Asian routes — Hong Kong and Tokyo — with executives saying that the Hong Kong route is booking well.

Largely because of its Heathrow constraints and Asian exposure, British Airways was the worst performing of IAG’s four big airline brands in the third quarter, with an operating margin of 12 percent. Vueling, a highly seasonal airline that typically runs up its margins in the summer, came in at 25 percent. Aer Lingus, which is also highly seasonal, was 25 percent and Iberia 15 percent.

For IAG collectively, financial performance is heavily influenced by developments across the transatlantic. Rivals Air France-KLM and Lufthansa are major market players too but not nearly as dependent on it as IAG. That dependence is a plus right now, with both North Atlantic and South Atlantic markets extremely strong from a demand and revenue perspective. That’s even true from European points of sale, IAG executives said, despite what currency movements would suggest. Strength was evident for premium and non-premium segments. Management also affirmed what many other airlines have been saying this earnings season: That people are increasingly combining their business and leisure trips, a phenomenon facilitated by remote working and flexible office hours.

Supporting IAG’s results was strength in several key business units, most notably loyalty — including money earned from mileage sales to credit card partners — and BA Holidays. Cargo, though still producing much higher revenues than in 2019, accounted for just 5 percent of company revenues. The pandemic-era cargo bonanza, in any case, seems to be coming to an end. “Demand is beginning to soften and world trade has begun to lose momentum in the second half of 2022,” IAG CEO Luis Gallego said during the company’s third-quarter earnings call.

Also featured during the call were mentions of some key IAG marketing initiatives, including the rollout of new premium seats at British Airways and Iberia, their move into American Airlines’ terminal at New York JFK airport later this year, and the expansion of British Airways joint venture with Qatar Airways. Management separately said forward bookings look good for both longhaul and shorthaul routes, except for Asia which is still lagging. Premium leisure travel looks as good as it ever did, and business travel is recovering. Some labor questions remain outstanding, one being whether British Airways’ pilots will vote to approve a new tentative contract agreement.  

IAG likes to call itself a champion of European consolidation. But it’s not done. It still wants full control of Spain’s Air Europa, which would consolidate its grip on the Europe-Latin America market. IAG currently owns a 20 percent stake, with the possibility of greater control subject to negotiation with Air Europa’s owner, the Spanish tourism company Globalia. A full takeover would also need the blessing of European Union antitrust regulators, hardly a slam dunk.