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IAG first quarter results

Last week International Consolidated Airlines Group (IAG) impressed the market with impressive first quarter results and traffic statistics

For the first three months of the year, IAG’s operating profit was €170 million before exceptional items compared to €155 million in the year-ago period.

IAG reported an adverse net foreign exchange operating profit impact for the quarter of €32 million. Passenger unit revenue for the quarter down 7.2 per cent, down 3.1 per cent at constant currency. Non-fuel unit costs before exceptional items for the quarter down 3.9 per cent, up 1.4 per cent at constant currency. Fuel unit costs before exceptional items for the quarter down 13.6 per cent, down 16.1 per cent at constant currency. Cash of €7,495 million at March 31, 2017 was up €1,067 million on 2016 year end. Adjusted net debt to EBITDAR improved by 0.3 to 1.5 times.

“We’re reporting an operating profit of €170 million before exceptional items which is up from €155 million compared to last year. This is a record performance in Q1, traditionally our weakest quarter, with the improving trend in passenger unit revenue continuing,” says Willie Walsh, IAG Chief Executive Officer. “The impact of currency exchange was €32 million in the quarter due to the translation of sterling profit into euros.”

Walsh again highlighted the launch of LEVEL, IAG’s new long-haul, low-cost airline brand, which starts flights from Barcelona to Los Angeles, San Francisco, Punta Cana and Buenos Aires in June. He said: “It’s already been extremely successful with sales running well ahead of expectations”.

At current fuel prices and exchange rates, IAG expects its operating profit for 2017 to show an improvement year-on-year. The Group expects quarter 2 passenger unit revenue (passenger revenue per ASK) to show an increase versus last year, at constant currency.

In the first three months of 2017, IAG capacity (ASK) was higher by 3.3 per cent with increases across all regions. Aer Lingus continued its growth across the North Atlantic while Vueling grew in Spain partially reducing its seasonality. British Airways launched new routes including Santiago and Oakland and discontinued its route to Chengdu. Iberia continued to consolidate its capacity in Europe offset by longhaul increases from routes launched in 2016 such as Shanghai, Tokyo and Johannesburg. Passenger load factor rose 0.1 pts to 79.0 per cent.

Passenger revenue decreased 4.2 per cent compared to the same period last year. Passenger unit revenue (passenger revenue per ASK) was down 3.1 per cent at constant currency (‘ccy’) from lower yields (passenger revenue/revenue passenger kilometre) impacted by the timing of Easter. At ccy, passenger yields decreased on leisure routes with the shift in Easter from March last year to April this year, partially offset by improvements in corporate bookings. Although passenger yields are down in the quarter, the passenger revenue performance trend improved versus the previous quarter. Passengers carried by the Group rose to 21,147 thousand, an increase of 3.8 per cent.

Cargo revenue for the period decreased 2.3 per cent, 2.1 per cent at ccy. The Cargo premium mix remained strong partially offsetting overall yield decreases while cargo tonnes carried were broadly flat.

Other revenue was up 13.7 per cent or €64 million excluding currency impacts, from an increase in activity at Iberia’s third party maintenance (MRO) business, BA Holidays and Avios.

Employee costs decreased 6.0 per cent compared to the same period last year. On a unit basis and at ccy, employee unit costs improved 2.6 per cent with salary awards more than offset by efficiency initiatives achieved by all airlines. The average number of employees rose 1.5 per cent for the Group while productivity increased 1.8 per cent with improvements at British Airways, Iberia and Aer Lingus.

Fuel costs decreased 10.8 per cent with fuel unit costs down 16.1 per cent at ccy primarily from average fuel prices net of hedging. The introduction of new fleet and improved operational procedures continued to drive efficiencies.

Supplier costs increased 2.3 per cent and at ccy supplier unit costs were up 4.2 per cent. The Group’s non-ASK businesses MRO, BA Holidays and Avios grew, increasing supplier costs. This affected handling and engineering costs with a corresponding increase in Other revenue. Excluding these items, the airline supplier unit costs rose from higher maintenance costs related to fleet mix, the shift to pay as you go maintenance contracts and additional EU compensation claims. The Group has also recognised elements of airport recharges as a cost in the quarter, rather than against revenues as in previous years, following a change in contractual arrangements.

Ownership costs decreased 0.2 per cent and at ccy ownership unit costs increased 0.1 per cent. Depreciation costs were down versus last year which included accelerated depreciation of Iberia’s Airbus A340-300s. Excluding this, depreciation costs at ccy were up including IT charges with the new check-in and aircraft boarding system. Aircraft operating lease costs increase with additional leased aircraft, including 9 Boeing 787-9s and 8 aircraft from the Airbus A330 family.

The Group’s operating profit for the period was €170 million, an increase of €15 million versus last year, or €47 million at ccy.

In 2017, the Group recognised an exceptional charge of €19 million related to the continuation of British Airways transformation initiatives. In 2016, the exceptional charge reflects the impact of recording Aer Lingus fuel cost at the hedged price in the pre-exceptional column, rather than at spot price in the reported column.

Net non-operating costs were €116 million for the quarter compared to €44 million in 2016. The increase was from higher unrealised losses on the remeasurement of derivatives not qualifying for hedge accounting and unrealised net currency retranslation charges, partially offset by a €17 million reduction in net financing costs.
The tax charge for the period was €8 million after exceptional items with an effective tax rate for the Group of 23 per cent impacted by the mix of profits and losses earned by jurisdiction (2016: 16 per cent).

The profit after tax and exceptional items for the quarter was €27 million (2016: €104 million), a reduction of €77 million in the period.

The Group’s cash position was €7,495 million up €1,067 million from December 31, 2016. Compared to December 31, 2016, the Group’s adjusted net debt decreased €1,061 million to €7,098 million, adjusted net debt to EBITDAR was lower by 0.3 at 1.5 times, and adjusted gearing decreased 2 points to 49 per cent.

IAG traffic in April, measured in Revenue Passenger Kilometres, increased by 10.0 per cent versus April 2016; Group capacity measured in Available Seat Kilometres rose by 4.0 per cent. Group premium traffic for the month of April increased by 7.0 per cent compared to the previous year.

On 5 April, British Airways launched a £400 million investment plan which includes improvements in Club World, the introduction of Club Europe on UK domestic services, new lounges and First Wing direct security and lounge access at Heathrow. In addition, self-service check-in and biometric boarding gates will speed up airport processes. Over the next two years, the airline’s shorthaul and longhaul fleets will be fitted with the latest generation Wi-Fi.

On 24 April, IAG announced that following its highly successful accelerator programme, Hangar 51, the Group will invest in two start-ups. Esplorio (an app that records and shares travel experiences) and Vchain (blockchain technology that allows customers to have control over their data and helps them get through airports faster) were selected to continue working with the Group to further develop their products and benefit customers. They will also receive funding from IAG’s multimillion pound investment fund for digital transformation.

On 2 May, Vueling announced that it has carried more than 100 million passengers at Barcelona airport since it started operations 13 years ago. Vueling is the leading airline at El Prat from where it flies to more than 130 European destinations and has 36 per cent market share.

Date: May 10, 2017

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