The British Airways (LON:) owner has taken to the skies of late and these results reflect more signs of promise as the company chases its longer haul goals.
Revenues of €15.9 billion were 8% higher than the previous year, helping to propel adjusted operating profit to €1.88 billion, an increase of 43.5% which was underpinned by 35.4% growth in the second quarter. Operating margin also grew to 11.8% from a previous 8.9%, with a constant passenger load of 84.1% keeping its ascendancy intact.
The shares have had a turbulent time more recently, weighed both by geopolitical uncertainty as well as fears that travel to the US would be impacted in reaction to its decision to declare a trade war on many countries around the globe.
However, IAG previously noted that while there has been some pressure of late on economy flights to the States, the strength of its premium cabin offering has more than offset any weakness and demand has been strong, with passenger revenues 5.4% higher. By brand, British Airways remains the jewel in the crown in terms of the group’s highest returns, especially this North Atlantic market. Flight frequency to selected destinations is continually on the increase, with IAG looking to maximise income from not only its premium offering but also an affluent customer base.
While Latin America and Europe are also holding firm, there remains some work to do in Asia Pacific, where capacity is lower than pre-pandemic due in part to its competitive disadvantage with Chinese carriers who are able to fly over Russia, impacting the destinations of Beijing, Shanghai and Hong Kong. Even so, the group has now added Bangkok, Kuala Lumpur and Tokyo in an effort to minimise this loss.
Significant cash generation has helped IAG in dealing with arguably the biggest thorn in its side, namely net debt, which represents an overhang from the days of the pandemic when the group was forced to ratchet up borrowings to survive.
The latest level of €5.46 billion is a notable improvement from the €7.52 billion recorded at the end of 2024 as IAG continues to erode the debt and previously enabled the group to undertake a share buyback programme of up to €1 billion, of which €650 million has been completed. The group also reintroduced the dividend, where a yield of 2% is pedestrian but nonetheless positive.
At the same time, the group’s profitability comes despite significant investment in the business amounting to €1.69 billion in the first half and particularly in the digital space, as well as allowing for improvements to its services such as the improvement of aircraft interiors and airport lounges. In addition, the group has ordered 71 aircraft which will be delivered over the next few years and taken delivery of 13 in the first half, with free cash flow continuing to enable IAG’s growing financial largesse.
There are also other sources of income, such as Iberia’s third party maintenance, repair and overhaul business, BA Holidays and the IAG Loyalty scheme. BA Holidays and IAG Loyalty have now been combined to form the third largest company in that field, with these strands of additional income providing a springboard for future growth. The appeal of this offering has been further enhanced by partnerships with the likes of Le Shuttle, American Express (NYSE:) and Universal Studios.
Of course, the ferocity of competition and economic pressure remain as potential headwinds, as do some of the other issues which have historically blighted the sector, such as virus outbreaks, industrial action, volcanic dust clouds, higher fuel costs and of late technical outages at certain airports.
Alongside the current macroeconomic and geopolitical concerns, this can be a potentially dangerous mix, underlying some of the potential hazards of investing in the airline sector. Even so, IAG’s combination of brands serve many different customer types to a multitude of destinations and across different price points, although business travel is recovering more slowly, particularly on short-haul destinations where perhaps the advent of virtual meetings lessens the viability of face-to-face meetings.
The group’s outlook is upbeat, with increased revenues likely to be in line with expectations and with the airline 57% booked for the second half. IAG expects higher earnings, margins and shareholder returns to add to its appeal, with some stretching targets in place such as a margin of 15% for British Airways by 2027.
The arduous reparation from the ravages of the pandemic will take some time to complete, but IAG is making large strides. Although the shares are down by some 20% since the previous recent highs achieved in May 2018, investors who chose to buy in to the recovery while the shares were grounded have been handsomely rewarded.
The price has risen by 128% over the last year, as compared to a gain of 10.3% for the wider , and by 222% over the last three years. The group’s improving financial strength and general growth lead to a market consensus of the shares as a buy, which is unlikely to waver.