IAG extends lead over rivals

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BRITISH AIRWAYS owner International Airlines Group increased its 2015 profit forecast by more than 20 per cent, sending its shares to an all-time high.

IAG, which is trying to acquire Ireland’s Aer Lingus, said that the profit increase would be driven by cost control across the group and growth at its Iberia Spanish unit which until last year had dragged on the business. Created by a merger in 2011, IAG prioritised cutting staff costs before rival European flag carriers Lufthansa and Air France-KLM, and is seeing the benefits of a painful restructuring at Iberia, where it cut jobs and salaries. IAG is also a step ahead of Europe’s other traditional airlines through its exposure to the continent’s budget travel sector, having acquired discount carrier Vueling in 2013, enabling it to compete with Ryanair and easyJet.

“We expect Iberia to continue to improve its profitability given the trajectory that it’s on. The performance to date for Iberia has been tremendous and we expect that to continue in 2015,” chief executive Willie Walsh said.

“IAG remains our top pick amongst the European airlines. It has positive earnings momentum with a better trading performance than its network carrier peers and it is showing clear benefits from its restructuring efforts,” Liberum analyst Gerald Khoo said, reiterating a “Buy” rating. Given its prospects, he said IAG’s valuation on an enterprise value (EV) to core earnings (EBITDA) ratio warranted a premium rating and it should move further towards the level of the budget airlines. IAG has benefited from its involvement in long-haul travel, where it is enjoying strong demand on trans-Atlantic routes, balanced with exposure to fast-growing, budget short-haul flights. Both Air France and Lufthansa are trying to expand their low-cost operations at the same time as reducing costs in their main businesses, emulating IAG’s moves over the last four years. Already the biggest European airline by market capitalisation, IAG could grow further by buying Aer Lingus.

But its 1.36bin euro approach is yet to get the backing from the Irish government, which owns a 25 per cent stake.