Friday, October 31, 2014

British Airways’ Parent Lifts Guidance: International Consolidated Airlines Group Boosted by Turnaround at Its Iberia Unit

The Wall Street Journal
By Robert Wall
Updated Oct. 31, 2014 6:00 a.m. ET

LONDON—British Airways parent International Consolidated Airlines Group SA on Friday raised its full-year earnings guidance as a turnaround at Spanish unit Iberia spurred a 30% rise in third-quarter operating profit.

The company said it expects operating profit to rise by between €550 million ($878 million) and €600 million this year, having previously projected a €500 million rise from last year’s €770 million.

Operating profit in the third quarter was €900 million, up from €690 million a year earlier. Net profit rose 3.1% to €598 million on an 8.5% rise in sales to €5.87 billion.

Shares rose more than 3% in early London trading.

IAG’s results contrast with those of rivals Air France-KLM SA, Europe’s largest carrier by traffic, and Deutsche Lufthansa AG. Both warned of overcapacity this week, and Lufthansa on Thursday cut its profit forecast for next year.

“We are in a completely different position,” IAG Chief Executive Willie told reporters Friday. “We addressed challenges that they are facing up to much earlier than they did.”

Air France-KLM and Lufthansa both have faced labor unrest amid efforts to cut costs. IAG faced similar disruptions last year as it tried to stem losses at Spanish unit Iberia. The airline reached an agreement with labor groups for deep structural changes, including more than 3,000 job cuts.

Iberia’s operating profit more than doubled in the third quarter to €162 million, while British Airways delivered an operating profit of €607 million, 27% higher than last year’s level. Barcelona-based discount unit Vueling’s operating profit was little changed at €140 million.

IAG is benefiting from strong economic growth in the U.S.—crucial to its trans-Atlantic routes—and in the U.K. Mr. Walsh said that, following its cost cuts, the company is “growing into areas where others are retreating because they are unable to compete effectively.”

“We see these results as further evidence of IAG’s superior financial performance and earnings momentum compared with its network carrier peers,” Liberum analyst Gerald Khoo said.

Mr. Walsh said he was “confident” the company will meet its operating profit target of €1.8 billion next year. Analysts widely expect IAG to beat that figure amid lower fuel prices and cost cuts, and even lift the goal at a capital markets day next week. Mr. Walsh said the airline would also provide an update then on its dividend plans.

IAG is modernizing its fleet to replace gas-guzzling planes with more fuel-efficient ones. British Airways last year introduced Airbus Group NV A380 superjumbo and Boeing Co. 787 Dreamliner long-range jets.

The company had held off on buying new planes for Iberia until restructuring measures were showing success. IAG last month ordered eight Airbus A330-200 long-range jets for Iberia for delivery from next year, alongside a deal for eight A350-900 jets to replace less efficient four-engine A340 planes.

“We continued to grow capacity efficiently and both our non-fuel and fuel unit cost performances were strong with the latter boosted by the introduction of new, more efficient aircraft into our flee,” Mr. Walsh said. Still, the carrier has trimmed its fourth-quarter growth plans to around 6% capacity growth from about 7.5%, he said.

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