British Airways owner boosts transatlantic transformation focus to post-pandemic

A big bet on Transatlantic flights has paid off for long-suffering investors in British airline owner IAG as the pandemic pushes the airline group’s shares to their highest level since the outbreak.

Shares in IAG, which owns five carriers including BA, Iberia and Aer Lingus, closed at under 316p last week, the highest level since February 2020. The stock fell on Monday, but doubled from last year’s high. A performer on London’s FTSE 100.

The turnaround in the company’s fortunes came as investors cheered a second consecutive summer of record profits, built on lucrative transatlantic flights that have seen particularly strong demand since the pandemic ended.

“They’re focused on where they fly to win,” said Andrew Lobenberg, head of European transport equity research at Barclays.

This allowed IAG to pay off its unexpected pandemic debt and restore its dividend. It also announced a 350 million euro shareholder buyback at the end of last year, the first since the outbreak.

“Demand is strong in the Atlantic and Europe,” said IAG. Nicolas Cadbury, chief financial officer, said the group’s shares had been supported by “higher cash flow and an increasingly strong balance sheet”, which would boost investor returns.

One of the biggest questions hanging over IAG is whether a £7 billion investment plan by British Airways can improve service and reduce delays and other operational problems at its main profit maker.

The airline has faced criticism from customers and unions – for putting shareholding ahead of customer experience and quality.

BA’s upgrade “should be a continued and strong profit driver for the group,” Loberberg said, especially given the airline’s stranglehold on Heathrow, one of the world’s most profitable travel markets.

“They should be making strong profits. So the performance of late has been very poor because of the investment.

IAG’s business model for long-haul travel and particularly its business and first-class cabins, a segment of the industry that has been slow to recover following Covid but is now booming.

“If you want exposure to transatlantic and premium travel, IAG is the play you want,” said Julian Cook, a London-based hedge fund partner who focuses on aviation.

ATKA sold its stake in Ryanair last year to buy IAG, which Cook says was a “no-brainer”.

“We could see that Atlantic was performing well and wanted to play the premium end of the market,” he added.

Even after the rally, IAG shares trade on a price/earnings ratio of just 6.5 times, lower than Ryanair and easyJet.

IAG’s main hubs in London, Dublin and Madrid are located on the western edge of Europe, giving it a natural advantage to fly across both the North and South Atlantic.

The group has doubled down on these routes since the outbreak of the pandemic on flights to Asia, where return demand has slowed and European carriers face the complexity and cost of avoiding Russian airspace.

Three-quarters of IAG’s long-haul routes are owned by Lufthansa Group with 53 percent and Air France KLM with 54 percent, according to Bernstein analysts.

This transatlantic focus has allowed IAG airlines to fend off competition from deep-pocketed and expanding competitors in Turkey and the Gulf, where European airlines struggle to compete on price and fares as well as service levels.

In contrast, US and European routes have become more profitable compared to pre-pandemic levels since Norwegian’s collapse in 2020, which has disrupted incumbent carriers with lower fares.

“Flying west rather than east is the best long-term travel strategy after the pandemic, especially from London,” said Alex Irving, transport analyst at Bernstein.

Analysts say other questions currently facing IAG include whether interest in flying in its key markets can be sustained, as well as rising geopolitical tensions, particularly from a second Trump presidency.

There is uncertainty over future M&A after its bid to buy Spain’s Air Europa to boost its position in the Latin American market was rejected by European competition authorities last year.

IAG management told investors it is focused on hitting its financial targets by 2023, which include increasing its operating margins to between 12 and 15 percent, up from 11.9 percent in 2023.

His other targets include increasing flight schedules between 4 and 5 percent per year and a return on investment capital of between 13 and 16 percent. According to Bernstein’s Irving, airlines typically generate single-digit ROI.

“In the context of other European flag carriers, they are not only very profitable, but also very shareholder-friendly, they have clear financial targets for each of their divisions and allocate to those divisions according to their revenue performance potential,” said Cook.