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International Airlines Group: Strong post covid recovery

International Airlines Group is one of the world's largest airline groups, with a fleet of 573 aircraft, operating 256 destinations and carried around 95 million passengers in 2022. 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 introduction to the company and update on performance and prospects following the recent Capital Markets Day. A recording of the webinar is available here.

As a reminder, International Airlines Group is a market leading commercial aviation group with strong brands, leading margins and returns and a track record of creating sustainable shareholder returns prior to the disruptions of the Covid period.

The strategy is to strengthen the core business, drive earnings growth through investment in asset light businesses and to have a strong financial model. This is to be achieved through growing their business in core markets, investing in BA to improve the customer experience, leveraging the Spanish transformation and continuing to pursue consolidation opportunities. The loyalty programme is the wrapper that connects all parts of the business and contributes strongly to profits and cash flow. Executed well, this should lead to best in class margins and returns, a strong balance sheet to provide financial flexibility, the ability to pay sustainable dividends to shareholders and return excess capital to shareholders.

The last 12 months have shown this to be a very resilient business with margins and ROIC now above pre-covid levels at 13.5% and 15.3% respectively. Balance sheet leverage has fallen to 1.4x, the same level as it was at the end of 2019. This year has witnessed strong customer demand, a market with constrained supply, unit costs have reduced and strong cash generation has resulted in a reduction in gross and net debt.

The four near term strategic priorities over the next 3-4 years are; transformation: looking to make improvements across all businesses so they can reach their long term potential; Leveraging: the good position of the Spanish operations after improvements in the last 10 years to generate over €1.5bn of operating profit; Investing: investment in British Airways which has been slightly left behind over the last few years to improve its customer satisfaction rating and profits; and Growing Loyalty: a capital light business which helps grow revenues of the airlines but which also generates high returns and cash flows.

In terms of the structure of the group, IAG, the parent, looks after portfolio management, financial strategy, capital allocation and M&A opportunities of the group. The operating companies have commercial and operational independence and are responsible for their financial performance. Finally, there are group platforms and central functions which allow the airlines to benefit from being part of a larger group and to benefit from best practice.

In terms of returns at the individual airlines, they have all improved returns substantially since IAG’s inception and overall returns are better than peer group returns and the IAG balance sheet is in a stronger position than its peers.

Stepping back and looking at the market, the trends remain positive. Aviation/travel is a secular long term growth market with the occasional short term shock and a short sharp drop due to Covid but demand has already recovered strongly. Consumers prioritise leisure trips highly and the Gen-Z and Millennial generations in particular look forward to their dream vacation. With the major airline manufacturers still recovering production after the pandemic, aircraft deliveries remain below 2018 levels. With the number of aircraft retirements over the coming years expected to remain high the net additions to the global airline fleet will be small.

Within this market IAG operates 85% of their passenger traffic in the most attractive markets of North America, Europe and Latin America. Their airline brands are based in some of the largest European hubs with Heathrow being the largest, Madrid the 5th largest and Barcelona the 8th largest. Strong market shares in these hubs help drive the margins and returns. These strong home market positions, with London, Dublin and Madrid all sitting on the Western side of Europe, have enabled the group to take a larger share of the lucrative trans-Atlantic market accounting for between 31% to 41% of traffic to the US, Canada, Latin America and the Caribbean.

In terms of investing for growth going forward IAG has a clear framework which drives their capital allocation process. The priority is investing the core profit pools where they make most of their money like the trans-Atlantic market and leveraging their strong Spanish position. The near term profit pools generally have smaller markets. Finally, there are some nascent businesses with India in particular having huge potential.

Looking at the core markets, the four airlines have a c50% market share in North America, with 150 daily flights across the Atlantic. There will be ongoing investment in the network, cities and frequencies.

The Latin American business is a good balance in the portfolio and one where they currently have a 30% market share but this is growing, in part due to competitors going out of business over Covid. There has been strong growth in the Latin America to Spanish market over the last 5 years and this market is now bigger than it was pre Covid. IAG is in the process of acquiring Air Europa which has an attractive network within Latin America and will help consolidate the Iberia position in this geography.

In the Rest of World markets there are growth opportunities through joint ventures with Qatar the biggest of these. With the exception of BA, IAG airlines don’t generally fly East and these JV’s have helped expand the network in that direction.

In terms of the brands, BA and Iberia are premium brands, Aer Lingus is a Value carrier across the Atlantic as well as a good premium leisure offer and Vueling is a very competitive European short haul business. Level has just been set up and is focussed on low cost long haul.

Investment in British Airways will continue to ensure leadership in London is maintained and the premium proposition is improved. People and IT infrastructure will also benefit from ongoing investment. In particular there is investment going into data centres and the transition of the IT infrastructure to the cloud.

The loyalty programme has an important part to play in the overall strategy of the group. It helps drive customer loyalty in the airlines which benefit from higher revenues. Investment is being made to make it easier to spend the Avios points across the airline brands and with partner organisations like hotels. Non airline partners, like financial services organisations, now generate over £1bn of revenue for IAG. Loyalty is a capital light business and has doubled in size over the last few years.

In terms of sustainability there is plan in place to reach net zero by 2050 and the first part of this is using more Sustainable Aviation Fuel (SAF). The initial target is for SAF to represent 10% of fuel by 2030.

Touching on the people side the company is investing heavily here, hiring over 15k people in the last 18 months. More money is going into training, digital tools, increased mobility and sharing of best practice.

In summary, IAG has 3 strong strategy components which are to build on the Global Leadership positions, to strengthen their portfolio of brands and to grow and enhance the loyalty programme. Medium term targets for margins and ROIC are above pre covid levels at 12-15% and 13-16% respectively. They expect to deliver 4-5% ASK growth whilst maintaining a strong balance sheet with gearing less than 1.8x net debt/ebitda. For shareholders this means EPS growth, a sustainable ordinary dividend and share buybacks or special dividends.

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

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