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British Airways Profitability Boosts IAG’s Earnings Outlook

Iberia and British Airways Aircraft Sit At Heathrow Airport
IAG more than doubled its third-quarter operating result to 690 million euros as Iberia, its main Spanish operator, joined BA and Vueling in posting a profit. Photographer: Simon Dawson/Bloomberg

British Airways parent IAG SA lifted its 2015 profit target by 12.5 percent as the U.K. unit benefits from growth in trans-Atlantic travel and discount arm Vueling boosts earnings at the group’s Spanish business.

Operating profit before one-time items will be 1.8 billion euros ($2.4 billion), versus a previous forecast of 1.6 billion euros, Europe’s third-biggest airline said in a statement today.

IAG’s third-quarter operating result more than doubled to 690 million euros as main Spanish operator Iberia joined BA and Vueling in posting a profit, it said Nov. 8. The London-based group is seeking more than 3,100 job cuts at Iberia to bring an end to annual losses as it expands the other two brands.

“You are still operating in a environment with many unknowns, so the 1.8 billion-euro goal is a good, realistic target,” said Donal O’Neill, an analyst at Goodbody Stockbrokers in Dublin.

IAG, which is seeking a tie-up with mainland Chinese carrier to fill a gap in the Oneworld alliance, according to Chief Executive Officer Willie Walsh, closed 2.9 percent lower at 362.10 pence in London. The stock has still surged 96 percent this year, outperforming rivals Air France-KLM Group, Europe’s largest airline, which has gained 1.6 percent, and Deutsche Lufthansa AG, up 6.7 percent.

U.K. Gains

IAG said today’s outlook upgrade envisages an “additional contribution” from growth at BA and Vueling, while Iberia’s recovery plan is “on track with improvement expected.”

Operating profit at British Airways should reach 1.3 billion pounds ($2.1 billion) in 2015, an increase of 200 million pounds over the previous forecast, IAG said.

“We are ahead of plan,” British Airways CEO Keith Williams told investors today. The integration of BMI, acquired in 2012, has yielded benefits faster than expected and revenues have also grown more than planned.

British Airways will expanded capacity 8 percent in the next two years, aided by the introduction of Airbus SAS A380 superjumbos and Boeing Co. 787 Dreamliners, greater seat-density on some short-haul jets, and new destinations.

Group-wide earnings of at least 54 cents a share are being targeted, with sustained “organic growth” of 2-3 percent not including Vueling. Additional business improvements and Vueling gains could lift earnings further, IAG Chief Financial Officer Enrique Dupuy said at the company’s capital markets day.

Iberia Measures

Capital expenditure is assumed to be around 2 billion euros to 2.2 billion euros annually.

IAG, formed from a BA-Iberia merger in 2011, expects to post an operating profit of about 740 million euros this year.

Air France-KLM and Lufthansa said Oct. 31 they were struggling to reach earnings goals as a stronger euro and sluggish economies undermine the benefits of savings programs.

CEO Walsh said last week he’s seeking additional restructuring measures at Iberia to achieve sustainable growth. Planned fleet modernization at the Spanish carrier, which is due to make a full-year profit next year, is contingent on further improvements, he said previously.

Vueling will benefit from growth opportunities as network carriers pare short-haul flights. Walsh expects it to set up new bases after delivering the group’s strongest operating margin for the third quarter at 25 percent, almost double the BA figure of 12.8 percent and four times Iberia’s 6.2 percent.

China Talks

Vueling is set to receive at least 62 new Airbus A320s from IAG’s purchase of as many as 220 of the single-aisle jets under a $20 billion deal with the planemaker agreed in August.

IAG is also renewing the British Airways fleet to cut costs, with the London Heathrow airport-based unit introducing the 787 and A380 in the third quarter as it accelerates the phasing out higher-fuel-burn 747 jumbos.

The group’s Oneworld alliance, which also counts American Airlines, Qantas Airways Ltd. and Cathay Pacific Airways Ltd. as members, would benefit from signing up a mainland Chinese operator, though a bilateral deal involving British Airways alone may be more “realistic,” Walsh said.

The U.K. carriers is continuing discussions with a number of Chinese airlines to that end, he said.

Download: Earnings

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