A consensus-beating Q3 and slightly downgraded outlook

IAG published a new record Q3, which was considerably above the consensus, and managed to streamline its debt profile. These positives were partially offset by the slightly narrower capacity forecast and cost improvement outlook. Regardless, we will upgrade our 2023 estimates, mainly to reflect the strong-than-expected Q3 figures, and reiterate our positive recommendation.

The return of the trans-Atlantic frontrunner

IAG’s quarterly results were much stronger than the consensus and its FY financial guidance has been maintained, backed by supportive forward bookings. We will upgrade our estimates.

Strongest Q1 post-pandemic; enhanced guidance

IAG delivered a surprising set of Q1 results which comfortably beat the guidance and the consensus thanks to strong pricing and a favourable fuel price. Leverage has been improved by more than anticipated and the FY financial guidance has been raised, albeit with a slightly narrowed capacity forecast. We expect an upgrade in the consensus and our estimates.

Acceleration needed at IAG to regain a leadership position

IAG’s 2022 results ended up coming in moderately stronger than the market’s expectations while its leverage needs to be further repaired. Subject to regulatory agreements, the group will convert its loans into a full takeover of Air Europa. The 2023 outlook was described as encouraging although returning to the company’s sector leadership status will require more effort. We expect a minor upgrade in the consensus while our estimates look consistent with the updated guidance.

The full-service frontrunner is back

IAG’s Q3 trading update was seen as encouraging, especially the overall progress in terms of profit generation and the better-than-rivals’ Q4 outlook. Regardless, a great part of this buoyancy had been reflected in the share performance following the publication of preliminary results. We expect a considerable increase in the consensus but a slight upgrade in our estimates.

Q2 finally back in green but the recovery will take time

The group’s Q2 delivered a positive operating result for the first time since the pandemic and came in ahead of the consensus. However, the management guided for a downgraded H2 capacity outlook due to airport chaos and a higher net debt forecast. The effect of a weaker H2 capacity schedule should be partially mitigated by strong pricing and encouraging fuel hedging positions. We will probably make a further small cut to our estimates.

A few twists and turns along the road to recovery

The share price declined by 7% due to IAG’s consensus-missing Q1 results and downwardly-adjusted FY capacity schedule, but its expectation of an operating profit from Q2 onwards remains very encouraging. We do not expect an important consensus downgrading.

Hopeful FY22 but geopolitical uncertainties weigh

The group’s FY21 results were broadly in line with the guidance and moderately stronger than the consensus. Its FY22 targets look promising, while the risk of deviations remains due to the Omicron-led disruptions in Q1 and geopolitical uncertainties.

Weaker-than-anticipated help from the US reopening

Despite efficient cost control, IAG’s limited resumption in volume, due to its substantial exposure to markets with strict COVID-19 measures, and the uncompressible portion of fixed costs continued to weigh on the group’s Q3 EBIT. The company’s forecasts for FY capacity and the adjusted operating loss are both lower than our expectations.

Trans-Atlantic master set to fly again

Following the progressive lifting of border rules in many countries, especially in the UK and the US, IAG is hoping to see a meaningful increase in bookings from Q4. It is also worth pointing out the remarkable profitability of the Trans-Atlantic operations and IAG’s important exposure on these routes. The share price has increased by 36% since mid-September. We confirm our upbeat stance and we reiterate this investment opportunity after our recent valuation update.

No meaningful resumption is expected shortly

Due to the very stringent restrictions applied in its core markets, IAG’s Q2 ended up similar to its Q1: in line operating results following a weaker-than-expected top line. The capacity outlook still seems depressed which is discouraging the market.

Mediocre Q1, subdued Q2 outlook

IAG’s Q1 top-line performance was weaker than market expectations but the operating results were in line. The capacity outlook was largely restricted by the less favourable (amidst the pandemic) geographic mix compared to its peers.

Capacity recovery hoping to come later but quickly

IAG delivered in line FY20 results and continues to seek further cost efficiency and liquidity flexibility. The group foresees a slower-than-peers capacity recovery for the short term but a faster one for the longer term.

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FY23 results preview

Morning Note – 22 February 2024

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