International Consolidated Airlines (IAG) has swung from €446m loss to underlying operating profit of €1.3bn in the first half. The rebound reflects good leisure travel demand, although business demand is recovering more slowly. Overall, underlying revenue climbed 45.3% to €13.6bn. The group has restored capacity to 94% of pre-pandemic levels and this is expected to reach 97% by the end of the year. On average, planes were 84.1% full in the period, slightly higher than pre-pandemic.
Net debt fell 26.7% to €7.6bn while free cash flow of €2.7bn, up around €1.0bn.
IAG highlighted that the summer quarter is 80% booked, with bookings lower for the final quarter but that this was broadly in-line with usual trends. The group remains mindful of the potential for disruption, including strikes, to affect performance in the short-term.
The shares rose 2.5% following the announcement.
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Our view
British Airways owner IAG has had a stonking first half. Backed up by soaring leisure travel demand and the reinstation of pre-pandemic capacity, profits have well and truly come along for the ride.
There's also been successful moves on price increases, despite the considerable pressure on customer incomes. That reflects the tailwind that is pent up travel demand. The second thing to consider is consolidation in the airline industry. A handful of smaller carriers have gone out of business and IAG's acquisition of Air Europa means there's more market for the taking. This doesn't upend the investment case, but it's a helpful market dynamic and shows the benefit of having strong, trusted brands in this business.
There are some things to keep in mind though. While pent up travel demand still has room to run, it can't go on forever. At some point we'll see what normal demand looks like once more. There's a very real risk that consumer behaviour is yet to fully adjust to a world of higher inflation and increased costs. If spending starts to rein in, we could see the strong forward order book come under pressure. The group's also more exposed to business travel than other short-haul focussed carriers, and that corner of the market is taking longer to recover.
Costs are also a drag, thanks to the wider cost increases that come with getting this giant bird of a business back at full height. This means pre-covid levels of operating profit aren't expected for a few years. For now, lower fuel prices should become profit-plumpers if sustained, but this is outside IAG's control and could change at short notice.
Our biggest concern for now is the group's debt pile, meaning that interest payments were north of €824m last year. Debt is reducing and we're pleased with the direction of travel but shareholder payouts could take a backseat to debt management for a while longer.
For now, it seems the worst is over for IAG and the current risks to demand look more like turbulence than a full stop. We're a lot more positive than we've been for some time. But keep in mind, IAG is likely to face the worst of any slowdown in consumer spending.
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