Can IAG's profits continue to soar?

The owner of British Airways posted its first-half profit in August. A third-quarter update is expected on Friday 31 October, and we will see whether the airline can maintain its course.

British Airways plane
Source: Bloomberg

International Consolidated Airlines Group finally swung to profit after an improved performance from Iberia Airlines. IAG entered the black back in February when first-quarter profits came in at £433 million, a large turnaround from the previous year’s first-quarter loss of £506 million. Both British Airways and low-cost Spanish carrier Vueling were behind the accent into profit.

A commitment to the restructuring of Iberia Airlines ensured second-quarter results stayed in positive territory. IAG CEO, Willie Walsh, stated that each of the airlines had its best second-quarter operating profit since 2007. Iberia Airlines, the weakest of the airlines, managed to register a profit of £13 million in the second quarter but the reorganisation did not stop there. Mr Walsh has signed an agreement which sees over 1400 job cuts which will enhance profitably in the coming years. IAG acquired budget airline Vueling last year, and adding a low-cost carrier to its portfolio is paying dividends as operating profit has risen by 11% in the previous quarter. In addition to that, it also assists the parent company in competing with Ryanair and easyJet.

The airline sector as a whole was hit hard with the uncertainty surrounding the Ebola crisis but those fears have passed for now. Keeping with the macro themes, the collapse in the price of oil has been welcomed by the industry.

IAG’s return to profit puts it in a strong position compared to Lufthansa and Air France which both issued profit warnings over the summer; saturation of North American routes, increased competition from Middle Eastern airlines, and European budget air carriers were to blame. IAG’s exposure to premium and budget air travel reduces its dependence on one target market. There seems to be a feeling of branching out in the aviation sector, with Ryanair making inroads in the business class sector while Air France and Lufthansa both look to steal business from the budget airlines.

Equity analysts are bullish on IAG. Out of the 32 recommendations, 24 are buys, five are holds and three are sells,with the average target price of £4.75. The consensus for third-quarter revenue is £4.85 billion and net income of £527 million.

Continued restructuring of Iberia Airlines and a commitment to a full-year profit could push the share price to the £4.25. It has found support at £3.20, and if this is taken out then £3 would be the next target.

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