IAG (IAGLN; Baa3, BBB- Pos) 1H (to June) Results; a revisit

We've said previously that we see IAG as one of the strongest on fundamentals and that view is unch after earnings. It also helps us firm up a value view for us on the €29s at Z+150/B+200. Airlines (despite the headlines) are not facing headline pressure or a slowing consumer. IAG has been very explicit about its views on this;
"we are looking at the market very carefully, since a long time ago, because this question about if this is a bubble after COVID that is going to end is here for almost a couple of years. And what we always answer is that we don't see that weakness coming. So now with the visibility that we have for the Q3 and the Q4, we don't see this weakness in our main markets, North Atlantic, Latin America and intra-Europe"

What we have seen is a strong increase in capacity that has brought pricing down from elevated levels. Costs are struggling to keep up and it's pushed margins lower. Not many are guiding to FY improvement for costs instead forcing them to revise down FY earnings. For now IAG stands firm on expectations for FCF (though non-numeric in guidance) and with BS in 1-turn leverage it has begun dividends after a 4yr hiatus. It joins easyJet as one of two airlines not disappointing this qtr and also holds onto its position as the 2nd highest margin among €issuers. Ryanair is still the sector leader despite facing a near halving in margins this quarter.

• 1H capacity growth of 7.5% was met with passenger growth of 7.2% and stronger RPK (distance x passengers) of +8.7% to leave load factors up +0.9ppt at 85%. Yields/pricing actually increased to 9.3c (+1.8%) leaving passenger revenue up +10.7% and in unit terms +2.9%.
• On cost side CASK did increase +1.2% despite fuel down -0.1% on rising non-fuel costs (+1.8%). As we said caution on co's that are beating using higher yields - market is clearly facing pricing competition and it may be hard for anyone to avoid that for long. BA we see avoiding that one 1) exposure away from Asia and towards firmer NA market and 2) perhaps mix into premium/business though it is not disclosing/admitting any impact from that.
• Headline performance dragged up EBIT to €1.3b (+3.9%) at a 8.9% margin (-40bps). Leaves it only trailing Ryanair among €issuers.
• By geography its boosted capacity in LATAM region to 18% of group - load factors indicate demand meeting it and impressively yields only down -3% in the region. North Atlantic is still the largest at 32%, Europe at 27%, Africa, Middle East and South Asia 11%, Domestic UK and Spain 8% and APAC 4%.
• As we noted before on Lufty earnings, North America is holding up better on yields, while Asia is suffering most on high capacity. IAG might be contributing to the issues in Asia; it boosted capacity by 32% in Q3 and was met with weak demand in China dragging unit revenues down -14% in the region.
• By airline flagship British Airways (46% of group EBIT) was up +5.4% and ran a 8.2% margin (+50bps), Spanish Iberia (20%) up +7.5% on 10.4% margin (-110bps), Spanish Vueling (8%) up +4% on a 6.6% margin (-20bps) and Irish Aer Lingus (1%) up +3.2% but on a razor thin 0.9% margin (-300bps). Air Lingus it says is facing intense competition from US carriers heading into Dublin (+20% increase in their capacity).
• IAG Loyalty brought in another 16% of group EBIT with sales up 23% and at a 17.7% margin (-150bps). It's getting support from BA holidays growth which is now 17% of the loyalty EBIT.
• It says corporate travel is still lagging full recovery; BA corporate is at 65% of 2019 volumes and 80% of 2019 revenues.
• FCF was €3.2b up from last year's €2.7b. It does get a low €2b boost from WC in 1H but still some positives there including from interest payments (€419m) which is down 14% on lower debt load.
• Capex was €1.4b up only €0.1b yoy. Its guiding to FY24 capex of €3.3b (down from €3.5b last year and initial guidance for €3.7b this year). It sees €4b in FY25/26. Fleet capex is generally 2/3 of that and revisions down in Capex (from €13.5 to €11.3b for FY24-26) seems to be on delays in deliveries into 2027.
• Dividend has been restarted at €3c/share (~€110m) after a 4yr covid-triggered Hiatus. It's also pulled itself from buying the remaining 80% stake in Spanish Air Europa and likely not helped by the competition regulators pushback it was facing. It had to pay a €50m break fee vs. the €400m it was set to pay for the stake.
• Gross debt was €16.1b (down €3.7b yoy), most of it in asset financing and leases (€13.5b). Cash was €9.7b (down from €12b last year) leaving net debt at €6.4b (vs. €7.6b last year). On LTM EBITDA leaves it 1.1x levered vs. 1.5x last year. That is well below target <1.8x across the cycle and will increase a tad on 2H WC (to ~1.4x we see). Co is being conservative adding "we'd always try and keep some headroom to the 1.8x because, as I said, we're in a volatile industry".
• We don't see supply this year as likely; front maturity is the March 25s for which refi looks very likely. It hasn't issued since 2021.
• On fuel, it's hedged 74% for reminder of this year, at average $845-50 - higher than spot that is falling towards this year's lows ; {JET1NECC Index}. Its hedged ~55% for 1H25, and ~35% in 2H25.
• FY guidance is unch; ASK growth of 7%, non-fuel unit costs to increase slightly, "significant FCF" (had €1.3b last year, c€1.6b) and maintain a strong BS. On forward bookings it says 81% for Q3 and 32% in Q4 (vs. expectations) - which is in-line with its forecasts it says. It sees some weakness in China and Asia (small presence for IAG), but sees South-east Asia holding better (Malaysia, Bangkok etc.).