International Airlines Group: Delivering Market leading returns

International Airlines Group is one of the world's largest airline groups, with a fleet of 627 aircraft, operating 285 destinations and carries around 122 million passengers. The following airline brands are part of IAG: Aer Lingus; British Airways; Iberia; Level and Vueling. It is a Spanish registered company with shares traded on the London and Madrid Stock Exchanges and is part of the FTSE 100 Index.

We were delighted to welcome Stuart Morgan, Head of Investor Relations, to the latest Yellowstone Advisory webinar to provide an update on performance and prospects following the recent Q1 results. A recording of the webinar is available here.

Management reiterated that IAG's strategy continues to centre on three pillars. The first is strengthening its core airline portfolio by investing in market-leading brands and maintaining leadership positions across its key hubs. The second is growing capital-light earnings through businesses such as IAG Loyalty, Holidays, cargo and maintenance services. The third is disciplined capital allocation, maintaining a strong balance sheet while investing for future growth and delivering attractive shareholder returns. This strategy has remained largely unchanged since the pandemic and management believes it is producing consistently strong financial performance.

The 2025 financial performance demonstrated the success of this approach. Revenue increased 3.5% to €33bn while operating profit exceeded €5bn for the first time, representing a group operating margin of 15.1%. British Airways delivered an operating margin above 15%, Iberia exceeded 16% and the Loyalty business continued to generate margins of around 18%. Earnings per share benefited from both higher profits and the ongoing share buyback programme. Free cash flow remained exceptionally strong at just over €3bn despite higher capital expenditure, while return on invested capital reached 18.5%, comfortably above the group's long-term target range of 13-16%. Net leverage continued to improve to just 0.8x, with first quarter leverage subsequently falling further to only 0.5x.

Management remains confident in the long-term outlook for air travel demand. Holiday spending continues to prove remarkably resilient, with four out of five consumers protecting travel expenditure even during periods of economic uncertainty. Premium demand also remains particularly strong, especially across the North Atlantic where London Heathrow continues to represent the world's largest premium aviation market. Latin America is becoming an increasingly attractive growth opportunity, now accounting for around 20% of group capacity, with improving demand from higher-value premium customers. In contrast, short-haul Europe remains highly competitive, although IAG continues to benefit from its strong market position in Spain and UK-Spain leisure routes.

Alongside network expansion, IAG continues to invest heavily in improving the customer proposition across its brands. One of the most significant recent announcements was the rollout of Starlink high-speed Wi-Fi across the fleet over the next eighteen months. British Airways is also upgrading lounges globally, introducing new commercial platforms, enhancing its mobile app and website and continuing the rollout of Club Suite across its long-haul fleet. By early 2027 virtually every Heathrow-based aircraft, excluding the A380 fleet, will feature the new Club Suite product. These investments are designed to improve customer satisfaction while supporting premium pricing.

Operational improvements remain another important driver of profitability. British Airways has significantly improved punctuality following major investment in staff and operational technology, including AI tools to better manage scheduling complexity. Iberia continues to benefit from premiumisation of Latin American traffic, with higher-value customers driving improved profitability, while Vueling has established itself as one of Europe's most efficient low-cost carriers through sustained reductions in unit costs over recent years.

The Loyalty business is growing in importance and management described Loyalty as one of the group's most attractive assets, generating high margins, strong cash flow and requiring relatively little capital investment. Active customers increased by 10% during the year while Avios issuance and redemption both continued to grow strongly. The business has now doubled profits compared with pre-pandemic levels and management has set a medium-term objective of delivering €1bn of annual operating profit, compared with approximately €570m today. Growth is being driven through increased use of co-branded financial services products, wider opportunities to earn and redeem Avios and the integration of British Airways Holidays into the platform. Management highlighted that only around 5% of Club members currently book holidays through the business despite representing 80% of Holidays revenue, illustrating the significant cross-selling opportunity still available.

Strategic airline partnerships also remain an important competitive advantage. Relationships with American Airlines, LATAM and Qatar Airways allow IAG to extend its global network without committing significant additional capital. These partnerships strengthen connectivity across North America, Latin America and Asia while supporting growth of both the OneWorld alliance and the Avios ecosystem.

On sustainability, management acknowledged that the regulatory framework surrounding Sustainable Aviation Fuel (SAF) continues to evolve, although IAG remains ahead of current mandates. More than 3% of fuel consumption already comes from SAF compared with the current regulatory requirement of 2%. Management continues to advocate for greater production capacity, which should improve availability and reduce costs over time.

On capital allocation, the balance sheet remains the group's first priority, with management committed to maintaining leverage comfortably below its through-cycle target of 1.8x. Investment in fleet renewal and customer experience remains the next priority, followed by sustainable dividend growth. Once these objectives have been satisfied, excess capital is returned to shareholders. Following last year's €1bn share buyback, the company has announced a further €1.5bn programme for 2026 and intends to continue returning excess cash while leverage remains below 1x.

The presentation also addressed the impact of recent conflict in the Middle East. Around 3% of group capacity had been exposed to the region, with services reduced or suspended where appropriate. Aircraft have largely been redeployed onto routes including Singapore, Bangkok, India, Nairobi and Caribbean leisure destinations. Management expects the second quarter to experience the greatest impact from higher fuel costs, with some residual effect during the third quarter before conditions gradually improve. Importantly, demand across the remainder of the network remains resilient and management continues to target operating margins at the lower end of its long-term 12-15% range despite the temporary disruption.

In summary, management remains confident that long-term structural demand for air travel, combined with IAG's leading portfolio of brands, improving operational performance and rapidly growing Loyalty business, will continue to support attractive shareholder returns. The group combines strong margins, exceptional cash generation and a highly disciplined approach to capital allocation, providing flexibility to invest in future growth while returning significant excess cash to shareholders. Although geopolitical events and supply chain issues create some near-term uncertainty, management believes the business remains well positioned to continue delivering industry-leading profitability and sustainable long-term value creation.

A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com