IAG (International Airlines Group) has terminated its proposed acquisition of Air Europa from Globalia, citing regulatory environment concerns, less than two months after it offered remedies to the European Commission antitrust regulators to secure approval for the deal.
IAG had offered concessions to the European Commission in June, after concerns the deal could have reduced competition.
EU antitrust regulators had been prepared to block the deal after IAG declined to offer additional concessions to address their concerns.
On the financial side, IAG issued their half year 2024 results:
Highlights
- Strong performance for H1 2024: operating profit of €1,309 million, €49 million ahead of H1 2023 • Q2 operating profit of €1,241 million – broadly in line with a record Q2 2023 (€1,251 million)
- Continuing robust demand for travel in our markets supports positive unit revenue growth
- Transformation programme helping to deliver strong margins and profit in the medium term• Focused growth in our core markets
• Making good progress with operational and customer initiatives at British Airways
• Continuing good operational and financial performance in Spain
• Further growth in our capital-light IAG Loyalty business; now including BA Holidays - Significant increase in H1 free cash flow to €3.2 billion
- Strong balance sheet: 1.1x leverage; Investment grade at S&P and Moody’s; refinanced Revolving Credit Facility
- Withdrawal from the Air Europa transaction in the best interests of our shareholders
- With confidence in the strategy and business model the Board has approved a 3 € cents per share interim dividend
- We remain committed to disciplined capital allocation and distributing excess cash to shareholders
- Luis Gallego, IAG Chief Executive Officer, said: “We see continuing strong demand for travel in the attractive core markets in which we operate: North Atlantic, Latin America and intra-Europe. We delivered a good performance in the first half of 2024, with operating profit €49 million ahead of the same period last year.“We are pleased to announce a return to paying a dividend, which reflects our confidence in the business, our performance and our transformation. We are delivering on our strategy and our commitment to sustainable shareholder returns.“We would like to thank our people working across the Group for their contribution to these positive results.”
Financial highlights for the first six months of 2024
- Capacity (ASK) growth of 7.5% for the first half as we invest in our markets
- Passenger unit revenue for the half year increased by 2.9% – reflecting strong demand for travel as well as for our brand offerings
- Our core markets are performing well – North Atlantic, Latin America and intra-Europe
- We are seeing some softness in long-haul pricing in Dublin, as well as in the Asian markets, both of which are small in relation toIAG’s total capacity.
- Non-fuel unit cost increased 1.8%, reflecting 2023 wage increases and investment in the business, offset by reduction in the cost ofdisruption
- The fuel cost increased by 7.4% to €3,814 million reflecting a small year-on-year reduction in the average hedged price andincreased capacity as well as the impact of increasing ETS costs
- Operating profit of €1,309 million (2023: €1,260 million), a margin of 8.9%; Easter was earlier in 2024 than in 2023, which benefitedQ1 2024 and had an adverse impact on Q2 2024 versus 2023
- Net debt of €6.4 billion (31 December 2023: €9.2 billion) benefitting from seasonal working capital inflows
Outlook for 2024
• Strong demand for travel, particularly in our core markets of the North Atlantic, Latin America and intra-Europe • Our full year capacity (ASK) growth guidance remains the same at 7%; Q3 2024 to be c.+7%
• Our non-fuel unit cost is also as previously guided: to increase slightly overall in 2024
• Expect to generate significant free cash flow and maintain a strong balance sheet
Delivering our strategy
Our strong performance in the first half of 2024 and the announcement of a resumption of sustainable shareholder returns are evidence of the successful delivery of our strategy.
IAG has a business model and strategy that is focused on maximising total shareholder returns through a disciplined capital allocation framework. Since IAG’s inception this has enabled us to establish a proven track record of delivering market-leading financial performance.
Our strategy seeks to deliver our medium-term objectives of operating margins of 12% to 15%; return on invested capital of 13% to 16%; and capacity growth from 2024 to 2026 of 4% to 5% per annum.
Building on our three strategic pillars, we have three main priorities to deliver our medium-term margin targets. These are as follows:
1 Transforming British Airways, to drive higher customer satisfaction, profits and margins
2 Leveraging our Spanish platforms, with a target to deliver over €1.5 billion of profit from our Spanish businesses 3 Growing IAG Loyalty for its higher growth, high margins and sustainable cash generation
These priorities are all underpinned by a Group-wide transformation programme to enable all our businesses to reach their full potential in the long term and with a strong foundation of capital discipline and a strong balance sheet.
Strengthening our core
We believe that aviation is a force for good, both for social and economic reasons, which is reflected in the strong demand for travel. This is a positive trend that has been sustained over the last fifty years.
Growing our global leadership positions
IAG is the leading European airline group in the North and South Atlantic, with extensive connectivity intra-Europe and with the rest of the world.
1 Investing in the North Atlantic – the largest aviation market from Europe
The North Atlantic is the largest long-haul market from Europe and is worth around €38 billion annually in revenue. It is now a more consolidated market among the carrier alliances and our Atlantic Joint Business represents around 58% share of the London – US market.
Aer Lingus continues to maximise its US point-of-sale opportunity, particularly to secondary cities, such as the return to Minneapolis this year as well as adding Denver. British Airways has deployed an additional 3% capacity across the North Atlantic in the first half. This includes further investment in frequencies and capacity this year to San Diego, Chicago and Nashville. Later this year Iberia will be able to expand and deepen its network to the US as it takes delivery of its first Airbus A321 XLR aircraft, allowing for more cost- effective flights. Finally LEVEL is building a focused long-haul, low-cost market from Barcelona, which is principally a point-to-point market. This means increasing its capacity to Miami, Los Angeles and Boston.
2 Investing in the structurally growing Latin American market
The Latin American market is a key driver in supporting our target of €1.5 billion operating profit from Spain, through Iberia and LEVEL. The market is the fastest growing from Spain with a 54% increase in revenue since 2019. This is driven by increased inward investment into Spain from Latin America, with the result being more premium customers for Iberia as well as increasing the amount of point-to-point traffic to and from Madrid.
Iberia is building its share in key, primary markets in Spanish-speaking countries, such as three-times-a-day frequencies to Mexico City and Buenos Aires and has been able to do so in a structurally more efficient way with the introduction of Airbus A350 aircraft. LEVEL is adding capacity to Santiago de Chile and Buenos Aires, benefitting partly from the advantageous exchange rate for Spanish tourists.
3 Strong demand for travel in the European short-haul market
The European short-haul market is a resilient market that has grown substantially over a number of years. IAG participates in the market through its network carriers, mainly providing onward connections to long-haul, as well as point-to-point services through BA Cityflyer, BA Euroflyer, Iberia Express and Vueling. IAG has the largest share in domestic Spain, Europe’s largest domestic market and is growing its share of the tourist markets into Spain such as from the UK.
In the first half of the year Aer Lingus and British Airways have added leisure point-to-point destinations to drive efficient capacity growth. Iberia has added capacity to key European cities such as Milan, Paris and Rome, helping also to increase transfer traffic to its long-haul network. Vueling has delivered a strong performance as it strengthens its position in its core cities, and in particular at Barcelona.
Strengthening our portfolio of world-class brands and operations
Our performance in all areas of the strategy is supported by our Group-wide transformation programme. In particular it supports our objective of delivering higher levels of customer service and operations that will help to drive sustainable earnings growth.
Engaging with our people
Our people are critical to delivering our transformation.
Over the year to date we have recruited around 7,000 new colleagues, attracted by our strong brands in each of our markets. This investment in our people, who are helping to deliver improvements that include operational resilience at British Airways, means that headcount (after natural attrition) has increased by c.6% to an average of 73,000 employees at IAG.
Aligned with our medium-term value-creation targets, we are continually engaging with our workforce to secure multi-year agreements that balance the interests of both stakeholders. We are pleased that deals are now in place in most of our teams including the recent settlement with the Aer Lingus pilots.
Investing in our fleet
Investment in new aircraft is key to delivering our growth plans in an efficient and sustainable way, as well as improving our customer proposition.
We have had nine new aircraft deliveries in the first half of 2024, including six Airbus narrowbody aircraft and three Boeing and Airbus widebodies. These were delivered to Aer Lingus, British Airways and Iberia.
Vueling also took delivery of five Airbus A320ceo direct-leased aircraft in the first half of the year to provide backfill linked to the Pratt & Whitney ‘GTF’ engine maintenance issue.
We expect aircraft deliveries broadly to be to plan with 20 new aircraft in 2024 and 27 aircraft in 2025, with one Boeing 787 moving from 2024 to 2025. In line with the rest of the sector there continues to be some risk of slippage from both Boeing and Airbus.
We are expecting our first A321 XLR deliveries later this year. In general these will be used to support additional frequencies or routes to secondary cities. Iberia will receive the first aircraft and use it to strengthen transatlantic routes, initially to Washington and Boston.
More efficient operations
An efficient and resilient operational performance is vital for both customer satisfaction, being the biggest factor in customer NPS scores, as well as driving efficiency.
Iberia and Vueling have continued to perform well so far this year and are two of the most punctual airlines in the world.
British Airways has invested significantly to improve its operational performance from last year, including launching a new Heathrow Operating Model in April this year, involving better team structures, greater management oversight and investment in a number of technology and software tools to help decision-making. In the first half British Airways delivered On Time Performance (OTP) of 75.5%, a 15 percentage point increase versus the first six months of 2023, leading to lower disruption costs and better customer NPS.
There is still scope to improve our own performance, whilst recognising that the external operating environment remains challenging. We continue to see high levels of air traffic flow restrictions due to ATC staffing issues, despite Europe’s ATC fees rising to record levels. Supply chain issues are also affecting aircraft technical availability.
Investing in our customers
We are investing to deliver better customer experiences across all our airlines, with a number of initiatives delivered in the first half of the year. These are driving improved customer NPS scores.
Reflecting its significant US customer base, Aer Lingus has implemented pre-check at its US airports, with 62% of customers eligible for the service, as well as refreshed lounges at San Francisco, Chicago and Boston.
British Airways is making further progress with its Club Suite rollout, which is now at 69% of the London Heathrow long-haul fleet, and is also starting a refresh of its lounges globally. Significant investment is being made in updating its website and customer app.
Iberia has a number of improvements planned in the second half, such as adding more baggage-friendly overhead bins on its Airbus A320s and improving customer accessibility.
Vueling is using digital tools throughout the customer journey to grow its ancillary revenue opportunities, support better customer service and improve operations.
Transformation supporting innovation and efficiency
Across our airlines, we are delivering transformation initiatives that will drive efficiencies. These include improvements to our digital infrastructure, as well as flight operations and organisational structures.
Aer Lingus has launched Connected Crew that gives cabin crew the ability to resolve operational and customer issues in real time.
Within its operational initiatives British Airways has implemented its Pathfinder tool to optimise aircraft allocation in response to network disruption. British Airways is also in the middle of a major commercial IT upgrade that will secure both revenue and cost benefits.
Iberia continued to develop Connected Operations tools, working to join up ramp, ground crew and cabin crew. The Digital Factory of Iberia continues to produce ultra-fast and low-cost tools that can be integrated into all areas of the business.
Vueling is using digital tools to improve decision-making in its Operational Control Centre, as well as in its maintenance planning processes.
Driving earnings growth through asset-light businesses
Our second strategic imperative is to generate capital-light earnings growth. The biggest element of this is the IAG Loyalty business, which has higher margins and returns than our airlines as well as attractive cash generation characteristics.
The business continues to grow strongly, focusing on encouraging its customers to ‘earn and burn’ more Avios. Over 23% more Avios were issued in the six months to 30 June 2024 than in the prior year and we have 13% more active customers than at the same point last year. Our non-airline partnerships are a key factor in financial performance and spend on UK Avios-earning credit cards is growing at four times the rate of the wider UK credit card market.
In April IAG Loyalty acquired BA Holidays from British Airways. This is expected to add significant value to the Loyalty business over time as well as increase the profitability of our Group holidays proposition.
A strong and sustainable business
Being an industry leader in the transition to Net Zero
We are transforming for the future by investing in sustainability. We were the first airline to commit to 10% Sustainable Aviation Fuel (SAF) use by 2030 and net zero emissions by 2050.
As a large component of our plans, alongside the purchase of more efficient aircraft, we are focused on securing a sufficient supply of SAF to be able to meet our targets. During 2024 this has included securing our largest-ever purchase agreement with Twelve, as well as more recent agreements with Repsol, EcoCeres and ST1. The agreement with Repsol is the largest purchase of SAF in Spain to date.
We are securing future volumes of SAF on competitive commercial terms and at significant scale, including direct investment. Due to the varying levels of financial support from outside the industry, we believe IAG’s scale and commitment will translate to an advantage against smaller and less geographically-diverse airlines in the future.
Performing disciplined capital allocation and balance sheet management
IAG has a disciplined capital allocation framework that supports investment in the business as well as delivering sustainable shareholder returns over the long term.
Maintain a strong balance sheet
Our priority is to maintain a strong balance sheet, to ensure resilience in times of weaker macro- economic performance and to provide strong foundations for growth. We have a target to remain below 1.8x net debt to EBITDA before exceptional items through the cycle, as a proxy for Investment Grade. We would ordinarily maintain further headroom to this target to manage any exceptional volatility in the business.
We have improved our leverage significantly over the last couple of years as the business has returned to full strength and generated significant free cash flow. We are at 1.1x as of 30 June 2024, albeit with the benefit of seasonal working capital inflows, the majority of which we expect to unwind in the second half of the year.
IAG’s financial strength is reflected in our Investment Grade status with our ratings agencies, with Moody’s moving us to Baa3, whilst S&P has recently upgraded us to a Positive outlook. We have significant liquidity, at €13.2 billion, and we refinanced and upsized our Revolving Credit Facility to a $3.0 billion facility reflecting strong demand. We also cancelled our expensive £2.0 billion UKEF facility.
In addition, included in our cash and leverage scenario planning is a contingent liability regarding a potential claim by HMRC over the appropriate VAT accounting applied by IAG Loyalty, as disclosed in the Financial Review and note 6. We expect more clarity on the matter later this year.
Investing in the business
As noted above, we are prioritising investment in the business to deliver sustainable customer, operational and financial benefits and to achieve our margin and returns targets. This, alongside our ongoing transformation programme to improve the customer experience, innovation and sustainability, is starting to deliver improvements in OTP and customer NPS.
So far this year we have spent €1.4 billion on capital expenditure, and expect to spend around €3.3 billion, on fleet and fleet-related purchases, IT and other property and equipment. This excludes expenditure on ETS allowances, which are now separately disclosed.
On the same basis, in 2025 and 2026 we expect to spend an average of €4.0 billion per annum, with around two thirds of that being spent on new, efficient aircraft. The timing of fleet expenditure depends to some extent on our suppliers and it is possible that some delays will occur.
Committed to sustainable shareholder returns
With a strong balance sheet now secured and our investment programme well-established, we are now in a position to resume shareholder distributions. Accordingly, the Board is declaring an interim dividend of 3 € cents per share for the half year. In future we are more likely to return to announcing an interim dividend at the third quarter results, as we did before the COVID-19 pandemic.
Given the strong cash-generative nature of our business, we will look to pay a sustainable, regular dividend and to distribute any surplus capital generated to shareholders annually. This is consistent with our communicated capital allocation priorities of maintaining a strong balance sheet, considering inorganic growth opportunities and returning excess cash to shareholders.
Summary
• We remain confident in the long-term prospects of the business, with a strong performance in the first half of 2024 • Demand remains strong, whilst supply is constrained for the medium term
• Our transformation programme is going well, securing customer, operational and financial benefits
• We are focused on our strategy to deliver world-class margins and returns
• Confidence in the strategy and business model reflected in the return to paying dividends
• We remain committed to disciplined capital allocation and to distributing excess cash to shareholders
Aircraft deliveries and financing
During the six months, the Group took delivery of 14 aircraft, including five Airbus A320ceo aircraft for Vueling to provide backfill for additional aircraft maintenance requirements linked to the Pratt & Whitney ‘GTF’ engines issue. The Group anticipates financing the substantial majority of its aircraft delivered in 2024, with financing to be drawn either in the remainder of the year, or in early 2025. During the first six months of 2024, the Group financed four aircraft delivered in 2023. In June 2024, Iberia exercised an option with Airbus to purchase one additional A350-900 for delivery in 2026.
Air Europa aircraft photo gallery:
