British Airways Parent IAG Cuts Earnings Outlook -- Update
October 28 2016 - 5:31AM
Dow Jones News
By Robert Wall
LONDON-- British Airways parent International Consolidated
Airlines Group SA Friday cut its earnings outlook further after
third-quarter operating profit fell 3.6%, weighed down by the sharp
drop in sterling after the U.K. voted to leave the European
Union.
Operating profit for the crucial July through September period
was 1.21 billion euros ($1.32 billion), compared with EUR1.25
billion in the year-earlier quarter. The figure strips out some
nonoperating costs and taxes and in this year's third quarter
reflected a EUR162 million currency headwind.
IAG shares, down about 30% for the year after the Brexit vote
and sterling's fall, were up 4.2% in midmorning trade on Friday
amid signs that downward pressure on ticket prices from
overcapacity among European airlines is starting to moderate.
Declines in unit revenue are easing and may be near to bottoming
out, IAG Chief Financial Officer Enrique Dupuy told analysts.
To help ease overcapacity, IAG has repeatedly cut growth in
seats-for-sale throughout the year and again in the last quarter.
It now expects capacity to advance 9.5%, boosted by the addition of
Aer Lingus, compared with a 10.5% increase forecast at the outset
of the year. Mr. Dupuy said "this is something we are going to be
continuing."
Net profit rose 9.9% to EUR930 million from EUR848 million.
Sales in the period declined 4% to EUR6.5 billion.
The currency impact was "significant" though, IAG Chief
Executive Willie Walsh said.
IAG reports earnings in euros, but its British Airways unit that
generates most profit principally sells tickets in pounds which are
now worth less.
The airline group, which also includes Aer Lingus and Spanish
carriers Iberia and Vueling, cut its profit outlook for the year
following the referendum. The pound has depreciated further since
then against the dollar and the euro. Mr. Walsh said the guidance
in July was based on the prevailing exchange rates now changed.
IAG Friday said it would deliver a full-year operating profit of
EUR2.5 billion. It had already revised its outlook down to low
double-digit growth in its adjusted operating profit beyond the
EUR2.3 billion generated in 2015. IAG began the year expecting to
deliver an operating profit of about EUR3.2 billion
European airlines have faced a multitude of headwinds weighing
on earnings. Ticket prices are plummeting because of overcapacity,
terror attacks have spooked passengers and repeated
air-traffic-control strikes have led to thousands of flight
cancellations.
Mr. Walsh said trading conditions said the business conditions
were "tough," with low growth in Europe and weakness in markets
such as Brazil. Conditions are worse than expected a year ago, he
said, and had not improved since the Brexit vote.
The impact from air-traffic control strikes this year has been
more pronounced than in prior years, he added.
Britain's June 23 vote to leave the EU has led the country's
currency fall to more than 30-year lows. IAG isn't the only airline
to suffer. Ryanair Holdings PLC, Europe's biggest discount airline,
in October said its profit in the fiscal year ending March 31,
2017, would advance more slowly than expected because of the
currency headwind.
Mr. Walsh, an Irishman who said he personally had opposed
Britain leaving the EU, kept the carrier from joining others in
lobbying to retain membership in the trade bloc, arguing an exit
wouldn't materially impact the airline.
British Airways may raise ticket prices to offset sterling's
weakness, Mr. Walsh said. However, he added that the currency
weakness also have given the carrier a competitive edge on the
important trans-Atlantic market because many of its costs have
effectively fallen compared with U.S. rivals.
Britons were still traveling abroad for vacations, Mr. Walsh
said, though trip lengths are shorter.
Even before the Brexit vote, Mr. Walsh had signaled IAG would
work hard this year to improve BA's competitiveness. The company
announced a first EUR62 million restructuring charge for the
airline, with more planned.
IAG on Thursday said it would pay an interim dividend of EUR0.11
per share, a 10% increase over the prior-year period, which it
expects to be about half of the full-year payout.
IAG also said British Airways agreed with pension trustees a
technical deficit of GBP2.8 billion ($3.4 billion), only slightly
higher than the early projection. Annual payments are little
changed.
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
October 28, 2016 06:16 ET (10:16 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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