IAG cuts its full-year profit guidance after first-half loss while we look at a CDS comparison

Victoria
By Victoria August 3, 2012 21:09

IAG cuts its full-year profit guidance after first-half loss while we look at a CDS comparison

After yesterday’s lessor-induced hangover (our thanks to them) it is back to business here:
IAG, Europe’s fourth-largest airline group by market value, has reported a first half-year operating loss of €253m ($308m) in the six months to the end of June. This compares to an €88m profit in the same period last year. Despite the loss, group revenue rose 9.8% to €8.53bn. Fuel costs rose 25% to just under €3bn, while non-fuel costs jumped 9.5% to €5.8bn.
British Airways made an operating profit, after exceptional items, of €13m in the first half, while and Iberia made an operating loss of €263m.
“We were previously targeting a break-even operating result this year, after the impact of (Iberia) restructuring costs and the short term earnings drag from the bmi acquisition. However, in the light of the Spanish macro headwind, we now expect to make a small operating loss in 2012,” said IAG chief executive Willie Walsh. “The Iberia restructuring plan could lead to further restructuring costs in the latter part of the year.”
IAG is continuing its Iberia restructuring and expects to finalise this by the end of September. On top of this Willie Walsh has been quoted as saying the Iberia restructuring would include short-term downsizing, a reshaping of its network as well as a re-evaluation of all aspects of the business.
Earlier this year IAG predicted its annual fuel bill would rise by €1bn while €90m worth of restructuring costs from its acquisition of bmi weighed on the books. All of this has led shares in IAG, which have fallen 10% in the last three months, to close at 159.3 pence yesterday, valuing the group at around £3bn ($4.67bn). This summer could be the bottom for IAG and as mentioned in Airline Economics May/June issue: IAG is well worth investment at this point on the basis that it will be looking to target TAP later this year and may yet still take a stake in JAL. As a long-term option this airline has to be close to the top of the wanted list.
So is IAG underperforming when compared to Lufthansa and Air France-KLM? Not at all. IAG is sorting out Iberia at breakneck speed whilst at the same time having the bmi hit on its books. Lufthansa is in a not-too-dissimilar situation, it though is more advanced in its efforts to sort out Austrian Airlines and that airline is now moving forward to expand.
Indeed one measure of looking at how an airline is doing is to look at the cost of insuring those debt piles. Lufthansa has seen a 7% drop to 254 basis points in the spread of 6.5% bonds due in 2016. Air France-KLM Group (AF-KLM) on the other hand in its efforts to cut its debt (the largest debt pile of any European airline) is being looked upon more favourably at this time after moving through a very rough patch. AF-KLM saw the cost of insuring its debt fall 30% to a five-month low since the launch of its reorganization plan on 24th May 2012. The decline is the steepest among credit-default swaps of European carriers and puts its €700m of 6.75% securities due in 2016 at 594bps of 5.94% from 766 less than a month ago. AF-KLM has €2.9bn of debt falling due during 2013 and 2014. The company’s unsecured debentures include €1.45bn of senior bonds and €1.1bn of convertible notes.
Credit-default swaps on AF-KLM dropped to 877 bps this week, from 1,226 on May 24, even so this is still higher than the 543 bps average for 2011 by some margin. Swaps protecting British Airways fell 18% to 639 bps in the same period, while Lufthansa fell 13% to 281 bps. If we were going to point out an airline in Europe that is going the other way then based upon this analysis we would have to target SAS who are slightly up at 1,332 bps.
Air France-KLM is carrying €6.2 billion of net debt. Lufthansa: €2.1bn and IAG €1.1bn. IAG remains the airline(s) to watch for all the right reasons even as it moves through this period of pain on the Iberia side.

Victoria
By Victoria August 3, 2012 21:09
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