British Airways-owner International Airlines Group raised its 2015 profit forecast by more than 20 per cent, outperforming struggling continental rivals and sending its shares to an all-time high.
IAG, which is trying to acquire Ireland’s Aer Lingus, said yesterday that the profit increase would be driven by cost control across the group and growth at its Iberia Spanish unit which until last year had dragged on the business.
Created by a merger in 2011, IAG prioritised cutting staff costs before rival European flag carriers Lufthansa and Air France-KLM, and is seeing the benefits of a painful restructuring at Iberia, where it cut jobs and salaries. IAG is also a step ahead of Europe’s other traditional airlines through its exposure to the continent’s budget travel sector, having acquired discount carrier Vueling in 2013, enabling it to compete with Ryanair and easyJet.
“We expect Iberia to continue to improve its profitability given the trajectory that it’s on. The performance to date for Iberia has been tremendous and we expect that to continue in 2015,” chief executive Willie Walsh told reporters.
Shares in IAG, which before yesterday had already soared 56 per cent over the last six months compared to a 1.6 per cent rise in Britain’s bluechip index, earlier hit their highest ever level before paring gains to trade up three per cent at 577 pence.
“IAG remains our top pick among the European airlines. It has positive earnings momentum with a better trading performance than its network carrier peers and it is showing clear benefits from its restructuring efforts,” Liberum analyst Gerald Khoo said, reiterating a ‘Buy’ rating.
Given its prospects, he said IAG’s valuation on an enterprise value (EV) to core earnings (EBITDA) ratio warranted a premium rating and it should move further towards the level of the budget airlines.
Currently IAG trades on an EV to EBITDA ratio of 6.85 according to Reuters data, trailing easyJet and Ryanair which trade on 9.28 and 10.10 respectively, but ahead of Air France and Lufthansa on 5.22 and 3.30.
IAG’s performance shows the benefits of its broader strategy. It benefits from involvement in long-haul travel, where it is enjoying strong demand on trans-Atlantic routes, balanced with exposure to fast-growing, budget short-haul flights.
Both Air France and Lufthansa, hit by strikes last year, are trying to expand their low-cost operations at the same time as reducing costs in their main businesses, emulating IAG’s moves over the last four years.
IAG is also getting an extra boost from economic growth in Britain and Spain, its two domestic markets.
Already the biggest European airline by market capitalisation, IAG could grow further by buying Aer Lingus.
But its €1.36 billion approach is yet to get the backing from the Irish government, which owns a 25 per cent stake.
“We remain very interested in acquiring Aer Lingus and at this stage we have nothing additional to add to what we’ve already said,” Walsh said when asked about the deal.
IAG said for 2015 it now expected operating profit in excess of €2.2 billion, compared to the €1.8 billion it had said it was targeting, the latest in a series of upgrades.
For 2014, it reported operating profit up 81 per cent to €1.390 billion.