Overall customer bookings for Q4 are as expected with around 75% of the fourth quarter’s passenger revenue already booked.
Record third quarter profit with strong trading across the IAG Group and a significantly stronger balance sheet
Highlights
- Strong growth of operating profit before exceptional items in the quarter to 1,745 million euros (Q3 2022: 1,216 million euros) and an operating margin of 20.2% (Q3 2022: 16.6%) due to:
– Capacity (ASK) increase of 17.9% on last year (95.6% of Q3 2019), with a focus over the summer on European holiday destinations and further investment across the South and North Atlantic, supported by 20 aircraft deliveries year to date
– Passenger unit revenue increased by 2.2% year-on-year (24.6% vs 2019) due to continued strong demand from leisure travel
– Non-fuel unit costs for the quarter were 3.5% below Q3 2022. This was despite a c.1.0 percentage point impact from higher disruption across the business, including the UK NATS systems outage in August. The majority of these additional costs were in British Airways.
– Fuel unit costs for the quarter were down 6.2% year on year.
• Continued balance sheet strengthening: Gross debt reduced by 2.4 billion euros to 17.2 billion euros at September 30, 2023 versus June 30, 2023, with £2.0 billion UKEF-backed loan repaid early and 0.5 billion euros IAG bond repaid on maturity. Consequently S&P upgraded IAG and British Airways to Investment Grade.
• Overall customer bookings for Q4 are as expected.
• IAG expect 2023 to be a year of strong recovery in its margins, operating profit and balance sheet and towards pre-COVID-19 levels of capacity.
Luis Gallego, International Airlines Group’s CEO, said: “This quarter represents a record third quarter performance for IAG. This is allowing us to invest in the business and reduce a significant amount of our debt. During the third quarter we saw sustained strong demand across all our routes, in particular the North and South Atlantic and in all leisure destinations around Europe. We continue to develop our hubs of Barcelona, Dublin, London and Madrid, supported by our fleet deliveries and future orders. Our strong financial performance is enabling investment in our people and allowing us to further improve customer experience. At the same time, we will keep working towards our sustainability goals. We would like to thank all our employees across the Group for their contribution to this performance.”
Strategic highlights
Trading and network
• Record profit and high margins in the third quarter of 2023, driven by very strong leisure demand across all our airlines
– Aer Lingus total revenue increased by 16% driving strong profit growth and operating margins of 25.5%, despite cost headwinds. Capacity increased by 15% across both longhaul and shorthaul over the summer, with the largest longhaul schedule ever. Next year Aer Lingus will also return to Minneapolis and fly a new route to Denver. Premium leisure on the transatlantic network was particularly strong, driving record load factors in business cabins.
– British Airways total revenue grew by 20% in the quarter, on capacity growth of 25%, in particular through strong leisure demand. Profits increased by 50% year-on-year as capacity increases drove strong non-fuel unit cost performance (-7.6%), despite disruption costs. Operating profit was £617 million and the operating margin was 15.3%. Capacity growth focused on increased frequencies and higher gauge aircraft, as well as rebuilding the Asian network. British Airways recently announced resumption of flights to Abu Dhabi in 2024. Further investment in stabilising operations, despite a challenging external environment and supply chain constraints, and a more resilient performance expected over the winter.
– Strong trading across the network at Iberia has driven an increase in total revenue of 19%, with capacity growth of 18% and passenger unit revenue growth of 5%, with leisure continuing to be strong and corporate travel mainly recovered to pre-Covid levels. Profit increased by 76% to 449 million euros and margins to 23.1%. Continued network investment in the strong and growing Latin American and Caribbean markets as well as the announcement of the new Doha route as a gateway to Asia. Transformation initiatives are delivering exceptional On Time Performance, cost control and better aircraft utilisation and maintenance.
– Vueling delivered a record operating profit (282 million euros) and margin for the quarter of 26.1%. Transformation initiatives are driving strong performance across all areas: higher load factors at 94% and ancillary revenue of 29 per passenger euros; robust cost control to offset inflationary headwinds; and On Time Performance 9 percentage points higher than Q3 2019. Vueling is maintaining capacity at 2019 levels whilst negotiations continue with pilots towards agreeing a sustainable collective agreement, with a cabin crew agreement secured earlier in the third quarter.
• Loyalty continued to drive good revenue growth in Q3 2023 as total revenue increased by 57%. The quarter was the highest ever for Avios issued and redeemed by customers, as well as a record quarter where 1.3 million customers joined IAG programmes. This was supported by the continuing roll-out of programme enhancements, including a further tranche of “Avios-only” flights for summer 2024.
Other developments
– Balance sheet continues to strengthen as the business returns to normal levels of profitability.
– Net debt has reduced by 3.1 billion euros year-on-year to 8.0 billion euros (September 30, 2022: 11.1 billion euros) and leverage was 1.4 times at September 30, 2023 (September 30, 2022: 4.4x).
– Gross debt reduced (September 30, 2023: 17.2 billion euros; June 30, 2023: 19.6 billion euros): in the quarter we repaid our £2 billion (2.3 billion euros) UK Export Finance-backed loan as well as a 500 million euros IAG bond.
– S&P has upgraded both IAG and British Airways to Investment Grade status at BBB- with a stable outlook.
• Fleet deliveries continue to be on schedule. During the nine months to September 30, 2023 we have had 20 aircraft delivered as we replace both our longhaul and shorthaul fleets. This comprised 12 narrowbody aircraft across all our airlines and 8 widebody aircraft to British Airways and Iberia.
• As announced at IAG’s half year results on July 28, 2023, they have also ordered more aircraft for future delivery to support our network growth strategy: six Boeing 787-10s for British Airways and one Airbus A350-900 for Iberia.
• IAG continue to monitor and manage the situation with regards to metal powder contamination in Pratt & Whitney (P&W) GTF engines. They have currently have 32 aircraft that they consider to be in the scope of the issues that P&W has raised (less than 10% of IAG’s shorthaul fleet) and are taking steps to mitigate prospective time out of service of those aircraft over the next three years.
• IAG have now secured wage agreements with most of our employee groups, including all Iberia teams and cabin crew at Aer Lingus, British Airways and Vueling. Our proposal to British Airways pilots is currently subject to a ballot having been recommended by BALPA. Discussions are ongoing with pilots at Vueling; and with pilots and maintenance teams at Aer Lingus.
Trading outlook
- IAG expect full year 2023 capacity to be around 96% of pre-COVID-19 levels.
- Whilst they maintain good forward bookings, they continue to be mindful of wider macroeconomic and geopolitical uncertainties that might affect the remainder of this year.
- They expect non-fuel unit costs for the full year 2023 to be at the lower end of previous guidance of 6% – 10% improvement on full year 2022, due to the higher level of disruption.
- At current fuel prices* and taking into consideration the 73% of hedging we have in place for the fourth quarter, total fuel costs would be 7.6 billion euros for the full year.
- IAG expect to generate sustainable free cash flow this year and for our net debt at December 31, 2023 to reflect the usual seasonal increase in the fourth quarter.
*Jet fuel forward prices as at October 26, 2023
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
