Skift Take

It's a tough market for European airlines, who must deal with concerns about terrorism, as well as economic uncertainty. Things could get worse before they improve.

British Airways parent IAG SA will cut capacity and put spending under review in the wake of the U.K.’s decision last month to quit the European Union, with the uncertainty depressing profit growth this year.

Operating profit excluding one-time items is now expected to grow by a low double-digit percentage, the London-based IAG said Friday. Prior to the June 23 Brexit vote, the company had forecast an earnings increase in line with the 950 million-euro ($1.05 billion) gain in 2015, or roughly 40 percent. The new guidance reflects a downward revision of about 600 million euros, based on an assumption of a 15 percent increase, according to Bloomberg calculations.

Chief Executive Officer Willie Walsh warned a day after the poll that IAG wouldn’t meet the earlier target as economic uncertainty after the “Leave” victory puts people off travel. The weaker pound also means U.K. receipts will be worth less when translated into euros.

“In the lead up to the vote, we witnessed softer than expected trading, principally with U.K. corporates,” Walsh said on a conference call. “Had the vote gone the other way we would have expected that to bounce back. Clearly that didn’t happen and that trend has continued.”

Capacity Curb

IAG’s cutback comes amid similar steps by the likes of Deutsche Lufthansa AG and Air France-KLM Group, which are reducing seats on routes to meet a slowdown in demand. The German carrier warned it expects a decline in 2016 operating profit instead of a gain, while its French counterpart warned its markets are deteriorating as fares fall and France’s standing as a tourist hotspot is undermined by a succession of terrorist attacks that have spanned Paris to the Riviera.

IAG’s Walsh predicted a recovery “at some point,” while suggesting it’s too early to say whether that will come later this year or early in 2017. Capacity gains for 2016 will now be reduced to 4.5 percent, down one percentage point, with all of IAG’s constituent airlines likely to be affected, he said.

IAG shares, which have lost about one-quarter of their value since the Brexit referendum, traded up 1.6 percent at 415.9 pence as of 9:56 a.m. in London.

Operating profit in the second quarter, which ended a week after the EU poll, increased to 555 million euros ($615 million) from 530 million euros a year earlier, boosted by lower fuel costs and the purchase of Ireland’s Aer Lingus.

U.K. Tourism

Currency fluctuations wiped 148 million euros from earnings after the pound fell in the run up to the vote. Walsh said Sterling’s weakness is likely to continue impacting results into next year. At the same time, the pound could have some positive effects by helping to encourage tourist visits to the U.K.

Earnings in the second half may also be crimped by the impact of a spree of terrorist attacks in mainland Europe, while air traffic control strikes — disrupting the Vueling unit in particular — will have an 80 million-euro impact.

IAG, as International Consolidated Airlines Group SA is known, was formed from a merger of BA and Spain’s Iberia before purchasing British Midland, Barcelona-based Vueling and Aer Lingus. With the group registered in Spain, an EU rule limiting outside ownership of the bloc’s carriers to 49 percent could compromise that structure once the Brexit is implemented.

To contact the reporter on this story: Benjamin Katz in London at [email protected] To contact the editors responsible for this story: Chris Reiter at [email protected], Christopher Jasper

©2016 Bloomberg L.P.

This article was written by Benjamin Katz from Bloomberg and was legally licensed through the NewsCred publisher network.

November 16, 2022
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Tags: british airways, iberia, International Airlines Group, vueling

Photo credit: International Airlines Group, which owns British Airways, warned Friday that investors should expect lower profits. Mark Hennihan / Associated Press