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It has been a while since British Airways boasted it was the “world’s favourite airline”. Even before the pandemic, the carrier, owned by IAG, battled reputational problems following years of cost cuts, plus other issues such as a big data breach.
A recent survey by the consumer group Which? ranked the UK’s flag carrier among the worst airlines for customer satisfaction. Yet full-year results on Thursday from its parent company, where BA accounts for about half of revenues, point to something of a comeback.
IAG more than doubled operating profits in 2023 to a record €3.5bn. The post-pandemic travel boom continues. Notably, wealthier holidaymakers who are willing to pay higher prices to fly in premium cabins helped to push IAG’s passenger unit revenue up 8.2 per cent year on year, even though corporate travel is yet to recover.
Why then does IAG have such a lowly valuation? It trades on a forward price earnings multiple of just over 4 times, lagging pre-pandemic levels and well below European budget rivals such as easyJet on 8.3 times.
The weakness reflects continued suspicion of legacy airlines. Markets are anticipating a “substantial” earnings drop, notes Liberum’s Gerald Khoo. There are several good reasons, though, to suggest some of that scepticism is overdone.
For a start, there is evidence across a number of flag carriers that “premium leisure travel” could be a sustaining trend. IAG is investing in BA’s offering to take advantage. At rival Air France-KLM, the load factor in premium cabins was higher in every quarter of 2023 than in 2019.
IAG’s bookings, at 92 per cent for the first quarter and 62 per cent for the first half of 2024, are also ahead compared with the same time last year. It is not awaiting big aircraft deliveries that will constrain capacity growth this year — something raised by European short-haul rivals, such as Ryanair.
True, non-fuel costs will rise as IAG invests in upgrading lounges, improving its BA call centre and better food. Capital expenditure between 2024 and 2026 is expected to average €4.5bn versus €3.5bn in 2023, as the group also expects new aircraft deliveries in 2025 and 2026.
But IAG is generating good free cash flow — €1.3bn in 2023. Chief executive Luis Gallego expressed confidence in “significant free cash flow generation” in 2024. As a result, its net debt to ebitda ratio, at 1.7 times, is below its 1.8 times target. Reinstating the dividend, which was cancelled during the first pandemic wave, should soon be on the agenda.
BA may no longer be able to claim it is the world’s favourite airline. But IAG can prove there is mileage yet in the legacy model.
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