British Airways Owner Says Economy Holds No Fear After Cost Cuts

By Chris Jasper  

Photographer: Andrew Harrer/Bloomberg

“The general economic environment is slightly weaker than three to six months ago, but... Read More

British Airways parent IAG SA (IAG) said it’s unperturbed by evidence of a slowing European economy as cost cuts at Spanish arm Iberia and a focus on buoyant U.S. markets put it in a stronger position than most major rivals.
IAG said today it’s sticking with a 1.8 billion euro ($2.3 billion) 2015 operating profit goal after Deutsche Lufthansa AG (LHA) this week cut its outlook for the second time in six months and Air France-KLM Group (AF) warned of sluggish fourth-quarter sales.
“The general economic environment is slightly weaker than three to six months ago, but we have anticipated that,” Chief Executive Officer Willie Walsh said on a conference call. “Our market focus is good and restructuring is showing benefits.”
IAG, Europe’s third-biggest airline, has expanded British Airways to
tap strong North Atlantic demand while slashing jobs and routes at Madrid-based Iberia. In contrast, Air France suffered a two week pilot strike this quarter that wiped 330 million euros from earnings as staff resist moves to expand low-cost flying, while Germany’s Lufthansa is still embroiled in walkouts over modifications to retirement benefits.
“Lufthansa is a little bit behind us, Air France is a good bit behind us,” Walsh said of their restructuring efforts. IAG’s view of demand is also colored by the strength of the U.S. and U.K. economies, he added, markets to which the two continental carriers are less exposed.

Gulf Buffer

Shares of IAG, as International Consolidated Airlines Group SA is known, rose as much as 3.6 percent and were trading 2.8 percent higher at 401.70 pence as of 8:10 a.m. in London.
IAG’s optimism has more in common with U.S. carriers, which continue to enjoy full planes and pricing power based on the strength of their home market. British Airways also tackled most short-haul cost issues years ago, making it less exposed to the growth of discount specialists led by Ryanair Holdings Plc (RYA), while its North Atlantic focus offers a partial buffer against the breakneck expansion of Gulf carriers led by Emirates.
“IAG remains a class of its own,” Commerzbank analyst Johannes Braun said in a note. “While Lufthansa and Air France struggle with excess capacity, labour issues and low cost/Mid East competition, IAG continues to deliver earnings momentum on the strength and resilience of the London market combined with prudent capacity growth elsewhere and ongoing benefits from the Iberia restructuring.” Braun reiterated his “buy” rating.
Walsh said operating profit this year will be 550 million euros to 600 million euros higher than last year’s 770 million euros, refining an earlier estimate for a gain of at least 500 million euros. Third-quarter earnings rose 30 percent to 900 million euros, excluding one-time items, versus the median analyst estimate of 879 million euros, based on nine estimates.

New Aircraft

To safeguard against any mismatch between demand and supply as the European economy slows, IAG has reined in capacity expansion this quarter to 6 percent, 1.3 points below the level originally planned, the CEO said.
Even in a slowdown, the company’s lower cost base should allow it to operate profitably in markets where carriers than haven’t yet pushed through cost reductions will suffer losses, Walsh said. The introduction of more efficient jets such as the Boeing Co. (BA) 787 will also aid that resilience, he said.
Iberia in particular is benefiting from “strong cost discipline combined with the continued benefits of restructuring,” IAG said. The unit posted a third-quarter profit of 162 million euros versus 74 million euros a year earlier, after Walsh sealed the last of three pay settlements in March, locking in more modest deals for pilots, ground-handling staff and cabin crew.

U.S. Focus

British Airways earnings climbed 27 percent to 607 million euros in the quarter. The U.K. unit has added flights to Austin, Texas, while scaling up aircraft on flights to Washington and Denver as it taps trans-Atlantic demand, aided by a growing fleet of Airbus Group NV (AIR) A380 superjumbos.
Barcelona-based discount arm Vueling SA reported a three-month profit little changed at 140 million euros.
Air France-KLM, Europe’s No. 1 carrier by passenger traffic, this week posted a 60 percent drop in operating profit to 247 million euros, hurt by the pilot strike, while warning that bookings this quarter have been weak.
Lufthansa, the European No. 2, said operating income next year won’t match the 2 billion euros previously forecast, though should be beyond this year’s projected 1 billion euros.
By contrast, American Airlines (AAL), United Airlines, Delta Air Lines Inc. (DAL), Southwest Airlines Co. and Alaska Air Group Inc. all exceeded third-quarter analyst projections, with JetBlue Airways Corp. (JBLU) alone among the U.S. top six in failing to beat estimates. Key to gains has been the ability to hold capacity increases in check, strengthening fare-raising powers.