IAG, owner of British Airways and Iberia, yesterday said it will continue to focus on driving down costs as competition intensifies both within Europe and as rivals put on more capacity on its all-important transatlantic routes.
IAG, which is buying Aer Lingus to add to a portfolio comprising BA, Iberia and Vueling, said its unit revenue per passenger carried and kilometre flown was down 6.6 per cent on a constant currency basis in the three months ended June 30, showing that no airline is immune from the price war.
Within Europe airlines are bracing themselves to compete with Ryanair, Europe’s biggest short-haul airline by passenger numbers, which has said it expects to slash fares this winter as a result of lower fuel prices, heaping pressure on airlines with higher cost bases.
On track to meet its annual profit target after beating the consensus market forecast in the second quarter, IAG appeared to be weathering the storm.
“We continue to take cost out of the business, with both employee and supplier unit costs down at constant currency, and improvements in productivity levels,” chief executive Willie Walsh said in a results statement yesterday.
As part of its focus on costs, Walsh said that IAG opposed a plan to build a new runway at London’s Heathrow Airport, where British Airways is the biggest airline, because the associated costs were “outrageous”.
“From an IAG point of view we will not be supporting it. We’re not going to support something that increases our costs,” Walsh told reporters on a call yesterday.
The airport is operating at full capacity and wants to build a third runway but faces significant political challenges to do so. An expanded airport would in part be paid for by lavying higher user charges on airlines.
Buying Aer Lingus is part of IAG’s plan to be able to add more lucrative transatlantic routes without needing more runway space at Heathrow, because it will provide the group with slots at Dublin Airport to use as a new hub.
IAG yesterday declared its €1.3 billion bid for Aer Lingus unconditional as to acceptances, after it waived a condition. But the group is still waiting for Ryanair to formally accept its bid, another condition of the deal. Ryanair has said it will do so in mid-August.
IAG earlier yesterday reported a 40 per cent rise in second-quarter operating profits to €530 million, which beat the consensus market forecast of €494 million, according to the company’s own survey of analysts.
Shares in IAG, which have risen 9 per cent in the last month, were up 0.7 per cent at 546 pence at 0832 GMT.
“Our ‘buy quality in a low fuel environment’ thesis is playing out, aiding IAG’s margin-build story,” Jefferies analyst James Letten, who rates the stock a ‘buy’, said in a note.
For 2015 IAG reiterated its forecast, last upgraded in February, for operating profits to be in excess of €2.2 billion, up from the €1.39 billion made in 2014.