British Airways Group IAG’s financial performance is significantly better than what City analysts expected for 2023 as well as compared to 2019, the year prior to the Covid-19 travel restrictions.
The group said that although business class passengers were slow to return after the pandemic the leisure market was strong, particularly among holiday travellers who are willing to pay more to sit in premium economy cabins.
The group said its planes were 3.5 percentage points more full last year, at 85.3%. Revenue per passenger kilometers flown (a proxy for inflation in air fares) grew by 27.8 percent.
IAG (or International Consolidated Airlines Group) is comprised of BA which represents nearly half the company, Iberia, Vueling and Aer Lingus, the Irish flag carrier. It has 582 aircraft. 193 are on long-haul flights, where it holds a leading position across the Atlantic in the US and Latin America. It is a FTSE 100 member.
It reported group revenues for 2023 of €29,4 billion. This is 15% higher than 2019. It reported an operating profit of €3.5 billion, compared to €3.2 billion, four years earlier, with a margin of 11.9%.
The City estimated that IAG’s pre-tax profits and earnings after tax per share would be €2.8 billion, or 43 cents each. In actuality, the company reported a profit of €3 billion with 50 eurocents per share.
The company stated that it would only reconsider resuming dividend payments once its balance sheet had been repaired after heavy borrowings to keep engines running throughout the pandemic. The company’s net debt is €9.2 billion, compared to €7.5 billion prior to the arrival of Covid-19.
British Airways’ slow return to Asian markets is holding it back. IAG’s airlines transported 115 million passengers in 2023; that number increased to 118 million in 2019.
The company stated in a press release that “Demand remains robust with a particular strength in leisure travel.” “We are currently 92% booked for 2024’s first quarter and 62% booked for first half. In 2024, we plan to increase capacity by approximately 7 percent. British Airways, in particular, will rebuild its long-haul capacity to pre-Covid-19 levels and Iberia will grow effectively in the attractive and rapidly growing Latin American market.”
IAG shares remain stuck in low-rated holding patterns despite the positive results and bullish outlook. Stock price is unchanged after trading in a tight range over the past 12 months.
This is a stark contrast to the strong recovery in the share price of European short-haul carriers Ryanair & easyJet.
IAG’s European competitors Lufthansa, and Air France-KLM saw their share prices fall by 25 percent or more over the last year. Its US competitors are also struggling on the stock exchange, with American Airlines down 4% and United Airlines down 14% over the last year.
IAG shares fell 3.6 percent, or 5 1/2p to 147 1/4p.
Luis Gallego replaced Willie Walsh, the former chief executive of IAG, during the pandemic. He said that he didn’t believe that the investors turned their backs on the airline group because of the slow return corporate customers.
He said corporate passengers are currently at 70% of their pre-pandemic level, but that as employers are willing to pay for the higher fares charged, revenue from business passengers has recovered to 85%.
Gallego, pointing to the high profits for 2023 that were reported by Gallego: “These results are excellent with only 70% of corporate traffic.” Gallego also said about an acceleration expected in the return of the business travelers: “Corporate Traffic is higher yielding. The results would be even more impressive. “There is a lot of potential upside.”
Profits better than before the pandemic, fare inflation and revenue growth, cash inflows and profits higher than they were prior to the pandemic, and debt mountain incurred during the Covid Crisis now falling. The IAG share price has been flat for the past year and fell later in trading.
Around 150p, IAG’s earnings for 2023 are only three-and-a-half times the price. This is a low rating by any standard.
If IAG executives were asked why, they would reply: “That’s a good question,” but without further explanation.
Analysts, as well as those who think the stock is a great buy, may be discouraged from purchasing shares.
There are many reasons for this, including the fact that the wars, and especially the multiple conflicts currently underway, do not encourage people to fly; there is doubt about the consumer’s willingness to pay the high fares; the failure of corporate travelers to return in sufficient numbers; the doubts over whether a £7-billion makeover at British Airways will be able to restore the trust that was lost under its previous regime; the increasing competition in the Atlantic market, the group’s main market.
IAG has huge gross borrowings of £16 billion, and there is no sign of dividends yet.